x Abu Dhabi, UAEFriday 21 July 2017

Gulf economies require solid institutional models

Most countries have two main economic goals: boosting their prosperity and increasing the number of citizens who benefit from it.

A mature and effective institutional model is essential to any economy.
A mature and effective institutional model is essential to any economy.

Most countries have two main economic goals: boosting their prosperity and increasing the number of citizens who benefit from it. But how can a country achieve economic prosperity, reduce the inequality gaps among its population, and sustain development and relay its benefits from today's generation to tomorrow's? To begin to answer these questions, policy makers should establish a well-functioning institutional model for economic development that aims to achieve the goals of economic prosperity and of equality - the country's ability to spread the rewards and costs of economic activity equally throughout its population.

These goals are naturally more difficult to achieve during economic downturns. But even bad times are easier to manage in countries with mature, comprehensive and responsive institutional models for economic development. A mature and effective institutional model is essential to any economy. In effect, it is a recipe for success. Such a model consists of a set of transparent, integrated, and overarching or specialised entities that co-operate to handle different aspects of economic development. Some entities, such as the ministry of economy, set economic policy; others, such as chambers of commerce, advocate for policies; some set and enforce regulations, for example market and consumer protection agencies; and others conduct operations and offer services, mainly through business facilitation agencies as well as export and investment promotion agencies.

This model aims to catalyse the real engines of growth, namely, development companies. The entities of the model focus on economic prosperity and equality to varying degrees; some view prosperity as an ultimate objective, while others set equality as a top priority. The crises that the world's economies are now facing offer a stark reminder of the importance of efficient and effective institutional models. The collapse of many of the world's financial institutions and the bursting of property bubbles can be attributed, at least in part, to institutional failures. However, an economic downturn is not the only time when an effective model matters. Such a model can stave off or reduce the effects of inevitable market cycles.

A study of economies in various stages of development by Booz and Company indicates a correlation between a mature institutional model and a country's economic prosperity and equality. The maturity of the institutional model for economic development is indicated by the extent to which it is effectively set up to fulfil its mandate. Economic prosperity is a measure of a country's ability to achieve sustainable economic growth, while economic equality refers to a country's ability to spread the rewards and costs of economic activity across its population, regardless of where they live in the country, and across economic agents, such as producers and businesses versus households and consumers, employers versus employees. Both prosperity and equality need to grow to balance successfully the needs of the current generation with those of future generations.

Countries with advanced economies, including Japan, France, the UK, and Germany, have high rankings both on the maturity of their institutional models for economic development and on measures of prosperity and equality. In contrast, the countries that have less-mature institutional models do not score as well when it comes to measures of economic growth sustainability or economic equality. How valuable can institutional models really be, given that virtually all countries, including those with the most mature models, are currently facing huge economic problems? It is a fair question. The answer: they are indeed valuable. The explanation is that the model is a necessary but not sufficient condition for achieving certain economic objectives, including avoiding crises or limiting their duration.

That government models have failed in this objective in the past few years should not be taken as proof that they cannot work, or that it is folly to try to organise them too precisely. Instead, the meltdown is a reminder that the individual entities assigned to handling certain tasks must carry out those duties with skill and foresight. Regulators in less-mature economies have made their own mistakes of insufficient oversight, of course. For example, recent property crashes have largely been a result of speculative buying and selling, and might have been avoided had the regulatory environment been tighter. Effective institutional models for economic development simply do not exist in many countries with emerging economies. Such countries set economic policy in an unco-ordinated and fragmented way and tend to handle policy making, regulatory and operational functions within the same organisations, leading to insufficient specialisation. In many cases, they lack the co-ordination mechanisms necessary to keep their policies in alignment, and their agencies are so busy handling operating details that they have little time for more important policy and strategy work.

It is worth recognising that although effective institutional models for economic development are an essential part of creating economic prosperity and equality, they cannot and should not function in isolation. Rather, they must interact effectively with other institutional models that also have an impact on their objectives. These may include the social institutional model, which has a great effect on equality, and the political institutional model, which establishes the overarching environment within which prosperity can be achieved.

Another important factor is the country's macroeconomic framework for stabilising and stimulating the economy. This model maintains stability by addressing measures such as inflation and prompts stimulation by, for example, lowering interest rates when necessary; it is vital to both prosperity and equality. The findings of this study have important implications for policy makers, including those in the Middle East's emerging economies. Crucial guidelines apply to any nation looking to transform its institutional model for economic development into a mature and effective one.

Policy making, regulatory, operational and other economic development roles need to be placed within an integrated institutional model that can quickly adapt to opportunities and challenges as they emerge. This may entail an extensive transformation of current models within the region's emerging economies. To achieve this, countries should establish effective governance mechanisms to ensure all the entities involved in the institutional model for economic development are well co-ordinated, and that transparency and accountability are entrenched throughout the system.

In addition, they should ensure that the institutional model for economic development is simultaneously developed and co-ordinated with complementary institutional models, such as social, geopolitical, and macroeconomic stability and stimulation, to yield further benefits and have a greater impact on economic prosperity and equality. Richard Shediac is a partner, and Chadi Moujaes a principal, at Booz and Company, and they are based in Abu Dhabi