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University of Oregon

Publication Date

Fall 2010

Program Name

Oman: Political Culture and Economic Development in the Gulf

Abstract

Diversification, a buzzword in the Middle East for much of the past two decades can only be likened to the phrase “dependence on foreign oil” used by American politicians during US elections. And indeed much like the latter has been mentioned by every president since Richard Nixon, it seems as if diversification is being sung in a round by kings presidents and sultans throughout the oil producing nations of the world, but still to no avail. Oman has been trumpeting diversification in five-year plan after five-year plan of which they are currently in their seventh (2006 - 2010) with an eighth on the way (2011-2015). In concert with many new programs being explored by the US government throughout the Middle East and North Africa (MENA) after the attacks of September 11th, former US President Bush laid out in a speech in 2003 his desire for a Middle East Free Trade Agreement (MEFTA), and in January of 2009 the US-Oman FTA took effect. This paper seeks to explore if the free trade agreement (FTA) was successful in changing domestic Omani economic policy, and moreover if those policy changes were implemented.

Although under the right circumstances the population explosion can be a “demographic gift”, with unemployment in the MENA region near 25%, Oman’s unemployment at over 15% (CIA, 2010) 70% of its population under 35 (Ministry of National Economy, 2010), and Oman’s oil prospects falling, it is important to address its need for export led growth to provide jobs. Over the past forty years since Sultan Qaboos came to power there have been rapid changes in development. Oman’s GDP has risen consistently at near 5% over the last twenty years and because its oil reserves stand at only 5 billion barrels, it has developed on a semi-sustainable trajectory, not following the lavish model employed in neighboring UAE. Oman has operated a budget surplus this decade except for 2009, although inflation is a little on the high end owing to their US pegged exchange rate, this usually falls between 3%-7%, however it was much higher in 2009 (Ministry of National Economy, 2010). 50% of its GDP comes directly from petroleum activities, and this is a base number because 77% of public financing comes from oil and gas revenue (Ministry of National Economy, August 2010), meaning that most government expenditure in the economy also is based on petroleum.

Petroleum Development Oman (PDO) estimates show that at the current recovery ratio oil is expected to no longer be a major source or revenue after twenty years. This, coupled with the age of the beloved Sultan spell out a volatile future for this young economy and its 2 million residents and 1 million expatriates. The GDP per capita stood in 2009 at $17,731 adjusted for market prices, down from over $23,000 the year before, and much is expected from this newly educated population.

Exports to the United States have not been a huge factor in the past, and are only 3.7%, with imports from the US accounting for even less of a percentage, Thus the US is barely one of Oman’s notable trading partners, but unlike many other countries who have slowed trade in recent years, the US has been pressing into the market, and the recent free trade agreement which took effect on January 1st of 2009 is a sign of that cooperation.

As the US continues to negotiate these agreements throughout the region, it needs to be investigated what the immediate and long term effects are on the economy’s they seek to help. My attention turns to the latter. Many economists most notably, professor Robert Lawrence of Harvard University have written extensively of the potential for MEFTA to not only help economically short term, but to act as a catalyst for political change inside the country (Galal, 2003) (Lawrence, 2006). This study seeks to answer has the Omani-US FTA been a catalyst like many academics, as well as notable American politicians such as Congressman Paul Ryan (Ryan, 2009) claim it can be? Has there been a freeing of investment rules, a drive for privatization, increases in labor rights protection, and most importantly a streamlining of the bureaucracy process as is supposed to come along with the detailed FTA’s drafted by the United States?

I conclude that the American FTA has done much to institutionalize changes that should have been made under their WTO accession, but also enacted new rules governing the economy most notably in areas of intellectual property, labor rights, investment regulation, and customs law. However this is not without qualification. Many instances occur where the US has failed to enforce, and Oman has failed to implement agreement protocols. The biggest gap in the process has occurred between the ministerial level and the action on the ground Additionally there are certain areas not covered by the FTA which would be a boon to future agreements. A large debate has erupted in the US over whether FTAs can be used as policy tools, or whether they should remain purely reactionary, rewarding countries with good records. This paper I believe settles that issue.

Section two presents a critical review of the arguments behind signing the agreement in the first place, from theoretical and quantitative arguments for trade, to the mindset behind MEFTA. Following this is a brief explanation of methodology. Section four is an analysis of the FTA itself, and what laws were enacted as a result of the FTA and its negotiations. I attempt to show what the possible outcomes of these changes will be. Section five is a review of the implementation of the agreement; what are the successes, and what are the failures. Finally section six will offer policy proposals to both the Omani and US governments going forward. This FTA is a new breed for the US, as it’s impetus is almost entirely geopolitical for the United States, thus if the US is to succeed in its mission throughout MENA, getting these agreements up and running fast is of the upmost importance.

Disciplines

Economics | International Law | International Trade Law

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