Page 239 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 221

affairs in exchange for being looked after by the state through ben-
efits, social services, and not having an income tax. Kuwait, for
example, provides citizens with financial rewards for marrying.
Introducing an income tax could have profound implications for
the social contract and give citizens a greater sense of entitlement in
the political arena. Just as the American independence movement
was grounded on the principle of no taxation without representa-
tion, Gulf nationals could assert greater political claims if they had
to pay taxes. Governments are aware of this dynamic and tread gen-
tly around the issue of taxation. Taxation, when introduced, begins
at the corporate level (Oman already has a corporate tax rate of
14
12 percent), then spreads next to indirect taxation, and expands
only slowly into a personal income tax.
The shift toward greater democratization in the Gulf is already
taking place, with active parliaments in Kuwait and Bahrain, and
consultative councils elsewhere. Hitherto, all moves toward elected
representation have preserved the notion of ruling dynasties. Even
when Kuwait’s parliament played a role in the succession of the last
ruler, its options were limited to two candidates within the ruling
family. Increased political representation is a trend that is likely to
continue irrespective of fiscal pressures. A need for higher govern-
ment revenue as the moment of truth draws closer would only bol-
ster or accelerate this process.

A DIFFERENT KIND OF BOOM
The boom of the 2000s has been managed in the GCC quite differ-
ently from the booms of the 1970s. While both periods witnessed
enormous surpluses for GCC states and unprecedented wealth cre-
ation, strategies for deploying the wealth have been quite different.
The differences in approach stem from the GCC in the 1970s having
been far less developed in terms of local institutions, investment
management capabilities, and the regional private sector. Table 8.1
summarizes some of the salient differences between investment
strategies of the 1970s and those of today.
During the boom of the 1970s, local capital markets were sim-
ply too underdeveloped to absorb the massive liquidity created by
oil wealth. Investing the bulk of the money in local markets would
have been irresponsible, as there were not enough investment