This proposal aims at conducting original research that might throw light on the capabilities and attitudes of the private sector, opening the door to a more sophisticated understanding of its evolving reality. 

The proposed research plan is divided in two parts: the first part aims at evaluating the private sector capabilities and degree of dependence on government spending or protection; the second part aims at discussing the actual and potential role of the private sector in promoting economic and political reform. 

1. Private sector capabilities and degree of dependence on the government. 

The first part of the research will entail collecting and evaluating evidence on key parameters to measure private sector dependence on, or independence from the government. We propose to articulate research in four main tasks: 

1. Estimate total domestically vs internationally invested capital, and domestically vs internationally generated profits 

A crucially important reason why the private sector is believed to have progressively become less dependent on governmental support is that a growing share of private investment has been directed outside of its country of origin, and wealth has been accumulated internationally even more rapidly than nationally. GCC investors have engaged in financial investment in the major international markets, and real estate investment in countries outside the GCC; as well as cross direct investment in other GCC countries or other Arab countries or, finally, the rest of the world. Arab entrepreneurs from outside the GCC frequently made their fortune by starting business activities in the GCC countries or in the US/Europe. In all cases, international investment escapes from the direct control, but also cannot benefit from special government support, being normally outside of the government’s jurisdiction. 

In parallel with the expansion of investment and wealth accumulated internationally, the origin of private sector profits has changed. It is important to estimate whether today’s major business groups realize their profits primarily in the domestic economy or internationally, and the extent to which their prosperity depends on the prosperity of the domestic economy, or is rather tied to global prosperity and, at least to some extent, de-linked from economic conditions at home. 

2. Estimate turnover with government and government entities vs open market based 

For some private companies government procurement remains a fundamentally important source of business and profit, but for many others the business is conducted primarily with private customers, be they final consumers or other business enterprises. Surely, the purchasing power of final consumers is also essentially influenced by government spending, and in this sense it might be true that the well being of the Arab economies still is substantially influenced by government expenditure. However, the significance and implications of being directly dependent on government business is entirely different from catering to a market whose overall purchasing power is influenced by government expenditure, but individual purchase decision are made privately and without government interference. 

The modalities of government procurement are also of relevance. We propose to explore the extent to which more transparent and competitive procedures have been adopted in procurement by the government and other major government-controlled agencies or companies, in order to estimate the extent to which direct access to this market still is a source of extra profit. 

3. Estimate concentration/competition 

The degree of competitiveness of key markets is very important in determining whether business may be said to stand on its own feet or be dependent on government support. Government can support specific businesses either through procurement, or by creating conditions of limited competition or outright monopoly to facilitate extra profit – i.e. create positions of rent. Competition can come from openness to international trade and investment, or from a multiplicity of domestic actors competing for the same customer, or both. It is the superficial impression of the proponent that the competitiveness of the Arab economies has significantly increased on both counts, and today there are relatively few “protected” niches in which private players can prosper undisturbed by competitors. Indeed, it is increasingly the case that also government-controlled corporations are being exposed to competition, or forced to become more competitive because their market increasingly lies abroad. 

4. Evolution of corporate structures and corporate governance 

The corporate structure of the business sector is also evolving, from being organized primarily as informal family-owned conglomerates (business groups) to being increasingly organized as formal, publicly-held corporations in which the founding families may maintain a dominant ownership, but management and ownership are increasingly separate. The extent to which this process is actually unfolding needs to be investigated; are the well known-cases of this tendency just isolated exceptions, or do they constitute the dominant trend? 

The reorganization of business enterprises is extremely important inasmuch it opens the door to more aggressive management of assets, i.e. divestment, acquisitions and mergers. Formal companies will tend to critically assess their assets, and exit areas in which their profits are below par, to concentrate in areas where they can do better. In this process of critical evaluation of corporate assets, corporate governance is also likely to improve, because management will pay attention to the transparency of results as a prerequisite of rational decision making. 

This is but one motivation behind the attention that has recently been devoted to improved corporate governance. The increasing importance of financial intermediaries and the desire to tap the equity market for growth by way of listing in the regional stock markets will inevitably bring about pressure to improve corporate governance and transparency. 

2. Actual and potential role of the private sector in promoting economic and political reform. 

Political science literature has frequently asserted a link between a thriving and competitive private sector and economic and political reform. This link can exist at two levels: because business openly and expressly articulates a reform agenda and calls on the government to engage in it; or because, even in the absence of open calls for reform, the business sector engages in behaviour that encourages/precipitates reform. 

Accordingly, we propose to divide our discussion in this second part in two main areas: participation and contests.