Mr. Brian Malnak:  I'll be short on introductions.  We've got a distinguished panel here today.  First up will be Brad Bourland, who is a chief economist that comes to us from Riyadh.  We look forward to hearing from him, so Brad, you're up.

Brad Bourland: Thank you Brian.  It's a pleasure to be back again to speak at this conference. 

You know I thought long and hard how I can add some value this afternoon to what really is a very simple story about the performance of the economies of the Arab world.  That simple story is that oil prices are $44 per barrel today. 

You really don't need to know a lot more than that.  Economically in the region, things are just fine.  It's good news this year to be a rentier economy -- more on that later and what I mean by that.  I spoke at this conference several years ago for the first time in 1999, and at that time I started by saying that I divide the economies of the Arab world into two types -- into oil economies and into non-oil oil economies.  What I meant by the later is that the non-oil producers in the Arab world -- Egypt, Lebanon, Jordan for example -- benefit substantially when oil prices are high.  They benefit from tourism in Beirut, Cairo and Dubai by the Saudis and other Gulf citizens.  That was a big story this summer.  The tourism to Beirut and Cairo was very strong.

In addition of course, the expat workers from these countries in the Gulf region repatriate their salaries, and when economic conditions are good, more money flows back to their home countries, and there are other benefits as well. 

So, let me emphasize the basic story that I don't want you to loose sight of today, and that's that oil revenues to the region are at historic highs -- something on the order of $250 billion or so in oil revenues will flow to the region this year -- maybe the highest in history.  As a result, stock markets are rallying.  Real estate markets are strong.  Government finances are being strengthened.  The trade balances will enjoy large surpluses.  Currencies in the oil-producing countries are strong.  Interest rates are low.  Inflation is low. 

The burning question in Saudi Arabia for the last two weeks, in the media for example, the burning economic question has been how will the government use its huge budget surplus.  That's the kind of problem we like to have.  The countries of the region this year will see growth rates that range from a still disappointing two to three percent in Egypt and Lebanon -- they seem to be the laggards despite the strong tourism flows -- to rates approaching China-like 10 percent growth in places like Qatar and Dubai.  And then, mid to high single digits in most of the other countries.  So, that's the economic story. 

Now, let me see if I can add some value to your thinking about the economies of the Arab world.  Imagine if you will your favorite country -- doesn't have to be an Arab country -- your favorite country with the following characteristics:  it has a large natural resource endowment -- copper, lumber, oil, whatever -- owned by the government, not the private sector.  The government, probably with the help of foreign firms exports the resource, and export earnings are its main source of revenue.  Thus, it does not tax its own people.  Thus, it is not particularly accountable to its own people, not particularly transparent either.  It's not particularly friendly to foreign investment because it earns foreign exchange it needs from selling its natural resource abroad.  It's not particularly friendly to the private sector because it doesn't need to tax the fast growing private sector for revenues.  And, the government probably owns a very large proportion of the infrastructure and fixed assets of the country anyway because the government had the money to build it.  This structure doesn't lend itself to job creation because private sector growth is not emphasized.  And, the main business of the country, a natural resource extractive industry, is capital, not labor intensive and is probably being done by foreigners anyway. 

What I just described is a rentier economy.  Collecting economic grants for the export of natural resources -- sounds like an awful model doesn't it?  In fact, if you were thinking of a place such as Brunei, Qatar, Norway, Abu Dhabi -- where the natural resource endowment is so huge, and the population so small -- then, it's a model that works extremely well.  And, these countries and their citizens will probably be rich and content forever.  On the other end of the spectrum are other countries such as Algeria, Nigeria, Iran, Venezuela -- where the natural resource is less abundant and the population is large.  In these cases, the model is a disaster.  And, a key country lies right in the middle -- that's Saudi Arabia, with a huge resource endowment, but also a large and fast-growing population.  Ten years from now, will Saudi Arabia look more like Nigeria than economically or more like Abu Dhabi?  A year ago, I would have said Nigeria.  But, as I just said, it's a good year to be a rentier economy.  And, maybe it's going to be a good decade to be a rentier economy.  I don't know, but maybe the jury's a little more out. 

In any case, we are going to talk about reforms, and we do frequently, and I would encourage you to ask yourself when you hear about economic reforms in the region, to ask whether these reforms are in any way altering the basic rentier structure of the economy.  If not, the country will still fundamentally be dependent on winning the occasional lottery of high commodity prices. 

Has there been much fundamental reform that alters this structure in the Arab world?  No.  Until Saudi Arabia sells the oil sector to the private sector and then taxes a fast-growing private sector, then it's going to be a rentier economy.  Are there, however, some interesting things in reform going on that do modify the structure?  I think there are.  Qatar for example is liberalizing its economy even at the same time it enjoys the huge natural resource wealth, creating super abundance in high growth that I think probably will persist for years and years in that small country. 

I believe Saudi Arabia with its well-diagnosed need for job creation is serious about private sector liberalization, about capital markets development, about privatization, and about opening to foreign investment.  So, I would say that there is an important but not fundamental restructuring occurring in Saudi Arabia itself. 

I wonder what Iraq will look like down the road?  Will it become primarily an rentier economy, relying on the government ownership and distribution of oil revenues?  Or will it include a powerful market economy element, like Dubai?  I believe it's very unclear at this point.  I don't have an answer or speculation on that question.  Well, I hope that added some value to your thinking about the Arab world economies. 

I want to end with an observation in line with the theme of this conference, which is restoring U.S.-Arab mutual trust.  An interesting contrast is occurring that I last saw in the region in the late 1970s -- at that point, we were at the peak of the oil boom and all the business opportunity that that implied and the political uncertainty that was going on because there was a revolution occurring in Iran next door. 

Today, terrorism is creating an uncertain security environment and an outflow of many Americans, especially from countries like Saudi Arabia.  But at the same time, the oil revenues pouring into the region are so huge, creating a powerful and compelling magnet for Western businesses, that actually right about now, I wouldn't be sort of surprised if we are at the bottom. 

In fact I'm quite hopeful that what has been a declining trend of U.S. business presence in the region probably will be reversed going forward. 

Thank you very much.  I will stop right there.

Questions for Brad Bourland in the question and answer session:

Question:  The title of the conference today is "Restoring Trust and Confidence."  You talked about when $44 is the price of oil that's good for the Saudi economy.  The reaction here from the consuming states is: there's a cartel, .. it's manipulation.. and all these bad names come out.  It's a general reaction especially in an election season.  Does this encourage the distrust between the US and Arabs when the prices are high and is there anything we can do about it?

Brad Bourland:  Well, when I'm in the US during the summer and I'm doing a lot of driving I'm a consumer and yes it does increase the angst that Saudi Arabia especially faces an uphill battle when it comes to the media portrayal of Saudi Arabia when the two main stories are terrorism and oil prices, that's not easy to deal with.  So yes, I think it does complicate it.

On the other hand I have to say I'm quite surprised at the complacency of America over $40 a barrel oil and $2 a gallon gasoline.  I expected to see in this country much more outrage and concern and blaming of OPEC than I have indeed seen.  I haven't seen many calls to toss the bums in jail like we used to hear about OPEC members in the past. 

Now it appears to me, to be practical about it, that oil prices at this level did slow down the US economy in the second quarter and maybe into the third quarter of this year, over the summer driving season.  And that gets to be dangerous for Saudi Arabia itself.  It recognizes that.  It doesn't want oil prices this high.  At current production levels and assuming it finds no more oil it won't run out for about 90 years.  It wants to maintain a market for that oil over the long term.  Saudi Arabia does want to push oil prices back down and has tried hard to do it.  I think they would be comfortable with prices in the range of about $30 a barrel.  They could live with it.  And I think the rest of the world could do it as well.

Question:  Please comment on the state and quality of Arab education, including Saudi Arabia.  Are Arab youth being prepared for a smart work force?

Brad Bourland:  Well, I'm not an expert at this.  I'll put it to your from the perspective of an organization that recruits from the Saudi labor force.  I work for a bank that's 80 percent Saudi.  From the perspective of someone who looks at job creation -- we don't just have a problem of job creation in Saudi Arabia; we have a problem with skill shortage in Saudi Arabia.  So, there's no doubt there's a mismatch between the skill set that's produced by the universities and that sought by the private sector.

In our case there really is one small university in the Kingdom that we recruit from.  It's the University of Petroleum and Minerals.  It has a good finance program.  It has an English language curriculum.  As you move to the other universities in Saudi Arabia, King Saud University in Riyadh would be our second choice.  It has a mixed Arabic and English curriculum.  By the time you get to King Abdul Aziz University in Jeddah the curriculum really is all Arabic and we see a lot of the graduates there having what we see is the equivalent of a high school education.  They're not qualified - we don't think - to come to work at the bank.  So we focus our recruitment efforts in a very narrow piece of the Saudi educational system.  So from that perspective I would say it definitely has some work to do to match the private sector needs with the skills that are being created.

Question:  What is the status of WTO negotiations and will accession to WTO change much in Saudi Arabia?

Brad Bourland:  Well, a US policymaker would be the one to ask what the status is, but I understand a Saudi delegation was here just in the last few days to advance talks further.  The sense that we get without knowing the details is that they are very advanced and Saudi Arabia is close to acceding to the WTO. 

Let's say that they get in.  What does it mean?  It gives Saudi Arabia the gift of competition.  So, it's a good thing.  It means the economy, at the end of the day - if they take it seriously and apply all the commitments they make, it will grow faster.  It will provide more jobs for its citizens.  It will give all of us that live there access to the world's best products at the cheapest prices.  This is all quite positive. 

Individual Saudi companies that only survive because they have protections from the Saudi government in the form of subsidies or protective high tariff barriers face something of a challenge.  That's something they individually will have to deal with.  I view it as a quite positive development that will advance the reform program and help do the things that we all want to see which are: job creation and faster growth in the private sector in Saudi Arabia.

Question:  We have an OPEC meeting coming up.  Any predictions on what OPEC will do?

Brad Bourland:  OPEC will become relevant again.  After losing control of oil prices for the last few months I think they will step back into a position of reasserting their relevance in an effort to bring prices back into line where they want them.  OPEC is producing about four million barrels a day above its quote - producing about 30 [mbpd], the quota's 26 [mpbd].   So maybe they will up the quota but not to the full amount.  There is some talk about altering the price band.  You know the target band is $22-$28 a barrel right now and we're way outside that on the high side.  But I don't think they will tamper with that right now.  That's it.

ABOUT BRAD BOURLAND

Mr. Brad Bourland has, since 1999, been the Chief Economist at Samba Financial Group, formerly Saudi American Bank, in Riyadh. He is also Head of Country Risk Management for the bank, which involves managing its cross-border risks. He publishes regularly on issues related to the Saudi Arabian and global economies and the world market, appears frequently in the domestic and international media, and is a regular public speaker.

Before joining Samba, Mr. Bourland spent an 18-year career as diplomat, economist, and manager with the U.S. Department of State. During the last three years of his diplomatic career, he was in Riyadh as the American Embassy's First Secretary responsible for financial affairs. In that capacity, he analyzed the Saudi Arabian economy for the U.S. Government and conducted financial aspects of U.S.-Saudi relations. He served on the U.S. negotiating team for Saudi accession to the World Trade Organization. Before joining the State Department he worked for two years for Raytheon in Jeddah as an instructor.

Mr. Bourland earned an M.A. in Linguistics and a B.A. in Arabic from the University of Utah, where he graduated magna cum laude. He is a Chartered Financial Analyst (CFA) charterholder.