GCC private businesses are failing to provide sufficient employment for nationals, are suffering from weak productivity and are not helping to create a "knowledge economy", argues a report by a leading expert on the GCC.
Providing no taxation or few investment opportunities for GCC nationals, business leaders in the region had little say in helping to steer diversification efforts in the economy, according to Steffen Hertog, an associate professor at London School of Economics.
For the most part, business remained dependent on the state, Mr Hertog wrote in the report, entitled The Private Sector and Reform in the Gulf Cooperation Council.
"Business has used the GCC's comparative advantages well, but has not employed them as stepping stones to the much-vaunted 'knowledge economy' - instead, it has witnessed declining productivity and failed to provide quality jobs for GCC citizens," he wrote.
It was often the state rather than private companies that were leaders in technology development, the modernisation of corporate governance, the build-up of a national managerial elite and the provision of blue-chip investment opportunities for the wider population, he wrote.
Private business has swelled in the GCC since the oil boom of the 1970s as companies have arrived to take advantage of government oil revenue investment and a broader push to widen the economy beyond hydrocarbons.
But despite the private sector's growing size, the generally higher pay, reduced working hours and better flexibility offered by the public sector means it accounts for around 90 per cent of employment in the UAE and some other GCC states. There is also no formal taxation system for businesses in any of the states.
The situation was partly responsible for the "structural isolation" of businesses from governments, Mr Hertog argues. He called the private sector's position "paradoxical". "It operates on a large scale, is internationally integrated, contributes the bulk of national capital formation and has attained fairly high levels of managerial sophistication," he wrote. "Yet business remains dependent on the state, living off government support in both obvious and less obvious ways."
But Mr Hertog also apportioned some share of the blame for the situation on regional governments.
The recent increase in public sector hiring and wage increases had "undermined" prospects for private sector employment, he wrote. The UAE Federal Government last year raised pay for public sector workers by between 35 and 100 per cent. It followed similar moves in Saudi Arabia, Qatar and Oman.
The UAE has named 2013 the year of Emiratisation as it aims to cut the burden on the public sector and improve technical skills. According to the Abu Dhabi Council for Economic Development, only 8.7 per cent of private-sector jobs in the emirate are held by Emiratis.
The number of Emiratis in government and semi-government jobs in Abu Dhabi could swell four times to 352,000 by 2030. To make the private sector more appealing, the Ministry of Labour is considering increasing holidays and providing a minimum salary entitlement for UAE nationals.
From 2005 companies operating in trade and commercial activities with more than 50 employees must maintain an annual 2 per cent Emiratisation quota with some sectors maintaining higher quotas, such as 15 per cent in banking. Saudi Arabia has applied more stringent methods, including the threat of fines, to address lack of employment of nationals across the private sector.