Venture capital is critical to the future success of not only the UAE but also the GCC. To understand this we first need to understand the historic formula for our success – oil leads to financial capital, which leads to real estate development, which creates social and business communities that attract people. Repeat.

Even if oil prices had not collapsed, sooner or later the size of the economy would reach a level at which oil alone could not deliver growth. We have not reached a point of reckoning because oil prices halved, that only accelerated the inevitable.

The conventional argument is that SMEs are the engine for growth in any economy. Some might argue that the global conglomerates coupled with global trade are the engines for growth. Whatever idea you subscribe to, in the end one has to accept that whether you believe SMEs drive economic growth or whether it is large companies, the first step is starting that company. Put simply, without start-ups an economy cannot normally achieve sustainable growth.

Oil and the exponential growth of our nascent economies short-circuited the natural route to start-ups – which is venture capital backing entrepreneurs who build those businesses. Similarly, massive government infrastructure spending, a normal phenomenon in growing economies, allowed for returns with near-zero risk, which, in turn, led to generations expecting rewards without understanding let alone taking risks. It is time to pay the piper and transition from government-led economic growth to private sector-led growth, and entrepreneurs backed by venture capital are the tip of the spear.

I have lived and worked in Abu Dhabi, Dubai, Bahrain and Riyadh as well as having done a lot of business in Kuwait. The best strategy that I have seen for this transition is Bahrain’s. The first interesting step was the founding of the Economic Development Board (EDB) under the direction of crown prince Salman bin Hamad Al Khalifa. As the name suggests, the EDB is tasked with developing the economy, but what is interesting, and quite different from its neighbours, is that the board is a mix of senior government officials and senior businessmen. The current chief executive, Khalid Al Rumaihi, is a veteran of Investcorp, the first major private equity player in the region and also based in Bahrain. Doing global deals but working with investors from across the region is basically the perfect profile to continue taking the EDB from success to success.

Equally interesting for Bahrain is that the previous chief executive of the EDB, Sheikh Mohammed bin Essa Al Khalifa, after having spent seven years building up the EDB from 2005-12, was in 2011 appointed chairman of Tamkeen, which focuses on building up the private sector component of economic growth. This continuity allows for the interlinking of important government initiatives. Just as importantly, recruiting fresh experience in the form of Al Rumaihi and rotating developed experience in the form of Sheikh Al Khalifa helps to foster integrated innovation in developing the economy.

To my mind two of the most important steps that Bahrain has undertaken to make it easier for entrepreneurs to launch their start-ups are that costs are reasonable and regulations are effective and efficient.

Bahrain ignored building an infrastructure for rich global companies filled with regional sales teams. Instead, it built an ecosystem friendly to the VCs. Carlyle and KKR may be based in DIFC, but 500 Startups Middle East, part of the global VC firm, is based in Manama and run by a veteran of another regional Bahraini blueblood financial services firm, Sico.

The key for entrepreneurs, of course, is the availability of venture capital and for that the central bank of Bahrain has done an outstanding job of being well ahead of the curve in evolving its regulations to keep pace with the global developments.

The first time I set up a company I moved to Bahrain to do it, leaving the UAE because Bahrain was far easier to set up in and far better integrated from a business perspective to the dominant economy in Mena – Saudi Arabia. Competitive advantages for VCs to set up in Bahrain remain.

This brings us full circle to the UAE and the question of how VC is supported. Some point to the new VC law, but I cannot find a copy and every report that I have seen discusses funds, not the investment management companies that are necessary to incorporate and manage such funds. It is important that improving regulations for funds needs to be matched by improving regulations for the investment companies. This is why I support Bahrain’s method of first allowing a dialogue around business and second allowing investors and entrepreneurs a voice in such dialogues to complement the view of the technocrats.

You might also like: Kick-start the UAE’s venture capital ecosystem to boost the economy and Venture Capital Lessons from India, Lebanon and Ireland

This article was originally published in The National.