So, how are the United States’ creditors managing their own economies?
Rather than looking at how the Gulf states are managing their foreign portfolio (today’s topic du jour), I want to look at how the Gulf states are managing their domestic economies.
No doubt the Gulf is booming. How could it not, with oil above $90.
That boom has triggered a very sharp rise in inflation across the region.
The UAE number for 2007 is an estimate that appeared in the press; the other numbers are the latest available data. And there is a fairly broad consensus that the official data understates actual inflation. Some informal estimates would put inflation in the UAE at over 20%.
Commentators who didn’t like Alan Greenspan’s decision to hold nominal US rates below the rate of inflation in the aftermath of the bursting of the .com bubble have even more to worry about in the Gulf.
Ex post real interest rates for 2007 look to be very, very negative.
Both charts are updated versions of charts that originally appeared in my Peterson institute policy brief.
And with US policy rates set to fall further and Gulf inflation set to rise further, real interest rates will only turn more negative. That cannot be good in the long-term.
Now it is a bit unfair to blame bad policy in the Gulf for the rise in inflation and negative real interest rates that now mark the region. After all, at least some of their problems stem from the dollar’s weakness.
But then again, no one forced the Gulf to peg to the (still depreciating, and now against the yen and yuan as well) dollar. That was their choice.
I agree with the head of Saudi Arabia’s National Commercial Bank: Saudi Arabia needs to let its currency appreciate in nominal terms.
Another FT article highlighted growing popular discontent at Saudi Arabia’s dollar peg. Its title – Saudis search for inflation scapegoat — explains why the US might want to consider signaling that it would have no objections to an adjustment in the GCC’s currency regime. A perception that the Gulf monarchies are clinging to the dollar peg as a favor to the US even though that peg no longer serves their domestic interests wouldn’t exactly improve an already strained relationship.
Update: Saudi inflation is now 6% (and still rising); Oman’s inflation rate rose to 7.6%.
No Responses to “So, how are the United States’ creditors managing their own economies?”
Are you suggesting that Gulf States will have to raise interest rates, where bye drawing capital away from the U.S.?
Booming Chinese economy driven mostly by domestic forces: study
WASHINGTON, Jan 15 (AFP) Jan 15, 2008
The surging Chinese economy has been largely driven by domestic forces and not as dependent on exports as some US officials contend, according to a new US study.
The study released Monday by the Carnegie Endowment for International Peace with the International Cooperation Center in China’s National Development and Reform Commission, contradicts many assumptions about China’s economic performance.
Economist Albert Keidel, who authored the report, wrote that China’s stunning growth of around 10 percent annually since 1990s “has been overwhelmingly domestic in origin.”
“Trade and foreign investment clearly became increasingly important as sources of foreign technology and management skill transfers; but unlike many other East Asian economies, China’s own fast and slow cycles have not followed the fortunes of US economic growth and recession — quite the opposite,” he added.
He said that China’s recent inflation surge “is the product of domestic rural structural problems, not excessive monetary growth linked to trade surpluses or foreign reserves.”
Keidel’s report said China already is driven to a large extent by domestic demand.
“US government analysts need to correct the popular misperception that Chinese growth is export-led and hence exchange-rate dependent — it is not,” he said.
“US commercial and diplomatic thinking regarding China’s commercial behavior and long-term prospects needs to shift to account for this conclusion.”
Because China’s growth has not been export-led, Keidel said the United States should concentrate on improving domestic components of its own international competitiveness rather than blaming China for imbalances.
British business launches $100 million festival of Chinese culture
LONDON, Jan 15 (AFP) Jan 15, 2008
Britain will host Europe’s biggest-ever celebration of modern China starting next month, an 800-event festival of art, film, food and much more, organisers said Tuesday.
China Now, which gets under way in February to coincide with the start of Lunar New Year, comes amid heightened British interest in China, largely due to the 2008 Olympic Games in Beijing, they added.
The festival has been organised by British business rather than government, but those behind it say the event, which will cost in excess of 50 million pounds (66 million euros, 100 million dollars), aims to promote cultural links.
Highlights of the six-month programme include a major exhibition at London’s Victoria and Albert Museum on contemporary Chinese design, a themed Hong Kong day at Ascot racecourse, west of London, and Lunar New Year celebrations in the capital.
Simon Heale, China Now’s chief executive, told reporters that the idea was “to inform, to educate, to enthuse as many people as possible in this country about China”.
“I have a great belief that if we want to do better business, we have got to understand a country’s culture,” Alan Parker, co-vice chairman of the festival and chairman of financial public relations firm Brunswick, told AFP.
China Now is chaired by Stephen Green, group chairman of HSBC Holdings, while James Hughes-Hallett, chairman of The Swire Group and a director of Cathay Pacific Airways, is another vice-chairman.
Nice direct post…logic seems perfect.
If Gulf states allow their currency to appreciate, hopefully turning negative real interest rates positive, then what affect will appreciation have on the U.S. as it lowers its interest rates?
On the one hand, it seems like the dog chasing its tail. The lower the U.S. goes, the more Gulf states have to appreciate their currencies.
At the same time, inflation in the U.S. will actually increase…oil more expensive, etc.
The dog just whirls faster and faster.
note the calls for ending the peg come when Bush is in Riyadh trying to get the Saudis to increase production- that’s called a stealth reval- very untransparent. Pegs exist precisely to counter rigged currency markets.
ashes, ashes, we all fall down
this isn’t a post about china. but suffice to say that i disagree strongly with Dr. Keidel. Tis true that most of China’s 10% plus growth can be attributed to domestic demand growth (notably investment). unless your current account goes from 10 to 20% of GDP in a year, net exports won’t generate 10% GDP growth. It is also true — as someone like jon anderson recognizes — that net exports have contributed between 2 and 3% of gdp to china’s growth over the past three years, and that is an unusually large amount.
You will get an adjustment. The question is how and where you will get an adjustment, and if it doesn’t come through currency revaluation, it will come through inflation.
Ultimately everything has to do with the US invasion of Iraq. One mental exercise is to compare the economic situation without a US invasion and with an invasion. The invasion requires large sums of wealth to be expended, and that wealth has to come from somewhere. As people try to keep the situation identical, the cost has to move elsewhere. The Iraq war has cost several hundred billion dollars, and that loss has to move though the system somehow.
I agree Twofish,
The Iraq war represents a massive misallocation of capital in the trillions of dollars that sadly most Economist pundits avoid speaking about. The multi-trillion dollar estimate includes direct and indirect costs including the future medical bills for the over 30,000 seriously injured US Soldiers.
Who wants to be a creditor of a currency that is structurally damaged as the U.S. dollar ? Those vested interests that support dollar based assets require big favors and special conditions.
Mr. Oilman Bush wants to see petroleum lower? Maybe his buddies and family are making too much money.
Re — Twofish on 2008-01-16 05:27:25
I agree with what you wrote on the Iraqi invasion. But I think the original mistake happened even before that. I think that the US answers to the 9/11 terrorist attacks were disastrous. Not just the wars, but the way they kept the economy artificially going by setting and holding the interest rate too low.
“if it doesn’t come through currency revaluation, it will come through inflation.” China is also a US creditor and seemingly has a similar inflation problem. However, it may be different. It is interesting to see the USDA data on meat production. In 2007 there was a huge drop in pork meat production in China, beacuse of a disease breakout. Supply dropped well below demand, no wonder leading to huge food inflation. When meat production goes back to normal, most of this will be solved. The question is if they can keep inflation from spreading to other sectors.
Re — Nicolas on 2008-01-16 06:55:33
“Who wants to be a creditor of a currency that is structurally damaged as the U.S. dollar?”
I think China will be willing a creditor as long as its support of the US can keep the current working of wold economy. Because the current system is what catapults China into economic power in an incredible short time-frame. I doubt that they care about potential losses on their dollar-assets, as long as they are paid out with growth, because growth generates far more wealth than any potential losses.
The argument on whether China’s economy is overly dependent on exports to the US Economy will be settled in the not too distant future. If China’s economic growth significantly tanks along with the US Economy, I will owe you a lunch. With the implosion of the credit driven US Housing bubble, it is almost inevitable that the US Economy tanks into severe recession. Nationwide, US Housing prices have at least another 30% downward correction as measured by Robert Shiller that will destroy $6 trillion of paper wealth. Americans will collectively learn that a house is a place to live in; it should never have been an ATM cash machine for conspicuous over consumption.
“Rating firm Moody’s on January 10 signaled its belief that the long-term credit rating of US government debt might have to be cut – downgraded – below AAA.” http://www.atimes.com/atimes/Global_Economy/JA17Dj02.html
Any comments on the accuracy of the story or why it has not been picked up by the media?
If true, it sounds like a bombshell to me. Of course, if a tree falls in the forest…
I just called Moody’s NY and was told the potential downgrade is a ten-year or so projection. In other words, it is troubling, but nothing more serious than one of Mr. Setser’s posts.
I have already commented on it in NR’s blog.
Despite the US is overdebted, I think the time and the timescale when and for which it was announced, indicates that Moody’s want to influence the election.
In their original message they said, without cutting in social security, MediAid, MediCare there will be this downgrade. This is clearly political, as it is not true, since e.g. reduction of military spending, increase of taxes or cutting gov employment would help as well, but the GOP propaganda focuses on the same issues as Moody’s. I think the Wall Street doesn’t want people like Huckabee or Edwards winning the party nomination.
So getting back on topic, I think that what’s going on in the GCC right now is very interesting. The comments from the UAE governor a while back that the cause of inflation wasn’t the dollar don’t really seem to indicate that the Gulf States have any desire to allow their currencies to move. But as Brad nicely graphs above, the end result is inflation and negative real interest rates. Which should only encourage more fixed asset investment in places like Dubai. The liquidity has been good to global managers who have allocations to Gulf stocks, which have done rather well in the past six months. At some point, though, you would think that inflation would turn into a political issue, and the governments, lacking legitimacy already, would almost be forced to do something about it. I am intrigued by the comment that the Saudis think they are doing us a favor by keeping the peg, and that Paulson ought to signal he is ok with a repeg
I am entirely in agreement as to the problems oil exporters have in their own economies when they peg their currencies to just about any other currency, not to mention that of a major oil importer. But I am less convinced of the effect that a change in their policy would have on US. Perhaps it is just my ignorance of the magnitudes involved (and I am indeed rather ignorant) but it seems to me that the relevant statistic is the extent to which a policy change would change their surplus/deficit vis a vis the rest of the world. Given the truly massive nature of the current oil windfall and the relative inflexibility of economies devoted so wholeheartedly to oil exporting, it is hard to see how the effects on us would change in a big enough way to make much difference. Sure, a change in their real exchange rate would induce marginal changes in how much of their windfall they save and how much they consume, but just about all of it is going to go back out overseas in one way or another given their limited domestic production of just about everything except oil. The question would then seem to boil down to : Can the induced shifts in consumption and savings really show in the US or European data or make a difference in where we are headed economically?
It is hard to convince myself of this – The big question for us isnt how they manage their non-oil economy. It is how much oil they pump and therefore how much we have to shell out to import it. Their non-oil economies could thrive or shrivel up and blow away and it still wouldnt make much of a difference to us.
A case in point. Iraq’s non-oil economy has been literally blown to pieces over the past several years. But what has actually mattered to the rest of us is what has happened to oil shipments. It is certainly extremely important to THEM what happens to the non-oil economy (and perhaps this was the only point you were trying to make) but I cant agree with the other commenters (or you if that is what you meant to say) if the argument is that their exchange rate policy means much to us.
I would even go further and say it really doesnt matter (except symbolically) what currency they price oil in either since both the price of oil and the price of currencies are determined by supply and demand for each but that is another topic.
Anonymous — thanks for the support.
SK — the oil exporters balance of payments is primarily a function of demand and supply (don’t forget demand) in the oil market — which determines exports. the exchange rate doesn’t matter.
it also though is a function of:
a) fiscal plans — i.e. what fraction of the oil windfall is spent and what fraction is saved by the government.
b) the exchange rate. a stronger exchange rate would increase the external purchasing power of all local currency revenue streams, including government salaries.
i find it hard to think that if the riyal doubled in value, more Saudis wouldn’t buy more imports — or travel abroad.
that is one linkage.
the other is the fiscal/ XR nexus. if the Saudis don’t want more inflation (for social stability reasons) and don’t want to change the peg to the dollar, the only policy tool left is fiscal — and a fiscal consolidation in the face of higher oil revenues would raise gov. savings, national savings and the current account deficit.
it would also mean more fees for those managing SAMA’s assets, or those managing the new sov. wealth fund.
it isn’t clear though that this produces a better result for ordinary saudis than more spending (i.e. higher local currency salaries) or, better in my view, a stronger currency and more external purchasing power for the same salaries.
would anyone indulge me by joining in this idle speculation ? -
if bernanke keeps lowering and the yen keeps strengthening, while the GCC look more and more like easing their dollar pegs, one way or another . . . can a reverse carry trade develop at some point ? could all the money that the fed tries to release into the economy be borrowed by carry traders ?
and this one : thought experiment. a secret atoll in the south pacific is a hideout for a dollar counterfeiting gang. their island imports more stuff than they export, because it doesn’t pay them, timewise, to waste an hour making anything else. question (a) do they run a deficit ? and (b) should they worry about it ?
and this one : can anyone recall, given that the GCC oil producers invest a percentage of their take in the u s, and given that the u s is the source of a somewhat smaller per cent of their take, – by how much does a $10 rise in the price of a barrel of oil boost the u s economy and markets ? or to put it the other way around, how much would a fall in the oil price to $80 slow the u s economy ?
As these countries are forced to de-peg isn’t that perhaps the most dollar negative event we can have? Won’t the effect be dramatic on the dollar?
I increasingly find it difficult to agree with the short term dollar bulls in light of rising global inflation in emerging markets. Their arguments seems to be only that the dollar will rally short term only because it has gone down so much. I also fail to see deflationists’ arguments that the dollar must rally since debt is being repaid as credit contracts.
Could you comment?
thanks for your outstanding work,
I agree with all that you are saying regarding linkages. Its just that given the size of the Saudi economy it is hard to believe that any possible-to-imagine appreciation would make a big difference to US. (I have no doubt it could make a big difference to THEM). That is, I am with you all the way with respect to channels of causality. I am just not so sure the magnitudes involved (e.g. the amount more that the Saudis would import) would make a huge difference to us. But I could be wrong since the magnitudes involved in the Saudi B of P are not things I carry around in my head.
ST- I think what you saw today in the EUR/USD cross is what the near term dollar bulls have been talking about. Europe has been bearing the brunt of dollar weakness, and now it appears that the ECB is going back on its hawkish rhetoric with the EUR a very long way above fair value. So after the comments were released, the EUR immediately tanked, taking commodities down with it, and the DXY rallied.
“Rather than looking at how the Gulf states are managing their foreign portfolio (today’s topic du jour), I want to look at how the Gulf states are managing their domestic economies.”
Nice charts, Brad. Now, where are the details about the individual economies that resulted in the inflationary trends?
I’m not trying to take a shot at you, but it would help to examine the specific drivers within each M.E. nation’s economic basket. The expenditures, on scale, in Saudi Arabia are different than for some of the other M.E. nations. Military hardware contracts, for example.
Anyway, I would appreciate a more thorough discussion if you find the time. If not, thanks for the two charts.
I believe most American are innocent people. Generally Americans are very hard working and intelligent people. But sadly the mainstream US media exclusively represents and works for Wall Street bankers, extremely rich people, and corrupt politicians (ie. the Robert Rubin’s and Hank Paulson’s have totally looted the US Economy in various fraud schemes: Enron, Worldcom, Tyco Corporation, Fannie Mae, Freddie Mac, subprime mortgage fiasco, etc). Oh well, the Chinese media works for the Chinese government so it’s no better there, but a few corrupt officials are executed one in a while
Dubai wealth fund could invest in China (cut and pasted from China Economic Review 2008-1-17)
“The Dubai government is considering investments in China through its sovereign wealth fund Istithmar, the Wall Street Journal reported. ‘Countries such as China where we recently opened an office are very welcoming to sovereign wealth funds, so more are looking to invest there,” said Istithmar head David Jackson. Large state-backed investments from Dubai have not always been welcomed elsewhere in the world. DP World, a Dubai-controlled port operator, was forced to sell five US ports it had gained in a larger acquisition in 2006 when US lawmakers changed the review process for foreign investments. Istithmar’s portfolio includes the American department store Barneys and has a 2.7% stake in Standard Chartered.’
Investing in China: Fool’s Gold?
Americans tend to disregard history. Henry Ford declared bluntly, “History is bunk,” while Gore Vidal calls the U.S. “the United States of Amnesia.” Usually, this disregard has few consequences, but sometimes not. That may be so with investing in China, where history suggests profits will be far below expectations, possibly making those investments fool’s gold.
China’s history is completely different from that of the United States and it has left deep imprints on China’s politics. Therein lies the trap for investors and policymakers who ignore history and wishfully think market forces will inevitably make China just like the United States.
One critical factor is China’s attitude to foreigners. That attitude is captured by the Great Wall of China, which provides a metaphor for China’s long history of isolationism and xenophobia. A second critical factor is the legacy of China’s humiliating defeats in the unjust 19th century opium wars with Great Britain. At the time, Britain was importing large amounts of tea and silks from China, and demanded the right to sell Indian opium in exchange. As the opium trade grew, not only did it cause massive addiction, it also caused a damaging monetary outflow of silver from China. That prompted China to stop the trade, and Britain then turned to military force to keep China’s market open.
This historical experience has made China nationalistic and profoundly averse to foreign exploitation, which is why history is so relevant for investing in China. As a result, China will never allow itself to be exploited by foreigners. For investors, the trouble is that China views making profits from the Chinese market as a form of exploitation.
When foreign investments are for exports, China has viewed the profits as being earned abroad. Difficulties only arise when the goal is production for the domestic market. This explains why profitability on such investments has historically been so low, and why so-many joint-venture investments with Chinese partners have failed.
So we have the Gulf State sitting on a lot of sand and a lot of oil (or maybe even not so much oil anymore)
None of those states can be described as an open society. From what I understand there is a dichtiomy between ruling class riches and people who support their lifestyle, quite a few from the latter group being immigrants. (This is the group that suffers from inflation. Poor immigrant from pakistan with dismal living conditions iin say UAE may not have a choice as a lot of them could not even afford the fare to go back to their hometown. But cost of living does also have an increasing impact on well educated foreigners from say Europe ( The fact, that they run the risk of having their 15 year old kid sodomised as happened lataly in ME adds to the problems of limitied freedom of their spouses).
There is no inherent culture of innovation (They do build universities now, those are also staffed with many foreigners)
The freedom for woman is very limited.
As oil will run out sooner or later or will hopefully be in part replaced with other sources of energy/more efficent use of energy how will the ruling families maintain their standard of living?
What they are doing at the moment is buying assets to live on the revenues of their investments ( e.g. other peoples physical/ intellectual labor). Is this strategy going to sustain their standard of living on the long run? I am not sure. Possibly they need to cut down somewhat on expensive hobbies ( falks, Royce Royce, distribution of whahabit islam etc.) in the future. Or does anybody have suggestions how this comparably small group of ruling families in the Gulf states are going to fare?
And what about the short term impact of inflation? Who is going to clean their houses, cook, wait on them, work in Hospitals, on construction sites if a substancial number of people decide that it is not worth the money to go to the Gulf states?
People should learn from history, but one lesson of history is that people and nations can change if they really want to. Three hundred years ago Sweden and Turkey were the terror of Europe, for example. The other lesson of history is that you shouldn’t draw simple lessons from history.
In the case of China, most people nowadays think of most foreign investment as a “win-win” situation. There is some nationalistic unease under the surface but it is blunted by the fact that China has gained tremendously by foreign investment and interaction and that the earlier periods of xenophobia and isolation left China much poorer than before.
Guest: Difficulties only arise when the goal is production for the domestic market. This explains why profitability on such investments has historically been so low, and why so-many joint-venture investments with Chinese partners have failed.
I don’t know about most joint venture investments failing, but if you want to do business in China you *really* want to avoid doing it as a joint venture since JV’s have a rigid legal structure that almost guarantees that the partners will end up hating each other.
You really should set up shop as a “wholly foreign owned enterprise” and then enter into contracts with your partners. The only reason for ever considering a JV is if there is some legal requirement to do so.
BMH: There is no inherent culture of innovation. The freedom for woman is very limited.
I think this is a very stereotyped view of the Middle East. The thing about the Middle East is that it is extremely diverse, and so you are likely to find places where people get the ingredients just right.
For example, Dubai is a major center of high technology and outsourcing, and lots of people are looking at Dubai as an example of what the Middle East could look like once the oil runs out.
DC: But sadly the mainstream US media exclusively represents and works for Wall Street bankers, extremely rich people, and corrupt politicians.
Not really. The mainstream US media exists primarily for entertaining people, so that they get eyeballs to sell advertising. There is no desire or duty to inform so they don’t.
“When you’re young, you look at television and think, There’s a conspiracy. The networks have conspired to dumb us down. But when you get a little older, you realize that’s not true. The networks are in business to give people exactly what they want. That’s a far more depressing thought. Conspiracy is optimistic! You can shoot the bastards!” — Steve Jobs, http://www.overcomingbias.com/2008/01/quotes-1.html
“I think this is a very stereotyped view of the Middle East”
I think it is too. I’d like to add that the undercurrent of a lot of these high falutin economic arguments, what seems to be driving them, is that some non-white people are now financially well-off and are now making investments around the world- kind of overturning the world order where colored folks are supposed to be house servants or some form of second class citizen or some guy/gal working behind the scenes. And that seems to disturb some people.
Guest — please note that my advice is that the Gulf countries would be better off running their own monetary policy, not importing monetary policy from either the US or the EU. i don’t think that is paternalistic in the slightest.
the concentration of wealth in the hands of a small number of families in the Gulf is an issue — as it would be if a comparable concentration of funds was in the hands of anyone else any where in the world. and those families are now controlling a flow of $250-300b. they are also extremely secretive. that is bound to attract scrutiny, again no matter what their background.
some with China’s $500-600b flow.
yes, there is an undercurrent of over-turning an old financial order where the US and Europe provided financing and expertise to the rest of the world. but the precise way that old order is being over turned is rather interesting — and indeed quite surprising in a lot of ways.
Two fish:There is no inherent culture of innovation
Don#t get me wrong. During the ending antique and all through medivial aera islamic/ME was the keeper and proliferator of science (scholars would translate the work of greek scientist/ philosophers and contributions to pharmacy, early chemistry botany and medicine were made that you had to sought after for in europe of that time. Iran rests on an 2500 year old empire). But if you look at the family ruled oelstates in ME innovation is not the fundament of their economic well being at the moment. I am fully aware that a lot of effort is being made to change this. But if you put yourself into the shoes of ME countries the question is, will once oel is gone or seriously diminished foreign investment and innovation at home be enough to sustain their economy. I don#t know.
As to the woman question. Again I am fully aware of the fact that things are changing. Had I quoted Sheika Haya (http//www.un.org/apps/news/story.asp?NewsID=22782&Cr1=haya – 13k- you would probably not have referred to my post as beiing stereotyped.
( As to guest with your non-white people with money being disturbing (to white supremacists?)-stuff. This is pointless at least for me. I am clearly not into male chauvinism or any kind of chauvinism but this is not a question of colour and when it comes to the middle east my personal experiences are somewhat limited to people from iran who emigrated to Europe/USA. if this experience would result in a stereotype it would be spelled: These are highly intelligent, cultivated and often stricingly beautiful people ).
To get back to economics: oilproducing tribal ruled ME countries might face economic trouble in the future partly because of a non decoupling scenario partly for intrinsic reasons.
I distrust a lot of what people have to say about the Middle East, not because I know that much about the Middle East, but because people have said similar things about China, and been wrong.
BMH: But if you look at the family ruled oelstates in ME innovation is not the fundament of their economic well being at the moment.
They are going to have to learn fast. One should point out that family owned businesses aren’t incompatible with innovation. It’s amusing for example that the big South Korean companies like Samsung, LG, and Hynudai are all family owned business with extensive marriage links between the companies and the South Korean government. It’s something that I’m sure that Kuwait is looking at.
For a ruling power elite to figure out how to get challengers to join them rather than overthrow them is a classic problem in political economy. One example of how this was done successfully is the case of Harvard University, which was the center of power for the Boston Brahmins. By incorporating possible challengers to the “First Families” and getting them to join in, Harvard has ended up extending its power far beyond would it would have been had they closed things up. The same thing is happening with Wall Street.
The old order doesn’t get overturned if they have any sense. If they have any sense, they find the people that are going to be powerful in the new order and make deals early on when the price is cheap. That’s the back story behind a lot of the deals you are seeing on Wall Street. People see who is likely to have the big power in the world economy in 30 years, and they make the deals now.
@twofish: Thanks for the reply
Interestingly there are two articles in the weekend edition of the Harold Tribune International on topics discussed on this thread:
Mohamed Shafik Gabr, Chairman of the arab business council of the World economic forum
in his oped article ” Time to relaunch” discusses causes for the minor role ME plays today in global economics and than elaborates what needs to be done to improve the situation:
“The most telling statistic in the World Economic Forum’s latest Global Competitiveness Report is that not a single Arab state made the top 25.
It is another stark reminder that, for all its billions of oil dollars and huge reserves, the Arab world remains a net importer of foreign technology and services. Even the mighty Kuwait, ranked 30th, lags behind minnows like Estonia”
He names low levels of foreign and intraregional investment as causes for
“low growth, high unemployment and poor economic development 20 years of Arab economic stagnation”.
He goes into strategies that need to be implemented to “increase (Arab business) competitiveness within the global economy”.
He views the politic instability as an obstacle in achieving this goal
“Our region’s political instability is a significant, but not exclusive, obstacle to economic regeneration.”
“To kickstart a revival of the Arab world’s social and economic fortunes – our second renaissance, or, in today’s parlance, a relaunch – we need to remind ourselves that our region has a rich cultural and scientific heritage.” ( as I mentioned on my 2nd post)
“We need to foster a culture that celebrates entrepreneurship, research, innovation and technology – all essential to sustain growth and development in the Arab world. The expansion of more competitive export sectors, other than those based on natural resources, is no longer a luxury, but an imperative.”
He adresses the need of a more open society and the role women would have to play in this society
“Arab leaders simply have to develop more business-friendly policies and to initiate structural reforms at a faster pace. Greater investment in local research and development, female empowerment in the workplace and job creation schemes for skilled workers and graduates would be a good start in defusing the demographic time bomb that awaits countries like Egypt and the Kingdom of Saudi Arabia.”
He adresses the problem of strategic foreign investment ” Far too often, we conform to the stereotype of the rich Arab and play into the hands of cynical business commentators. But as long as we are involved piecemeal in the apparently random acquisition of expensive Western corporate trophies, allegedly in the name of strategic economic diversification, who can disagree with them?”
He states money was not the issue
“Money, of course, is not the issue. After 9/11, many Arabs repatriated some of the $1 trillion of money then believed to be invested outside the region. This sudden liquidity, coupled with record oil prices, means that greater capital sums are now available for investment.”
( I am not sure about that, money is alwas an issue. From what one can read in the press the question of currency appreciation and dollar depegging seems to be a hot topic in the arab financial/ business/political circles- To achieve the above mentioned goals they need high skilled people. These people are not going to to a good job if all there earnings are being eaten up to pay for a place to live and something to eat. So inflation needs to be adressed on a short term basis. Appreciation of the currency means that assests in form of other peoples debt ( US-treasuries) loose value, which means less money to invest in needed projects. Also the arab business world should be contemplating a worst case scenario regarding dollar depreciation and/ or default on debt issued by the US-Government. The evolving pattern of the subprime/financial crisis is, that at the end of the day all the bad credit finds its way onto the balance sheet of the US government. This is not going to improve the rating of debt issued by the US government. In this scenario it is only prudent to diversify away from assets that are the debts of the counterside to tangible assest like shares of a company. I would do the exact same thing and I am not a ” state lacking democratic legitimation”)
He ends by stressing the importance of a political will to implement economic/social reforms
“But if we are to become masters of our own destiny in shaping an economic future that is not based solely on a finite supply of national resources, we need to harness the political will to step up our reforms now.”
Basically it would be hard to find arguments to make the ME responsible for the current dire situation of the US-society. And the argument towards the need of “political will to step up reforms” could and should be picked up by the U.S..
The other article “The construction site called Saudi Arabia” by Jad Mouawad describes how far the vision has allready been materialised using a large petrochemical plant as an impressive example.
“The Saudi economy was in idle mode for 20 years,” said John Sfakianakis, the chief economist at SABB, formerly known as the Saudi British Bank, who is based in Riyadh, the Saudi capital. “Today, the feeling here is, ‘We’ve won the lottery; let’s not waste it.’ ”
“Despite all the recent headlines about Middle East investors bailing out troubled American banks like Citigroup, a growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East.”
“… while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed. The kingdom, which has a population of 24.5 million, including nearly 7 million foreigners, has what one analyst called a “human time bomb.” About 40 percent of Saudis are under 15, and because the country has one of the world’s highest birth rates, the population is expected to reach nearly 40 million by 2025.”
” But while oil-rich states are still buying American Treasury bonds or military hardware from the West, analysts say the more significant trend is for a growing share of their investments to be pumped into local projects.”
“”The vision is to turn the kingdom into a major industrial power by 2020,” said Jean-François Seznec, a professor at Georgetown University who is a specialist in industrial policies in the Gulf. ”
Both articles are worth to be read in full length.
“overseas investors buy U.S. holdings at a record pace”
By Peter S. Goodman and Louise Story
Why shouldn’t the Gulf countries just alter their methodologies for calculating inflation?
A little bit of hedonics, and the problem’s solved!
Some of your readers comments are well off the topic of infationary pressures within the GCC countries. Something that led to a more social discussion of the GCC countries. Neverthe less I’m curious about your Fiscal solution to the problem. It is obvious the since the monetary policy is inept due to the dollar peg (which is part of the problem!). The question that I believe is very important, how do these governments slow down their fiscal spending while continuing to provide necessary infrastruture spending? For the typical person slowing down fiscal spending is counter intuitive at times of oil price booms. With ever growing populations public services such as health and educaiton demand more resources.
I must disagree with the so called dichotomy of rulers and common people. While there exists distinctions there also exhists substantial influence from indivudals outside the circle of royalty and government. This is not to say some ruling families have substantial influence, more so than others within the region. It is a bit crude to think of it as dichotomy however.
I also agree with some of your readers about the misconception of the cultural aspects of the ME generally and the GCC specifically. Until you have visisted all six states you can never make any assumptions. Despite what is being precieved the region is undergoing strong culutral influences whether Western or self innovated. I believe the region is a spectrum of conservatism and liberalism, however it is all relative.
My final remark, back to economics, what is the cost of de-pegging from the dollar on Oil revenues? non-oil sectors? domestic spending?