The Arab world climbs up the growth curve
The important factor to note is that the Arab economy managed to grow due to domestic demand in favoUr of investment

The Arab World experienced another good year of economic growth in 2007, which was consistent with the rest of world in general. Growth reached 6.3 per cent for the region, up from growth averaging 3.6 per cent a year over the 1990s. Growth has been driven by continuous economic reforms (especially in the GCC countries) intra Arab investment ventures and high revenues from sale of commodities such as oil. On a per capita basis, the region grew by 4.2 per cent over 2006, this is the highest per capita growth achieved since the 1970s.

The important factor to note is that the economy managed to grow due to domestic demand in favour of investment. Additionally, private investment as a share of GDP reached 14.4 per cent and is increasing for all sub-groups. Foreign Direct Investment, mostly by capital within the Arab countries is also growing (now at $24 billion), particularly in resource poor countries, and imports of capital goods are a significant part of the total imports.

Economic growth through the region
As the level of economic freedom in the Arab world varies from one country to another, there are significant differences in the registered economic growth among sub-groups and countries in the region. Qatar, the UAE and the Sultanate of Oman are growing very rapidly. These countries have managed to win investors’ confidence and they are gaining the critical mass. At the other end, Lebanon, Iraq, Palestine and Somalia had declining GDP growth as a result of conflicts. At the sub-group level, growth is dominated by economically free countries which grew by 7.5 per cent in 2006, while those Arab countries that registered middle range economic freedom grew by 4.3 per cent.

Constraints to growth
Compared to the developing world, the Arab World – on a per capita basis – still lags behind most developing regions except the least developed nations and Sub-Sahara Africa whose performance was the worst in 2006. Industrial production is declining for oil exporters as hydrocarbons faced capacity constraints. Overall industrial production in the Arab World declined by 0.4 per cent in the year 2007. Growth in countries that are predominately dependent on hydrocarbons declined by 2.3 per cent while those countries that have more of diversified economies had a growth of 3.6 per cent.

Another important development in the region has obviously been the presence of continued conflicts that has derailed prospects for recovery in Lebanon and Iraq. The problem of Darfur and the conflict in Somalia have shaken investors’ confidence in long term meaningful ventures. The impact is not only on economic growth, but also other areas such as labour markets. It has hindered migration and this has had spillover effects in several countries in the region. If conflicts were to subside the peace dividends could be significant.

Employment prospects from growth
High economic growth has resulted in strong employment creation at 4.5 per cent per annum in 2000-06. Unemployment has declined from 14.3 per cent to 10.8 per cent, while labour force has grown at 3.6 per cent per annum between 2000-06 and there has been increased labour force participation, particularly for women. Unemployment has not only declined, but did so at the time when the region is facing peak pressures from labour force growth.

The boost in labour force growth was due to the arrival of women to the labour market. However, women are still less successful than men at finding jobs.

Progressing on trade
On the trade front, the Arab world is continuing to make progress in reducing tariffs. In this respect, it is only surpassed by Europe and Central Asia in terms of tariff reforms. These reforms, though, are limited to a few countries within the Arab world, mostly the GCC countries. In other parts of the Arab World, trade regimes remain protective and the processes for exporting and importing are still cumbersome. In these countries tariffs average more than 16 per cent, which is still considered high compared to the GCC countries with an average of 5 per cent custom tariffs.

The area of future concern in the Arab World is the over accelerated economic growth of the GCC countries. While foreign direct investment is welcome, these countries need to have the right fiscal and monetary policies to make them capable of absorbing the billions of dollars that follow in either as FDI or as oil revenues.

These countries are entering a unique phase of their economic development, coupled by high oil revenues and large investments by local and foreign companies. They have witnessed a marked success in their efforts to attract foreign investment from the period when $10 million was considered as a large investment to currently an investment of $100 million, which is considered as a medium size investment.
Unfortunately, if fiscal and monetary policies are not properly monitored, an economy that is dominated by one sector could suffer harmful competitiveness consequences resulting from large increases in the country’s revenues. The increase in exploitation of natural resources, such as oil, in the GCC countries, could result to a decline in the other sectors.

The increase in revenues from natural resources and foreign direct investment will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive internationally. When oil prices climb and oil exports rise they do so at the expense of other sectors such as manufacturing and services. As the national currency becomes strong, the local products and services become less competitive in the international market.

Although this trend is generally associated with natural resources, it can occur from any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investments, which has been the case for the GCC countries.

It is essential therefore for GCC countries to safeguard the value of their currencies in terms of what they will purchase. Rising prices, inflation, reduces the value of money. Monetary policy, therefore, should be directed at achieving this objective and providing a framework for non inflationary economic growth.

Low inflation is not an end in itself. It is, however, an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help foster sustainable long-term economic growth.

The GCC countries should therefore, use all tools available at their disposal such as Interest rates decisions to stabilise the economy. They have to judge what interest rates are necessary to meet a target for overall inflation in the economy.

The monetary policy objectives should be to deliver price stability, low inflation and to support the Government’s economic objectives including those for growth and employment. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can affect consumers’ and firms’ cash flow, a fall in interest rates, reduces the income from savings and the interest payments due on loans. Borrowers tend to spend more of any extra money they have than lenders, so the net effect of lower interest rates through this cash flow channel is to encourage higher spending in aggregate.

The opposite occurs when interest rates are increased. Lower interest rates can boost the prices of assets such as shares and houses. Higher housing prices enable existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

If the economies of the GCC countries were to be effected by high inflow of revenues they will catch Dutch disease, which could in turn have a negative effect on the whole Arab World.

Top^