Revisiting the events and issues of the global financial crisis, still rumbling on in various ways, it would seem that key differentiations are to be found between countries’ economic records according to the twin, essentially non-quantifiable, characteristics of culture and context.
That realisation should undercut any rigid, deterministic approach to policy, at least one that ignores the reality of how a given society is likely to respond.
One example from the pre-crisis era was the ability of Canada to eliminate its substantial budget deficit in the 1990s by reappraising what the state is for and cutting swathes of its spending, which depended on the willingness of that country’s citizens to see the matter sufficiently the same way. That, together with a common-sense approach to banking regulation that proved significantly absent elsewhere, enabled better survival of the credit crunch.
Another example is very much in the spotlight today in the (superficially) post-crisis world. As the Eurozone slips into outright deflation (with its associated systemic threat to over-indebted sovereigns), Germany insists that its economy reacts better to responsible budgetary consolidation than to persistent reflation, the result both of historical experience and of ingrained social conservatism.
Viewing now the US, the one bright lodestar currently hauling the world economy behind it, we could argue indefinitely over whether its own impressive rebound follows from fiscal accommodation and the even greater monetary support of QE, or from the inherent merits of a freewheeling, predominantly market economy that engages in creative destruction and rapid deleveraging at the expense of precepts that other blocs (viz. Europe, Japan) would adhere to in the name of social cohesion.
Thus, what actually arises in response to policy behaviour may depend on local realities on the ground, feasibly quite different from one country to the next. Each case is its own laboratory.
So to the Gulf, whose example clearly is distinguishable from most of the rest of the globe, in the scale but also lopsidedness of its resource base, besides having its own geography, history, authorities and people.
Right now its identification with oil especially dominates that narrative to an even greater degree than normal, given a halving of prices in the past six months. That fact doesn’t so much colour the regional story as throw a tin of paint all over it.
But what about the underlying nitty-gritty of economic responsiveness, even beyond much-vaunted restructuring and diversification?
If there are three pertinent themes to allude to beyond the hydrocarbon-based cycle, they might be government leadership, capitalism itself and globalisation. Even cursory and sporadic reference to available analyses on these subjects offers recognisable arguments.
For instance, on government’s role, Espinoza in an OxCarre paper of 2012 maintains, “public investment and subsidies are typically inefficient, but in the GCC these are crucial engines of growth”. The scale of the state’s presence can potentially be problematic, albeit understandable in marshalling vital national reserves. “Capital accumulation by the public sector has been strong and contributed to the high levels of income per capita. However, it is difficult to sustain the quality of investment when volumes are so high.” Hence issues of productivity.
On capitalism per se, much maligned in some quarters in the aftermath of the global financial crisis, there is no doubting the commercial impetus of business activity in the region. An LSE paper authored by Hertog in 2013 suggested, however, that much of private business essentially recycles the liquidity of oil surpluses, even if unavoidably, “often providing no taxes, little employment and few investment opportunities for GCC nationals”, therefore limited in its autonomous contribution.
As to globalisation, the issue is essentially how the Gulf engages with a world economy whose capitalist traits have increased in recent decades, with enhanced trade patterns and the development of emerging nations and markets. In that respect, simply by sustaining energy exports and increasingly servicing global flows of goods, services, income and wealth, the GCC states naturally find productive exposure to whatever upside worldwide trends impart, yet also a vulnerability to downside forces (as oil prices most obviously have shown).
In all, it suggests the Gulf has the challenge of finding its own workable, sustainable model, internationally interactive and domestically viable.
With world policymakers grappling with competing imperatives (for instance ‘austerity’ versus ‘stimulus’), perhaps a defining observation would be: what course of policy action facilitates true confidence among businesses and households?
That idea was proposed by modern historian Niall Ferguson, and would seem at least as relevant in the Gulf as to the debt-stretched, developed economies. It chimes also with the IMF’s notion, as described here last week, of emphasising the cultivation of tradable, value-added output.
As to the surrounding world economy, for planners and investors in the Gulf alike, understanding its relative state amid the obscurity of waves of easy money clearly requires a devoted watching brief.
