Classifieds powered by Gulf News

Trying to make the new economy work

Trying to reflate activity might perpetuate if not aggravate the business cycle of boom and bust

Image Credit: Bloomberg
The Kuwait stock exchange. The GCC needs to encourage the private sector and anentrepreneurial culture to speed the transitional trajectory.
Gulf News

You might just have noticed in recent years that there’s been a bit of an interruption to the onward march of prosperity around the world. The capitalist machine has not only coughed and spluttered but threatened to break down.

Moreover, not to put too fine a point on it, economic reversal has meant losses in output and employment which policy makers want to see regained.

A feature of the surrounding debate in the developed economies is whether to try to replenish what might be perceived as missing demand, or instead accept that the prior trend in growth was financed excessively by debt and therefore not truly reflective of a sustainable rate of GDP growth. Besides austerity, supply structures in product and labour markets might have to be reformed. And that is indeed a fierce contest.

The business cycle of boom and bust is familiar and real enough, however, and simply aiming to reflate activity might only perpetuate if not aggravate that volatility.

Over time what is needed is a different form of impetus, a momentum based on strategically-designed reinvention at both corporate and aggregate levels rather than purely the pumping of money and credit.

Simplistically, it’s the distinction between pursuing added value rather than merely volume. Any fool, or rather central bank, can keep shovelling cash into the pit. It’s what you are liable to get for it that really counts: a true revival of confidence, or just a desperate grab for self-protection by hoarding or by investing in the safest financial investments?

The relevance to the Gulf of this dilemma in Western economies is not only in the form of the relative health or otherwise of international markets -- with GCC and Mena countries needing destinations for their globally-oriented exports -- but also in prevailing interest rates, a critical macroeconomic setting.

No-one needs reminding that the Gulf economies effectively take their monetary policy from the United States. Just as Hong Kong has stuck with its dollar peg through thick and thin, so this region has determined that its interests, excuse the pun, rest in sticking with the settled benchmark.

Not many will have failed to notice, too, that very low interest rates not only persist now, right across the US yield curve, but that the Fed is committed to keeping them there for the foreseeable future. The short end is close to zero, and the long end suppressed by so-called quantitative easing.

That means the Gulf continues to import a very slack monetary stance -- as it has now for many years -- tending to fuel demand in what was a surging uptrend before the financial crisis, and subsequently now in the recovery phase after the sudden downshift.

On the fiscal side, governments in the Gulf have also been able to dispense the quite substantial proceeds, on average over several years, of the relatively high oil prices historically, as an additional source of stimulus.

Policies in the mature and struggling Western economies have to be contrived to find some combination of artificial cyclical lift amid the short- to medium-term pressures of retrenchment at the same time as the necessary structural overhaul for the longer term. Not only that, but financial sector woes, especially in Europe, have yet to be worked out. None of which is remotely easy.

For the Gulf, with the demand side taken care of, and with the signs being that economic rebound is well under way and the banking system finding its way back to stability, it is the supply side -- microeconomic conditions and prospects -- that remains the crucial concern. The need is to generate sustained systemic renewal in a region that has depended on default resources for decades.

Fortunately, the understanding of that requirement has become well-established, and if there is a word that characterizes the attitude of the UAE and much of the Gulf towards sustainable economic growth it is innovation. A multitude of purpose-built institutes, studies, frameworks and programmes have dotted the business landscape and dialogue accordingly.

As the report accompanying this month’s latest Global Innovation Index, produced by Insead, says: there is no quick fix. The GCC still ranks better on the so-called ‘input pillars’ of frameworks stimulated by government than on its outputs (see chart), and needs to encourage the private sector and an entrepreneurial culture to speed the transitional trajectory. Pockets of knowledge-based excellence then have a better chance of creating a genuine, lasting multiplier effect for the economy.

It’s reasonable to argue that the road to prosperity is surely not about ‘more’ but about ‘better’. That means knowing what kind of change is truly beneficial, and enabling that to happen. So while the West is distracted by a theoretical, maybe imaginary output ‘gap’, the Gulf can concentrate on bridging the remaining, real developmental gap it confronts, emphasizing expertise and self-regeneration.