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Monday, Nov. 24, 2008

Gulf states should step up — U.S. consumption can't carry world

Staff writer

Persian Gulf countries with large accumulations of wealth can play an active role in reforming the international financial regime rocked by the ongoing global crisis, British experts told a recent symposium in Tokyo.

News photo
Paola Subacchi (right) and Vanessa Rossi, researchers from the Royal Institute of International Affairs, discuss the prospects for Gulf economies during a symposium held Nov. 12 at Keidanren Kaikan in Tokyo. SATOKO KAWASAKI PHOTO

The role of the Gulf region will also be important for the world to address the longer-term problem of continuing global imbalances — of the United States being the sole major driving engine of global growth, they said.

Two researchers from the Royal Institute of International Affairs were assessing the prospects for the Gulf economies and their possible roles for the world economy during the Nov. 12 symposium organized by Keizai Koho Center on the theme "Global financial turmoil: Gulf states as 'white knights'?"

"The global economic order does not belong any more to the established developed countries," and there is a "constant and progressive shift toward the inclusion of emerging market economies," said Paola Subacchi, research director on international economics at the London-based institute, popularly known as Chatam House.

The presence of emerging economies, particularly China and some Gulf economies, was highlighted during the Nov. 15-16 meeting of leaders of the Group of 20 countries held in Washington to deal with the financial crisis.

Attention has focused on whether sovereign wealth funds of the Gulf countries would consider more acquisitions of distressed U.S. and European assets, but "the current mood actually is more toward including some of these countries in the larger debate on the reform of the international financial system," Subacchi said.

The Gulf economies have experienced a large boom in recent years due to the high oil prices, which boosted infrastructure spending and investments in the region, Subacchi said.

And this boom is "very different" from a similar boom the region experienced from surging oil prices in the 1970s, "when the oil revenues were wasted rather than used in a productive way for development of the region," she said.

Today, the Gulf economies have taken a "more regional approach," in which "money tends to stay in the region, rather than being exported somewhere else, and there is a more private-sector approach" to using the oil revenue for productive investments, Subacchi said.

Vanessa Rossi, the institute's senior research fellow for international economics, said emerging economies cannot be immune from the current global crisis. "There is no such thing as being able to 'decouple' in financial systems. We see all stock markets, all financial sectors affected by the crisis," she said.

On Nov. 9, China unveiled a $586 billion stimulus package in an attempt to counter the impact of the global crisis on its growth.

Such efforts raise hopes that China may be able to maintain strong growth, Rossi said. "But I think the first priority for everybody in this crisis is looking after your own country's growth, so this may be enough to keep China growing, but it's not clear if it does the tricks for the whole world," she noted.

There will also need to be more realism in assessing the prospect for the Gulf economies, given the recent fallback in the oil prices and the seriousness of the global crisis, Rossi said.

Still, Rossi pointed out, most of the Gulf countries have had "extremely prudent planning of oil prices and oil revenue" and their government budget has largely been based on crude oil prices of between $50 to $60 per barrel.

"So these countries still have current account surpluses at this level of oil prices," she said.

Rossi also noted that once the global economy gets back on a recovery phase — either by 2010 or 2011, oil prices are expected to rise again with the tight demand from emerging economies. "There is every reason to believe Asia and emerging market economies will again be able to pick up and grow strongly from the same factors" that pushed them up in recent years, and similar patterns of growth will boost resources and energy demand that "will feed into the oil prices and revenues for the Gulf area," she said.

Today, the six states that form the Gulf Cooperation Council — Saudi Arabia, Kuwait, Oman, Bahrain, Qatar and the United Arab Emirates — combined are worth around $1 trillion in terms of gross domestic product, putting them within the world's top 10 economies, Rossi noted.

These economies should be considered as a group because of their structural similarities and because "they will behave in the same way as regards (to) their effect on the world economy," she said.

While the presence of the Gulf economies is also growing in the global financial arena, their weakness lies in their lack of development in the bond market system, Rossi noted.

"I think this is a particularly difficult issue if you want to become a financial center," she said.

The Gulf region and Asia need to create an alternative to the U.S. and European bond markets to match their rising wealth, she added.

Development of the bond market system in the Gulf as well as in Asia is also important in terms of having a more balanced financial system for the world economy, Subacchi told the audience.

"The global imbalance is still there. . . . We are still in a situation where there are parts of the world which save too much, and parts of the world where there (is) still too much consumption, and we have not found a way to resolve this issue," she said.

The other imbalance, Subacchi said, is that there is "only one engine for the world economy — the U.S. economy." Seeking answers from the incoming U.S. administration to revive American consumption as the driving force of global growth "will be an unsatisfactory solution because the risk is to create a kind of situation that generated the crisis, where there is too much consumption and too little savings in the U.S.," she pointed out.

In the near future, the big question will be how the world will come out of this crisis, "but in the longer term we need to focus on how to resolve these imbalances," she said.

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