The GCC region is going through intense macroeconomic changes.
It is modernising its economies through diversification, regional integration and jobs creation. In the long run, the region is opening up to the global market. More investment opportunities both locally and from abroad naturally lead to growth and development. But there are many challenges on the way.
An open market faces opportunities and threats, so balancing out the risks and rewards is key. The advantages are many. Among them are access to international capital and trade. Robust trading leads to a more diverse economic base. This means stronger growth driven by productivity and competitiveness. Both the private and public sectors benefit from this phenomenon, as research shows.
The income per capita in developing countries that drop trade barriers is five times that of other emerging economies. The World Bank estimates that per capita income grew by 5 per cent in open economies, compared to 1.4 per cent in closed economies. Higher per capita income means increased tax revenues, consumer spending and investments.
Yet one cannot turn a blind eye to the threats of a free market. An economy that expands and opens too fast can run into problems like contagion from its major trading partners.
Even the European Union, the largest trading bloc in the world, ran into financial and economic contagion problems. The sub-prime crisis in the US and the knock-on effect of slower growth in Asia are two examples.
During the recession in the US, most economies in the EU went through a period of recession before recovering. This was because of the domino effect of the interlinked financial and trading systems. But much of the potential damage can be handled by a progressive central banking system and enough reserves for crises.
There were early success stories from emerging economies like Tanzania. Over a 15-year period as of 1986, the African country transformed from a closed economy to an open market one. Economic governance was successful in opening the economy stage by stage. The resulting GDP growth was significant, averaging about 7 per cent between 2001-07.
There were many factors in the country’s sound economic governance during liberalisation. Tanzania introduced fiscal and monetary policies to control double-digit inflation. Other reforms were fiscal consolidation and stronger public financial management. Privatisation and reform of state-owned enterprises led to a smaller state role in the economy. There were trade reforms and liberalisation of the financial sector. All accomplished within a market-oriented regulatory framework. Foreign direct investment (fdi) grew strongly, stimulated by depreciation allowances, import duty exemptions and income tax holidays.
After 2007, however, the success story is marred with the same challenges faced by the GCC. The global slowdown harmed Tanzania, which now struggles with high public debt. Interestingly, it made little difference to the GCC that it wasn’t a completely open economy in 2007, because when international commodity prices dropped in 2014 owing to the slowdown in the previous seven years, the loss in oil revenues made itself felt in the region in any case. As a result, public debt has also risen in the GCC since 2014.
So how do open markets handle high public debt based on global economic weakness? One of the fathers of modern economic theory, John Maynard Keynes, believed that strong demand is the secret to a successful economy. He advised governments to borrow and spend during recessions to boost demand and profits.
In this paradigm, high public debt is not necessarily negative in open market economies. Provided its debts are repaid when demand rises, a free market can build its credibility even beyond the bottom line of economic fundamentals.
Free market economies come with their risks and rewards. From the investor’s point of view, when fundamentals are sound and GDP is growing, the opportunities multiply. At every level in the economy there are more chances to invest in anything from stock exchanges to natural resources.
There is one chief difference between a successful or failed open market economy. That is the presence of progressive and efficient economic governance with a long-term plan. Solid economic governance can make the difference between success and failure in an open economy. Like a father guiding his son, economic governance must allow growth at the right pace; not too fast or too slow.
Hussein Sayed is the chief market strategist at FXTM.
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