Global econ­omy puts Gulf in frame for slow­down

The Pak Banker - - OPINION - An­drew Shouler

IN­TER­EST­ING times in­deed, and bound to stay so. Amid the com­mo­tion, some per­spec­tive again is due. One of the most bizarre ideas to emerge from this cri­sis-re­lated era, yet rou­tinely ex­pressed by main­stream econ­o­mists, is that a drop in oil prices, though it re­duces trans­port costs to in­dus­try and adds to the dis­cre­tionary in­come of con­sumers in im­port­ing coun­tries di­rectly and in­di­rectly, is bad for their eco­nomic growth.

Why? Be­cause it re­duces the in­fla­tion rate and there­fore the down­ward pres­sure on the real value of ac­cu­mu­lated debt, and dis­cour­ages hasty pur­chases of goods and ser­vices. That is how warped some of the reg­u­lar anal­y­sis is be­hind a lot of pol­i­cy­mak­ing the­ory and prac­tice to­day. It might be mu­sic to the ears of those look­ing for higher prices, such as the oil-ex­port­ing na­tions ob­vi­ously, ex­cept for the fact that the fun­da­men­tal think­ing is so wrong that the stim­u­lus-based and credit-based strate­gies for growth around the world in mod­ern times have sim­ply not pro­pelled growth in a sus­tain­able way (in eco­nomic and fi­nan­cial not en­vi­ron­men­tal terms).

Which means that the re­spon­si­ble author­i­ties in the lead­ing economies are be­fud­dled, as the re­sources and/or meth­ods to pro­mote pros­per­ity and ei­ther al­le­vi­ate or by­pass the nat­u­ral busi­ness cy­cle are near enough de­pleted. The whirl­wind of fall­out in in­ter­na­tional mar­kets last week de­noted the re­al­i­sa­tion of this fact. The penny, and much else, has dropped. While a lot of this rea­son­ing has been avail­able and aired from time to time, it takes a sharp and mean­ing­fully felt re­ver­sal in the for­tunes of in­vestors, as well as in the num­bers con­fronting pol­i­cy­mak­ers, for the un­com­fort­able re­al­ity to hit home: that over­spend­ing of one kind and another, be­fore and af­ter the shake­out of a burst­ing bub­ble, is no good strate­gic way for­ward.

We live in a world now vir­tu­ally locked in a low in­ter­est-rate trap, epit­o­mis­ing the er­ro­neous stance of try­ing to foster growth by sheer mo­men­tum and en­cour­ag­ing ev­ery­one, by pe­nal­is­ing sav­ing, merely to re­cy­cle oceans of liq­uid­ity. That is the con­di­tion ev­i­dently vis­i­ble in the US, China, Ja­pan, Europe, dol­lar-linked emerg­ing mar­kets and all the com­mod­ity pro­duc­ers de­pen­dent on those sources of de­mand. How many coun­tries of any weight does that leave?

The re­sult which now threat­ens is that those par­tic­i­pants in the merry-go-round of reach­ing for mar­ket share in this in­ter­de­pen­dent world will try the ex­change-rate route to com­pet­i­tive­ness (as some feel China may have done with its par­tially-dis­guised cur­rency de­val­u­a­tion in the past fort­night). Do­mes­tic mon­e­tary and fis­cal room for ma­noeu­vre has widely been usurped, and struc­tural (sup­ply­side) re­forms to lib­er­ate prod­uct and labour mar­kets are sim­ply way too dif­fi­cult po­lit­i­cally to in­sti­tute among peo­ples in­grained with the easy-money modus operandi.

Some­thing of the flavour of these over­ar­ch­ing trends of course made its way into the story of the Gulf in the past decade, whether in ab­sorb­ing the over­spill of cheap global credit into lo­cal busi­ness en­vi­ron­ments, or main­tain- ing the dol­lar peg that links the GCC to the in­ter­est rates pre­vail­ing else­where, or per­mit­ting a cul­ture of roller-coaster in­vest­ment be­hav­iour (not least in real es­tate) that clearly draws on the same well of ha­bit­ual im­pe­tus.

It's a sad fact that the costs of the orig­i­nal pol­icy mal­prac­tice (per­ceiv­ing the long term as only a suc­ces­sion of short-term sit­u­a­tions to keep ig­nited) has so markedly dis­torted the eco­nomic and fi­nan­cial en­vi­ron­ment. In par­tic­u­lar, it has di­verted the scarce re­sources that de­fine eco­nom­ics - in prin­ci­ple and in prac­ti­cal ap­pli­ca­tion - from those house­holds striv­ing to work and put money aside to pro­vide for them­selves and their fam­i­lies, to­wards fi­nan­cial prac­ti­tion­ers who have been the ul­ti­mate ben­e­fi­cia­ries of too much money slosh­ing around in an of­fi­cially-spon­sored, dys­func­tional sys­tem. It's gloomy, no doubt, as the pum­melling of mar­kets rep­re­sents po­ten­tially only the thin edge of the wedge of the dif­fi­culty which has been so en­gi­neered. We are back in un­charted ter­ri­tory again - to which the ruc­tions within Opec, pend­ing Greek elec­tions again, and the all-en­com­pass­ing fear af­flict­ing US and es­pe­cially China watch­ers bear wit­ness. For the Gulf econ­omy, the buf­fer of re­serves at­tained in pre­vi­ous years can keep the worst of these in­tractable dilem­mas at bay, as can the in­her­ent, catch-up di­men­sion of the re­gion's de­vel­op­ment path.

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