CAPITAL FLOW IN THE ARAB WORLD
by Osama Kadi
West Asian countries are beginning to make stronger efforts to create a business-friendly environment. However, countries that are members of the Gulf Cooperation Council (GCC) are relatively less open to non-GCC investors. For example, in Oman, effective from January 1997, the new corporation tax code penalizes companies with foreign -equity stakes by requiring them to pay tax rates of 25 to 50 percent on profits (depending on the level of the ownership), while wholly owned Omani firms pay tax rates ranging between 5 to 7.5 percent. However, the preferential FDI treatment given to GCC members is not reflected in the pattern of bilateral investment treaties.
As of January 1, 1997, only 7 of the 152 treaties concluded by these countries for the promotion and protection of FDI were intra-regional bilateral arrangements. France, Germany and the United Kingdom together accounted for some three-fifths of the treaties signed by West Asian countries with developed countries. Most FDI outflows from West Asia originate mainly from Kuwait and Saudi Arabia and are directed to GCC members. Though small, annual average intra-regional flows have tripled between the periods 1980-1985 and 1991-1994, attaining $640 million in the latter period.
While petroleum industry of the oil exporting countries receives most FDI inflows, in the non-oil exporting economies FDI flows go mainly to the secondary and tertiary sectors. Activities to expand the oil and gas industry and plans for large investments mainly in Oman, Qatar and the United Arab Emirates to supply gas to Asian markets, encourages petroleum FDI into these countries. Saudi Arabia’s application in 1997 to join the WTO, if successful, could enable its petrochemical industry to gain better access to international markets, as well as boost its non-oil exports through enhanced investment and trade liberalization. FDI flows to non-oil producing economies, such as Jordan, Lebanon and Turkey are increasingly going into manufacturing (United Nation. 1997. "World Investment report 1997, Transnational Corporations, Market Structure and Competition policy." New York and Geneva: United Nation Publication: 96).
The best year for most of the Arab world was 1994, which investment inflows went up and reached the maximum. After the peace process got frozen by Netanyahu’s government in 1994, the capital inflows went down in Egypt from $1256 million in 1994, to $740 million in 1996. In Syria the inflows investment went down from $143 million to $120 million in 1996. Jordan economy experienced the worst scenario, its investment decreased from $43 million in 1995 to only $5 million in 1996.
the estimated $6.2 billion of Jordanian external savings is over 160 percent of Jordan’s GNP, Syria’s $26.1 billion is over 160 percent of its GNP. Middle East savings are abundant. The capital problem in the Middle East is fundamentally institutional. First highly inefficient statist economies generate far less “bang for the buck” than do market economies. Indeed, the efficiency of investment has been falling in the region during the pats decade.
In 1970-74, it took about $3.5 of investment to generate an annual stream of income in the Mashreq. In the late 1980s, it took over $7.5, and in 1988-91, over $13! Second, savers and investors (with good reason )fear and distrust national governments. Specifically, they fear that their savings will be expropriated either directly by state decree, or by stealth via rampant inflation and overvalued exchange rates. Unsurprisingly, they hold their savings off-shore or in highly liquid form. Only in genuine political reform creates secure private-property rights and an independent judicial system to reforce those rights will the savings of Middle Easterners be placed inside their own countries, and, still more difficult, in the kind of liquid, fixed –capital investment (like factories) that the region needs to produce goods to sell abroad to buy food and to create jobs.
The government of Lebanon believes that it will need over $10 billion merely to repair infrastructure. The needs in Egypt (57% million) and the Maghreb ($60 million) are far larger. However, international indebtedness is not the root of regional capital scarcity, neither can we blame deficient savings propensities: there is no evidence whatsoever that Middle easterners do not save. Egypt offers a useful illustration: the estimated "off-shore" holdings of hard currency by Egyptians exceeds $80 billion, nearly twice the size of Egypt’s current international debt, gross investment in Egypt was about $3 billion at 1988 official exchange rate (Richards, Alan. Vol. Sep. 1995. "Economic Roots of Instability in the Middle East." Washington, DC. Middle East Policy, Middle East Policy Council: 183).
Mohamed A. El-Erian noticed that the region is being less affected by the ongoing process of globalization, and integration of financial markets with the exception of a few countries. This is brought out starkly by two quantity indicators relating to Arab economies. The region has attracted a disproportional small share of recent international equity flows to developing countries –less than 1 percent to recent estimates. The total flow of private capital (e.g., equity, bond and foreign direct investment) to the region has only been about 2% percent of that going to developing countries (El-Erian, Mohamed A. Vol. IV Nom.3, March 1996. "Middle Eastern Economies’ external environment: What lies ahead?." Washington, DC. Middle East Policy, Middle East policy Council: 141).
Economic freedom, in the form of free markets and small governments that focus on the maintenance of property rights, are often thought to encourage economic growth (Barro, J.Robert. 1997. Determinants of Economic Growth: a Cross-country Empirical Study. Massachusetts Institute of Technology, MIT Press : 49). In Barrow’s view , an expansion of political rights -more "democracy"- fosters economic rights and tends thereby to stimulate growth.
The interplay between political institutions and economic outcomes also involves the effect of the standard of living on a country’s propensity to experience democracy. A common view since Lipset’s (1959) research is that prosperity stimulates democracy, an idea often described as the Lipset hypothesis. Lipset apparently prefers to view it as the Aristotle hypothesis: "From Aristotle down to the present, men have argued that only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self restraint necessary to avoid succumbing to the appeals of irresponsible demagogues" (ibid: 49).
One of the pioneering explanations of democracy was made by Lipset (1959). Lipset noted the correlation between the existence of democracy and such variables as per capita, wealth, industrialization, urbanization and the level of education, and saw these variables as causes of democracy (Pinkney, Robert. 1994. Democracy in the Third World. Boulder & Colorado, Lynne Rienner Publishers: 21).
THIS ARTICLE HAS BEEN SUBMITTED AS AN EXCERPT FROM OSAMA KADI'S PAPER ECONOMICS SUMMITS FROM CASABLANCA TO DOHA, THE ECONOMIC CONSEQUENCES PRESENTED AT THE INTERNATIONAL CONFERENCE ON THE ECONOMIC DEVELOPMENTS AND THEIR IMPACT ON ARAB COUNTRIES (TUNIS, JUNE 3-5, 1998).
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