Question

11 IT N AaBbCcDdEe A Normal s, and improvements, choose Check for Updates. ANALYTICAL AND CRITICAL THINKING QUESTIONS GCC real GDP growth outlook 2018 2019 2017 2.5 2.1 2.7 2.8 2224 2. O 13 Kuwait Oman Qatar Saudi Arabia UAE Bahrain "Projections Source: The Gulf News Global economic activity is gaining momentum. Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016. Risks around this forecast are broadly balanced in the near term, but are skewed to the downside over the medium term. The more positive global growth environment should support somewhat stronger oil demand. GCC countries are continuing to adjust to lower oil price. However, because of lower oil output, overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016. Growth prospects in the medium-term remain subdued amid relatively low oil prices and geopolitical risks. Source: IME policy paper (2017) Q1. Define economic growth and discuss its utility at the scale of one country and at the global scale. Q2. Discuss the factors affecting the GDP growth in Gulf corporation countries (GCC) Q3. By looking to the graph, explain why the GDP growth in some GCC countries was negative in 2017 Q4. How GCC countries can avoid negative economic growth (this is an open question, the figure and the text are a tool to answer this question) !!

Answer 1

Part 1

One can define economic growth as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. Statisticians conventionally measure such growth as the percent rate of increase in real gross domestic product, or real GDP.

Living standards vary widely from country to country, and furthermore the change in living standards over time varies widely from country to country. Below is a table which shows GDP per person and annualized per person GDP growth for a selection of countries over a period of about 100 years. The GDP per person data are adjusted for inflation, hence they are "real". GDP per person (more commonly called "per capita" GDP) is the GDP of the entire country divided by the number of people in the country; GDP per person is conceptually analogous to "average income".

Economic growth by country

Country Period Real GDP per person at beginning of period Real GDP per person at end of period Annualized growth rate

Japan 1890–2008 $1,504 $35,220 2.71%

Brazil 1900–2008 $779 $10,070 2.40%

Mexico 1900–2008 $1,159 $14,270 2.35%

Germany 1870–2008 $2,184 $35,940 2.05%

Canada 1870–2008 $2,375 $36,220 1.99%

China 1900–2008 $716 $6,020 1.99%

United States 1870–2008 $4,007 $46,970 1.80%

Argentina 1900–2008 $2,293 $14,020 1.69%

United Kingdom 1870–2008 $4,808 $36,130 1.47%

India 1900–2008 $675 $2,960 1.38%

Indonesia 1900–2008 $891 $3,830 1.36%

Bangladesh 1900–2008 $623 $1,440 0.78%

Seemingly small differences in yearly GDP growth lead to large changes in GDP when compounded over time. For instance, in the above table, GDP per person in the United Kingdom in the year 1870 was $4,808. At the same time in the United States, GDP per person was $4,007, lower than the UK by about 20%. However, in 2008 the positions were reversed: GDP per person was $36,130 in the United Kingdom and $46,970 in the United States, i.e. GDP per person in the US was 30% more than it was in the UK. As the above table shows, this means that GDP per person grew, on average, by 1.80% per year in the US and by 1.47% in the UK. Thus, a difference in GDP growth by only a few tenths of a percent per year results in large differences in outcomes when the growth is persistent over a generation. This and other observations have led some economists to view GDP growth as the most important part of the field of macroeconomics:..if we can learn about government policy options that have even small effects on long-term growth rates, we can contribute much more to improvements in standards of living than has been provided by the entire history of macroeconomic analysis of countercyclical policy and fine-tuning. Economic growth [is] the part of macroeconomics that really matters.

Part 2

The paper investigates determinants of economic growth in GCC countries using VECM approach. The results report that in a 10-year horizon, FDI accounts 15.87%, 10.29%, 16.58%, 0.89% and 6.88% for Bahrain, Kuwait, Qatar, Saudi Arabia and United Arab Emirates respectively in shocks in their economic growth compared to the contributions of exports (9.55%, 1.33%, 6.85%, 10.38% and 20.9%) and gross capital formation (0.83%, 0.07%, 9.88%, 1.98 and 17.98%) for the countries respectively. The results also show that the main determinants of economic growth are foreign direct investment and gross capital formation for Bahrain. For Kuwait, Qatar and Saudi Arabia, exports and gross capital formation are the main determinants of economic growth. Exports and foreign direct investment are the main determinants of economic growth in United Arab Emirates. Finally, there is no any evidence for short-run or long-run unidirectional oror bidirectional causality relationship for Oman.

Part3

The main objective of this research is to identify the determinants of economic development in Gulf Cooperation Council (GCC) countries over the period of 1996-2016. The economic growth of GCC countries has slowed down due to a sharp drop in oil prices as GCC countries are depending on oil exportation for their economies.

Part 4

Economic growth is expected to strengthen gradually, helped by the recent partial recovery in energy prices, the expiration of oil production cuts after 2018, and an easing of fiscal austerity. The World Bank expects growth to firm to 2.1% in 2018 and rise further to 2.7% in 2019. Growth in Saudi Arabia is expected to rebound close to 2% in 2018-19 and to strengthen similarly elsewhere in the region.  

“Policy attention is shifting towards deeper structural reforms needed to sever the region’s longer-term fortunes from those of the energy sector,” said Nadir Mohammed, World Bank Country Director for the GCC. “While the recent increase in oil prices provides some breathing space, policy makers should guard against complacency and instead double down on reforms needed to breathe new life into sluggish domestic economies, to create jobs for young people and to diversify the economic base. Any slippage could negatively impact the credibility of the policy framework and dampen investor sentiment.”

Looking forward, there are several downside risks that may weigh on activity. Lower than expected oil prices could exert pressure on the OPEC producers to extend or deepen their production reduction agreement and dampen medium-term growth in the GCC countries.

Although fiscal and current account balances are improving, the region continues to face large financing needs and remains vulnerable to shifts in global risk sentiment and the cost of funding. Geopolitical developments and relations within the region could slow growth prospects. Slippage in the implementation of country reform plans arising from weak institutional capacity will rob the GCC of the benefits of fiscal adjustment and of deeper structural reforms that aim to diversify their economies.

Over the longer term, the enduring dominance of the hydrocarbon sector in the GCC economies argues for the vigorous implementation of structural reforms. The terms of trade shocks in 2008-09 and in 2014-16 barely dented the dominance of the hydrocarbon sector in the GCC, with the bulk of the adjustment so far driven by spending cuts rather than the emergence of other traded sectors.