The International Monetary Fund (IMF) Middle East & Central Asia director, Masood Ahmed, had bad news and some good when he presented the fund’s revised economic forecasts for 2009 and 2010 at the Dubai International Financial Centre in February.
The bad news is already well known. Global gross domestic product (GDP) will fall more sharply in 2010 than in any year since the IMF was founded. Ahmed did not rule out the possibility that the trends in the year to come could be even worse than the fund now expects.
Good news for the GCC is that the IMF forecasts the region’s non-oil GDP in 2009 to be about the same as in 2008. The dollar value of imports, an analogue of total consumption expenditure in the GCC, is projected to hold steady. Government spending is forecast to grow as governments accelerate capital investment programmes. Remarkably, the Gulf is seen as helping to offset the negative economic trends elsewhere in the world.
The fund is calling for governments to do more to counter the impact of the downturn. This involves expanded government spending, more monetary relaxation and extra assistance to the banking and finance system. Its recommendations are similar to the main features of the economic recovery plan implemented in the US since the collapse of Lehman Brothers in September.
Most economists agree that it is the right treatment, but a minority believe that huge government interventions will do little more than fuel inflation in the long term. But all are unanimous that political pressure for protectionism must be resisted if the recession is not to be turned into a deep recession.
It may already be too late. National, not global, factors have driven government measures since the financial bubble burst last summer. They are likely to become more powerful as the recession deepens and unemployment grows.
The troubled asset recovery programme (Tarp), approved by US congress last November, treats US banks more favourably than foreign ones. It flies in the face of the core principles underpinning 60 years of efforts to end discriminatory treatment of foreign suppliers of goods and services.
Even UK Prime Minister Gordon Brown, leader of the traditionally internationalist Labour Party, has called for British jobs for British workers.
In the UAE, Abu Dhabi announced additional support measures in early February – but only for Abu Dhabi’s banks. The conclusion drawn by many is that the emirate is looking after its own first. It is a compelling sign of the times.
Globalisation, never popular, is going backwards. Chinese business people say that Beijing, reeling as the trade slump slashes demand for its products, is preparing to redirect production to local markets and away from volatile international ones. If this happens, the most powerful motor driving expanded global trade in goods and services will go into reverse.
Similar measures are being taken by every government on earth. They are subtler than the tariff walls and import quotas imposed in the 1930s, but protectionist nonetheless.
The theoreticians of free trade will resile in horror. Practical people are more pragmatic. If governments do not help their own businesses and people, the reality is that no one else will.
The idea that wealth is increased if people trade across borders remains a powerful one. But the best that can be hoped, in the climate the IMF so vividly describes, is for efforts to be focused on the regional, rather than the national, level.
In the Gulf, this is already beginning to happen as investors, ravaged by the disasters that have swept global financial markets, decide in growing numbers that there is no place like home.