| Kippreport.com

Road to Recovery, Part II

November 23, 2009 12:15 by Scott MacMillan

Click here to read Part I.

But while the high price of oil is a “shortcut to recovery” (in the bank’s words), governments will probably have enough savings to get by even if oil drops again. The coffers of the Gulf states are chock full due to years of saving, enhancing their capacity to intervene and boost domestic demand.

Saudi Arabia, for instance, runs a massively counter-cyclical fiscal policy, with budget expenditures expected to increase to 37 percent of GDP in 2009, up from 29 percent in 2008.

Moreover, analysts say governments invested much of the windfall from the second great oil boom of modern times more prudently than the riches from the first. In the boom of the 1970s, many of the gains were squandered on impractical schemes like Saudi Arabia’s vision – only now finally being abandoned – of turning the desert into a breadbasket, via massive irrigation.

In the 2000s, governments instead invested in productivity-enhancing initiatives like education and infrastructure, according to Mohammed Zaher, a senior economist at National Bank of Kuwait.  “We are talking about $2.1 trillion worth of projects that are underway, or in the early or advanced stages of planning,” Zaher says.

“Those trillions of investment will increase the efficiency of the Gulf economies and in turn will improve the productivity of those economies.”

Ibrahim Saif, a resident scholar at the Carnegie Middle East Center of the Carnegie Endowment for International Peace, offers a far more critical post-boom analysis. In a March 2009 paper, Said argued that while Gulf governments talk a lot about developing non-oil revenue sources, their actual moves toward diversification have been less than impressive.

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Tags: Economy, Financial Crisis, gcc, Regional