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GCC Needs to Win Confidence of its Investors and Consumers
While governments across the world are planning to raise trillions of dollars to fund their bailout and fiscal spending plans, the fact is that it is hard to find convincing examples of fiscal stimulus successfully driving an economic recovery.
It certainly didn’t help
In fact higher government spending, funded by sovereign bonds, could create a situation that economists call as the “crowding out effect”. Increased government borrowing, to fund a deficit or simply to support additional spending, tends to increase market interest rates. While the government can always pay the market interest rate, there comes a point when corporations and individuals can no longer afford to borrow or are “crowded out” of the debt market.
So advocates of fiscal stimuli should be very careful on where the funding comes from and at what price, and what those funds would be spent on.
However, given the unprecedented nature of the global economic crisis, exceptions might win the day.
The one positive aspect of increased government spending is that it could help rebuild the confidence investors and consumers need to invest and spend. After all, the global crisis we are in today is more about a lack of confidence rather than a lack of funds per say.
Dimes and dollars might help, but eventually whoever would manage to rekindle investor and consumer confidence would see their economies rebound first.
The six-member Gulf Cooperation Council in this context has a great opportunity to garner confidence of its people and the world, by delivering on its promises and targets set years ago. A common market, unified monetary and exchange rate policy and a unified regulatory framework would go a long way in reviving the positive hype the region badly needs.
The challenge appears overwhelming, according to most financial analysts. Not because of a lack of financial strength or political will, but because they doubt the institutional capacity in the region to manage the task. Once again a “confidence” issue.
So whatever GCC members decide behind closed doors in
Most economies in the region already face broader transparency issues. Many lack detailed official statistics on a broad range of subjects ranging from the economy to the financial system. The drip-feed manner, in which information—both corporate and economic—has historically been disseminated, has resulted in growing uncertainty about and speculation over financial stability and institutional credibility.
Investor uncertainty, frustration and rising risk premium for Gulf assets are obvious from the losses suffered by the region’s stock markets. If GCC fails to convince its people and the world that it can move beyond these issues and forward to achieve its goals and targets, a sustained recovery will be elusive no matter how much governments in the region might decide to spend.
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