Regulation has rarely been as challenging as in the past few days. While the Emirates Securities and Commodities Authority (ESCA) is intervening in the long-running dispute between Shuaa Capital and Dubai Holding, it has also asked Emaar to come clean on its reported agreement with Kingdom Holding in Saudi Arabia. The news that Emaar had won a big contract in Saudi sent its shares soaring. At first Emaar issued no comment, before issuing a statement, once the market had closed, denying that it was to be the master developer of Kingdom Holding's Dh100 billion (US$27.23bn) project, although it admitted it would be providing management services for the project.
Does this signal the beginning of greater regulation in the country? And if so, is it to be welcomed? Free market capitalism has been the dominant economic paradigm since the 1980s. The era of directed development as seen in "five-year development plans" is clearly dead and buried. It is now all about foreign direct investment and privatisation; deregulation and free capital flows; and the world becoming flat because of globalisation.
The global credit crisis has its roots in this unbridled capitalism. Although most economists remain firmly committed to the free-market paradigm, the question is: have we moved too far to one extreme? In other words, is there a need for a more balanced model for policy making? Some parts of the GCC have witnessed overinvestment and are currently grappling with oversupply in real estate, shopping malls, hotels and support services. The reason for this exuberance can be traced to the perception that there could be no downside, while governments encouraged this view by prioritising growth over stability.
Policy measures to curb domestic demand are inherently unpopular - the equivalent of removing the punchbowl just when the party gets going. Furthermore, beyond the political will required to step on the brakes, the GCC also lacks the policy instruments to slow things down. GCC interest rates are largely determined by US monetary policy because of the fixed exchange rates and free capital flows. As we have seen, the period of Fed rate cuts that started in Sept 2007 was very awkward for the GCC. Cutting interest rates when these economies were overheating was not what the doctor prescribed, but policy makers in the region had little choice but to follow.
Furthermore, fiscal spending is strongly influenced by the price of oil, over which the GCC has little control. The issue is not government spending, as GCC governments have recently taken counter-cyclical fiscal steps to address the current downturn - the problem is that private sector sentiments closely track government surpluses. Hence, during periods of buoyant oil prices, private sector investment picks up and pulls in additional public spending.
The challenge remains - how can policy makers slow the economy when external circumstances and the private sector are pushing the economy to the point of overheating. In my view, the first port of call should be credit disbursed by the banking system. In the recent past, the fastest growing economies in the GCC were experiencing an unsustainable increase in bank loans. The monthly year-on-year increase in credit expansion in Qatar was in the range of 34 per cent to 74 per cent - average was 51 per cent - for the Jan 2005 to July 2008 period, while the UAE posted growth of 21 per cent to 59 per cent - average was 38 per cent - in the same period. This multiple increase in purchasing power was difficult to control, and eventually surfaced as record inflation. Curbing credit growth is the first step to maintaining a handle on domestic demand. Whether this is done by imposing strict exposure limits on banks, or by creating credit ceilings for individual banks, should be determined by local conditions.
Another option is government oversight on private sector investment. This may sound regressive in this era of "market fundamentalism", but large private sector projects that attract other investments - private and public - should fit into a government's projected growth forecasts to ensure that imbalances are not created. However, this does not mean a return to stifling government controls. Most analysts have a tendency to see things in black and white - the private sector is the bastion of efficiency and competitiveness, while the public sector is a den of corruption and inefficiency. In my view, the picture is painted in shades of grey. A less dogmatic approach is not only possible, but is also required.
As the price of oil recovers, it is safe to say that the worst is over for the GCC. With the region about to enter another growth phase, policy makers should be less dogmatic about policy paradigms. Both government and the private sector must learn from past mistakes, because one party is not always right and the other is not always wrong. While the private sector should take the lead to identify and launch new ventures that create jobs and generate income, government must sometimes step in to warn an overexuberant private sector to stay away from the punchbowl.
Perhaps one positive outcome of the current economic crisis is to forge more distinct roles for government and private sector. The global crisis has shown that the private sector cannot be trusted to regulate itself, while government, in turn, should resist becoming the spark for private sector growth. Mushtaq Khan is an independent economist based in Karachi. Previously, he was with Citigroup, ABN AMRO Bank and the Pakistani central bank. He holds a PhD in economics from Stanford University.