Few foresaw how the global credit crunch would deprive the region's businesses of funding.
Optimism is a good thing, in moderation
"You've got to accentuate the positive, eliminate the negative, latch on to the affirmative, don't mess with Mister In-between." So sang Bing Crosby in late 1944 as the Second World War raged and Allied troops were liberating Greece from the Germans. The war had turned, but it would take seven more months and Europe's deadliest battle before Germany's surrender. Japan's capitulation came only after 10 more months and two atom bombs.
Optimism is a powerful weapon in troubled times. But optimism did not win that war and optimism alone cannot prevent the current economic crisis from taking an inexorable toll in lost livelihoods and shattered aspirations. There remains a strong body of opinion in the Gulf that regards the impact of the crisis in this part of the world as an attitude problem, one that could be corrected with a little positive thinking. That view was on display this week at the Abu Dhabi Economic Forum. Some blamed the media for exaggerating the scale of the problems, creating a vicious circle of negative sentiment that is driving prices down and making matters worse.
Compared with the scale of the problems facing the heavily indebted nations of the West, after all, the situation here does not seem particularly bleak. As is so often pointed out, the oil-exporting nations of the Gulf have managed to build up some of the world's biggest savings, a cash cushion that seems to help many people sleep better at night. There are no growing lines of jobless here; those who lose their jobs simply vanish, leaving no trace but perhaps some unpaid loans and a dusty Land Rover.
With little direct exposure to the kinds of securities that triggered the global financial crisis, many predicted that the Gulf would suffer little impact, if any at all. Few foresaw how the global credit crunch would deprive the region's businesses of funding or how oil would suffer a 70 per cent decline in price. Now, shrinking demand in the West is having an unexpectedly severe impact on global trade and investment, hitting the economies of major exporters such as Japan and emerging markets elsewhere in Asia harder than most economists believed possible.
It would be folly to assume that government spending can prop up the economic status quo. Despite booming oil revenues, the Gulf has become more, not less, reliant on global capital markets. "We have to take it on the chin that the closure of those markets is going to fundamentally affect the way these economies perform," Simon Williams, the chief regional economist at HSBC, told forum participants. "We are expecting governments to do the impossible if we expect them to insulate these economies from this truly dreadful economic environment."
Offering a reality check from outside the Gulf was INSEAD's senior affiliate professor of international management Helmut Schutte, who journeyed from the French business school's campus in Singapore to provide the view from the Gulf's biggest oil market, Asia. There, he noted, the mood is decidedly less optimistic. The response is growing protectionism, as efforts by governments to stimulate their own economies focus on domestic producers at the expense of foreign exporters. Globalisation, therefore, is in decline. A century ago, the world's economy was even more globalised, part of a trend called colonialism that linked economies in the sphere of a handful of industrialised powers. Then came the First World War, the Great Depression and the Second World War, and globalisation was rolled back. Globalisation may have bounced back thanks to international trade agreements and technology, but it is by no means inevitable. "Countries will revert for political reasons to protectionism," Prof Schutte said.
This isn't something emerging markets such as those in the Gulf will get to watch from the sidelines. As economists at RGE Monitor, a global economic and financial analysis firm in New York, wrote this week: "Increased global integration since the 1930s also indicates the consequences of protectionism will also be larger." What struck Prof Schutte about the dialogue in Abu Dhabi was not only the confidence placed in the Government's savings, but the complete absence of talk about political risk in a region famous for it. Even the august sport of cricket no longer affords us refuge from the knowledge that all is not well in our neighbourhood.
Prof Schutte warns that in the wake of the financial crisis and the subsequent crisis in the real economy, a social crisis is looming, in which growing unemployment creates greater instability. He isn't the only one. In the latest edition of Foreign Policy magazine, Harvard University's celebrity Scotsman, history professor Niall Ferguson, argues in an article entitled 'The Axis of Upheaval' that the US-led economic crisis has put the world on the brink of a new era of political turmoil. "The resources available for policing the world are certain to be reduced for the foreseeable future," Prof Ferguson writes. The decline of the American empire and falling global incomes are a recipe for disorder in areas already vexed by ethnic strife. "Economic volatility, plus ethnic disintegration, plus an empire in decline: that combination is about the most lethal in geopolitics. We now have all three. The age of upheaval starts now."
Optimistic? Hardly. But neither is it a time to surrender hope. "This is not a time to hide," said Constantin Salameh, the group chief operating officer of Emirates International Investment Company in Abu Dhabi, as he argued the case for companies to be ruthless in focusing on their core competitiveness. "This is a time to be courageous." That kind of optimism works. The danger is that optimism becomes a smokescreen for denial and inertia. As Farouk Soussa, the head of Middle East government ratings at Standard & Poor's, said recently: "If you don't acknowledge the problem people will be convinced you don't have a solution to the problem."
Take us home, Bing: "You've got to spread joy up to the maximum, bring gloom down to the minimum. Have faith or pandemonium, liable to walk upon the scene." email@example.com