Addressing Challenges in Gulf Cooperation Council Economies

By Christine Lagarde, Managing Director, International Monetary Fund, Kuwait City, Kuwait, November 10, 2013

As prepared for delivery

Good evening—massakum Allah belkhair! Let me begin by thanking my gracious host, Governor Mohammad Al-Hashel. I would also like to acknowledge the minister of finance, Sheikh Salem Abdulaziz al-Sabah.

It is a great privilege for me to come to this region, and especially to Kuwait. Yours is a thriving corner of the global economy, a world-renowned emblem of hospitality, and a living embodiment of an ancient and noble culture.

In recent years, your economies have made tremendous progress. The Gulf region has some of world’s highest living standards.

My main message this evening is this: the Gulf region must continue to build on its gains. To do so, it needs to address and overcome three distinct types of challenges:

  • One, the challenges of the present—making sure that the region can continue to support stability and growth in an uncertain world.
  • Two, the challenges of the future—making sure that the region can find new sources of productivity and prosperity for the 21st century.
  • Three, the challenges of a common global citizenship—recognizing that in this interconnected world, the problems of each are the problems of all.
Let me talk about each area in turn.

1. Challenges of the present

I will begin with the challenges of the present and how what is happening in the broader global economy affects the Gulf region. You are well aware that economic storms from elsewhere can all too easily reach your shores. As the great Arab poet Al Mutanabbi once said, “The wind goes against the wish of the ships”.

With the right preparation, however, I believe that shocks will not unsettle and disturbances will not derail. The important thing is to be ready, and watch the ever-changing direction and strength of the wind.

So let me talk about the trends in the global economy. Overall, the global recovery continues. We expect growth to hit 3½ percent next year—but it is still too slow, too unbalanced, and too insecure.

The good news is that we are finally seeing signs of hope in the advanced economies. We expect growth of around 2 percent next year, almost twice as high as this year. This is coming from an invigorated private sector in the United States, from new policy decisiveness in Japan—and also from the Euro Area, where growth should be back in positive territory.

The less-good news is that the emerging markets, after pulling the global economy over the past few years, are now slowing down a bit. This reflects both the turn of the economic cycle and the fact that some countries are bumping up against structural impediments to growth. Overall, we expect growth in the emerging markets and developing countries of around 5 percent next year, about half a percent lower than this year.

This growth transition is being complicated by a more volatile external environment. With the liquidity taps from U.S. monetary policy expected to be turned off slowly, the financial flows that lifted the prospects of emerging markets are starting to recede. We are seeing signs of stress in countries like Brazil, India, Indonesia, South Africa, and Turkey. Uncertainty about spending cuts and the future path of fiscal policy in the United States also adds to global headwinds.

What about this region? So far, so good. Non-oil GDP growth in the Gulf region is strong—above 5 percent. For Kuwait, non-oil growth continues to rise from the trough in 2010 and should reach 4½ percent in 2014. Prospects remain favorable, with high confidence and large infrastructure projects coming on stream.

The real question is: how exposed is the Gulf region to any turmoil in the rest of the world? The main links come through oil and gas. A negative shock would mean lower energy prices and probably lower oil and gas output. In turn, this weakens both external and fiscal accounts.

Fortunately, there are two important factors that limit contagion from widespread adverse fallout.

First, apart from oil, the region is still somewhat insulated from the global economy—even though trade and financial links have been increasing.

Second, the region has policy lines of defense that are second to none. Let me talk about these defenses: fiscal defenses, and defenses against financial contagion.

Starting with fiscal defenses: the Gulf region is expected to run a fiscal surplus exceeding 9 percent of GDP next year. Your castle walls are among the sturdiest in the world—especially in Kuwait, Qatar, Saudi Arabia and the UAE. Kuwait has a fiscal surplus of 25 percent of GDP. The walls are weaker, however, in places like Oman where global turbulences could turn surpluses into deficits. Bahrain is already running fiscal deficits.

Overall, the strong fiscal position provides security and comfort. Should the economic situation deteriorate, the region can maintain or even increase government spending to counteract any private sector slowdown. This can be done quickly, through sizeable public investment programs.

As you know only too well, even the strongest walls will weaken without regular maintenance. So the region needs to keep strengthening its fiscal frameworks, which will help make spending more efficient. This is especially true in Kuwait, which is making substantial investments in large infrastructure projects, and needs to find ways of containing current spending and raising more non-oil revenue. The macrofiscal unit established by Kuwait is certainly a step in the right direction.

Ultimately, this is about saving for, and investing in, the future—for the benefit of the next generation.

The region also has strong defenses against financial contagion. Banks are generally in good shape, including in Kuwait—they are well capitalized and liquid, well regulated and supervised. Still, higher funding costs could affect the more financially-integrated countries, including regional financial centers like Bahrain and the UAE. Investment companies in Kuwait with weak balance sheets could also take a hit. Macroprudential policies can be used to tame any tensions. Giving the central bank more autonomy here in Kuwait can also help strengthen defenses.

Overall, I believe the region is well positioned to overcome the challenges of the present—through prudence, preparation, and planning.

2. Challenges of the future

Let me now move to my second area—meeting the challenges of the future. This is about making sure that the living standards of your children and grandchildren meet or exceed the living standards of your own generation.

This is a live issue in Kuwait and across the region. We all know that oil, your most precious resource, will not last forever. For each well, the day will come when it runs dry. Aside from this, we all need to wean the planet from its dependence on fossil fuels.

The time to plan for the future is now. As the Arabic proverb puts it, “save your white penny for your black day”.

What does this mean? It means making economies more diverse. It means creating jobs in the private sector for nationals. It means investing in skills and education, so that all people—including girls and women—can fulfill their potential and live rewarding lives.

The region has certainly made good progress. You have been exemplary stewards of your natural resources, using them to improve peoples’ lives. The region has also become a major destination for foreign workers and a source of remittances for their families back home. It is also a financial center, and a hub for international trade and business services.

Yet there is still a long way to go. Diversification, including in Kuwait, is still in its infant stages. The public wage bill is too high. Productivity—the key driver of long-term growth—has declined or stagnated.

A key problem is that too few nationals seek work in the private sector. Over the first decade of this century, the Gulf created about 5½ million private sector jobs. Nearly nine in ten of these jobs went to non-nationals, with nationals preferring the security of public sector employment.

This does not bode well for the future. The rate of private sector job creation is expected to slow down in the coming decades. Even without this slowdown, however, only a third to a half of nationals joining the labor force by 2018 would find employment in the private sector. This is true for Kuwait and for the Gulf countries more broadly.

Clearly, these trends are not sustainable.

To move forward, the region needs to invest more—in infrastructure, in skills, in people. It needs to exploit its natural advantages—its favorable location between Europe and Asia; its young, dynamic, and highly-motivated population.

The benefits of investing in high-quality investment are plain. It is about choosing a secure tomorrow over an ephemeral today. Also, do not forget the benefits of partnership—large-scale investments in logistics and tourism infrastructure can work better when coordinated across countries.

When it comes to investing in skills and people, nothing is more important than enhancing the quality of education. Certainly, there have been great strides forward. The number of years in school has risen considerably over the past decade. But there is still some distance to travel if nationals are to compete for high-paying jobs with the best and the brightest in the global economy.

A real concern is that students from the region score relatively poorly in international mathematics and science tests. The Arab region was an early pioneer in the field of scientific enquiry, going all the way back to people like Al-Hasan Ibn Al-Haytham and Jabir Ibn Hayyan. This is your legacy—I am confident that it will also be your destiny!

Beyond education, other policies can help secure the future. Innovation and entrepreneurship should be supported, never held back. Governments can make private employment more attractive both by resisting the urge to open the floodgates of public employment in times of stress, and by implementing measures to boost private sector pay—including by facilitating on-the-job training and well-targeted wage subsidies.

Let me talk about one more issue, one that is close to my heart—the economic contribution of women. In the long race ahead, it makes no sense to simply eliminate half of the contestants even before the starting gun is sounded.

Letting women participate more fully in economic life can yield enormous economic benefits—this was demonstrated in a recent IMF study.

This is one area where your region really lags behind. For the entire Middle East and North Africa region, the gap between male and female participation in the labor force over the past decade was almost triple the average gap of the emerging market and developing economies.

If this gap had simply been double instead of triple, the gains for the entire region, the Gulf countries included, would have been enormous—almost $1 trillion in output, amounting to annual gains of about 6 percent of GDP.

Given the stakes, the time has come to break down the obstacles and attitudes that hold women back—and in doing so, damage economies and degrade societies.

We know how this can be done. By making sure that all girls have access to quality education. By removing restrictions on the economic role of women—their mobility, their participation in certain sectors, their property rights. By enshrining the principle of equal pay for equal work. By giving mothers and fathers real choices through appropriate parental leave programs and quality child care.

When it comes to the role of women, I know that Kuwait is a regional role model. The female labor force participation of 53 percent is the highest in the Gulf region. Kuwait is home to some of the brightest, most educated, most creative women in the world. I had the pleasure of meeting some of them today.

With talent of this caliber, I know the future of the region is secure.

3. Challenges of common global citizenship

So far, I talked about the challenges of the present and the future. Let me now turn to my third area—the challenges of our common global citizenship.

I believe strongly that if countries cooperate and work together, then everybody does better. In our increasingly interconnected global economy, we thrive best when we pitch our tents next to each other.

As the great poet Ahmed Shawky put it, “cooperation is the highest power—it builds character and pushes innovation”.

You know this. The spirit of embracive hospitality is cherished in this region. It is what the Gulf Cooperation Council is wired to do. Certainly, your actions in the global oil market are an important impetus for global stability.

You are always ready to lend a helping hand to your neighbors, including to the Arab countries in transition—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen. This transition, toward more inclusive economies, has become more challenging—dramatically so in some countries.

We know the needs are great. Too many people are still being excluded from economic life, from the chance to make their way in the world with dignity and respect. Even conservative estimates suggest that unemployment in the Arab countries in transition increased by 1-1½ million people since 2010. These countries risk being trapped in a self-fulfilling cycle of stagnation and strife.

They need external support—now more than ever. They need the breathing space to put in place the reforms needed to make them more competitive and make their growth more inclusive. They need funding to help them bring down fiscal deficits—averaging 10 percent of GDP—with minimal harm to ordinary people.

This is where regional help would be essential. I know the Gulf Cooperation Council has been providing extensive financial support to these countries. I would like to express my profound appreciation for this, including Kuwait’s generous support to the region. I am trying as hard as I can to convince other members of the international community to stand side by side with you. The time is now, the need is urgent.

On the topic of broader global cooperation, let me talk briefly about the role played by the IMF with your support. I believe that the IMF provides a unique forum for cooperation and partnership, a premier conduit for the international community to help each other in times of need.

Here in Kuwait, I know you attach great importance to the dewaniya, the place where people come together to dialogue, discuss, debate, and forge consensus. I would like you to see the IMF as a kind of global dewaniya, a true meeting of the community of nations where members seek collective solutions to common challenges.

I am proud of the tremendous partnership between the IMF and the Gulf Cooperation Council. You have always been among our closest friends.

You helped make sure that the IMF has enough resources to be able to help all members in need in a turbulent world. Kuwait and others in the Gulf have consented to the distribution of windfall profits of gold sales to shore up our concessional lending. Kuwait, especially, has given money to the trust fund used to combat money laundering and terrorism financing.

Kuwait and some other Gulf countries have also consented to our quota increase, which will make the IMF more legitimate—and hence more credible and more relevant—in the modern global economy. I thank you for this, and I hope our governance reforms can be completed as soon as possible.

We are also partnering with you in the provision of training and technical assistance, knowing well that sound policies are built upon sound foundations.

The IMF Middle East Center for Economics and Finance in Kuwait City, which I had the pleasure of visiting this morning, is seen as a premier location for training officials in the region. I am most grateful to the Kuwaiti government for its generous support. Thanks to you, the IMF has been able to offer 30 courses in 2013, three times the number offered in the past. We have trained over 2,000 government officials from 22 countries at the center—a sure down payment on a bright future.

We are also working closely with you through our surveillance and policy advice, on areas of direct relevance to Kuwait and its neighbors. Some examples include: assessing spillovers between the global economy and this region, strengthening fiscal and macroprudential policies and institutions, and exploring ways to sustain strong growth and job creation for nationals in the non-oil sector.

I am happy to announce that we are releasing a book on the macroeconomics of the Arab countries of the Gulf today—as far as I know, the only book available on this important topic. This book provides original insights into the functioning of the Gulf countries and the policy challenges ahead, and marks an important milestone for the IMF’s work in the region.

I certainly welcome your feedback and your thoughts on this whole agenda. After all, our job is to serve you, to meet your needs, to help you meet the challenges of today and tomorrow.

I hope our cherished partnership will only grow stronger with the passage of time.

Conclusion

Let me conclude. Kuwait and the Gulf region have enormous potential, building from a great legacy. At a time when Europe was sleeping, the Arab world formed a magnificent civilization stretching from the Euphrates to the Atlantic—a haven of deep learning and high culture, bound together by an ironclad sense of common purpose and common destiny.

You were part of something bigger, and you are still part of something bigger. Those same principles that shaped your success in the past—innovation, openness, inclusion—will also shape your success in the future.

Let me assure you that the IMF will always stand with you.

Thank you—shukran!



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