Expansionary fiscal policies and lower domestic interest rates will help maintain the tempo of strong economic growth in the Persian Gulf Arab states.

In business and economics, the biggest threat is the one that we cannot forecast. This is why it is important to identify the wild cards that could play out differently from what the majority is expecting.
The consensus view is that the credit crunch and the weakening US housing market will slow world economic growth to 3.5 percent in 2008 from 4.9 percent in 2007, with the US economy growing at 0.5 percent, down from 2.2 percent in 2007. This will put downward pressure on oil prices bringing them closer to the $70 level from the highs of $100 a barrel in late 2007.
As reported by Alarab.com, expansionary fiscal policies in the Arab countries and lower domestic interest rates, moving in tandem with dollar rates, will help maintain the tempo of strong economic growth in the region, and fuel inflationary pressures leading to higher real asset prices. Commodity prices will remain high even in the face of US economic slowdown, underpinned by the generally weak dollar.
Here are some of the surprises or wild cards that could form credible threats to the consensus view. Their importance derives from the fact that they are inter-related. A surprise in one area could trigger events and generate surprises elsewhere, leaving their impact on the regional and global scene.
1. The first wild card is a deeper recession in the US than markets are expecting. The burst of the housing and credit bubbles could spill over into consumer spending and credit card finance, reducing growth further and dragging the US into a deeper recession.
Canada, Mexico, China, and others whose exports to the US range between 15 percent to 20 percent of their respective GDP, would be the hardest hit. Slower world economic growth would impact global demand for oil and bring a sharper decline in oil prices, down to $50 a barrel. Lower oil revenues and the reversal of feel-good effect would leave their impact on economic growth and corporate profitability. This could bring forth lower asset prices (stocks and real estate) and deflate household wealth.
2. The second wild card is the rising inflationary pressures in the region that governments are finding difficult to control, rendering inflation more of a structural rather than a cyclical phenomenon. This could lead to the drop in purchasing power, negative real interest rates, rising income inequality and social dissatisfaction, higher wages feeding into higher inflation, loss of competitiveness and the risk of a hard landing later on. Domestic demand is being fueled by strong government expenditures aimed at upgrading infrastructure and excessive growth in domestic liquidity.
3. The other wild card is the threat of a financial shock that may originate from the massive financial surpluses accumulated by China and the main oil producing countries.
If the outcry against sovereign wealth funds intensifies, with politically motivated restrictions imposed on the investment of these funds, this could greatly disrupt the free flow of capital and lead to a protectionist backlash.
4. The other wild card is the decline in real estate prices in our region, under the weight of excess supply, tighter lending conditions and the general trend of weaker property prices worldwide. The perception that real estate prices here and abroad have peaked may encourage speculators to sell the property they hold before prices start to actually decline in their domestic markets.
The additional supply coming to the market will be seen in the form of building inventory, less sales and eventually lower prices. The decline in real estate prices would reduce household wealth, bring forth lower consumption and economic growth and possibly damage the asset quality of banks. Its impact will vary from one city to another, being more visible in countries where real estate prices have surged most in the past few years.
5. Another wild card is the possible slide in commodity prices this year. Slower growth in world demand for commodities and a stronger US dollar would make such an event a possibility.
To conclude, the Persian Gulf region is experiencing a period of growth and prosperity that is likely to prevail in 2008. Even when conditions are good and there has rarely been a better time to do business in the region, one should not be complacent. Instead, we should try to heed the lessons of previous years, i.e. to expect the unexpected.

An abundance of natural capital tends to crowd out investments in Saudi ArabiaÕs human capital, and the natural extension of this is a slowing down in economic development.

The availability of rich oil resources has brought untold affluence to Saudi Arabia. Despite this, economic growth has been slow during much of the period since the 1980s.
According to Arabnews.com, from late 1973, there was a sharp rise in petroleum revenues which contributed to Saudi Arabia’s rise as one of the fastest growing economies in the world. At the height of the oil boom in the late 1970s and early 1980s, the average per capita income in Saudi Arabia was about $17,000. Trade surplus was the result and the government had abundant reserves to canalize into development and defense and in providing aid to other Arab countries.
However, the situation changed in the eighties, as rising oil prices led to a reduction in global oil consumption and the development of more oilfields around the globe. There was a worldwide glut in oil, which introduced an element of uncertainty into the oil economy.
Saudi oil production, which was about 10 million barrels a day dropped to about 3 million barrels a day by 1985, which contributed, along with low prices, to budgetary deficits in the Saudi economy. A relatively stable level of oil production since late 1980s, combined with fluctuating but relatively low oil export revenues, with a simultaneous growth in population impacted negatively on the Saudi budget, economy and its per capita income continued to decline, dropping to $11,000 in early 2000s, thereby lagging behind most Persian Gulf countries.
But due to the increase in oil prices in recent times, the per capita income in Saudi Arabia has gradually increased, to reach $15,500 in 2006, still below the level reached in 1980 in real terms.
Over the past few years, the Saudi government has introduced economic reforms that aimed to encourage more development in the private sector. Saudi Arabia has joined the WTO (World Trade Organization) in 2005, in order to enhance its trading, diversify its economy and attract a higher proportion of foreign investment. The government has also been spending larger amounts on infrastructure development, job training and education in view of the country’s heavy dependence on oil.
With continued growth in demand during the next 10 to 20 years, without the means to supplement the actual endowment in world oil resources, the result may be a steep and sudden decline in the supply of oil.
Therefore, it appears that the recent rise in per capita income in Saudi Arabia may be in danger of a further downslide, as alternatives to oil resources will very likely be developed in the coming decades. The measures taken by the Saudi government to improve infrastructure and other sectors of the economy are not considered fully enough.
Due to the abundance of the natural resource, like oil, the country’s economy becomes largely export-centered; as a result such an export concentration is associated with poor management and performance of public institutions. Several studies that have utilized cross-sectional data have shown the connection that exists between institutions and economic growth, such that weaker public institutions are associated with slower economic growth.
These studies have shown that the pace of economic development is generally higher in some nations largely due to the nature of the institutions that are in place, which focus upon the maintenance of strict law and order and the promotion of free enterprise.

Hong Kong will become one of the world’s most developed cities if it maintains its status as an international financial center while speeding up its integration with the mainland, said Justin Lin Yifu, the newly appointed senior vice president and chief economist of the World Bank.
Lin was quoted as saying in an exclusive interview with the Hong Kong-based Chinese daily Wen Weipo this week.
Lin, born in China’s Taiwan but making a career as a mainland-based economist, was appointed senior vice president for development economics and chief economist of the World Bank on Monday and expected to assume office on May 31.
The 56-year-old economist, often wearing a brisk haircut and a scholarly smile, said he had always looked forward to visiting Taiwan again as he had never been able to return to the island province over the past 29 years.
Lin said he had always wished he could be of help to Taiwan no matter where he was. “Further integration between the mainland and Taiwan is in the fundamental interests of both sides,“ Lin said.
But he noted it was a must for Taiwan to remove political barriers in cross-Strait economic and trade ties for the further development of Taiwan’s economy.
Lin said his appointment showed the new vision of the World Bank on developing issues under the leadership of president Robert B. Zoellick.
Zoellick had said he looked forward to working together with Lin on issues such as the development of African countries, cooperation among developing countries as well as the prices of agricultural produces and energy.
“It is an honor for me to take up the position at a time when the World Bank is undergoing adjustments in its strategy. I will bring my approach to the World Bank as a researcher from the developing world,“ Lin was quoted as saying.
He said the many challenges facing the world economy in 2008 would be a short-term correction in the economic cycle, and not a major recession.
The world economy will set off on another stage of development after the correction while the Chinese economy would have a growth of around 10 percent in 2008 to 2009, he said.
China’s economic growth will be powered by domestic demand and consumption, with challenges arising from export uncertainties offset by opportunities arising from industrial upgrading and relatively active investments, he said.
Inflation is most likely to be 4 to 5 percent in China in 2008, he said.

Many prominent US and European companies use outsourcers, especially for tech services and support.

A few years ago, Vishal Goel had high hopes of moving from his native India to the US to work as a computer programmer. He approached Patni Computer Systems, a Mumbai company that provides tech services to many American businesses, and Patni agreed to apply for a US work visa on his behalf.
By 2004, Goel was in Bloomington, Ill., working for Patni at State Farm Mutual Automobile Insurance, the largest car insurer in the country. But this was no dream job come true, Businessweek.com reported.
Goel’s base salary was $23,310, about half the $44,000 that Patni had said it would pay on the visa application, according to a lawsuit he has filed against the company. When Goel complained, one official said that Patni would brand him a “troublemaker“ and that his parents in India would be harassed unless he stopped, the suit alleges.
Goel, who left Patni in 2005, filed suit in November, 2007, in federal court in Illinois. He’s suing along with a former colleague, Peeush Goyal, who alleges he was subjected to similar treatment. Patni declined to comment, though in court documents it denies the charges.
Goel’s is not an isolated case. A number of the most active users of the work-visa program, for what are known as H-1B visas, have been accused of underpaying or otherwise mistreating workers. Last year, Patni paid $2.4 million to 607 H-1B visa workers after a Labor Dept. investigation uncovered systematic underpayment of wages.
“I highly suspect that these employment practices are widespread among the tech-outsourcing firms,“ says Ron Hira, assistant professor of public policy at Rochester Institute of Technology.
The Goel lawsuit is one of the first filed in US courts by a visa worker against his employer, perhaps because of the murky legal status of such workers. The estimated 500,000 people in the US on H-1Bs are by definition citizens of other nations, and they’re usually beholden to employers that can transfer them home at will. The Goel case provides rare insight into how one outfit allegedly has treated workers it brings into the US.
In their case, Goel and Goyal say that Patni regularly underpays employees in the US. “This forces the same financially strapped individuals to incur the expense of retaining an attorney to try and obtain the money to which they are entitled,“ the suit charges. If workers complain, the plaintiffs say, Patni threatens to sue them. They charge that Patni’s motivation is simple greed. “The more H-1B employees that Patni is underpaying, the more total profit that is made by Patni,“ the suit alleges.
Goel, Goyal, and their lawyer, Thomas J. Arkell, declined to comment for this article because the litigation is ongoing.