Capital flows in ESCWA countries

As expected, the huge rise in oil revenue in recent years has resulted in a sharp increase in total capital flows. By 2006, excess savings over investment in the region topped 0.5 trillion dollars and is fast approaching the trillion dollar mark. This situation is markedly different from the stagnant situation in the 1980s and 1990s, and similar to the major boom of the 1970s, although not without qualification. While in the late 1970s, a much higher share of oil revenues was retained for investment in the social and physical infrastructure, with the current greater involvement of the private sector in the development process, a lower rate of oil revenues is retained within national borders. In the first oil boom, the absolute value of investment in the Gulf economies increased nearly four times between 1974 and 1977. In the current oil boom, the value of investment has remained steady and, more importantly, has been of poor quality, exhibiting many of the characteristics of a FIRE economy. Furthermore, between 2003 and 2006, oil prices more than doubled, from US$ 28 per barrel to US$ 61, whilst in the case of Saudi Arabia, for example, portfolio investment assets nearly quadrupled over the same period. Moreover, the rate of capital flight from the region has quickened once more, reflecting the uncertainty associated with geopolitical risks and institutional fragility, and hampering the prospects of badly-needed long-term investment in scale economies. In view of the openness of capital account regimes and the stark volatility of oil prices and capital flows, the region must be prepared for a higher rate of reverse flows. The best preventive action is joint action and collaboration between member countries with the clear aim of retaining financial resources in the region.

Related Subject(s): Economic and Social Development