There were few bold souls who ventured to forecast that the world would recover at a much faster pace, following the attacks on New York’s Twin Towers on 9/11. Indeed, the global economic collapse that was then forecasted was like the dog that did not bark after all. For the Gulf economies, the five years since 9/11 have seen a fundamental transformation in their domestic and external investment and economic orientation.
The gloomy forecasts following the events of that momentous day were not unreasonable to assume. Economists of all persuasion were forecasting gloomy scenarios of an impending shock to the US economy that would plunge the world into recession. The talk then was of a diminished world trade, collapse of the airline business and travel, and a sharp rise in US and global unemployment. The only growth areas forecasted seemed to be in security and their associated services, which would mushroom and generate new defense related technologies.
What has occurred over the past four years, after a year of relative stagnation in 2001/02, has been a remarkable economic recovery, both in the US and amongst emerging Asian economies. The world economy, as a whole, has grown above 4 percent in each of the past three years and is forecast to do so again this year despite higher oil prices. This also masks the phenomenal growth rates of 8-10 percent per annum for countries such as China. On the whole, the world’s economic growth of the past few years has rarely been witnessed across the board since the early 1970’s. One forecast, that indeed came true, was the emergence of new security and defense related technologies and industries which are now mushrooming all over the globe. The most recent air travel scares in the UK, will undoubtedly give a further boost to this sector, irrespective what happens to the rest of economic cycles.
In the US, the events of 9/11 gave the American administration the necessary political clout to push through massive defense spending, and support for sustained cuts in interest rates, reaching 45-year lows for that country. Taxes were also slashed, although some would argue for the wrong population segment, and consumer confidence began to pick up.
Is this all rosy then for the future? One key indicator might give a pointer to the fact that the recession that was forecasted after 9/11, has only been delayed, and that a recession in the US in the future might be inevitable. This indicator is the level of foreign direct investment into the US economy, which had peaked in 2000, before the events of 2001. The effects of 9/11 have been a rise in global anxiety over the best and safest havens for foreign direct investment, and the US does not seem a particularly safe and best bet to many, especially in the Gulf region.
The recent very public squabble about Dubai’s acquisition of US port management companies has sent a shock wave to even normally pro-US Gulf business interests, and accentuated a trend of disinvestment away from the US. That trend was immediately discernible following 9/11, when capital was repatriated back to the region and other safer European or Asian havens. This liquidity, in part, stimulated a dormant stock and real estate market in the Gulf, and made investors aware of opportunities nearer to home. The accession of Saudi Arabia to the World Trade Organization in 2005 has also given an added impetus to exploit Saudi Arabia’s comparative advantage in certain sectors of energy, especially petrochemicals and large scale Saudi private sector investments are under way in this sector.
The boom in Dubai, Qatar and Bahrain, in a variety of sectors such as services, real estate and finance has provided regional investors with a wider variety of investment potential. 9/11 also forced some of the larger Gulf economies to try and diversify their economic and investment relationships with a wider number of countries to pre-empt depending on a few relationships with economies that might be prone to recessions following 9/11. The Kingdom opened up its trading and investment links with China, India, Malaysia and Brazil, while others such as Qatar did the same with the new energy hungry economies of China and India. Where diplomacy ventured, businessmen followed, and the Gulf’s relationships with these countries is becoming an important source of cross-investment opportunities.
9/11 changed the world in more ways than could have been forecasted, politically, militarily and in economic relationships. Existing alliances, unspoken assumptions, old ways of doing things, suddenly began to be seriously re-examined in the Gulf. New opportunities were explored with new partners of choice. Where this will lead to in the next few years is still uncertain, as the US economy is the pre-eminent world economy and a recession there in the future will affect all.
Already the IMF and World Bank are nervously adjusting downward their forecasts for US economic growth for 2007, fearing that the long delayed 9/11 American recession is coming. For Saudi Arabia and the rest of the Gulf, at least more diversified international investment and economic relationships might soften the blow of future recessions.
(Dr. Mohamed A. Ramady is visiting associate professor finance and economics at King Fahd University of Petroleum and Minerals.)