Cooling down overheated economies, Booz and Company reports (page 5 of 5)

Banks must create improved savings vehicles and channel these to foreign assets via macroeconomic policy entities (MEPEs). Central banks are one macroeconomic policy entity; sovereign wealth funds like the Abu Dhabi Investment Authority and the Kuwait Investment Authority are a second. A third prospective MEPE, which policymakers could help form—are dedicated and specialized 'capital control funds' that would act as a support mechanism to banks.

Policymakers must also find ways to encourage more investment in export-oriented productive sectors, such as manufacturing and tourism, and in enabling sectors of the domestic economy, such as financial services, healthcare, and education. The output from these productive sectors should be partly reinvested in productive sectors or channeled through the MEPEs.

Six Key Imperatives for GCC Policymakers

The challenge for GCC countries is to create their own macroeconomic stability frameworks and to make sure these are integrated and coordinated regionally and globally. "There need to be formal ways in which the region's central banks interact with each other and those outside the GCC," Moujaes commented. There are six key imperatives the region's policymakers must keep in mind:

Develop Inflation-detecting abilities by putting in place and continuously updating state-of-the-art methodologies and tools for measuring, forecasting, and analyzing price increases.

Treat price stability as a continuous challenge that requires a comprehensive approach, rather than something that can be dealt with sporadically and partially. If designed correctly a framework could capture all the important levers of macroeconomic policymaking.

Involve all market participants in the mission to fight inflation. Helping financial entities deploy modern currency hedging tools and other mechanisms is part of the solution, and could be instrumental in building a shield against inflation.

Create more effective sterilization mechanisms and more productive economic bases to channel and absorb excess liquidity.

Adopt a model of sustainable and resilient economic growth, with a focus on maintaining positive real GDP and price stability to maximize socioeconomic benefits and minimize the risks.

Revise the mandates of existing institutions and help them build capabilities to contribute to the creation of a persistently stable macroeconomic environment. These must aim for further integration and develop coordinating mechanisms, to set policy at national, regional and global levels.

In the face of the GCC's inflation challenge, it is tempting to hope that the region's policymakers might get some guidance from the institutions responsible for global economic stability. Lately, however, those institutions have not inspired confidence in terms of their ability to anticipate and head off economic or financial crises. "Indeed, the challenge for the GCC countries is not just to create their own macroeconomic stability frameworks, but to make sure these frameworks are integrated and coordinated regionally and globally. There need to be formal ways in which the region's central banks interact—with each other and with central banks outside the GCC," argued Najjar.

Creating such a framework will take a lot of brainpower, leadership, and political will to pull off. "But with the economic and financial crises around the globe, the effort is more important than ever—and the rewards will be worth it," concluded Shediac. Emerging economies like the GCC are creating wealth at a rate that has captured the world's attention. By instituting macroeconomic stability frameworks, these countries can go a long way toward protecting what they have built.