IMF predicts 4.5% regional GDP growth

It is an economic paradox that war in Iraq and the consequent disruption of normal trading activity has coincided with a strong upturn in the regional economy.

The International Monetary Fund now predicts economic growth of 4.5% for 2003 in the Middle East, although naturally the exact rate of growth varies from country to country. And the answer to the growth paradox is simple: a downturn in the non-oil sectors has been more than compensated by a strong surge in oil revenues.

For this has not been a good year for aviation, hotels and tourism, nor the IT sector. Construction and real estate certainly have maintained upward momentum, and so has retail banking. But investment and corporate banking activity has been low, and advertising revenues have been poor for the media.

The challenge for 2004 is to see whether the growth in the non-oil sectors will resume, at present the push for greater economic diversification is in reverse gear. This will have to change if economic growth is to continue when oil revenues decline, if indeed that happens.

The danger of high oil revenues is always that they begin to crowd out diversification policies. The classic, and tragic, example of this is the $25 billion Saudi Gas Initiative, a brilliant initiative by the Crown Prince to diversify the kingdom's economy.

Unfortunately a few years of high oil prices and the war in Iraq seem to have rallied opposition to this project and it has now been rejected. It is always a danger that high oil prices encourage the feeling that economic reform is unnecessary and that the status quo is the best option.

The contrast between Saudi Arabia and the policies of Qatar, Oman and the UAE in actively engaging Western investment and expertise in the diversification of local economies is very great. So too is the openness and willingness to accept that economic reform and globalization is a good thing.

It does not require much more than commonsense to guess which economies will be more successful in generating jobs and a higher standard of living for their populations in the near future.