Economic Growth and the Promising Future of the Middle East Financial Markets

• Author: Enas A. Hassan
• Date: 01 April 2018
• Published date: 01 April 2018
• DOI: http://doi.org/10.1002/jcaf.22335

151

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22335

C

o

m

m

e

n

t

a

r

y

Economic Growth and the Promising

Future of the Middle East Financial

Markets

Enas A. Hassan

In January 1966, Hugh T.

Patrick’s article “Financial

Development and Economic

Growth in Underdeveloped

Countries” published on

Economic Development and

Cultural Change, suggests a

dynamic relationship between

financial development and

economic growth. However,

the direction is ambiguous, and

depends on both endogenous

and exogenous factors. Patrick

observes: “In actual practice,

there is likely to be an interac-

tion of supply-leading and

demand-following phenomena.

Nevertheless, the following

sequence may be postulated.

Before sustained modern indus-

trial growth gets underway,

supply-leading may be able to

induce real innovation-type

investment. As the process of

real growth occurs, the supply-

leading impetus gradually

becomes less important, and

the demand-following financial

response becomes dominant.”

Applying this concept to

the Middle East region (ME)

shows that in the mid-1990s,

economic growth in the ME

region was heavily affected by

the decline in oil prices. Coun-

tries in the region saw a need to

expand capital infrastructure

and to address uncertain reve-

nues from fluctuating oil prices.

Relatively, during the last

decade these countries moved

from central planned econo-

mies to free market economic

structures. In doing so, they

introduced many regulatory

reforms. These reforms were

expected to lead to an improve-

ment in the efficiency of capital

markets by improving transpar-

ency, credibility, the flow of

financial information to inves-

tors, and improving the inves-

tor protection environment in

order to attract higher levels of

foreign capital at low cost. This

in turn, will reduce dependence

on oil and facilitating growth

of the non-oil sector.

Saudi Arabia, as an

example, has witnessed in

April 25, 2016 the introduc-

tion of 2030 vision, which aims

to raise the share of non-oil

exports in non-oil GDP from

16% to 50%. In doing so, the

Kingdom plans, first, to allow

privatization of a range of sec-

tors. To achieve this goal, the

Kingdom intends to reduce

the role of government in the

economy and make the private

sector the engine for develop-

ment. Based on the vision, the

Kingdom wants to increase

the private sector’s contribu-

tion from 40% to 65% of GDP

by 2030. Within the private

sector, the small and medium

enterprises are important play-

ers, and expected to contribute

about 20% to 35% of GDP by

2030. However, this will require

deepening liquidity in the capi-

tal markets, fortifying the role

of the debt market and pav-

ing the way for the derivatives

market.

Second, the Kingdom plans

to improve governance, trans-

parency, structural reform in

the government functioning. It

states to achieve zero tolerance

for all levels of corruption,