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

Date01 April 2018
Published date01 April 2018
DOIhttp://doi.org/10.1002/jcaf.22335
151
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22335
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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,

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