Jordan E. Toone, Mirage in the Gulf?: Examining the Upsurge in Fdi in the Gcc and Its Legal and Economic Implications for the Mena Region

• Citation: Vol. 26 No. 2
• Publication year: 2010

MIRAGE IN THE GULF?: EXAMINING THE UPSURGE IN FDI IN THE GCC AND ITS LEGAL AND ECONOMIC IMPLICATIONS FOR THE MENA REGION

Jordan E. Toone*

Between 2002 and 2010, foreign direct investment (“FDI”) exploded in the Gulf Cooperation Council (“GCC”). Between 2002 and 2008 alone, FDI in the GCC increased over 3800%, outpacing both the developed and developing world by a significant margin. Although recent data suggests that FDI has declined in the GCC since 2010, scholars have yet to proffer nuanced analyses of the upsurge in FDI between 2002 and 2010. In general, the literature has not adequately examined the relatively dramatic increase in FDI in the GCC insofar as it has focused on pre-2002 data, failed to distinguish between FDI trends in the GCC and those in the wider Middle East and North Africa (“MENA”) region, ascribed the increased levels of FDI in the GCC solely to the rise in the price of crude oil, or examined post-2002 increases and decreases in FDI within unrepresentative contexts. More importantly, scholars have yet to examine whether the increase in FDI has facilitated economic growth in the GCC since 2002.

Relying on information from the United Nations Conference on Trade and Development, the World Bank, and, where available, GCC countries themselves, this Article introduces statistical evidence into the scholarly debate on FDI in the GCC and the broader MENA region, revealing the dramatic upsurge in FDI in the GCC between 2002 and 2010 in comparison to global and regional trends. This Article also examines the general legal frameworks governing FDI regimes in the GCC, demonstrating the unique manner in which GCC states have implemented liberal macroeconomic policies while simultaneously maintaining regulatory control over strategic elements of their FDI regimes. Finally, this Article contributes to the ongoing scholarly debate surrounding the relationship between FDI and economic growth by examining the impact that the increased levels of FDI have had on economic growth in

* Associate at White & Case LLP. I would like to thank Antony Anghie for his insightful comments. I

am also indebted to the faculty and staff affiliated with the Visiting Researcher Program at Yale Law School for kindly providing the much needed time and resources necessary to revise this Article. In addition, I am especially grateful to Lindsay Toone, whose counsel and encouragement facilitated the research, writing, and editing of this Article. I alone am responsible for all errors herein.

GCC economies. Based on the available data, the statistical correlation between the dramatic increases in FDI and short-term economic growth in the GCC is minimal. The data suggests a stronger link between FDI and long-term economic growth in the GCC, although a definitive assessment requires a more nuanced statistical analysis. Thus, even if FDI levels had not declined after 2010, the data suggests that GCC states—and, by implication, other MENA states—ought to exercise restraint in assuming that increased levels of FDI translate into increased economic growth, at least in the short term. The findings herein are timely for other resource-rich, non-GCC states in the MENA region, particularly post-Arab spring democracies, as they reconsider traditional approaches to FDI in their efforts to foster economic development without surrendering regulatory control over strategic elements of state sovereignty.

INTRODUCTION 679

1. REVIEW OF LITERATURE 680

2. STATISTICS 683

   1. FDI Inflows in GCC Member States, 2002–2010 685

   2. Foreign Stock Investments in GCC Member States, 2002– 2010 694

   3. FDI Trends Since 2010 696

3. THE LEGAL FRAMEWORK GOVERNING FDI IN THE GCC 698

   1. Neoliberal Economic Policies in GCC Member States’ FDI Regimes 698

      1. Diversification 699

      2. Trade 702

      3. Bilateral Investment Treaties 704

      4. Legal Initiatives 705

      5. Other 707

   2. Anti-liberal Trends in GCC FDI Regimes 709

4. THE UPSURGE IN FDI AND ITS IMPACT ON ECONOMIC GROWTH 712

   1. The Academic Debate: The Impact of FDI on Economic Growth 713

   2. Statistical Analysis: The Impact of FDI on Short-term Economic Growth 716

      1. The Statistical Link Between FDI and Short-Term Economic Growth 718

      2. FDI, Long-Term Growth, and Other Economic Development Indicators 726

CONCLUSION 730

INTRODUCTION

Between 2002 and 2010, the Gulf Cooperation Council (“GCC”)1 experienced a 2533% overall increase in inward foreign direct investment (“FDI”) flows, significantly outpacing global increases (108%) during the same period.2 Foreign stock investment3 flows into the GCC increased at high rates during this same period.4 Although recent data shows that FDI in the GCC has declined from its peak in 2008,5 there is not a substantial volume of scholarly research concerning the reasons behind either the increase in FDI in the GCC or its subsequent decline.6 The impact that these fluctuations— particularly the increases—in FDI have had on economic development in the GCC since 2002 is an important question that this Article will examine.

Relying on information from the United Nations Conference on Trade and Development (“UNCTAD”), the World Bank, and, where available, the GCC countries themselves, this Article adumbrates statistical evidence demonstrating the upsurge of FDI in the GCC, which, since 2002, has witnessed a yearly percentage increase in FDI that rivals any economic union, region, or individual state anywhere in the world. Even though FDI levels in the GCC began to decline in 2009, the dramatic increase in FDI in the GCC prior to 2009 provides scholars an excellent case study with which to examine the impact that FDI has on economic growth, thereby contributing to the

1. Also known as the Cooperation Council for the Arab States of the Gulf. See Cooperation Council for the Arab States Charter, May 25, 1981, 26 I.L.M. 1131 [hereinafter GCC Charter], available at http://www. gcc-sg.org/eng/indexfc7a.html. For a discussion of the GCC and its members, see infra Part II.

2. See U.N. Conference on Trade & Dev. [UNCTAD], Inward and Outward Foreign Direct Investment

   Flows, Annual, 1970–2011, UNCTADSTAT (July 18, 2012), http://unctadstat.unctad.org/TableViewer/ tableView.aspx?ReportId=88 [hereinafter UNCTAD, FDI Statistics].

3. For definitions of “foreign investment” and “foreign stock investment,” see, respectively, infra notes

36 and 73 and accompanying text.

1. See UNCTAD, Inward and Outward Foreign Direct Investment Stock, Annual, 1980–2011, UNCTADSTAT (July 18, 2012), http://unctadstat.unctad.org/TableViewer/tableView.aspx?ReportId=89 [hereinafter UNCTAD, Foreign Stock Statistics].

2. UNCTAD, FDI Statistics, supra note 2 (showing that in 2009, 2010, and 2011, FDI in the GCC has

   declined from its peak in 2008); UNCTAD, WORLD INVESTMENT REPORT 2012, at 48–50, U.N. Sales No. E.12.II.D.3 (2012), [hereinafter WORLD INVESTMENT REPORT 2012] available at http://www.unctad-docs.org/ files/UNCTAD-WIR2012-Full-en.pdf.

3. For an example of scholarship relating to FDI in the GCC, see Wasseem Mina, Do Bilateral

   Investment Treaties Encourage FDI in the GCC Countries?, 2 AFR. REV. ECON. & FIN. 1 (2010), available at http://african-review.com/Vol.%202%20(1)/Bilateral%20Investment%20Treaties%20and%20FDI.pdf. In 2012 UNCTAD suggested the decline in FDI could be attributed in part to the fact that GCC countries were still recovering from the cancellation of large-scale projects in the wake of the global financial crisis. WORLD INVESTMENT REPORT 2012, supra note 5, at 49.

   ongoing scholarly debate over the relationship between FDI and both short- term and long-term economic growth.7

   
   

   Following a brief overview in Part I of the literature surrounding FDI in the GCC and broader Middle East and North Africa (“MENA”) region, Part II provides statistical evidence from UNCTAD, the World Bank, and the GCC countries themselves outlining the upsurge of FDI in the GCC since 2002, followed by a brief overview of FDI levels since 2010. Part III briefly outlines and examines the legal framework governing the FDI regimes in the GCC states, revealing the unique manner in which the GCC states have promoted liberal economic policies while concomitantly maintaining regulatory control over important elements of their FDI regimes. Part IV then provides a modest contribution to the ongoing debate surrounding the relationship between FDI and economic growth by outlining the statistical impact that the increased levels of FDI have had on short-term economic growth in the GCC since 2002.

   
   

   1. REVIEW OF LITERATURE

      
      

      Although scholars, the media, international institutions, and governments or governmental organizations have examined various aspects of FDI in the Gulf, no academic study to date has been conducted which examines the increase of FDI in the GCC since 2002 or comprehensively analyzes the legal framework governing FDI in the GCC. The following is a brief overview of the existing literature on the topic.

      
      

      To begin with, much of the academic literature on the topic of FDI in the GCC is outdated. The dramatic rise in FDI has only occurred since 2002, making literature even from the late 1990s and early to mid-2000s outdated.8 For example, the World Bank’s publication, Trade, Investment, and

      Development in the Middle East and North Africa, examines several key elements of the legal regimes governing FDI in the GCC, but because it was

      
      

4. For more on the debate, see infra Part IV.A.

5. See, e.g., E. Mick Riordan et al., The World Economy and Its Implications for the Middle East and North Africa, 1995–2010, in PROSPECTS FOR MENA ECONOMIES: FROM BOOM TO BUST AND BACK? 15, 16,

   20–21 (Nemat Shafik ed., 1998) (stating that there was “little growth in real oil prices expected through 2010”); Mona S.W. Bseiso, Inter-Arab Inv. Guarantee Corp., The Role of Government in Promoting FDI in the Gulf Region, (Jan. 24, 2003) (unpublished conference paper, Eighth Annual WAIPA Conference), available at http://www.fdi.net/documents/WorldBank/databases/waipa/gulfregion.htm; M. Kabir Hassan, FDI, Information Technology and Economic Growth in the MENA Region (Econ. Research Forum, Conference Paper No...