Economic Strategies in the Middle Term Paper

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One can therefore expect that Israel will benefit from an increase in knowledge-based industry that will continue to power employment and GDP growth.

Investment

Investment is a triple indicator: relative attractiveness of the country, the type of investment being attracted, and political stability or instability. In comparison to the U.S., all countries save Saudi Arabia are attracting more investment. One would expect that the U.S., as a relatively mature first-world economy, would be at a relatively lower level. The surprise in this analysis exists in both extremes: Saudi Arabia on the low side, and Qatar, Kuwait and Dubai on the high side. Israel's relatively low investment can be explained by the type of knowledge-intensive industrial development it is experiencing now.

Qatar and Kuwait are experiencing resource-extraction investment at record levels. The primary driver is natural gas expansion. Unlike oil, natural gas must be processed extensively by capital-intensive facilities before it can be exported. Kuwait and Qatar sit on enormous gas reserves which, to this point, have not been exploited to a great degree. This is changing, now that high demand in the Far East is propelling the search for new and reasonably-priced energy sources. Although Japan has had a LNG capacity for a long time (primarily importing LNG from Indonesia), China is by far the biggest growth factor in LNG for the future. A couple of indicators demonstrate the tremendous growth expectations for LNG exports:

The first is the relative price advantage of gas in China, as compared to coal:

Relative Price Today of Energy in China (Oil and Energy Trends, 2005)

This graph demonstrates that, while Sakhalin gas prices are relatively low, international prices are high. Given that the cost of natural gas is very low in the Middle East, there is an attraction to developing liquefaction facilities for export. This is a highly knowledge- and capital-intensive effort. The other element that needs to be developed is adequate LNG shipping capability. A look at recent trends in that area demonstrates the growth of shipping capacity, particularly under the control of China:

LNG Tankers on Order and Delivered (Collins, 2007)

Qatar has the third-highest reserves of gas in the world, behind Russia and Iran (Oil and Energy Trends, 2005). Qatar does not have significant oil reserves, so its emphasis on gas is logical, given the opportunity for exports. Kuwait also holds significant gas reserves, which it has not exploited until recently; Kuwait and Saudi Arabia used to burn off substantial amounts of natural gas into the atmosphere in order to increase oil production; this is still true in Saudi Arabia, but no longer the case in Kuwait.

The biggest concern in investing in LNG facilities is political stability. Many of the world's energy importers remember the disastrous experience of trying to export LNG in tankers from Algeria in the 1970's. Algeria's civil war and graft-driven economy essentially scuttled LNG plant investment in the country, and mothballed the LNG tankers that had been built at great expense to transport the non-existent LNG to Europe.

The second global concern is the total supply of energy available for growth. Quite unrelated to specific developments in the Middle East, the growth of the U.S., China and India mean that overall energy demand is not only growing faster, but is expected to continue its growth for decades to come. A predictable growth in the price of natural gas makes the multi-tens of billions of dollar investments in LNG facilities in three areas: (1) at the port of debarkation, (2) for transport ships, which are expensive and highly-specialized, and (3) at the port of entry of the country.

Although political stability was a concern up until 1991 (when Saddam Hussein took Kuwait as Iraq's "13th Province"), the U.S. And 29 other allies -- including a large contingent of Gulf States -- demonstrated that Kuwait's sovereignty would be protected by local and international armed intervention. Kuwait's subsequent moves to grant universal suffrage and free its economy have demonstrated a political will to demonstrate stability and become a safe place for investment.

GDP per Capita (PPP)

It is particularly important to compare PPP GDP per capita, rather than nominal GDP in dollars per person. That's because the local prices for consumer goods can vary significantly depending on local tariffs, government interference, and local demand. Many Middle Eastern countries have erected high tariff barriers, which makes it difficult to import goods at reasonable prices (Rivlin, 2001). Much of the cost of imports of basic foodstuffs in Saudi Arabia was artificially elevated due to Saudi support for local farmers, where Saudi wheat was supported at a price level four times higher than that of the world market (Henry C. a., 2001).

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Saudi Arabia's poor performance in GDP per capita is therefore partially due to the relatively high cost of living for a market basket of consumer items.

Saudi Arabia's tariff barriers are a holdover from previous decades when the Kingdom earned a good deal of its government revenue through tariffs. Many of Saudi Arabia's resource-poor nations depend on tariffs as a significant source of government revenue, which makes it difficult to support economic growth (Henry C., 2003).

The opposite is true in Kuwait, Qatar and Dubai. The countries do not try to support local manufacture of goods, nor do they have a local agricultural infrastructure. One of the attractions for knowledge workers of moving to these countries is their relatively low cost of living as compared to their relatively high wages. All three countries also have low or nonexistent tax rates, which increases the amount of spending cash available to workers in the economy (GulfNews.com, 2007).

Dubai's tax and tariff policies are particularly important to its growth. France, with its marginal tax rates higher than 50%, has lost investment bankers to London, with its 40% marginal rates. Those in the investment banking and service areas willing to move to Dubai enjoy a 0% marginal income tax rate, no VAT, and no inheritance or gift taxes. This favorable tax and tariff policy is a significant in attracting the knowledge workers needed for their growth (Remarks by HH Sheikha Lubna Al Qassimi, Minister of Economy and Planning, Dubai, n.d.).

Israel's relatively high income tax and tariff structure acts as a brake on employment and growth. Unlike Dubai and other Gulf States, Israel can count on a well-educated workforce and significant in-migration of workers who are willing to put up with military insecurity, high taxes and a relatively poor economy (as compared to their alternatives in Western Europe and the United States) for reasons other than economic reward. Israel's cost of living, therefore, is relatively high as compared to the Gulf States. Its income in PPP terms is therefore somewhat reduced by this high cost of living and taxation (Economist, 2007).

Demographic Factors

Demographic pressures work in two ways on economic growth. In a country where there is a need for educated workers, the increase in population can mean a greater employment rate and faster economic growth overall. In countries where there is a great deal of internal population growth, but the population is not well-suited to the needs of the growing economy, the demographic trends act as a drag on future economic growth.

The conventional wisdom in the Middle East is that a huge bulge of working-age people are entering the workforce at a time when there are few jobs available (Laipson, 2003). This is certainly true in Jordan, Syria, Lebanon and Saudi Arabia. The poor local educational facilities, relatively low literacy rate and disconnect between work and the populace have led to high unemployment rates just at the time when the number of working-age people is growing at its fastest. Due to its oil wealth and need for expertise, Saudi Arabia imports experienced workers and doesn't employ its own population. High population growth, therefore, assures that GDP per head remains relatively low.

The demographic factors play well for Qatar, Kuwait and Dubai, however. With relatively high birthrates, low unemployment and significant educational opportunities, the citizens of these countries can compete for abundant jobs. In their cases, population growth means higher overall economic growth.

Israel stands on its own, as a low Jewish birthrate (and high Israeli Arab birthrate) holds down economic growth. Israel's relatively high immigration rate of well-educated high-tech workers over the past ten years has been a major contributor to its high-tech growth. Future immigration may be contained, however, by political risk and the lack of highly-skilled immigrants from other countries (such as the ex-Soviet Union) which provide a windfall of talent (Trajtenberg, 2005).

Economic Policies: Measuring the Factors for Growth

Measuring where the countries are is one part of the puzzle. Dubai is the clear winner up to the present. The key question for this paper is: what are the key winning strategies for the future? This paper posits several factors needed for growth. Some of these factors have different importance for different countries, depending on the future source of their….....

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