On the sidelines of the ECSSR's 14th Annual Conference entitled "Human Resources and Development in the Arabian Gulf (February 02-04, 2009)" at the Emirates Center for Strategic Studies and Research,
|Dr. Uri Dadush|
Question 1: What would be the impact of the current economic crisis facing the world on globalization? Will we be witnessing a rise in economic protectionism or the emergence of a new global economic order led by the strengthening of global institutions, as some world leaders envision?
Answer: I think there are significant risks now of some backtracking and of protectionism. I believe that if this acute recession is relatively short-lived and lasts for a year or so then we should be able to avoid the worst effects of protectionism. What I am really concerned about is going into an episode that lasts several years. Already we are witnessing significant signs of parties backtracking. This underlines the importance of economic stimulus measures and steps for strengthening the banking system, so that we rid ourselves of this crisis in a relatively short time. This also underlines the importance of policy makers being disciplined in not giving in to this temptation (of protectionism). If the recession is short, the process of globalization would sustain itself as it is driven by very strong and deep forces, like technology, communications, people's need for diversity, etc. Therefore, this process of globalization will not be affected, so long as we do not go into a depression.
Question 2: In your lecture at the conference you spoke of the need for greater integration and participation of GCC economies in the global economy. However, certain sovereign wealth funds of the region have faced minor setbacks in the wake of the current financial crisis. Moreover, GCC states have to presently address their own immediate economic concerns of the global economic crisis. In this context, what would be the best way for GCC states to judiciously use their sovereign wealth funds?
Answer: I think mitigating the impact of the global economic crisis would be very important. However, I think it would be very damaging if we just focused on mitigating the effects of the crisis and nothing else. The UAE is very fortunate to have very large reserves of sovereign wealth in this period of global economic crisis, and a lot of countries would like to be in the same position. However, there is also a need to initiate reforms and investments for the longer term¿be they in education, opening up the services sector, deregulating the economy, and making the economy more competitive internationally. I do not think anybody can afford to stop that process. These investments will have very good returns, as I believe the globalization process will be a lot stronger 20 years from now than it is today. I also believe that oil prices would rise significantly in the medium term, say over a period of three to 10 years.
Q3. There is a perception that the value of the dollar is under threat. People are buying US treasuries that is propping up the dollar for now, even as the US economy faces major crises. Does this pose a threat to wealth in US dollar-denominated assets?
Answer: I agree that there is a significant risk of a dollar realignment. As we begin to come out of the crisis, the 'safe haven' argument in favor of the dollar¿which is ironic as the crisis is centered in the US¿may disappear quite quickly. I do not think anybody can predict this, but the argument that you should have a diversified portfolio in terms of currencies is a very powerful one.
Q4. How do we tackle the issue of a demographic imbalance in GCC states without compromising on our requirements for development?
Answer: I think this is a very complicated issue. Some of the GCC states have 80 percent immigrant labor force which is unique in the world and does raise all sorts of fundamental questions. In terms of the economics, what is striking about Gulf countries is that the productivity of the service sector is a lot lower than that of high-income countries, even though this sector provides 70 percent of employment. This is a reflection of the easy availability of unskilled labor. Over a period of time, I think the region would see an improvement in productivity and wages, lesser reliance on unskilled labor and the creation of more employment opportunities for nationals. I also believe that economics will drive the demand and not the other way round. The idea that you suddenly stop the use of unskilled labor does not work here, just as it does not work in the United States. People will need unskilled labor, given the current economic constraints. However, it is possible to make the economy more productive over a period of time, and move to more capital-intensive forms of industry to limit the use of unskilled labor.