Scenarios for alternative Inter-Arab Financing for Development

Abdallah Al DardariDirector

Economic Development and Globalisation DivisionUN-ESCWA

December 08 2011

• This work was initiated in the context of the preparation of two ESCWA publications: the Arab World 20-25 report, and the Arab Integration report.

• Given some of the main questions of the lead authors, a macroeconomic framework that ensures the coherency of model and judgment-based forecasts was deemed necessary.

• The main features of a small Macro-econometric modeling exercise in the Keynes-Klein/ Phillips- Bergstrom tradition will be presented.

• The model is a stochastic, dynamic, non-linear simultaneous-equations model formulated in discrete time.

The main purpose of a Macro-econometric Model is to forecast :

- Wealth/ Income/ GDP growth;

- Employment;

- Price/ Monetary developments;

- Balance of Payments Developments;

- Fiscal Sustainability Issues/ Public Debt Developments.

Structure of the Model:The model is structured along 5 main Blocks:- The real sector dealing with household demand,

factors demand by firms, and external trade.- The Balance of Payments block;- The Prices-Wages block;- The Monetary survey;- The Fiscal accounts.

The output of the model will be linked to sub-modules tackling several development issues (poverty, malnutrition,…) through cross-sectional regressions.

The main purpose of the framework is to:• to conduct simulations of the impact of budgetary (and

monetary) policies.• to shock indicators/ parameters related to:

- Intra-regional financial flows, in particular issues related to the reallocation of the global accumulated Oil Wealth;

- intra-regional aid flows;- Intraregional-trade in goods and services with reference the

two main modeled sub-regions;- Some structural developments related to Labor Supply,

particularly to simulate the impact of increases in the participation rates in the region;

- The model considers two sub-regional groupings, the Oil Exporters (the GCCs along with Algeria and Libya) and the Oil Importers. So far the model excludes Comoros, Djibouti, Iraq and Somalia. Iraq will be modeled separately.

Picture that: Real GDP per capita in the Arab World

The outcomes under the status quo are alarming for the Oil Importers…

1,100

1,200

1,300

1,400

1,500

1,600

1,700

00 02 04 06 08 10 12 14 16 18 20 22 24

Real GDP per capita - Oil Importing Countries

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

00 02 04 06 08 10 12 14 16 18 20 22 24

Real GDP per capita - Oil Exporting Countries

Baseline

800

850

900

950

1,000

1,050

1,100

00 02 04 06 08 10 12 14 16 18 20 22 24

Real Private Consumption per capita - Oil Importing Countries

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

00 02 04 06 08 10 12 14 16 18 20 22 24

Real Private Consumption per capita - Oil Exporting Countries

Baseline

Adverse capital accumulation dynamics…

0

200

400

600

800

1,000

80 85 90 95 00 05 10 15 20 25

Physical Capital Stock - Oil Importing Countries

0

1,000

2,000

3,000

4,000

80 85 90 95 00 05 10 15 20 25

Physical Capital Stock - Oil Exporting Countries

Baseline

0

20

40

60

80

100

120

70 75 80 85 90 95 00 05 10 15 20 25

Real Gross Fixed Capital Formation - Oil Importing CountriesR_GFCFOIEXO (Baseline)

Real Gross Fixed Capital Formation - Oil Importing Countries

40

80

120

160

200

240

280

320

70 75 80 85 90 95 00 05 10 15 20 25

Real Gross Fixed Capital Formation - Oil Exporting CountriesR_GFCFOXEXO (Baseline)

Real Gross Fixed Capital Formation - Oil Exporting Countries

.. Even if the trade balance of Oil Importers is set to reach equilibrium in 2025 on mechanical grounds

-60

-50

-40

-30

-20

-10

0

10

1995 2000 2005 2010 2015 2020 2025

Trade Balance - Oil Importing CountriesTrade Balance - Oil Importing Countries (Baseline)

Trade Balance - Oil Importing Countries

-12

-10

-8

-6

-4

-2

0

2

1995 2000 2005 2010 2015 2020 2025

Trade Balance as a percentage of GDP - Oil Importing CountriesTrade Balance as a percentage of GDP - Oil Importing Countries (Baseline)

Trade Balance as a percentage of GDP - Oil Importing Countries

0

100

200

300

400

500

600

700

1995 2000 2005 2010 2015 2020 2025

Trade Balance - Oil Exporting CountriesTrade Balance - Oil Exporting Countries (Baseline)

Trade Balance - Oil Exporting Countries

0

10

20

30

40

1995 2000 2005 2010 2015 2020 2025

Trade Balance as a percentage of GDP - Oil Exporting CountriesTrade Balance as a percentage of GDP - Oil Exporting Countries (Baseline)

Trade Balance as a percentage of GDP - Oil Exporting Countries

Some Simulations

• Main assumption: 10% of the projected oil receipts of the Oil Exporters are invested in the Oil Importing Countries, and 0.5% in increased intra-regional aid.

Simulation Results

150

200

250

300

350

00 02 04 06 08 10 12 14 16 18 20 22 24

Real Private Consumption - Oil Importing Countries (Scenario 3)R_CPOIEXO (Baseline)

Real Private Consumption - Oil Importing Countries

200

250

300

350

400

450

500

00 02 04 06 08 10 12 14 16 18 20 22 24

Real Gross Domestic Product - Oil Importing Countries (Scenario 3)R_GDPOI2 (Baseline)

Real Gross Domestic Product - Oil Importing Countries

1,000

1,200

1,400

1,600

1,800

2,000

00 02 04 06 08 10 12 14 16 18 20 22 24

Real GDP per capita - Oil Importing Countries (Scenario 3)R_GDPOI_CAP2 (Baseline)

Real GDP per capita - Oil Importing Countries

400

600

800

1,000

1,200

1,400

00 02 04 06 08 10 12 14 16 18 20 22 24

Physical Capital Stock - Oil Importing Countries (Scenario 3)KOI (Baseline)

Physical Capital Stock - Oil Importing Countries

-100

-80

-60

-40

-20

0

20

00 02 04 06 08 10 12 14 16 18 20 22 24

Trade Balance - Oil Importing Countries (Scenario 3)Trade Balance - Oil Importing Countries (Baseline)

Trade Balance - Oil Importing Countries

-16

-12

-8

-4

0

4

00 02 04 06 08 10 12 14 16 18 20 22 24

Trade Balance as a percentage of GDP - Oil Importing Countries (Scenario 3)Trade Balance as a percentage of GDP - Oil Importing Countries (Baseline)

Trade Balance as a percentage of GDP - Oil Importing Countries

0

100

200

300

400

500

600

700

00 02 04 06 08 10 12 14 16 18 20 22 24

Trade Balance - Oil Exporting Countries (Scenario 3)Trade Balance - Oil Exporting Countries (Baseline)

Trade Balance - Oil Exporting Countries

8

12

16

20

24

28

00 02 04 06 08 10 12 14 16 18 20 22 24

Trade Balance as a percentage of GDP - Oil Exporting Countries (Scenario 3)Trade Balance as a percentage of GDP - Oil Exporting Countries (Baseline)

Trade Balance as a percentage of GDP - Oil Exporting Countries

3.4

3.6

3.8

4.0

4.2

1,000

2,000

3,000

4,000

5,000

6,000

2010 2012 2014 2016 2018 2020 2022 2024

N_GDPARAB (Scenario 3)N_GDPARAB (Baseline)Perc ent Dev iation

N_GDPARAB

0

10

20

30

40

600

800

1,000

1,200

1,400

2010 2012 2014 2016 2018 2020 2022 2024

Phys ical Capital Stock - Oil Importing Countries (Scenario 3)KOI (Bas eline)Perc ent Dev iation

Physical Capital Stock - O il Importing Countries

.54

.55

.56

.57

.58

.59

60

70

80

90

100

2010 2012 2014 2016 2018 2020 2022 2024

Labor Demand - Oil Importing Countries (Scenario 3)LDOI (Bas eline)Perc ent Dev iation

Labor Demand - O il Importing Countries

.026

.028

.030

.032

.034

20

30

40

50

2010 2012 2014 2016 2018 2020 2022 2024

Labor Demand - Oil Exporting Countries (Scenario 3)LDOX (Bas eline)Perc ent Dev iation

Labor Demand - O il Exporting Countries

12.0

12.4

12.8

13.2

900

1,000

1,100

1,200

1,300

2010 2012 2014 2016 2018 2020 2022 2024

Real Private Consumption per capita - Oil Importing Countries (Scenario 3)R_CPOIEXO_CAP (Bas eline)Perc ent Dev iation

Real Private Consumption per capita - O il Importing Countries

.00

.04

.08

.12

.16

3,400

3,500

3,600

3,700

3,800

3,900

2010 2012 2014 2016 2018 2020 2022 2024

Real Private Consumption per capita - Oil Exporting Countries (Scenario 3)R_CPOXEXO_CAP (Bas eline)Perc ent D ev iation

Real Private Consumption per capita - O il Exporting Countries

12.4

12.8

13.2

13.6

350

400

450

500

2010 2012 2014 2016 2018 2020 2022 2024

Real Gross Domestic Produc t - Oil Importing Countries (Scenario 3)R_GDPOI2 (Bas eline)Perc ent Dev iation

Real G ross Domestic Product - O il Importing Countries

12.4

12.8

13.2

13.6

1,400

1,500

1,600

1,700

1,800

1,900

2010 2012 2014 2016 2018 2020 2022 2024

Real GDP per capita - Oil Importing Countries (Scenario 3)R_GDPOI_CAP2 (Bas eline)Perc ent Dev iation

Real GDP per capita - O il Importing Countries

.13

.14

.15

.16

.17

700

800

900

1,000

1,100

2010 2012 2014 2016 2018 2020 2022 2024

Real Gross Domestic Product - Oil Exporting Countries (Scenario 3)R_GDPOX2 (Bas eline)Perc ent Dev iation

Real Gross Domestic Product - O il Exporting Countries

.13

.14

.15

.16

.17

8,400

8,800

9,200

9,600

10,000

2010 2012 2014 2016 2018 2020 2022 2024

Real GDP per capita - Oil Exporting Countries (Scenario 3)R_GDPOX_CAP2 (Bas eline)Perc ent Dev iation

Real GDP per capita - O il Exporting Countries

.00

.04

.08

.12

.16

1,500

2,000

2,500

3,000

3,500

4,000

2010 2012 2014 2016 2018 2020 2022 2024

Physical Capital Stock - Oil Exporting Countries (Scenario 3)KOX (Bas eline)Perc ent Dev iation

Physical Capital Stock - O il Exporting Countries

Further simulation of Innovative Financing

• Liquidity Surplus in Arab Banks in MICs and LDCs is estimated at US$150 billion

• Effective intermediation with strctural transformation would have much higher impact on poverty reduction, employment and equity.

THANK YOU