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Gulf Financial Aid And Direct Investment: Tracking The Implications Of State Capitalism, Aid, And Investment Flows


Karen E. YoungBy Karen E. Young,

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Resident Scholar

@ProfessorKaren

American Enterprise Institute


August 13, 2020

Key Points

  • Much energy has focused on China’s Belt and Road Initiative and the debt-trap diplomacy it represents. But there is another set of players on the scene whose growth and influence in this sphere have been largely ignored. Gulf Arab states, particularly Saudi Arabia and the United Arab Emirates, have increasingly embraced an aggressive growth, investment, and development model for the broader Middle East.
  • This report and the accompanying Gulf Financial Aid and Direct Investment Tracker are an effort to understand the breadth and scope of Gulf aid and financial intervention into a representative set of cases in the Middle East, the Horn of Africa, and West Asia.
  • The objective is to demonstrate the competitive landscape for foreign investment in the receiving case countries and indicate the growing strength of Gulf capital investment, as it measures against a perception of Chinese capacity in the wider Middle East and emerging markets broadly. Most important, the comparative data here also demonstrate how private capital flows from the United States, United Kingdom, and European Union compete against flows of capital from state capitalism sources such as China and the Gulf.

Executive Summary

Emerging markets and developing economies from Africa to the Middle East to Asia now have some interesting choices in development finance partners. Where the money comes from matters. First, sources of development finance through loans or foreign direct investment create institutional consequences in the recipient state. Second, the deal-making of development finance creates political alliances that transcend the development transaction and, in many cases, reinforce patronage networks and personalist politics. Third, the efficacy of project delivery and its long-term viability, whether infrastructure investment in utilities or social infrastructure in health and education, depends on governance, competition, and the mutual benefits of rule-based markets.

Much energy has focused on China’s Belt and Road Initiative (BRI) and the debt-trap diplomacy it represents. But there is another set of players on the scene whose growth and influence in this sphere have been largely ignored. Gulf Arab states, particularly Saudi Arabia and the United Arab Emirates, have increasingly embraced an aggressive growth, investment, and development model for the broader Middle East and an expanding sphere of influence north to Jordan and Egypt, south to Yemen, and southwest to the vital trade corridor around the Arabian Sea toward the Horn of Africa and the Red Sea. Like the People’s Republic of China, the Gulf States are seeking political influence through economic statecraft.

This report and an accompanying interactive dataset and tracker are an effort to understand the breadth and scope of Gulf aid and financial intervention into a representative set of countries in the Middle East, Horn of Africa, and West Asia. The Gulf Financial Aid and Direct Investment Tracker includes all six Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates—as sending countries and then tracks official development assistance (as reported by sending governments), central bank deposits, and foreign direct investment in eight receiving case countries: Djibouti, Egypt, Ethiopia, Jordan, Oman, Pakistan, Sudan, and Yemen.

The clear finding from the Gulf Financial Aid and Direct Investment Tracker is that the GCC states are by far the largest source of capital investment in the eight recipient case countries when combined as a cohort. Even taking away the cases in which other foreign investment would be less interested to intervene (as in the case of Yemen or Sudan because of war or sanctions), the GCC states appear as important sources of capital, as we see in Egypt (where foreign investment is strong), Djibouti, and Oman (where China is understood to be a strong source of capital and where the cases are of core strategic interest to China’s BRI policy).

A second objective of the report and tracker is to demonstrate the competitive landscape for foreign investment in the receiving case countries and indicate the growing strength of Gulf capital investment, as it measures against a perception of Chinese capacity in the wider Middle East and emerging markets broadly. Most important, the comparative data here also demonstrate how private capital flows from the United States, United Kingdom, and European Union compete against flows of capital from state capitalism sources such as China and the Gulf.

Introduction

For much of the post–World War II era, the United States believed its model of investment and development represented not simply the sole model of building aspirational democratic capitalism but one that was underpinned by global institutions and unfettered by serious competition. That is no longer true, and while the United States still can offer a transformative global investment and development model, it neither does so aggressively nor appreciates the reality of growing competition in that sphere. Emerging models of state-led growth, market intervention, and preferential treatment of state investment in market institutions are challenging the preference for democratic capitalism as a source of ideological influence and a prescriptive for growth.

These emerging models are gaining traction as states vie for opportunities as agents of finance and development across emerging markets. China is of course a leader in this effort through its Belt and Road Initiative (BRI), but other small states with deep pockets have staged equally disruptive interventions. The Gulf Arab states are especially active now as agents of development finance.

The foreign policy implications for the United States in a post-COVID-19 global economy are immense. As the demand for foreign direct investment, refinancing of outstanding debt obligations, and new debt issuance becomes the mechanism of recovery for emerging markets, the United States as a source of private financial flows will contend with state sources of finance with political ambitions. More than an important source of private investment, the United States stands as a model of development based on free markets, competition, and rule of law.

This report and an accompanying interactive dataset and tracker are an effort to understand the breadth and scope of Gulf aid and financial intervention into a representative set of countries in the Middle East, Horn of Africa, and West Asia. The Gulf Financial Aid and Direct Investment Tracker includes all six Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates—as sending countries and then tracks official development assistance (as reported by sending governments), central bank deposits, and foreign direct investment in eight receiving case countries: Djibouti, Egypt, Ethiopia, Jordan, Oman, Pakistan, Sudan, and Yemen.

As a note on receiving country case selection: These eight recipient case countries vary widely in their geography, attractiveness to foreign investment, economic size and scale, natural resource dependency and diversification, and strategic importance to external powers. The data are a compilation of news reports, recipient and sending government data, and foreign direct investment flows tracked by fDi Markets, a Financial Times company, all combined and available by request and downloadable on the AEI website.1 The data compiled represent the period between 2003 and May 2020.

In this report, the six GCC states are combined as one analytical unit and compared with capital investment from China, the United States, the United Kingdom, and the European Union. The objective is to demonstrate the competitive landscape for foreign investment in the receiving case countries and indicate the growing strength of Gulf capital investment, as it measures against a perception of Chinese capacity in the wider Middle East and emerging markets broadly.

Most important, the comparative data here also demonstrate how private capital flows from the United States, United Kingdom, and European Union work together to compete with flows of capital from state capitalism sources such as China and the Gulf. The findings suggest that in demonstrating more consistent capital flows and job creation, capital investment from the US, UK, and EU present a major counterforce to support growth, innovation, entrepreneurship, individualism, and, one would hope, democracy as the “best aspects of free market capitalism,” as Joshua Kurlantzick describes.2

Read the full report.

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