The impact of economic and political volatility in the region

What is the impact of economic and political volatility on the economic health of countries in the Arab world generally, and on Foreign Direct Investments specifically? This question was addressed in a parallel session on the second day of the conference.

The first paper presented by Martijn BurgerElena Ianchovichina and Bob Rijkers entitled ‘Risky business: Political instability and Greenfield foreign direct investment in the Arab world, looks at the impact of political instability on Foreign Direct Investment (FDI) inflows into the MENA region.

Based on an analysis of quarterly Greenfield investment flows into MENA countries from 2003 to 2012, the authors explore foreign direct investments that are most affected by political instability. They find that investments in non-resource tradable/manufacturing sectors are very sensitive to political insensitivity but this sensitivity is not found for investments in natural resource sectors and non-tradable activities. In countries experiencing Arab Spring uprisings,  the authors find significant reduction in greenfield investments most starkly in the non-oil manufacturing sector. They argue that political instability is associated with increased reliance on non-tradable sectors and aggravated resource dependence. Political instability, therefore, impedes diversification in the MENA economies while strengthening investment in natural resources and non-tradable sectors.

Focusing on herding behaviours in the region’s stock markets

The second presentation by Mehmet BalcilarRiza Demirer and Shawkat Hammoudeh based on their paper entitled What drives herding in developing stock markets? Relative roles of own volatility and global factors‘,  looked at the influence of economic volatility on herd behavior. In their paper, authors aim to establish the volatility-herding link in the developing stock markets of the oil-rich GCC countries. Unlike the frequent presumption that herding volatility often comes from external factors, the authors argue that there is significant evidence of herding in all Gulf stock markets, with the domestic market volatility being the main trigger for herding behavior.

The authors suggest that governments focus on reducing the triggers for local volatility. This can be applied through financial regulation, access to information about stocks which in turns will improve people’s judgments about the value of their investment. “Having faith in your own stocks” will reduce the trigger for the herding behavior, and therefore, increase the stability of the local stock market you are investing in; as argued by Hoekman.

At the end of the session, its discussant Bernard Hoekman (European University Institute), summarised the main findings of both papers and their policy implications.

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