The economic development gap between countries in the Middle East and countries in the European Union
Literature review
The purpose of this essay is to represent some of the interconnected economic theories that were initially illustrated in previous studies. In addition to that, a number of reliable references will be highlighted taking into account the methodology to be followed before analyzing the results obtained. In return, the paper will explore the effects of the various determinants of economic growth and how they differ from one author to another in terms of their conditions, relevance, timeframe, and so on. Finally, the manner in which previous studies relates with the objectives of this study will also be analyzed.
The Neo-Classical theory
According to this theory, it is evident that technology, labor, and capital are the main variables that enhance economic growth. On the other hand, it is not easy for economists to have the potential of realizing a state of economic equilibrium without the need of fostering productivity via increased capital inflow, job creation, and technological advancement. As a result of that, this research will be intended to incorporate other factors that have the ability of impacting economic growth so as to facilitate potential results.
Effects of inflation in the literature review
From research, it seems researchers, economist, and practitioners have not agreed on one definition of inflation. According to Makinen (2003), inflation is the rate of purchasing goods and services. This economic indicator takes into account the annual growth rate and in an index. Hypotheses on inflation by researchers have been used to measure the economic growth of individual countries; however, literature on the inflation rate as a factor in economic growth has received varied opinions. In this literature review, Li (2006) opinion is that inflation nature provides controversies when determining the growth of economies. Habermeier et al (2009) did a study and came into a conclusion that consumer prices, which include fuels prices, were responsible for inflation in most Middle East countries between 2000 and 2008. The conclusion, however, did not differentiate between food and fuel prices. Middle East countries are grouped as developing countries, that is why its economic growth has been affected by both fuel and non-fuel commodity prices. The paper by Haber et al 2009) confirms that present and past research on impact of US dollar on inflation is true. Impact of dollar is significant in countries that are non-oil producers. Clark (2004) affirms the appreciation of dollar did have a divergent inflation of goods and services. The paper identified a problem with use of world interest rates to explain inflation in some countries. It is therefore not clear on ways in which world interest rates can be used to determine inflation in Middle East countries.
Effects of exports of goods in the literature review
By selecting the relevant countries on World Bank, this indicator comprises all transactions between Countries in the Middle East and the EU involving a change of ownership from residents to non-residents of general merchandise, net exports of goods under gold and nonmonetary gold. Currently available descriptive data shows that middle countries trade with European countries is below average. Bhattacharya & Wolde (2010) from their research indicates that the GDP ratio for non-oil exporting Middle East countries was lower compared to time between 1999-2008. The researchers further used cross-section gravity model and found out a negative co-efficient for all countries under MENA. There are literatures that agree on state of exports of goods and services between EU and MENA. Cieslik & Hagemejer (2009) concluded that there were more imports from EU to Middle East compared to exports.
Effects of fuel exports in the literature review
Most of the countries in the Middle East are big fuel exporters, this variable comprises the commodities in SITC section 3 (Standard international trade classification). Investigation and research on role of fuel exports on economic growth is an important factor that has helped policy makers to develop growth policies. Empirical studies indicates that the economic growth of the majority of the Middle East countries have ended up adopting a granger causality tests that can stimulate economic growth with response to the exportation of fuel products.
The effects of government expenditure in the literature review
Government expenditure is used for the purpose of representing the value of goods and services bought or manufactured by the government and delivered to households for consumption. From economic perspectives, government spending is a strategy used by most countries to intervene on failed government (Ahuja, 2013). Economies, which are at its developing stages, depend on government expenditure for its economic development. Taking into consideration the study conducted by (Groh and Wich, 2012) a productive government that productively spends on infrastructure, technology, education and transport network will always prosper in its GDP growth. Improved domestic economies attracts outside investors who will eventually boost the country’s economy.
The effects of unemployment in literature review
The rate of unemployment is used for the purpose of representing the section of the labour force that is currently unemployed but available for and seeking to secure work. This, therefore, implies that the relationship between gross domestic product and unemployment is well researched in economics. Unemployment is under macro-economic with its effects felt different across different countries. Economists and policy makers carrying out research on unemployment with an objective of solving issues that causes it. Explanation provided by Levinson (2018) indicates that unemployment a social problems arising from lack on income. Researchers attribute Okun’s Law to connection between economic growth and unemployment. Villaverde and Maza (2009) have proved Okun’s law through analysis of Spanish countries between 1980 and 2004. The outcome of the analysis showed inverse relationship between unemployment and output is true for most of the countries. High unemployment witnessed in Middle East countries imply that labor resources are not utilized as it is supposed to be. According to Shayerah (2010), the young population in Middle East countries keep increasing yet there are no employments for them. Unutilized young talent is therefore slowing economic growth of these countries.
Effects of foreign direct investment in the literature review
Direct foreign investment aid in recording the value of cross-border direct investment transactions over a given period, typically quarter or a year. Accordingly, the truth is that develops simultaneous equation model to determine the impacts of foreign direct investments have had impact on economic development of Middle East countries a case study of Egypt, Jordan, and Oman. The results from the models suggest that Middle Eastern countries high economic growth rates attributes to high in flow of foreign capital. Net inflows from foreign capital lead to growth in exports of both good and services, which in return result in increased foreign capital. Middle East countries are now embracing privatization through introduction of policies that minimize price distortion thus eventually opening its markets for international trade. Despite the positive impacts FDI inflows on Middle East economic growth, Mina (2013) has a contrary opinion. Mina believes that high number of regulations negatively influence potential impact of FDI on economic growth. For instance in UAE investors are required share with the national government 51% of its investment.
The effects of households and NPISHs Final consumption expenditure per capita growth in literature review
This represents the value of goods and services bought by each household. A good number of researchers believe that household consumption is a measure of economic growth. Empirical studies using literature in economics have been used to determine the relationship between consumption expenditure and economic growth. Research by Test (2011) in his research discussed how household expenditure integrates with economic growth in line with Keynesian consumption function. The modern consumption theories are based on foundation laid by Keynes (1936).
Despite differences by researchers in determining income measurements, household private consumption is studied across the economics field. Final consumption expenditure is affected by other factors that include social security, welfares, taxes and savings decisions. A growing economy is supposed to witness increased consumption expenditure. Michael (2015) affirms this statement through his prove that households who are expects to be hit by inflation will spend more durables.
The effects of imports of goods and services in the literature review
In economic terms, imports are used to represents the goods, which add to the stock of material resources of a country by entering its economic territory. The reason for taking that into consideration is because imports of goods are a factor when it comes to determining economic growth of a country. Academics and policy makers for a long time have been able to study relationship between imports and country’s economic growth. Ahmet (2008) in his research on Turkey’s economy confirmed that indeed imports did have a direct association with the economic development. Another research work by Murat & Erdogan (2010) tested the relationship between imports-export of goods using VAR analysis. Countries that depend on imports have the likelihood of slowing down economic development.
The effects of population growth in literature review
In this case, population increase will take into account the need of determining the effect it has to economic development of a country. The positive side of population growth is that it ensures that a country do not lack labor while on the contrary high populations can be seen to exhaust a country’s resources. Mason (1988) study on population growth witnessed in developing countries indicates that a rapid growth in population requires a country to improve their investments in order to maintain the available labor. Analyst such as (Heady& Hodge, 2009) believes that high-income areas such as Europe could face a slow economic growth since currently its population growth is slow. Baker et al (2005) indicates that with slow population growth will result into future drop in economic growth for the majority of the Middle East countries.
Criticism, limitations, and evaluations
As much as gross the above variables are concerned, some of them do not have the potential of providing a true estimate economic growth in the Middle East since 1820. The reason for that is because it has been realized that Middle East entry into modern economic world is something had already began in the nineteenth century. The comparisons that are made are the one that had ended up increasing the economic gap that exists between the Middle East and European countries towards the World War I.
One of the limitations of this study is that the absence of valid data was one of the issues that resulted to the lack of evidence, which further increased uncertainty on the true picture of position of most Middle East countries. With regard to the existing data, it is difficult to take into account the need of using some economic input and output prices to calculate productivity. Therefore, the economic gap that existed could have been as a result of prolonged political challenges in the Middle East experienced political challenges. Last, but not least, regardless of the fact that Middle East countries continues to depend on oil as a means of getting revenue, still they face a gap in terms of per capita incomes when compared with Europe countries.
References
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Baker, D., Delong, J. B., Krugman, P. R. (2005). Asset returns and economic growth. Brookings Papers on Economic Activity, 1, 289-330.
Clark, T. (2004) “An Evaluation of the Decline in Goods Inflation,” Federal Reserve Bank of Kansas City Economic Review, Second Quarter
D’Acunto F., Hoang D., and Weber M. (2015). Inflation Expectations and Consumption Expenditure. Meeting Papers from Society for Economic. Dynamics, No 1266. Available . at:https://bfi.uchicago.edu/sites/default/files/research/paper_Weber.pdf
Groh, A. P., & Wich, M. (2012). Emerging economies’ attraction of foreign direct investment.
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Habermeier, Karl, İnci Ötker-Robe, Luis Jacome, Alessandro Giustiniani, Kotaro Ishi, David Vávra, Turgut Kışınbay, and Francisco Vazquez (2009) “Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries—A Cross Regional Perspective,” IMF Working Paper WP/09/1.
Heady, D. D., Hodge, A. (2009). The effect of population growth on economic growth: A meta-regression analysis of the macroeconomic literature. Population and Development Review, 35, 221-248.
Keynes, J.M. (1936). The General Theory of Employment, Interest and Money.
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Li, M. (2006). Inflation and Economic Growth: Threshold Effects and Transmission Mechanisms, University of Alberta, Working papers.
Makinen, G. (2003). Inflation: Causes, Costs, and Current Status. Report for Congress, Congressional Research Service. The Library of Congress.
Shayerah, I. (2010). Iran’s Economic Conditions: U.S. Policy Issues, Congressional Research Service.
Villaverde, J. and Maza, A. (2009). The robustness of Okun’s Law in Spain, 1980–2004: Regional evidence, Journal of Policy Modeling, 31(2), 289-297. doi:10.1016/j.jpolmod.2008.09.003,
http://dx.doi.org/10.1016/j.jpolmod.2008.09.003
