Browsing by Author "El-Gamal, Mahmoud A."
Now showing 1 - 19 of 19
Results Per Page
Sort Options
Item Bank-Insured RoSCA for Microfinance: Experimental Evidence in Poor Egyptian Villages(James A. Baker III Institute for Public Policy) El-Gamal, Mahmoud A.; El-Komi, Mohamed; Karlan, Dean; Osman, Adam; James A. Baker III Institute for Public PolicyMicrofinance institutions (MFIs) have continued to grow over the past few decades, both in numbers of clients and portfolio sizes. The growth of these MFIs has enabled greater access to credit in many of the world’s less developed nations. However, recent studies have shown that very many of the poor – especially Muslims – remain unbanked, and many who have access to banks remain credit constrained. Confounding this problem in many Muslim countries is the poor’s propensity to reject microfinance, when available, on religious grounds. In this paper we propose an alternative microfinance model built on the familiar rotating savings and credit association (RoSCA) model that is Islamically accepted, and test its performance against sequential Grameen-style microcredit provision in a “laboratory experiment in the field” conducted in poor Egyptian villages. Our model of bank-insured RoSCAs is shown to solve coordination-failure problems that may otherwise prevent the spontaneous development of informal RoSCAs in practice. Empirically, our guaranteed-RoSCA model generated significantly higher take-up and repayment rates than the Grameen model, suggesting that this model can be a useful alternative for Islamic countries where many of the poor have rejected conventional modes of microfinance.Item Cheap Money, Geopolitics and Supernormal Backwardation of the WTI Forward Curve(IAEE, 2023) El-Gamal, Mahmoud A.; Jaffe, Amy M.; Medlock, Kenneth B. IIIFinancial speculators frequently trade in the most liquid short-tenor contracts. We study repeating patterns of sharply steepening slopes in the WTI forward curve to investigate whether, after controlling for macroeconomic variables, physical market fundamentals, and basic arbitrage, calendar spread behavior is partly explained by speculation related to assessed geopolitical risk. We estimate WTI forward curve backwardation using the slope component from the parsimonious Dynamic Nelson-Siegel factor model, and then regress the resulting time series on a variety of economic, financial, and geopolitical variables. Results show that geopolitical risk in juxtaposition with low interest rates explains a significant percentage of the slope variation from 2011 to 2021. We then investigate whether there is evidence to support the common narrative that speculators buy the geopolitical threat and sell the event. We find confirmation of the hypothesis. We further study the dynamic effects of interest rate and geopolitical risk on speculative activity using a Factor-Augmented Vector Autoregression analysis. Impulse response functions from the latter indicate that independent shocks related to geopolitical threat result in heightened supernormal backwardation for a month or more. We recommend changing margin requirements in WTI futures markets in light of these findings to disincentivize this speculative behavior.Item Chinese Growth Prospects in the Short to Medium Term(James A. Baker III Institute for Public Policy) El-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyThe Chinese economy has grown at incredibly fast rates over the past three decades. This growth has been heavily biased in favor of investment-driven, capital-and-resource-intensive, and export-oriented industrialization. Although China has made great strides in improving energy efficiency and reducing the environmental impact of its growth path, continued fast growth is certain to increase demand pressure on fuels and other resources, and to test the limits of environmental sustainability. A very large literature has evolved over the past decade—one extreme praising the Chinese growth model as a new (Beijing consensus) economic paradigm to challenge the Washington consensus, predicting its continuity for the foreseeable future, and the other extreme predicting an imminent collapse. Proponents of the latter approach point to internal and external imbalances of the Chinese growth model (toward investment and trade surpluses, respectively), potential banking crises, and sociopolitical risks emanating from rampant corruption and growing inequalities. Chinese officials have been aware of these three categories of problems, and have promised, at least as early as 2004, to address them. However, imbalances have continued over the past few years, suggesting that gradual transformation away from heavy industry toward employment-creating light manufacturing, which would also contribute to shifting demand from investment to domestic consumption and reduce income inequalities, may be difficult to implement. This “addiction to the Beijing consensus” problem notwithstanding, there is not sufficient evidence to suggest that Chinese internal and external economic imbalances have reached crisis levels. Moreover, the banking sector appears sound, and even if economic slow-down, which is inevitable, uncovers large volumes of nonperforming loans, state domination of banking and the economy, together with massive reserves, would allow for relatively low-cost recapitalization. Sociopolitical risk is very real and appropriately a major concern for Chinese leadership, although the massive size of the country makes an Egyptian- or Tunisian-style revolution highly unlikely.Item Discordant Egyptian and Saudi Visions 2030 and the Forgotten Quest for Mena Economic Integration(James A. Baker III Institute for Public Policy) El-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyThe Arab Spring brought about, simultaneously, an oil-price geopolitical premium for Saudi Arabia and other Gulf Cooperation Council countries and economic hardships for Egypt and other countries of the Spring. Over the past five years, GCC countries offered financial support to soften the economic blow to the Egyptian economy. However, an envisioned major injection of investments to ensure long-term economic success did not materialize due to a combination of lower oil prices—which forced Saudi Arabia, in particular, to worry about its own long-term economic success—and the inability of successive Egyptian regimes to implement sufficient reforms to reassure prospective investors. Minimal financial support to Egypt has continued, mainly from Saudi Arabia and the United Arab Emirates. Recent funding from those countries is now linked to an expected IMF loan that would signal the Egyptian government’s commitment to economic reform. Unfortunately, long-term Visions 2030 economic plans for Egypt and Saudi Arabia were developed by each country in isolation of its neighborhood, despite economic and political conditions that are similar to the 1990s, when many viewed regional integration as the way forward for the region’s economies. This paper discusses the shortcomings of these narrow national visions and argues for a comprehensive framework for regional economic integration, wherein each country’s vision is harmonized with those of its neighbors.Item Energy, Financial Contagion, and the DollarEl-Gamal, Mahmoud A.; Jaffe, Amy Myers; James A. Baker III Institute for Public PolicyItem Essays in financial risk management(2010) Ergen, Ibrahim; El-Gamal, Mahmoud A.In Chapter 1, the usefulness of Extreme Value Theory (EVT) methods, GARCH models, and skewed distributions in market risk measurement is shown by predicting and backtesting the one-day-ahead VaR for emerging stock markets and the S&P 500 index. It has been found that the conventional risk measurement methods, which rely on normal distribution assumption, grossly underestimate the downside risk. In Chapter 2, the dependence of the extreme losses of the emerging stock market indices is analyzed. It is shown that the dependence in the tails of their loss distributions is much stronger than that implied by a correlation analysis. Economically speaking, the benefits of portfolio diversification are lost when investors need them most. The standard methodology for bivariate extremal dependence analysis is slightly generalized into a multi-asset setting. The concept of hidden extremal dependence for a multi-asset portfolio is introduced to the literature and it is shown that the existence of such hidden dependence reduces the diversification benefits. In Chapter 3, the mechanisms that drive the international financial contagion are discussed. Trade competition and macroeconomic similarity channels are identified as significant drivers of financial contagion as measured by extremal dependence. In Chapter 4, the determinants of short-term volatility for natural gas futures are investigated within a GARCH framework augmented with market fundamentals. New findings include the asymmetric effect of storage levels and maturity effect across seasons. More importantly, I showed that, the augmentation of GARCH models with market fundamentals improves the accuracy of out-of-sample volatility forecasts.Item Essays on financial analysis: Capital structure, dynamic dependence and extreme loss modeling(2008) Wang, Xin; El-Gamal, Mahmoud A.This dissertation contains three essays concerning two broad areas, namely, optimal capital structure and risky assets modeling. In the first paper, we study corporate debt values, capital structure, and the term structure of interest rates in a unified framework. We employ numerical techniques to compute the firm's optimal capital structure and the value of its long-term risky debt with call option embedded and yield spreads when the value of the firm's unleveraged assets and the instantaneous default-free interest rate are risk factors. Debt and leveraged firm value are thus explicitly linked to properties of the firm's unleveraged assets, the term structure of default-free interest rates, taxes, bankruptcy costs, payout rates, and bond covenants. The results clarify the relationship between a firm's capital structure and movements in the term structure and other important aspects of the capital structure decision. In the second chapter, we propose a dynamic copula modeling framework that allows copula association parameters to change with time and macroeconomic variables. We find empirical evidence that nominal interest rate and price index for traded goods differentials between two countries have significant impact on the co-movement of foreign exchange rates. Our Pearson-type goodness-of-fit test has the power to reject constant and time-varying copula modeling approaches at the 95% confidence level. In the third chapter, a new method for solving sample size problem in probabilistic risk assessment has been developed. We propose the use of Bayesian power prior distributions to improve extreme value theory and provide reliable estimates of Value-at-Risk (VaR) and expected shortfall. The Bayesian Monte Carlo Markov chain computational scheme with power prior distributions allows us to properly incorporate historical data and borrow strength and information from related sources to current study.Item Essays on heterogeneous technologies in banking and finance(2004) Inanoglu, Hulusi; El-Gamal, Mahmoud A.This dissertation focuses on the heterogeneous production technologies in banking and finance within the context of efficiency-analyses. The first essay studies the cost efficiency of Turkish banking industry. Studies of bank efficiency tend to draw conclusions from pooled estimates, assuming that all banks in a sample use the same technology, or estimates based on a priori classifications of the banks. It is well known that efficiency rankings may be corrupted if banks that use different technologies are pooled together in estimating the technological frontier with respect to which inefficiency is estimated. We model unobserved heterogeneity in banking technologies as a mixture model, and investigate the efficiencies of 53 Turkish banks using likelihood-based stochastic frontier analysis for the period 1990--2000. Our likelihood-based analysis finds no evidence of heterogeneity along the state vs. private and Islamic vs. conventional dimensions. The estimated classifications and mixture components have intuitive ex post institutional explanations. The second essay investigates the labor efficiency of Turkish banks for 1990--2000 by using a flexible translog functional form where the demand for labor is a function of loans, deposits, number of branches, total fixed assets and a time variable. The model allows for the possibility that at any point banks' observed employment may not be optimal. We expand the labor-use model by utilizing the EC (Estimation-Classification) estimator to obtain data-driven identification of bank-technology-classes in our sample. The third essay uses a set of semiparametric efficient (SPE) estimators for a panel data of 32 developing countries to investigate the effect of sources of external financing on production efficiency. The idea of production frontiers for firms in a given industry is applied in a macroeconomic context in which countries are producers of output (GDP) given inputs (capital and labor) and some external factors (i.e. debt, equity and foreign direct investment (FDI) stocks). Using two recent datasets, we are able to investigate the individual impact of foreign liabilities, namely debt, equity and FDI, on production efficiency. The estimates indicate that FDI plays a more prominent role of promoting production efficiency than debt or equity financing for developing countries.Item Financial Imbalances, Middle East Industrialization, and Carbon Dioxide Emissions(James A. Baker III Institute for Public Policy) El-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyEarly into the new millennium, many observers expected the financial imbalances between export-oriented East Asia, especially China, and consumption-oriented advanced economies, especially the U.S., to be sustainable. However, as El-Gamal and Jaffe (2010) have shown, the period of sustained growth despite those financial imbalances came to an abrupt end when petrodollar flows—forgotten since the 1980s—resurfaced to tip the balance and make the global credit bubble unsustainable. One way to prevent petrodollar problems from continuing to resurface is for Middle-East countries to focus their efforts on enhancing intra-regional trade, especially in manufactured goods. Not only is this the proven path for overcoming the effects of the economic crisis, but it is also the path for enhancing the economic absorptive capacity of the region, thus ameliorating the cycle of petrodollar flows and the destructive credit crises that follow. One of the potential side effects of industrialization in the Middle East would be significant increase in carbon emissions. This is indeed a major concern, especially given the recent focus in the region on energy-intensive industries and construction, which are not particularly friendly environmentally. Using a large panel of 118 countries over the 40-year period 1969-2008, I show that although growth in industrial output (which includes mining, construction, electricity, water, and gas, as well as manufacturing) contributes significantly to the accelerated increase of carbon emissions, growth in manufacturing output does not. This suggests that carefully balanced industrial planning can allow manufacturing and intra-regional trade to increase without significantly contributing to accelerated growth in carbon emissions.Item “Islamic Finance” After State-Sponsored Capitalist IslamismEl-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyDuring the late part of the nineteenth century CE, nationalist-Islamism emerged as a theology of liberation from the realities of European colonialism under which most Muslims lived. This form of Islamism survived into the mid twentieth century, without significant thought being lent to the possibility or desirability of a so-called “Islamic finance.” Indeed, juristic developments during this period justified conventional financial practices, and many nationalist movements aimed merely to replace European financial institutions with indigenous ones focused on boosting domestic and regional economic development. Shortly after independence, and under the influence of global currents, the liberation theology of nationalist-Islamism mutated into a socialist-Islamism that focused on self reliance to defeat poverty and continued economic dependence of Muslim-majority countries. To counter this theology that threatened their regimes, oil monarchies used their relatively limited petrodollar resources to promote a religious-identity form of pan-Islamism based on the incoherent midcentury thought of Mawdudi and his followers. Then, starting in the 1970s, ample petrodollar flows, and their recycling, fueled a state-sponsored Capitalist-Islamism that included adoption of this incoherent midcentury thought into a so-called “Islamic finance” industry. The rise of this industry may thus be attributed to four forces: (i) governments seeking to appease Islamist sentiments in areas that did not threaten their postcolonial timocracies; (ii) emerging middle classes who favor formulaic religious-identity Islamism, and simultaneously seek to join the upper (increasingly financial and legal) rungs of society; (iii) advances in financial engineering that made it easy to replicate contemporary financial practices using medieval contracts; and (iv) recycling of petrodollars from Muslim economies with limited absorptive capacity. The last two forces created the methods and funds to power so-called “Islamic finance,” while the first two provided advantages and space for its personnel and client-base. As the petrodollar age and its concomitant brand of capitalist-Islamism come to an end, Muslim middle classes and timocracies retain the incentives to sustain the fiction that powers this industry. However, the impending demise of petrodollar-supported Capitalist-Islamism, failures of which begat twenty first century terrorist-Islamism, incentivizes them to find another outlet for Muslim liberation theology. This amplifies manifold the risks (and potential, but limited, benefits) of “Islamic finance.”Item Mean reversion in macroeconomic and financial data(2004) Ryu, Deockhyun; El-Gamal, Mahmoud A.This dissertation focuses on the mean reversion in macroeconomic and financial data using nonparametric estimation method. The first essay studies the recent attempts to solve the second form of the Purchasing Power Parity (PPP) puzzle (usually expressed as a half-life of 3∼5 years), mostly by using non-linear stochastic models of real exchange rates. Despite the introduction of non-linearities, the literature has continued to focus on the notion of "half-life" as a measure of persistence. We argue the half-life measure is only appropriate in linear settings, failing to capture the richness of non-linear dynamics introduced in the more recent literature. We conclude that depending on the models and criteria selected for investigating the PPP puzzle, the puzzle may be in the eye of the beholder. The second essay studies the convergence of per capita income across the world. The recent literature on "convergence" of cross-country per capita incomes has been dominated by the two hypotheses of "global convergence" vs. "club-convergence". Utilizing new measures of "stochastic stability", we establish two stylized facts that question the fruitfulness of the literature's focus on asymptotic income distributions. The first stylized fact is non-stationarity of transition dynamics, in the sense of changing transition kernels, thus making "convergence" hypotheses less meaningful. In the meantime, we find statistical support for a second stylized fact of emergence, disappearance, and re-emergence of a "stochastically stable" middle-income group. Moreover, the probability of escaping a low-income poverty-trap appears to depend significantly on the existence of such a stable middle-income group. The third essay studies the individual income convergence issue. The recent literature on 'global income distribution' has recently focused on 'individual income inequality' to account for the so-called China effect. We examine the robustness of various population weighting schemes that account for different country sizes in the study of income distribution dynamics. We apply our test of stochastic stability to within as well as between country income distribution dynamics, and find that the middle-income group's role in income distribution dynamics vanishes when we allow for very higher population weights for China and India.Item Nonstationarity and Stochastic Stability of Relative Income Clubs(International Association for Research in Income and Wealth, 2013) El-Gamal, Mahmoud A.; Ryu, DeockhyunThe recent literature on “convergence” of cross-country per capita incomes has been dominated by the two hypotheses of “global convergence” and “club-convergence,” pertaining to limits of estimated income distribution dynamics. Utilizing a new measure of “stochastic stability,” we establish two stylized facts regarding short- and medium-term distribution dynamics. The first is non-stationarity of transition dynamics, in the sense of changing transition kernels, and the second is emergence, disappearance, and re-emergence of a “stochastically stable” middle income group. This middle income group emerges as the gap between rich and poor clubs gets larger, and it changes the dynamics of transition to and from the rich and poor clubs, eventually narrowing the gap between the poor and rich as the middle club vanishes. Analyzing the stochastic stability of middle-income groups is thus a first step toward understanding higher-order dynamics of narrowing or widening of the gap between rich and poor countries.Item Oil Demand, Supply, and Medium-Term Price Prospects: A Wavelets-Based AnalysisEl-Gamal, Mahmoud A.; Jaffe, Amy Myers; James A. Baker III Institute for Public PolicyThe global “great recession” was precipitated in part by record high prices of oil and other commodities. Previous severe recessions have typically resulted in significantly lower energy prices, which in turn spurred growth and fueled a healthy recovery. In part due to expansionary monetary policies worldwide, oil prices have remained relatively high, making it difficult for the global economy to stage a strong recovery. The result is a short-to-medium term forecast of weak to modest growth, which—combined with continuously falling energy-intensity of GDP—means that oil demand will remain stagnant or at best grow modestly. Under these circumstances, surging supply from U.S. shale and similar technologically-driven unconventional oil sources is likely to create excess supply and put strong downward pressure on oil prices. Voluntary reduction in oil production to prevent falling prices is highly unlikely, because swing producer Saudi Arabia and other GCC countries need revenues at the level of current volumes and prices in order to meet core budgetary requirements and prevent regime-change risk in the aftermath of “Arab Spring” revolts. Our wavelet analysis of all countries that have ever produced more than one million barrels of oil per day shows that regime change by itself would not result in significant reduction in oil production—although it may result in lower investment and therefore prevention of further increase in production capacity. However, war that destroys physical installations for the production and/or transport of oil can significantly disrupt oil supplies. In sum, if the outright scenario is excluded, we expect prices to fall precipitously in the medium term (3-5 years). However, the continued threat of currently-contained civil wars into larger confrontations can maintain the current prices, especially if unprecedented monetary easing continues.Item Robust GARCH methods and analysis of partial least squares regression(2014-04-24) Egbulefu, Joseph; Cox, Dennis D.; Ensor, Katherine B.; El-Gamal, Mahmoud A.New approaches to modeling volatility are evaluated and properties of partial least squares (PLS) regression are investigated. Common methods for modeling volatility, the standard deviation of price changes over a period, that account for the heavy tails of asset returns rely on maximum likelihood estimation using a heavy-tailed distribu- tion. A fractional power GARCH model is developed for robust volatility modeling of heavy tailed returns using a fractional power transform and Gaussian quasi maximum likelihood estimation. Furthermore, a smooth periodic GARCH model, incorporating seasonal trends by wavelet analysis, is developed and shown to outperform existing approaches in long-horizon volatility forecasting. PLS is a latent variable method for regression with correlated predictors. Previous approaches to derive the asymptotic covariance of PLS regression coefficients rely on restrictive assumptions. The asymptotic covariance of PLS coefficients are derived under general conditions. PLS regression is applied to variable selection in the context of index tracking.Item Structural Analysis of the "Best Offer" Mechanism on eBay(2014-04-21) Toklu, Kerem Yener; Sickles, Robin C.; El-Gamal, Mahmoud A.; Pasquali, MatteoIn this study, I examine the "Best Offer" mechanism on eBay by structural analysis. The methods I use in this study are based on the literature on structural auction and "Name your own price" models. Thus, in the fi rst chapter, I provide a survey of this literature. In the second chapter, I conduct a structural analysis, and propose a two step method to estimate the valuations of buyers who use the "Best Offer" format. The method is computationally attractive and can be implemented both parametrically and nonparametrically. It also has the flexibility to capture potential correlation across buyers' valuations and different selling strategies. I test the performance of the estimator in Monte Carlo experiments, and find that the estimator performs reasonably well. In the third chapter, I apply the estimation method to the used car market on eBay. I estimate buyers' valuations and the determinants of them. I then run counterfactual experiments to find the optimal selling strategies. I find that the sellers behavior in the market is consistent with revenue maximization. In the fourth chapter, I propose an alternative approach to estimate the distribution of buyers' valuations based on weak behavioral assumptions. The method does not require the buyers to follow any particular offer strategy; therefore, it captures multiple equilibria that are possible to arise in the environment. Utilizing this feature, I test whether the valuation of a buyer who offers once is on average different from that of a buyer who makes multiple offers. The results suggest that sellers can be better off by following a harder bargaining strategy against the buyers who make multiple offers.Item The Rise of China and Its Energy Implications—Executive SummaryBarnes, Joe; Coan, James D.; Elass, Jareer; El-Gamal, Mahmoud A.; Hartley, Peter R.; Jaffe, Amy Myers; Lewis, Steven W.; Mares, David R.; Medlock, Kenneth B. III; Soligo, Ronald; Stoll, Richard J.; Troner, Alan J.; James A. Baker III Institute for Public PolicyItem Three Essays on Sovereign Default and Robust Policy Design(2014-04-23) Li, Xin; Loch-Temzelides, Ted; Narajabad, Borghan N.; El-Gamal, Mahmoud A.; Fang, SongyingChapter 1 discusses the optimal fiscal response of a small open economy to business cycle fluctuations at the presence of sovereign default risks. The most recent sovereign debt crisis in Europe has demonstrated that the risk of sovereign default is not a problem in developing economies only. However, empirical studies show that fiscal policy tends to be countercyclical or acyclical in developed small open economies and procyclical in developing countries. This chapter presents a general equilibrium model with endogenous government spending, external debt financing, and sovereign default decisions for a small open economy. The model shows that developed countries’ acyclical fiscal response to productivity fluctuations can be motivated by their larger size of public sectors, lower demand elasticity of public goods, and lower volatilities of domestic investments relative to foreign investments, compared to their developing counterparts. Along this line, the recently observed fiscal policy graduation in some Latin American countries can be rationalized by the shifts in the characteristics of their public sectors towards developed countries. The model also implies that fiscal austerity is always optimal for countries with sufficiently high debt-to-output ratio, and the optimal consolidation consists of tax hikes, cuts in public consumption but not in public investment. Based on Chapman, Fang, Li and Stone (2013), Chapter 2 studies the effect of new official bailouts on capital markets when borrowing countries economic state is private information. We first analyze a game-theoretical model of crisis lending that incorporates bargaining, compliance and enforcement. The presence of asymmet- ric information yields two interesting scenarios. There are conditions under which lending reduces the risk of a deepening crisis and reduces the risk premium demanded by market actors. On the other hand, the political interests that make lenders willing to lend weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net “catalytic” effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings about market reactions, especially with regard to IMF programs. We test the implications of our theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans, and measures of the geopolitical interests of the United States, a key IMF principal. Based on Li, Narajabad, and Temzelides (2013), Chapter 3 turns to the study of robust policy design when decision makers are concerned about model uncertainty. We study a dynamic stochastic general equilibrium model where agents are concerned about model uncertainty regarding climate change. An externality from greenhouse gas emissions adversely affects the economy’s capital stock. We assume that the mapping from climate change to damages is subject to uncertainty, and we adapt and use techniques from robust control theory in order to study efficiency and optimal policy. We obtain a sharp analytical solution for the implied environmental externality, and we characterize dynamic optimal taxation. A small increase in the concern about model uncertainty can cause a significant drop in optimal energy extraction. The optimal tax which restores the social optimal allocation is Pigouvian. Under more general assumptions, we develop a recursive method and solve the model computationally. We find that the introduction of uncertainty matters qualitatively and quantitatively. We study optimal output growth in the presence and in the absence of concerns about uncertainty and find that these can lead to substantially different conclusions.Item White Elephants on Quicksand: Low Oil Prices and High Geopolitical Risk(James A. Baker III Institute for Public Policy) Abdel-Latif, Hany; El-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyThis paper investigates the effects of low oil prices and heightened geopolitical risks on economic growth and investment in the Middle East and North African (MENA) countries. We employ a Global Vector Autoregression (GVAR) model with 53 countries, including 15 MENA countries, over the period 1979Q2-2017Q2. We impose sign restrictions on the impulse response functions (IRFs) to identify two types of negative oil price shocks, resulting from demand or supply changes, as well as geopolitical risks. Moreover, we estimate a set of nonlinear local projection IRFs, which allow for a regime change, high vs. low, in oil price and geopolitical risk levels. We find that negative shocks to oil prices and positive shocks to geopolitical risk have adverse effects on GDP and investments in MENA countries. Moreover, we find that a simultaneous incidence of (i) positive shock to country-level investment together, (ii) a negative shock to oil price and (iii) positive shock to geopolitical risk has statistically insignificant effects on country-specific economic growth. Finally, we find that the impact of investment on GDP in MENA countries is muted when oil prices are low and/or geopolitical risk level is high. These findings cast doubts on the prospects of mega-project economic transformation plans as envisioned in 2030 visions for several MENA countries.Item Winter is Coming: Controlled Conflicts and the Oil-Price Geopolitical-Risk Premium(James A. Baker III Institute for Public Policy) El-Gamal, Mahmoud A.; James A. Baker III Institute for Public PolicyThis paper presents a simple dynamic growth model of investment, consumption, passive military spending, and active military spending for an oil-exporting country. Passive military spending (arms buildup) adds to security, while active military spending (conflict) depletes it, but adds to output and hence civilian capital (as a proxy for geopolitical risk premium in oil prices) in a non-monotonic way (some geopolitical risk is good for an oil exporter, but too much risk is not). It is shown that when the risk premium is sufficiently small, the optimal policy function does not support any positive active military spending at any level of civilian capital and security. However, with a sufficiently high geopolitical risk premium, the model country engages in controlled conflict (positive active military spending) when civilian capital is low. A controlled conflict in the latter case can shift the production function up, allowing the country to boost its consumption and arms buildup. This explains the big increase in the geopolitical risk premium following the Arab Spring, which included, among other disruptions, a military intervention by Saudi Arabia in Bahrain, as well as the smaller geopolitical risk premium following the recent Saudi-led war against the Houthis in Yemen. If oil prices remain low, depleting the civilian capital of Saudi Arabia and other oil exporters, it may be rational, according to our model, to expect greater military activity, both to deal with geopolitical risks in the region, and to boost oil prices through the geopolitical risk premium.