Arab governments adopted different approaches to mitigate the adverse effects of the crisis. Faced with deteriorating figures of declining oil prices, export levels, stock prices, inflows of worker’s remittances, and foreign direct investment, the nature of policies varied between an array of adjustment and financing measures. Some countries have designed comprehensive rescue packages and allocated significant resources in order to sustain economic performance. This is predominantly the case in the more affluent Gulf Cooperation Council (GCC) Countries. In contrast, both the Maghreb (Algeria, Morocco, and Tunisia) and the Mashreq (Egypt, Jordan, Lebanon, Syria, and Yemen) countries, characterized by varying degrees of limited financial resources, weak institutional capacity, and hiking budget deficits, have struggled to respond effectively to the macroeconomic and social impact of the crisis.

Year-to-Year Percent Change

Year	2007	2008	2009
World Trade	6	2	-9
Capital Flows ($bn)	928.6	465.8	165.3
Remittance ($bn)	281	305	290
Oil Price	10.6	42.3	-26.4
Commodity prices (non-energy)	17	22.4	-19.1

Sources: World Trade data from WTO, March 2009. Capital Flows to emerging Economies data from IIF March 2009. Commodity Prices data from Global Economic Prospects, WB 2009.

Differences in Policy Response Explained
Disparity in policy response is attributed to five main factors. First, the economies depend to varying degrees on oil prices, workers’ remittances, tourism, foreign direct investment (FDI), and world trade. Thus, different factors will affect them differently. Second, the political context greatly influences the speed and content with which governments respond to emerging difficulties. The political vibrancy with which Kuwait has reacted differs greatly from the belated response of Egypt. Third, the financial wealth of countries has decisive implications for policy choice flexibility. The GCC countries, which enjoy a comfortable financial cushion, are in a better position to fund short-run policies to address the crisis. Fourth, the quality of public institutions and lobbying powers of business elites and the private sector in the respective countries affect the content of rescue packages. Fifth, countries face social challenges to varying degrees. The poverty rate in Yemen reaches a level of 46 percent but is very low in the GCC, and while official unemployment in Yemen is 15 percent, the GCC is heavily reliant on imported labor.

GCC Countries
GCC countries face a massive decline in oil prices, from the 2007 average of U.S. $146 to an average of $50 in 2008, as well as a decline in export volumes, thus cutting oil revenues by two-thirds. The financial crisis first revealed itself in disastrous stock market performances and bankruptcies in the banking sector. Rising public criticism pushed the GCC governments to admit, though belatedly, the significant hit destabilizing their economies. Initial financial bailouts failed to elicit public confidence, and business committees and public figures called for further bailout measures. The subsequent policy response was carried at both the national and regional level. At the national level, countries relaxed the monetary policy and opted for expansionary fiscal policies. Except for less-affluent Oman and Bahrain and financially-troubled UAE, the GCC countries quickly moved to announce that governments will increase public spending in social services and raise the minimum wage for nationals. At the regional level, GCC countries unanimously agreed to coordinate policies and to introduce new measures to ease inter-bank lending rates and to regulate their stock markets. Though this consensus has been further emphasized in the Arab Economic and Social Summit held in Kuwait, it has failed to address the practical means by which members are to enact these policies. Consequently, past years’ accumulation of wealth and the political set-up affected the relaxed position of GCC countries in designing politically and financially affordable policies.

The Maghreb and the Mashreq
In the Maghreb, the global financial crisis will heavily impact the real sectors of Tunisia, Algeria, and Morocco, where export revenues, capital inflows, and tourism are expected to slow remarkably. Moreover, the Maghreb economies are highly exposed to European markets, where the recession is dampening demand for all exports, including those from the Maghreb. Rising unemployment in Europe is also directly impacting the Maghreb, as remittances from expatriates, which made up around 9 percent of GDP in Morocco, 5 percent in Tunisia, and 2.2 percent in Algeria, drop, further diminishing investment and household consumption in the region. The decline of both remittances and exports presents a pressing social challenge.

In the Mashreq, it is harder to identify the multifaceted sources of impact, though diminished remittance inflows and increasing unemployment remain the most apparent result that demand government attention. Unemployment in Jordan is 14 percent, 18 percent in Egypt, and affects more than a third of the population in Yemen.

The policy scenario is somewhat more complex in the more diversified countries of the Maghreb and the Mashreq. Burdened with hiking budget deficits, the two sub-regions have limited financial resources to replicate the “rescue packages” enacted in the GCC nations. In 2008, Tunisia and Morocco ran a deficit of 1 percent and 2.6 percent respectively. The IMF expects the rates to worsen by 2012. For example, Algeria, which ran a surplus in its current account in 2008 of about 28 percent, is expected to witness a decline to 10 percent by 2012. The Mashreq countries are also in a constrained position due to limited financial resources, traditional budget deficits, high dependence on foreign aid, and a more vulnerable position relative to the declining economies of the GCC countries. The 2008 current account deficits are 1 percent in Egypt, 18 percent in Jordan, 2.7 percent in Syria, and 13.5 percent in Lebanon. Deteriorating current account deficits means that these countries must seek new sources to fund their deficit. The crisis makes this task even harder.

Worse, while limited fiscal capacity should have encouraged carefully focused interventions with social impact and stabilization in mind, unfortunately we observe something quite different: a series of policies lacking a clear vision, interventions that are responding to select pressure groups, and overly ambitious public statements that raise expectations only to disappoint later. Policies are aimed at boosting market confidence without specifically addressing the credit crunch facing some sectors, such as construction or corporate business. Monetary authorities have responded only passively or not at all to the growing consensus among banks that their conservative policies insulated them from the impacts of the crisis.

All countries have simply disregarded the informal economy in their policy response, though it employs large segment of the labor force. With widening lay-off threats, the newly unemployed will further depress informal wages. Social unrest might escalate if rescue plans remain narrow and opaque in the face of a further deteriorating global economy.

Contrary to GCC countries, Maghreb and Mashreq countries have limited their policy proposition to fiscal policy at the national level; there is no indication that the countries will engage in discussing a common action plan to coordinate financial, monetary, and sectoral policies at the sub-regional level.

Policy Recommendations
So far, the direct impact of the crisis has been limited to reducing the growth rate without pushing these countries into a recession. A recent IMF report highlights that government spending by oil exporting countries has cushioned economic activity and prevented a further drop in growth rates. Hence the Middle East region is expected to witness a drop in its growth rate from 5.5 in 2008 to 3.3 in 2009, in contrast to the 5.8 to 2.1 percent drop expected in developing countries. However, this relatively better international position does not solve the salient challenges that governments should address in their immediate and long-term policies. Countries should pursue collective action both at the governmental and private sector levels to face the global nature of the crisis.

In addition to the traditional rescue packages, central banks should at least consider less orthodox schemes to ease monetary polices, many of which have been pioneered recently in other countries more directly affected by the financial crisis. For example, central banks can contribute by injecting liquidity to small- and medium-scale industries under special schemes. They can also encourage commercial banks lending by refraining from the absorption of excess liquidity. For this matter, governments should limit their borrowing from the domestic market to avoid crowding out the private sector. However, with limited international sources of finance, this goal is even harder to achieve.