The spillover effect of international trade and investment flows: spotlight on Arab unrest

Abstract

The economic and political grievances of Arab youth is fueling social and political upheaval across the Arab world and is reviving the call for equitable and inclusive economic development. The Arab world, where young people constitute a significant proportion of the population, is lagging behind other developing regions over human development. Indeed, addressing the human development challenge has become a necessity and strategic path to achieve peace and security in the Arab world. The purpose of this article is to investigate the spillover effects of economic globalization, economic flows, and restriction on trade and capital on Arab human development. This article attempts, both theoretically and empirically, to answer four questions. First, could economic globalization fulfil the promises of human development in the Arab world? Second, whether actual economic flows (trade, FDI and portfolio investment) to the Arab world have been enough to make meaningful contributions in terms of human welfare. Third, do Arab countries’ restrictions on trade and capital diminish human development? Fourth, whether Arab countries’ governance impede actual economic flows’ development potential. We opted for the Generalized Method of Moments “System GMM” to analyze the effects of international trade and capital flows and openness to trade and foreign capital on Arab human development. The statistical approach, designed for dynamic panel model, helps account for unobserved country specific effects and endogenous determinants. Our panel consists of 18 Arab countries for which data is available on all variables and covers the period between 1990 and 2011. The system GMM models reveal that economic globalization increases the rate of human development both in aggregate and via two channels: international trade and capital flows and trade and investment regimes. These findings highlights the positive effects on human development of a more globalized economy where international trade and capital flows plays a significant role. We also find considerable backing of our hypothesis that openness to trade and capital will likely accelerate human development in the Arab world. The results are consistent with the conjecture of trade and free-market theories of that nation may benefit from engaging in international trade. We conclude by stressing the need for Arab economies to globalize further and they must implement outward-oriented policies that maximize the benefits and minimize the costs of economic globalization more effectively. The Arab world stands at a crossroads and the continuous unrest is a stern wake-up call to tackle the human development challenge.