Petrodollars at Work and in Play in the Post-September 11 Decade
What does one do with a $1.3 trillion windfall? That was the cumulative value of current account surpluses that flushed into the Arab region from 2000 to 2008, according to the International Monetary Fund. The main source was hydrocarbon export revenues, thanks to the rise in demand for oil and everything else during the roaring 2000s. It was also fed by foreign direct investment (FDI) into the region, remittances by émigré workers in Europe and North America, and sales of other types of exports, like textiles, electronics and processed foods, encouraged by the liberalization of trade. Domestic consumption demand and aggregate economic growth in the diversified economies of the region, like Egypt and Jordan, boomed right along with the oil exporters and the rest of the world.
But it was the era of the “war on terror,” was it not? How could it happen that the biggest beneficiaries of the economic boom, the wealthy hydrocarbon exporters of the Gulf, and Saudi Arabia in particular, were at the same time prime suspects in the terrorism financing hunt and the objects of mass anger and stereotyping in the wake of the tragedy of September 11, 2001? What if these petrodollar surpluses were being used to finance terrorist operations? What if the Gulf countries holding assets in the West were to sell them abruptly and withdraw their capital? Or were these surpluses mostly wasted on conspicuous consumption, as in the last petrodollar boom of 1979-1983? On the other hand, might it be possible that the Gulf countries had learned a lesson from that last experience, and the subsequent stagnation of their economies in the 1980s and 1990s, and actually invested their windfall? What forms would that investment take and what impact might it have on the Arab region as a whole?
The destinations and uses of these funds were a combination of untraceable outflows to unknown havens, mostly for private accumulation rather than for funding terrorist networks, some measure of extravagance in both consumption and mega-investment, and various types of much-heralded purposeful investment. Capital was exported for investment both to the West and to “emerging markets” in the Middle East and other non-Western regions. Furthermore, in a surprising reversal of the 1979-1983 boom, the Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) turned out to be not only exporters of investment capital to the region and the world but also major investors in the diversification of their own economies and the main objects of both incoming FDI and international lending. Much of the domestic investment was productive, but a fair amount of the investment in the West meant participating in the excesses of Wall Street. The financial crash in 2008 and subsequent recession in 2009 hit the Gulf economies hard, turning them into a transmission belt for economic woes to the rest of the Middle East.
The Known and the Unknowable
The cumulative value of the Gulf countries’ current account surpluses was almost $912 billion in the period 2003-2008, of which $544 billion could be traced to external destinations and $368 billion could not. Researchers for the Samba Financial Group, based in Riyadh, found in a 2008 report that the Gulf countries allocated the traceable portion to three types of foreign asset holdings each year: Bank for International Settlements deposits (used, for example, to pay for imports), US financial claims such as Treasury bonds and FDI. Over these years, the proportions changed, with the share to Bank deposits decreasing from 38 percent to 14 percent, while holdings of US securities rose from half to two thirds, and Gulf FDI rose to almost 20 percent as of 2008. In other words, the proportion known to be spent decreased while the proportions going to savings and investment increased. The rising investment in US security instruments helped lay to rest fears that Gulf funds would flee America amidst anti-Arab and anti-Muslim hysteria.
Another surprise from Samba was that 13 percent of the total -- some $120 billion -- had gone as FDI to other Arab countries and Turkey. Wholesome as this intra-regional investment might sound, though, it is clearly dwarfed by the magnitude of Gulf-owned assets held in the West. For example, in a single transaction in October 2008, investors from Abu Dhabi and Qatar spent $12 billion to purchase 16 percent ownership in Barclays Bank, a crisis-stricken British financial institution. This purchase alone was worth more than the $9.5 billion of FDI from all sources that went to Egypt in the whole of 2008. Indeed, the amount Gulf investors placed in US securities from 2003 to 2008, $450 billion, was almost twice the total FDI from all sources, $243 billion, invested in the 13 southern and eastern Mediterranean economies as a group in those years. 
But where might the $368 billion worth of untraceable surpluses have gone? In a January 2011 report, two economists working for the Global Financial Integrity project deduced that the main destination was most likely private accounts overseas, drained out of current account surpluses via “illicit financial flows,” more commonly referred to as “capital flight.” The fleeing monies are not necessarily earned illegally; they are “illicit” if they are not recorded and thus enable the sender to avoid taxation or capital controls. The main problems with such flows are that they can be used for anti-social purposes like drug trafficking and terrorism and can divert funds from investment or development aid. Global Financial Integrity estimated that the developing world had given up a stunning total of $6.5 trillion in flight capital from 2000 to 2008. Of that amount, the Middle East and North Africa accounted for almost 18 percent and had the highest rate of growth of illicit outflows among the developing regions of the world at over 24 percent per year. This estimate comes predominantly from balance of payments discrepancies, believed to reflect embezzlement of hydrocarbon export revenues, and yields a cumulative total of $1.2 trillion over those nine years lost to potential investment in the region. 
While no Middle Eastern country was innocent, the four stars of this performance were Saudi Arabia, the UAE, Kuwait and Qatar, which placed fourth, sixth, seventh and ninth, respectively, among all developing countries ranked by the amount of “illicit” funds lost from 2000 to 2008. Together they accounted for $957 billion of the developing countries’ cumulative capital flight for this period, that is, for almost 15 percentage points of the 18 percent from the Middle East as a whole. What proportion of these funds might have gone to financing terrorism was a mystery, as of the report’s publication, despite the post-September 11 efforts to trace and control such flows.
Within six weeks of the September 11 attacks, recall, the Treasury Department had announced it was mounting a powerful counterattack, the colorfully named Operation Greenquest. The project was not new, but rather an enlargement of an FBI program that was two decades old, using standard techniques like undercover operations and electronic surveillance to freeze or seize assets and to capture and prosecute individuals and organizations responsible for financing terrorism. As Michael Chertoff, then assistant attorney general, put it: “The lifeblood of terrorism is money, and if we cut off the money we cut the blood supply.”
The targets of Greenquest were the usual counterfeiters, drug traffickers and front companies, but also Islamic charities and financial institutions and the hawala networks used to channel remittances from émigré laborers to their families. The operation netted a few small fry, but petered out within two years, due to inter-agency squabbling and, it seems, political pressure from unexpected quarters. Some wealthy, prominent Muslim Americans under investigation by Greenquest agents were personally connected to the Bush family and to others high up in the Bush administration through their economic interests (serving on the boards, for example, of the Harken Energy and Halliburton companies). Facilitated by Grover Norquist, the promoter of right-wing causes, their complaints to Treasury Secretary Paul O’Neill about raids and prosecutions of their charitable organizations appeared to help end Operation Greenquest in June 2003. The 9/11 Commission Report of 2004 laid the project officially to rest. It did not mention most of the terrorism financing cases the Greenquest operation had pursued, but said, “There is little hard evidence of substantial funds from the United States actually going to al-Qaeda…. Ultimately, the question of the origin of the funds is of little practical significance.” The report further seemed to clear the Saudi royal family and government of involvement in financing al-Qaeda. 
Scrutiny of the Saudis’ financial dealings lessened even as their assets, and those of other monied Gulf interests, swelled.
FDI and the Saudi Magnet
As global FDI grew by leaps and bounds in the 2000s, the Arab region kept pace and even improved its take. Inflows to West Asia, according to UN data, rose from $40 billion in 2005 to $64 billion in 2007. The share of FDI to the Arab region as a whole (which includes North Africa) had risen from close to nil in the 1990s to over 4 percent of global FDI and 15.3 percent of FDI to developing regions in 2007, and 5.7 and 15.5 percent, respectively, in 2008. Furthermore, when FDI to the world decreased by 38.7 percent from 2008 to 2009, FDI to the Arab region decreased by just 17.7 percent, indicating the continued importance of investment in hydrocarbons and related industries, even during the global recession.
The distribution of FDI to the region was uneven and disproportionate to the wealth of the recipient countries. The six Gulf countries have just 10 percent of the Arab countries’ population, about 40 million people (including resident non-citizens), but from 2005 to 2009, they received 60 percent of the global FDI that flowed into the Arab region. Saudi Arabia was by far the biggest single recipient, averaging about one third of global FDI inflow per year. Saudi Arabia was also the leading recipient of intra-regional investment, taking in an average of 43 percent of total inter-Arab flows from 2005 to 2009, often greater than that of Egypt, Jordan, Lebanon and Syria combined. In 2008, 55 percent of UAE, 56 percent of Bahraini and 68 percent of Kuwaiti inter-Arab FDI went to Saudi Arabia alone. 
Even among investors from the diversified Arab countries, FDI outflow favored Saudi Arabia. In 2008, Saudi Arabia received 44 percent of Syrian, 64 percent of Palestinian and 68 percent of Jordanian inter-Arab investment. 
Given the shift toward productive investment of capital surpluses in their own economies in the 2000s, the Gulf countries were presented by some enthusiastic analysts as a vibrant and integrated single economy. With an aggregate gross domestic product of more than a trillion dollars in 2010, as well as net assets of at least one trillion dollars, the Gulf could be seen as constituting a large domestic market for both locally produced products and imports. The Gulf is potentially an “economic powerhouse,” argued one Goldman Sachs analyst, because its average per capita income had risen to $20,500 in 2006, close to that of Israel and about half of the G-7 average, and would rise to about 77 percent of the G-7 average by 2050. 
Similarly, the World Bank and IMF spoke of the Gulf as a relatively autonomous region set apart from the rest of the Arab world or Middle East. To some admirers, the Gulf was a beacon of progressive economic policies and political stability surrounded by a “natural economic hinterland” of 300 million people in a region “beset by political instability and low growth.”  Ignoring the rich history and economic potential of the rest of the Middle East, never mind the potential for intra-regional investment, admirers described the Gulf’s location and wealth as a free-standing endowment that makes it a natural “hub” for finance, commerce and transportation linking three continents.
Gulf governments were said to have learned from their experience of economic stagnation in the 1980s and 1990s that oil revenues could be unreliable. They adopted a strategy of using accumulated current account surpluses from periods when export revenues were high to invest in portfolios of non-hydrocarbon projects at home and abroad that would build infrastructure, diversify their economies and broaden sources of income. Although current account surpluses were building up in the oil exporters’ coffers, none of the Gulf countries paid down debt and, indeed, several added to it in those years.
Much of the Gulf countries’ investment, then, was internally focused, with ambitious projects for infrastructure such as ports, highways, railroads and whole new industrial and residential cities. According to numerous articles from Gulf periodicals carried by the Gulf in the Media web service, investment projects being promoted in 2010-2011 included alternative energy such as wind and solar and the integration of a region-wide electricity grid that can be extended to elsewhere in the Middle East and beyond to Europe and South Asia. Other big projects included telecommunications and residential construction, including affordable as well as luxury housing, social infrastructure and the subsidization of private enterprise initiatives in manufacturing as well as real estate and services. These projects were successful enough that, during the 2002-2007 boom, “the non-oil sectors in the six states of the Gulf Cooperation Council (GCC) averaged around 7 percent annual growth,” as another fan wrote. 
Saudi Arabia had become a giant sponge for FDI from many sources, unlike in the preceding decade, when its inflows and outflows were more closely balanced. From 2005 through 2008, Saudi cumulative inflows equaled about $93.2 billion, while its outflows were only $15.5 billion. Global sources of FDI to Saudi Arabia were relatively diverse. As of 2009, firms based in the United States had been the source of almost 18 percent of the total accumulated stock of FDI, with 16 percent coming from Europe, 10 percent from Japan, 13 percent from the UAE and 9 percent from Kuwait. New inflows of FDI in 2009 came in close to the same proportions -- US 16 percent, Kuwait 12 percent, UAE 11 percent, followed by Europe and Japan -- but China, Russia and Malaysia had all moved up in source ranking.
FDI appeared to be dispersed among many sectors, but was concentrated in those sectors linked to hydrocarbons and other primary commodities. In 2008, according to UN data, mining, oil, gas, refining, chemicals and petrochemicals accounted for 41 percent, with transportation, utilities and other industries taking 14 percent, real estate 21 percent, and finance, insurance, trade, contracting and other activities 24 percent. The focus of hydrocarbon-linked activities had shifted from oil extraction and refining to the newer and more promising production of natural gas. For the Gulf countries and for Saudi Arabia in particular, says a 2011 Samba report, oil production was projected to be lower in 2011 than it had been in 2008, while production of natural gas liquids would be almost double the 2008 level. Gas was produced for export, especially by Qatar, but it was also growing in importance for domestic uses such as feedstock for petrochemicals and “clean” fuel for heavy industry such as aluminum, steel and cement. As part of its internal diversification strategy, “Saudi Arabia is set to become a heavy industry base for the region…. Current plans…envisage that by 2020 the country will supply 15 percent of the world market for aluminum and plastics.” 
While FDI was pumped into these core industries, state-linked entities kept control, usually in the form of joint ventures with transnational corporations. Private-sector enterprises were concentrated in fields like construction, real estate, tourism, telecommunications, software, pharmaceuticals and transportation services. But a critic of the glowing manner in which FDI was presented to the public by the Saudi Arabian Government Investment Authority and other promoters like the World Bank discovered that the bulk, billions of dollars, was going to sectors controlled by the traditional powerful enterprises, like Aramco, the Saudi Arabian Basic Industries Corporation and the Saudi Arabian Monetary Authority, while much smaller amounts, $11 million or less, went to the sectors reserved for private enterprise. 
Saudi Arabia was the largest and most influential economic power in the Gulf group, and it shaped its appeal to potential foreign investors with the argument that it offered diversified opportunities and an open, accommodating environment. The country won plaudits for its rising scores on the “competitiveness” and “doing business” indices promulgated by the World Bank, and for making it to eighth place in world rankings for FDI inflow in 2009. Saudi self-promotion tactics ranged from the promise of easy credit, high consumer confidence and growing domestic demand to across-the-board public infrastructure investment and low-cost access to fuel and feedstock for energy-intensive industries in the four new planned cities. The Saudis also promised a high quality of life for expatriate families living in the country’s “famous compounds,” with “first-rate international schools” and “state-of-the-art health facilities.” The Investment Authority website compared Saudi Arabia with Egypt, showing that it had a real aggregate GDP in 2008 that was 2.4 times larger than Egypt’s, and that it spent 50 percent more on education as a percentage of GDP than Egypt did in 2008.
No mention is made in the Investment Authority’s 2010 publications of the problem that “around 20 percent of the aggregate private sector projects in Saudi Arabia [were] on hold in 2009,” as reported by the UN. Nor do the government’s promotional materials note two other developments tracked in the Samba report: the enduring doldrums in 2010 in Saudi and other Gulf private sectors -- the dearth of private-sector borrowing, the oversupply of real estate in Qatar and the UAE, the hangovers from Dubai’s indebtedness and restructuring and from the defaults by two Saudi conglomerates -- and the return of Gulf corporations and sovereign investment agencies to borrowing on the international capital market, $32 billion in 2009 and $26 billion in 2010, to keep their ambitious projects funded.
The FDI gold rush into Saudi Arabia resumed in 2010, a response to the familiar forces that were stimulating overall growth in Saudi Arabia and the rest of the Gulf. These were, first, high prices and growing profits from the hydrocarbon and related sectors, and, second, guarantees of sovereign backing, and thus the reduction of risk, for the high-profit projects in which FDI-bearing firms were likely to be interested. Meanwhile, concerns about “sustainable use of hydrocarbon revenues” and “private-sector development” could just be put off until next year. As an IMF report so delicately put it in October 2010, “Beyond 2011, fiscal consolidation should be underway…to confront the medium-term challenges of ensuring a sustainable use of hydrocarbon revenues and supporting private-sector development.”
Mediterranean Inflows in the Go-Go Years
Between the 2001 recession and the 2008 financial crisis, the diversified economies of the Middle East grew in tandem with the global economy. Except for dips in Lebanon due mainly to domestic political crises, annual growth rates averaged 5 percent and up in the Arab Mediterranean economies, fueled by an increase in all types of financial inflows. The World Bank reported in 2009 that annual additions of international reserves to the diversified countries of the region, such as Egypt and Jordan, increased by a factor of about 3.8 thanks to the boom in hydrocarbon and other export revenues. Workers’ remittances increased by a factor of 2.2 due to the growth of demand for émigré labor in the host countries of the region and in the West. Net equity inflow, mostly FDI, rose dramatically from $4.7 billion in 2000 to $25 billion in 2006, then eased off to $24.2 billion in 2007 and $22.5 billion in 2008.
Facilitated by these inflows, the developing countries of the region as a group were able to pay down debt to official creditors and, for a few years, to private creditors as well. Lebanon was an outlier in its high and steady debt level, which was held mainly by domestic banks receiving deposits from outside as well as inside the country. Lebanon’s banking system was considered a relatively safe haven by portfolio investors in the region.
FDI to the 13 Mediterranean countries rose from $8.1 billion in 2002 to an apogee of almost $64 billion in 2006,  about 5 percent of total world FDI in 2006. Second only to China, the Mediterranean region took in more FDI in 2006 than other competing regions, even India and Russia. But this investment then leveled off and declined for two years before the financial crisis of 2008 struck, calling into question the sustainability of the surge.
The three top recipients were Israel, Turkey and Egypt, with Turkey surpassing Israel in 2005. The magnitude of FDI into the Mediterranean seemed large in money terms, given the size of the recipient economies’ national product and their FDI from all sources. From 2005 to 2007, FDI averaged 5 percent of GDP or more for all countries in the group, with Jordan at the top, averaging 25 percent, followed by Syria at 19 and Egypt at 15. Israel took the top prize for FDI per capita, at 1,250 euros, although it had the highest GDP per capita of the group in these years. 
Rather than repay debt, boosters say, Gulf interests have reinvested the windfall. A World Bank document waxed enthusiastic about the origins and purposes of Gulf investment to the region, giving the impression that the petro-princedoms were primarily responsible for the inflow of FDI: “FDI was increasingly sourced from the GCC countries and targeted at a wide range of infrastructure, real estate and industrial projects across the region, from Morocco to Jordan.” But Gulf-sourced FDI was only one part of a complex story.
A geographical and quantitative division of labor prevailed among providers of FDI to the Mediterranean, seemingly influenced by proximity and historical links. European FDI flowed more toward North Africa, Turkey, Cyprus and Malta, while US capital flowed more toward Israel and, to a lesser extent, Egypt and Jordan. Gulf-based FDI and firms from Asia and other emerging economies tended to favor Turkey and the Arab east.  This pattern was reflected in the relative proportions of incoming FDI from the source regions. From 2003 to 2007, the EU and other European countries provided the largest proportion of total FDI inflows, 37.2 percent. The Gulf countries came in second, at 27.3 percent, and North America third at 23.7 percent. The Mediterranean countries themselves supplied less than 4 percent of FDI to one another. Gulf capital flow to the Mediterranean through 2007, then, while certainly significant, was less than that from Europe and not much greater than that from the United States and Canada. 
European and Gulf investors had different interests and a different balance of projects in the Mediterranean. Europeans and North Americans had a greater interest in energy, which took up 23 percent of European funds and 19 percent from the United States and Canada, while Gulf investors spent only 6 percent in that sector, mostly for downstream hydrocarbon-spinoff industries like plastics and fertilizer. Sectors favored by both European and Gulf investors were telecommunications, the Internet and financial services.
Outside of energy exploration and production, European investors preferred smaller-scale projects than did the Gulf investors, for example in manufacturing of consumer or intermediate goods, in partnership with local small and medium-sized enterprises, and taking over management of operations they could improve on or expand. In contrast, Gulf investors representing influential privately held firms or public investment companies preferred to work with well-established, large-scale local private or public enterprises. They were more eager to undertake grander, fresh projects in public works or utilities or the transportation sector or to bankroll large-scale real estate projects such as hotels, tourist resorts and high-end shopping malls, although Gulf projects had a poorer record of fulfillment.  Gulf investment in Mediterranean industry included metallurgy and more specialized high-technology sectors like organic farming and logistics,  but very little went to the kind of light industry that would serve the needs of ordinary consumers.
From Boom to Crisis
While wealthy families and privately held investment companies participated in both domestic and international investment of Gulf funds, much of the traceable investment from the Gulf countries came from sovereign wealth funds, which expanded worldwide in the 2000s. Sovereign wealth funds are investment agencies owned by governments but usually run by professional managers as autonomous firms. Prior to the year 2000, Gulf funds had held about half of their assets in low-risk dollar, euro or yen-denominated forms like bonds and blue-chip stocks that provided a relatively dependable income over the long run, and put the other half into equity commitments with higher risk. Total Gulf investment outflow from 2002 through 2006 was about $560 billion, including 55 percent to the US.  From 2000 to 2005, acquisitions in the United States alone were valued at over $2.6 billion, including an aircraft manufacturer, a coffee distribution and retail chain, and real estate like the Chrysler Building in Manhattan. 
The gush of oil revenues in the 2002-2007 boom enticed Gulf fund managers, except for Saudi Arabia’s, to rebalance their portfolios to take on more risk, such as new “alternatives” like derivatives, stocks in the faster-growing emerging markets and shares in hedge funds and private equity firms. For example, the Kuwait Investment Authority, long a pioneer, decided to follow Yale University’s endowment strategy and reduce the lower-risk portion of its holdings to 40 percent, while raising the share of equities in emerging markets to 10 percent and other more risky alternatives to 15 percent. The immediate reward was a rise in the value of the Kuwaiti holdings from $55 billion at the end of 1999 to $275 billion at the end of 2007, and the Gulf sovereign wealth funds as a group held more than $1 trillion in assets at the end of 2007. 
Gulf investors now had a huge stake in the system and displayed their faith as boom turned into crisis. When prices of alternative financial assets stopped rising in early 2007, Gulf investors increased purchases of shares in troubled Western financial institutions, especially in the US, in order to “get good deals” and to “learn financial management techniques” from “the impressive global reach of the Anglo-Saxon banking model.”  When the markets began to decline in 2007-2008, Gulf sovereign wealth funds and wealthy private investors bought shares in Citigroup, Credit Suisse and the London Stock Exchange, among other institutions, to help restore the markets for their own, as well as the system’s, sake.
The net value of Gulf overseas assets, public and private, fell by 19 percent in just five months, from $1.6 trillion in July 2008 to $1.3 trillion by the end of that year. The sovereign wealth funds alone lost 12 percent of their capital value, from $724 billion at the end of 2007 to $634 billion by the end of 2008. These losses, the Institute for International Finance reports, came about because of the fall in asset prices abroad as the asset-price bubble there deflated, given that much of the Gulf asset pool had been invested in the West.
Furthermore, Gulf countries watched their own homegrown asset-price bubbles deflate. From 2005 to 2008, imprudent bank lending for riskier loans had fed a speculative fever in local asset markets, including consumer finance, securities, real estate and construction. When these asset-price bubbles deflated in 2008, there began a “sharp correction” in Gulf financial markets, with an excessive level of non-performing loans and threats of default. By 2009, according to the National Bank of Kuwait, Gulf banks faced dangerously high ratios of 60 percent for loans-to-assets and 120 percent for loans-to-deposits.
Another channel of vulnerability was the debt overhang from the boom years, when Gulf investors and governments had been borrowing on international capital markets, usually through syndicated bank loans, to finance their ambitious infrastructure and economic development projects. During the crisis of 2008, however, international lenders pulled back to protect themselves from the fall in value of their assets elsewhere. As fear of increased risk in emerging markets took hold, international portfolio investors flew to safety in the West as quickly as possible. Combined with the fall of oil prices and revenues in late 2008 and 2009 as the recession took hold, this drain on local financial markets left the Gulf countries strapped for funds to cover their domestic investment projects.
The contagion spread as credit became scarcer and more expensive and as the number of bond and equity issues to finance important projects was reduced. The value of other financial assets fell across the region. Profits at most firms traded on the Kuwait Stock Exchange dropped 94 percent in the first quarter of 2009 as compared to the first quarter of 2008, with the biggest impact on investment companies and banks, especially those that had been active in mergers and acquisitions in the region, like the National Bank of Kuwait, which had acquired al-Watani Bank in Egypt in 2007. From their peaks in spring of 2008, Gulf stock markets had fallen 50 percent and Egypt’s bourse index dropped 54 percent by November. Even financial entities that were not involved in the toxic machinations of Western institutions were hit. For example, 271 Islamic funds had been launched from 2007 to 2008, but only 89 were launched in 2008-2009 and 25 had to be liquidated, while average returns in 2008 were -39 percent as compared to 23 percent in 2007.
Gulf governments intervened. Central banks declared their support for, or just took over financing, shaky banks and investment companies. They increased deposit guarantees to keep capital from fleeing. They loosened monetary policy quickly and generously and put expansive fiscal stimulus programs into place. Given the massive construction projects underway, Gulf governments were anxious to remain attractive for both portfolio and foreign direct investment, guaranteeing sovereign backing for distressed financial institutions. Still, the UN and the Institute for International Finance conclude, about 23 percent of $2 trillion worth of projects had to be suspended or cancelled by the end of 2008. A large measure of public funds, says the National Bank of Kuwait, were put into “cleaning up bank balance sheets” in 2009 and 2010.
The diversified economies of the Arab region felt the impact of the world crisis both directly and indirectly. The direct effects came from the recession of 2009 in Europe and North America, via the decline in demand for their merchandise exports and their labor, and the sharp fall in foreign direct investment from all sources. FDI to the Mediterranean economies fell by 50 percent from 2007 to 2009, and barely increased in 2010.  The indirect impact came through the crisis in the Gulf economies, via the crash in regional stock markets, sudden unemployment of émigré workers, and the withdrawal or suspension of investment projects.
As with the Gulf economies, growth was restored to the diversified Arab economies in 2010 thanks to domestic investment and government stimulus programs and the expansion of export demand from Asia and other regions outside of Europe and North America. But the vaunted Gulf investment programs turned out to be more valuable to themselves than to other countries in the region, and continued to suck in external capital that might have been better used elsewhere. What was most damaging was the (perhaps naïve) participation of Gulf investors in Wall Street’s speculative fever of the roaring 2000s, which channeled the recession of 2009 into the region but did little to help the 2010 recovery. Whether Gulf monies can be of true support in the rebuilding of the Tunisian, Egyptian and other economies after the uprisings of 2010-2011 is something that the new governments need to ponder carefully.
 Ashraf Mishrif, Investing in the Middle East: The Political Economy of European Direct Investment in Egypt (New York: I. B. Tauris, 2010), p. 135, table 6.3.
 Dev Kar and Karly Curcio, Illicit Financial Flows from Developing Countries: 2000-2009 (Washington, DC: Global Financial Integrity, January 2011), pp. 3, 14-15.
 New York Times, August 22, 2004.
 Unless otherwise noted, figures in the above paragraphs are taken from Dhaman, Projected Inward FDI Trends to Arab Countries, October 25, 2010.
 Dhaman, Investment Climate Report in Arab Countries (2009), table 4.
 Ahmet Akarli, “The GCC Economic Powerhouse Between the BRICs and the Developed World,” in John Nugée and Paola Subacchi, eds., The Gulf Region: A New Hub of Global Financial Power (London: Chatham House, 2008), pp. 47-48, 64.
 Mina Toksov, “The GCC: Prospects and Risks in the New Oil Boom,” in Nugée and Subacchi, pp. 81, 93-94.
 Lee Hudson Teslik, “Growing Cities in the Arabian Desert,” Council on Foreign Relations Analysis Brief, June 4, 2008.
 Toksov, pp. 81, 87.
 Steffen Hertog, Princes, Brokers and Bureaucrats: The Politics of the Saudi State (Ithaca, NY: Cornell University Press, 2010), pp. 177-178.
 Mishrif, table 6.3.
 Pierre Henry et al, Foreign Direct Investment into MEDA in the Switch (Paris: ANIMA Investment Network, July 2008), p. 13, figure 4.
 Bénédict de Saint-Laurent, “Investment from the GCC and Development in the Mediterranean,” paper delivered at Instituto Affari Internazionali, Rome (2009), p. 4.
 Henry et al, p. 153.
 De Saint Laurent (2009), pp. 6, 11.
 Mahmoud Mohieldin, “Neighborly Investments,” Finance and Development 45/4 (December 2008), pp. 40-41.
 Brian Setser and Rachel Ziemba, “Understanding the New Financial Superpower: The Management of GCC Official Foreign Assets,” RGE Monitor (2007), p. 12.
 Washington Post, March 7, 2006.
 Setser and Ziemba, pp. 1, 7, 10, 12, 14.
 Parmy Olson, “Sovereign Shift,” Forbes, December 19, 2007.
 Benedict de Saint Laurent et al, The Mediterranean Between Growth and Revolution (Paris: ANIMA Investment Network, March 2011), p. 12, figure 9.