The Case for a WANA Regional Development...

“Knowledge from the region, action for the region”

The Case for a WANA Regional Development Bank

Mays Abdel AzizResearch Fellow, Human Security

Mays holds a BA (Honours) in Economics and a BA (Hon-ours) in Political Studies from Queen’s University, Canada. She obtained her Master’s in International Economic Poli-cy, with a focus on the Middle East and Intelligence Studies from the Paris School of International Affairs, Sciences Po in 2014. Her Master’s Thesis was on Foreign Direct Invest- ment flows to Jordan and their development implications. Her areas of interest include economic policies and inter-national relations, specifically: the political economy of the West Asia – North Africa region and issues of development. At the WANA Institute, Mays will be undertaking research in the Human Security team, with a focus on regional eco-nomic policies and the economics of refugee crises.

Dr Erica HarperExecutive Director, WANA Institute

Dr. Harper was appointed by HRH Prince El Hassan bin Ta-lal as the Executive Director of the WANA Institute in 2014. Prior to this, she was the Senior Rule of Law Advisor for the International Development Law Organi- zation in Geneva where she ran a portfolio of legal empowerment projects spanning 13 countries in the areas of customary justice, com-munity land titling, and child protection. During this period she was also seconded to UNHCR as Chair of the Global Pro-tection Cluster Taskforce on Natural Disasters. Dr. Harper has worked for various international organisations including UN-HCR and UNDP, as well as NGOs and academic institutions in Indonesia, the Philippines, Switzerland, Italy and Australia.

Dr Harper is the author of six books on international legal issues, and has been published in more than 15 academic journals. She holds a Bachelor of Commerce (Economics), Bachelor of Laws (Hons) and Doctor of Philosophy (Inter-national Law). Dr. Harper is a thought leader and regular commentator on international criminal law and the state-civil society compact; she has worked as an advisor and speech writer for political leaders and former Heads of State in Europe and Asia. The mother of three daughters, Erica aspires for a world where equal opportunity, critical thinking and social consciousness are embedded rather than tolerated norms. She is passionate about anything that takes her into the outdoors, literature and the people of Jordan.

Previously, she worked at Al-Bawaba News, the Institute of Intergovernmental Relations at Queen’s University and the Arab Fund for Economic and Social Development. During her time as a student, she was President of Queen’s Interna-tional Affairs Association and participated extensively in Model United Nations conferences.

©WANAInstitute2015.Allrightsreserved.TheCaseforaWANARegionalDevelopmentBankisalsoavailableinEnglishandArabiconlineatwww.wanainstitute.orgToobtainacopyofthispublicationpleasecontact:WestAsia–NorthAfrica(WANA)InstituteMajlisElHassan–RoyalPalacesAmmanJordanTelephone:+96264644407Businesshours:9.00am–5.00pm(UTC+2)Email:info@wanainstitute.orgPermissiontoReproduceTheinformationinthispublicationmaynotbereproduced,inpartorinwholeandbyanymeans,withoutchargeorfurtherpermissionfromtheWANAInstitute. Forpermissiontoreproduce the information in this publication, please contact the WANA InstituteCommunicationsDepartmentthroughthecontactinformationabove.PublishedbytheWANAInstitute,MajlisElHassan,Amman,JordanContent:MaysAbdelAziz,DrEricaHaperCover:WANAInstituteInteriorDesign:WANAInstituteandTheEconomicPressCoEditing:DrEricaHarperandRoisinTaylor,WANAInstitutePrintedinAmman,Jordan10987654321

The Case for a WANA Development Bank (WDB) MaysAbdelAziz

www.wanainstitute.org

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ExecutiveSummary…………………………………………………………………………………………………………………………..………1

1:TheEconomiesoftheWANARegion………………………………………………………………………………………....……....…..3

2:WhyDoWeCare?LowIncomesandResourceDependenceasKeyDriversofConflict………………………..……5

3:TheEconomicCaseforaWANADevelopmentBank……………………………………………………………………………....7

4:RealisingtheBankConcept……………………………………………………………………………………………………………..……11

Table of Contents



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NewandbettersolutionsareneededtorespondtotheeconomicchallengesthatareaffectingtheWestAsia-NorthAfrica(WANA)regionandpotentiallymaintainingitinaconflicttrap.Thesesolutionsmustevolvefromtheregionitself,bothforsustainabilityandtogalvanisethepoliticalwillnecessaryforneededpolicychangestotakehold.Thegoodnewsisthatregiondoeshavethecapacitytoresolveitseconomicchallenges;resourcesare simply under-tapped and poorly managed. First, the massive foreign reserves accumulated by oil-exporting Gulf States could be better channeled into development projects in resource-scare and conflict-affectedcountriestoraiseeconomicactivityandcreatejobs.Second,public-privatepartnershipscouldserveas a vehicle to for governments to obtainmuch-needed infrastructurewithout raising taxation or utilisingotherpublicfunds,andpromoteengagementbytheprivatesectorintheregion’sdevelopmentagenda.Third,despiteitsenormouspotential,zakathasnotbeeneffectivelyusedasadevelopmenttool.Instead,insufficientchecks and balances to guard against corruption and distribution methodologies that prioritise charitablegivingoversustainableandinclusivedevelopmenthavedonemoretoentrenchpovertytrapsthansolvethem.Gulf finance, public-private partnerships and zakat might be brought together in a Regional DevelopmentBankoperatingontheeconomicprinciplesofintegration,comparativeadvantageandspecialisationtodeliverneweconomicopportunities.SuchaBankwouldnotonlyfinancedevelopmentprojects,butalsoinitiativestopromote resilience, social cohesion and conflict avoidance. The Bank would also act as a hub of criticalanalysisondevelopment theory specific to the region toguide loanmaking, investmentsandprojects.Thispapermakesthecaseforaregionaldevelopmentbank,outlinesitsconstitutiveelementsandpresentsaseriesofnextstepsforrealisingtheBankconcept.

Key take-aways

• Thebenefitsof investment-driveneconomic integration respond to the region’sdevelopmentneedsandaspirations,yetremainlargelyuntapped

• Oilrents,whiletraditionallyrenderedasanunproductivesourceofincome,cangenerateproductiveeconomic activity. Given the availability of surplus capital in the region, the opportunity forestablishingaregionaldevelopmentalbankthattransformsoilrentstovalue-addedeconomicactivityisripe

• The economic challenges facing the WANA are too complex to be tackled by either the public orprivate sector separately. A better model for development projects is public-private sectorcooperationandundertheauspicesofasupranationaldevelopmentbank

• A regional bank would not only promote and facilitate physical infrastructure projects, but alsoprojectsthatadvancesocialcohesion.AmoreequitabledistributionofresourcesthroughaShari’ah-compliant zakat fundwould fill a persistent financing gap inWANA in amanner that respects theregion’sreligiousandculturalspecificities

• Establishing a regional development bank means putting in place the required institutionalframeworkfordemocratisationtothrive

Executive Summary



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TheWANA region is facing unprecedented andmulti-faceted development challenges. These includeweakgovernance, chronic conflict, gender inequalityandanemerging threatofviolentextremism.Onechallengelinking each these issues is varying levels of economic development and functionality.WANA has becomesynonymouswithdeficits such asunemployment, rentierismand stuntedprivate sector growth.Moreover,whiletheregionishometovastwealth,itisalsooneofentrenchedeconomicandsocialinequality:in2013,Qatar’s GDP per capita stood at USD 93,714 compared to Yemen’s meagre USD 1,473.1Another set ofchallenges relates to employment and entrepreneurial opportunity. Despite high secondary and tertiaryeducation rates in many Arab states, youth unemployment sits at 22 percent for men, and as high as 40percentforwomen.Membersoftheinformaleconomy,whichmakeup60percentoftheArabworkforce,areexposed tounsafeworkingconditions (especially in thegarment-makinganddomestic laboursectors),andsuffer frompooraccess toentitlementssuchasminimumwages, social securityand insurance.AreviewofwhereArab countries sit on the Ease ofDoingBusiness Index illustrates the stifling of entrepreneurialismcaused by difficulty in obtaining credit, enforcing contracts, and accessing training and skills development.Theseconcernsmustbeconsideredagainstapooreconomicoutlookwithinflationashighas11percent insomecountries,andone-fifthoftheArabpopulationlivingbeneaththepovertyline.

Tounderstandthiscomplex,andsomewhatcontradictory,stateofaffairs,thethreeeconomic‘families’oftheWANA region need to be more closely examined. First, there are the resource-poor economies of Egypt,Jordan, Lebanon, Morocco, Tunisia, Djibouti, Mauritania and Palestine. These countries suffer from lowincomes, poor growth, highunemployment and consequently a net outflowof skilled labour,mainly to theWest and oil-producing Gulf countries.2Insufficient economic activity coupled with a depletion of skilledlabourleavesthemunabletocompetebothwithlow-incomecountriesproducinglabour-extensiveproducts,and advanced economies in terms of exporting technological and knowledge-intensive goods and services.Theyhavebecomefixedin,whatMichaelSpencehastermed,amiddleincome‘trap’.

The second group is the resource-rich, labor abundant economies of Algeria, Iraq, Syria andYemen. Thesecountries serve as harsh reminders of how the region’s massive economic potential has fallen victim toconflict.Syria’seconomyhasbeencutinhalfsince2011,3whileYemen’seconomyslippedintorecessionwithGDPcontractingby12.7percentsince2011,4andinIraq,breakdownsingovernance,civilunrestandtheriseofDaeshshranktheeconomyby2.7percentin2014alone.5

Thefinalgroupofcountriesistheresource-richGulfcountriesofBahrain,Kuwait,Oman,Qatar,SaudiArabia,and the United Arab Emirates. They account for around 60 percent of the region’s economic activity6andenjoysomeofthehighestGDPpercapitaratesintheworld.Theyhave,however,haddifficultydirectingtheirmassivewindfalls to diversify theirmarkets, raise living standards and address food andwater insecurity.

1DSorensen,AnIntroductiontotheModernMiddleEast:History,Religion,PoliticalEconomy,Politics.WestviewPress,2008.TheMiddleEastishometoextremesofwealthandpoverty,asmeasuredinpercapitaincome-theGDPpercapitafortheUnitedArabEmiratesin2006was$45,200;forYemenitwas$900

2Accordingtoa2014UNDevelopmentProgramme(UNDP)report,Arab‘brain-drain’isworsening,fromanestimated10-15percentlossinworkforcein2012,to20-25percenttodayRJames,‘Arab'braindrain'acceleratesafterArabSpring:UN’,MiddleEastEye,8May2015.3MLobel,‘Syria'seconomycutinhalfbyconflict’,BBCNews,23June2015.4TheWorldBank,‘CountryOverview:Yemen’<http://www.worldbank.org/en/country/yemen/overview>at11August2015.5‘Iraq’seconomy:anemptychest’,TheEconomist,21March2015.6UnofficialestimatessuggestingthatunemploymentamongtheGCC’syouth(16–24years),andespeciallyamonguniversitygraduates,ismorethantwicethatofthetotallaborforce(morethan35percentacrosstheGCCregion).SSalacanin,‘GCCSovereignWealthFundsManageoverUSD1.7trillion’,QatarBQMagazine(Doha),December9th,2014.

1: The Economies of the WANA Region



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Theirprincipaleconomicchallengeisresourceover-dependency,theso-called‘oilcurse’.Relianceonvolatilehydrocarbonmarketscauseslocalcurrencyappreciations,makingotherexportsuncompetitive(asthemoneyearned isworth less in terms of local currency).7This retards the growth of labour intensive exports thatotherwise have the potential to grow rapidly and further technological progress.8Over the long term, it isunlikely that the oil benefits can continue to outweigh the costs. Rentierism is broadly incompatible withpolitical resilience and resource insecurity will ultimately become an existential threat. Moreover, it isimpossible to ignore thatoil revenueshavenot translated intohumandevelopmentgains.DespiteenjoyingOECD levels (or higher) of GDP per capita, the Gulf countries lag behind on important developmentindicators.9This abnormal discrepancy between material wellbeing and human development exposes thebroaderlimitationsoftherentierwelfarestatemodel.

7PCollier,TheBottomBillion:WhythePoorestCountriesintheWorldareFailingandWhatCanbeDoneAboutIt?(2007)39-40.8ibid121,162;Hvidt,Martin,EconomicDiversificationinGCCCountries:PastRecordandFuture.9Forexample,whileQatarrankssecondintermsofglobalGDPpercapita,itstillranks36thintermsofHDI(UNDP2013).TheHumanDevelopmentIndex(HDI)whichtakesintoaccountlifeexpectancy,literacy,education,standardsofliving,andqualityoflifeforcountriesworldwide.



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ThemostobviousreasontobeconcernedabouttheperformanceofWANAeconomiesisbecauseofthedire

consequences that stem from under-development and poverty. Poor societies rank badly on a range of

development indicators including basic education, infant mortality, malnutrition and preventable disease.

Another key reason to be concerned is because two of the key drivers of civil conflict are found in these

economies:

2.1 Low incomes and slow (or negative) economic growth

Overafive-yearperiod,atypicallow-incomecountryfacesa14percentriskcivilwar;eachpercentagepoint

ofgrowth,however,equallyreducestheriskofconflict.10

2.2 Dependence on natural resources

ThemainnaturalresourcesprevalentinWANAareoilandgas.InAlgeria,IraqandSyria,oilhasplayedarole

inconflicts,eitherbyprovidingasourceoffinanceforrebels(asinthecaseofSyria)ora‘honeypot’tofight

over(as inthecaseof IraqandAlgeria). It is importanttonotethatwhennaturalresourcesaresufficiently

abundant,theriskofconflictdrops,perhapsexplainingthestabilityoftheoil-richstates.Thisisnottosaythat

over-dependence on natural resources is a positive thing; as explained above, rents inflate local currency,

skewingexport investment and slowinggrowth.Rentierismalso enables governments “to functionwithout

taxingtheincomesofcitizens,whichgraduallydetachesitfromwhatcitizenswant”.11

Once civil conflicts start, theyhavedevastating consequences fornational economies.Onaverage, civilwar

reduces a country’s growthby2.3percentper year; a typical seven-yearwar leavinga country15percent

poorerthanitwouldhavebeenwithoutconflict.12

Syrian economic performance in the decade before 2011 was considered

impressive; between 2000-2010 real growth averaged nearly 4.5 percent,

inflation was running at less than 5 percent and positive external balances

allowedanaccumulationofinternationalreservestoUSD18.2billion.13Today,

itisestimatedthatSyria’seconomyhasbeencutinhalf,14throwingthecountry

backtoitseconomicstatusinthe1970s.15AnotherstrikingexampleisYemen;

whenconflictengulfedtheregionin2011,theeconomyslippedintorecession

with GDP contracting by 12.7 percent.16Likewise in Iraq, breakdowns in

10Collier(n7)20.11PCollierWars,GunsandVotes:DemocracyinDangerousPlaces(2010)126.12ResearchbyCollierbasedoncross-countrypaneldateinthelast50yearssuggeststhatthecostofcivilwarsrangefrom1.6percentageto2.3

percentageofGDPperyearofviolence;Collier(n7)27.13MKhanandSMilbert,‘Syria’seconomicglorydaysaregone’,TheAtlanticCouncil,April32014<http://www.atlanticcouncil.org/blogs/menasource/syria-s-economic-glory-days-are-gone>accessed8August2015.14SHeller.“TheCostofCivilWar:Syria'sEconomyAfterFourYearsofConflict”GlobalEnvision<http://www.globalenvision.org/2015/03/25/cost-

civil-war-syria’s-economy-after-four-years-conflict>accessed6July2015;seealsoDButter“Syria'sEconomy:PickingUpthePieces.”ChathamHouse

2.

15MLobel,‘Syria'seconomycutinhalfbyconflict’,BBCNews,23June2015.16TheWorldBank,‘CountryOverview:Yemen’<http://www.worldbank.org/en/country/yemen/overview>at11August2015

2: Why Do We Care? Low Incomes and Resource Dependence as Key Drivers of Conflict



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governance, civil unrest and the rise of Daesh shrank the economy by 2.7percentin2014alone.17

Atthedomesticlevel,suchcostsaccrueintheformsofdirectassetandinfrastructuredestruction,increasedspending onhealth, policing and security, reducedproductivity, and the opportunity costs that flow fromgovernmentsdivertingfundsearmarkedforsociallyusefulformsofinvestmenttocovermilitaryandotherconflict-related expenditures. 18 Externally, disruption to trade and reduced investment are the mainexplanationsfor lostgrowth.TheWorldBankhasfoundthat investorriskperceptioninthefirstyearofawarcanreduce tradebybetween12-25percent,andup to40percent forseverecivilwars (thosewithacumulative death toll greater than 50,000, as is the case in Syria).19Terrorist violence has a particularlysharp relationship with foreign investment;20in Lebanon it reduced foreign direct investment by 26.6percentbetween2012-2013.21Theseimpactslastlongafterfightingsubsides;recoveringtooriginalgrowthpathstakesaround14yearsofpeace.The destruction, slowed growth and weakened civic cohesion that accompanies conflict manifests inincreased poverty.22Social and economic development is near impossible in the context of war, andwartends to create legacies of crime and violence that are profitable and hence difficult to shed.23Thisrelationship has evidential support. Countries experiencing conflict have, on average, a poverty rate 21percentagepointshigherthanthosethatareconflict-free.24Thekeyissueisthatslowgrowthandpoverty—theconsequencesofconflict—arealsokeypredictorsofconflict.Conflict,reducedgrowthandpovertyhencework inadestructiveandmutually constituting cycle.This theory is supportedby strongdataon conflictrecurrence;39percentofstatesemergingfromconflictreturntowarinthefirstfiveyears,andanother32percentreturntoconflictinthefollowingfiveyears.25

17‘Iraq’seconomy:anemptychest’,TheEconomist,21March2015.18Militaryspendingtypicallyincreasesby2.2percentduringcivilwar;acivilwarreducesacountry’saverageratingontheInternationalCountryRiskGuidebyaround7.7points(ona100-pointscale);WorldBank,WorldDevelopmentReport(2011)64-65.19id.20ibid65.21InternationalMonetaryFund,UNCTADWorldInvestmentReport(2014).Akeyreasonwhyconflictimpactsgrowthsoseverelyisthatthecostsofwardonotendwithacessationofhostilities.Threeyearsafterpeace,investorriskperceptionremains3.5pointslowerthatnon-conflictaffectedcountriesand,onaverage,ittakes20yearsfortradetorecovertopre-conflictlevels;ibid64.22TheWorldBankhasestablishedthat“acountrythatexperiencedmajorviolenceovertheperiodfrom1981to2005hasapovertyrate21percentagepointshigherthanacountrythatsawnoviolence”Saferworld(2013)AddressingConflictandViolencefrom2015;seefurtherFigure1.6,WorldBank(n18)60-62.23Collier(n11)138;Collier(n7)33-34.24“Peopleinfragileandconflict-affectedstatesaremorethantwiceaslikelytobeundernourishedasthoseinotherdevelopingcountries,morethanthreetimesaslikelytobeunabletosendtheirchildrentoschool,twiceaslikelytoseetheirchildrendiebeforeagefive,andmorethantwiceaslikelytolackcleanwater.”WorldBank(n18)5.“Povertyreductionincountriesaffectedbymajorviolenceisonaveragenearlyapercentagepointslowerperyear than in countries not affected by violence. After a few years ofmajor violence, the contrast can be quite stark: countries affected by violencethroughoutthe1980slaggedinpovertyreductionby8percentagepoints,andthosethathadexperiencedmajorviolencethroughoutthe1980sand1990slaggedby16percentagepoints”.ibid60.25ibid57;“90percentofthelastdecade’scivilwarsoccurredincountriesthathadalreadyhadacivilwarinthelast30years”ibid2.



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Asintimatedabove,thediversechallengesimpactingtheeconomicsoftheWANAregionrequireadiversesetofsolutions.Resourcepoorandconflict-affectedstatesneedtomakestructuralchangestowardsvalue-addedactivities (such as manufacturing),1and at the same time attract large-scale capital inflow investments tocounter unemployment and increase growth rates.1For such investment to take place and be effective,however,stabilitymustbeconsolidated,deficitsinopportunityaddressedandgovernancestrengthened.Oilexportingcountries,bycontrast,needtomoveawayfromretail,realestateandservicesandintosectorsthatgenerate value-added economic activity, amore inclusive and resilient formof governancewill need to beadopted,andalocal,highproductivitylabourforceneedstogrow.

Economists argue that the way forward is elaborated regional economic integration. Currently, inter-Arabfinancial linkages principally exist as functions of remittance and aid flows.A healthier driver of economicintegration is Foreign Direct Investments (FDI’s). The theory is that FDIs foster economic growth anddevelopment by bridging the gap between domestic savings and investments and transferring the latesttechnologiesandmanagementknow-howfromdevelopedtodevelopingeconomies.

Andperhaps the solution lies close to home.While theGulf oil economies have traditionally directed theirforeign investments towards American and Europeanmarkets, they are increasingly investing their fundsclosertohome.26It isnotonlythequantityandlocationoftheir investmentsthat ischangingbutalsotheirnature—thepatternisatransitionfromlow-risktohigh-riskportfolios.27

Facilitating inter-regional investments within the South-South context of the WANA region may unleashunprecedenteddevelopmental opportunities. This couldbemanaged through a regional developmentbankoperatingontheeconomicprinciplesofintegration,comparativeadvantageandspecialisation.InshortsuchaBankwould linkup theaccountdeficits in resource-poorand resource-rich labor-abundant countries,withthe record surpluses in the resource-rich countries, creating compatible and mutual opportunities foreconomic advancement. Poor and conflict-affected economies would receive the investment needed topromote growth, create jobs and raise incomes, thereby bolstering their resilience to conflict; while GulfStates would diversify their markets and move away from the rentier-state model to one that generatesproductive and sustainable economic activity.28This would not be the Bank’s only source of funds. Zakatcontributionsandpublic-privatesectorpartnershipswouldalsofeatureintheBank’soperationalmodalities,allowingforbroaderprojectopportunitiesandarangeofaid-baseddevelopmentinterventions.

3.1 Why a Regional Bank?

Despite its economic, chronic conflict and governance challenges, WANA is the only region without adevelopmentbank.Existingdevelopmentfunds,suchastheArabFundforEconomicandSocialDevelopmentand theKuwait Fund for Arab EconomicDevelopment, operate primarily on a bilateral basis and focus on

26Atthesametime,theregionisexperiencinganunprecedentedtrendwherea“newphaseofintegrationischaracterizedbythreesecularshifts:businessisplayingamoreimportantrolethangovernment,foreigndirectinvestment(FDI)ismoreimportantthantrade,andtheGulfisapivotalplayer.SHertog,‘TheGCCandArabEconomicIntegration:aNewParadigm’14(1)MiddleEastPolicy14(2007),53.EmergingTrendsintheregionalSWFlandscape,KPMGreport(2013).<http://www.kpmg.com/AE/en/Documents/2013/Emerging_trends_in_the_regional_SWF_landscape.pdf>27ABabood,‘TheGrowingEconomicPresenceofGulfCountriesintheMediterraneanRegion’,GulfResearchCentre,UniversityofCambridge(2009):203-209.

28Despitehavingmassivestart-upcosts,infrastructuralprojects,forexample,areeconomicallyproventogenerateconsistentfinancialreturnsinthelong-term.Hence,bymakinginvestmentsintheirneighboringcountries’sectorsthatgeneratevalue-addedeconomicactivity,cateringtheGulf’ssurpluscapitaltowardsregionaldevelopmentalneeds,alsopresentsarealopportunityfortheGulfeconomiestodiversifytheirsourcesofincomeforthelong-term.

3: The Economic Case for a WANA Development Bank



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‘traditional’ sectors of the economy. They do not have amultilateral function nor do they engage both thepublic andprivate sectors.There is also an insufficient linkingupbetweenpolicy scholarshipon resilienceanddevelopmentandthewaythesefundsoperate.

Arguably, a redistribution of WANA resources conducive to development is not possible without theestablishmentofaregionalBankonthelinesoftheEuropeanBankforReconstructionandDevelopmentortheAsianDevelopmentBank.Moreover,onlyasupra-nationalstructurewithadevelopmentmandatewouldbe capable of facilitating regional integration and spearheading necessary economic, political and socialreforms.

3.2 What would the Bank do?

ThemainmissionoftheBankwouldbetoincentivise,finance,andfacilitateinvestmentprojectsthatwouldcontribute to the region’s developmental needs, and specifically those that would: generate value-addedeconomicactivity; createemploymentopportunities;advancekeysectorssuchaseducation,manufacturingandinfrastructure;andpromotecross-borderinvestmentsanddevelopmentalprojects.

Second,as theagent linkingcapital flowstoregionaldevelopmentpriorities, theBankwouldbe inastrongposition to promote policy and economic reforms. It could do this through conditional investments andfinancing;i.e.thefinancingofdevelopmentalprojectswouldnotonlybelinkedtoeconomicneeds,butalsotogoodgovernancereforms.

Third, the Bankwould also act as a hub for critical analysis and region-specific knowledge generation oneconomicdevelopment,policyreformandmarketrestructuring.Thisregionaloutlookwouldprovideitwithacomparativeadvantageoverotherfinancingmechanismsinguidingloan-making,investmentsandprojects.

Finally,theBankwouldgobeyondthetraditionalfunctionofadvancingphysicalinfrastructureandeconomicopportunities, towork on the advancement of ‘social’ infrastructure, specifically resilience, social cohesionandconflictavoidance.Critically,as theBankwouldreceiveandallocatezakat funds, itcouldalso invest inandundertakesocialredistributiveprojects,microcreditandotherformsofsocialdevelopmentfinancing.

3.3 How would the Bank be financed?

The region’s economic challenges are too large and complex tobe tackedbya single entity, be it public orprivate.Abankwouldmostlikelyrequiredonorgovernmentsupport,butthemajorityoffundswouldbeGulfinvestment,alongwithzakatcontributionsandpublic-privatepartnershipinvestment.

3.3.1 Matching surplus capital to development gaps

Following the unprecedented surge of oil prices in the early 2000’s, the Gulf States have accruedunprecedentedcurrentaccountsurpluses.Likeotheroil-exportingcountries,thesestatestransformedthisoilwindfall into financial wealth by setting up dedicated investment funds. With 10 sovereign wealth funds(SWF’s) and USD1.7 trillion worth of assets under management, the Gulf States have fast emerged as theworld’slargestnetsupplieroffinancialresources.29

These account surpluses have also translated into loans, aid, and even oil shipments (at times of crisis) totheirnon-oilproducingandconflict-affected regional counterparts. Suchcapital transfersarenot,however,profitable.Moreover,becausetheyhavenotbeendirectedintothesectorsthatgeneratethemostvalue-addedeconomicactivity,likerealestate,theyhavedonelittletoallowbothdonorandrecipienteconomiestoescaperenterismandaiddependencytraps,respectively. 29SalacaninS,‘GCCSovereignWealthFundsManageoverUSD1.7trillion’,QatarBQMagazine,Doha,December9th,2014.



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At the same time, the SWF Gulf countries are continuously proving that oil rents can, at times and undercertain conditions, generateproductive economicactivity.Gulfwealth, flowing frombothgovernments andprivate businesses, has translated into developmental projects both at home and abroad. Gulf capital hasfinanced massive infrastructural and educational projects including Jordan’s revamping of the Queen AliaInternationalAirportandtheongoingUSD90billionGCC-wideeducationboom.30

Themain purpose of a regional Bank, thereforewould not be tomobilise additional funding, but to betterdirectpre-existing capital towards the region’s economic and social development needs, providing theGulfwithaprofitablealternativeandultimatelyleadingtogreatereconomic,financial,andpoliticalintegrationfortheregion.

3.3.2 Public-private sector partnerships

The public-private partnership (PPP)31model for facilitating infrastructural projects is gaining increasedlegitimacy in theWANA region.32They are a particularly viable option for the resource poor and conflict-affectedcountriesbecausetheyoccurasan‘offbalancesheet’projectmakingitpossibleforgovernmentstoobtain much-needed infrastructure without raising taxation or utilising other public funds. The centralelementofPPPprocurement ishow it financesprojects; incontrast tocorporate financewhere theprojectreliesonthestrengthoftheborrower’sbalancesheetorcredithistory,creditisextendedonthebasisoftheproject’sprojected cashgeneration.PPPsbring together a consortiumof ahost government, private sectorinvestorsandlenderstoundertakeprojectsthatwouldbetoolargeorriskyforanindividualentity,betheypublicorprivate.Becauserisk,profit,andpoweraresharedequitably,groupfinancingcanallowdevelopingcountriestopursueprojectstoheightengrowthandexpandtheireconomicprospects.Moreover,themodelmeansthatcreatesstrong incentivestoavoidandpreventcorruptionandmismanagement.Finally, thePPPmodel isameansofovercoming long-standingdiscordbetweenprivatebusinessandstate interests(whichhaveactedasamajorobstacletotheregion’spoliticalreforms),byincentivisingownersofprivatecapitaltoengagewith the region’sdevelopment agenda. In this case theBankwould act as a linking agent; using itsvisiontomatchfinancetoprojectsthataremostneededandstrategicforregionaldevelopment.

3.3.3 Zakat

Zakat—oneofthefivepillarsofIslam—requiresthatMuslimstodonate2.5percentoftheirwealthaboveaspecifiedamounttoeightspecifiedpurposes,themostimportantofwhichissupportforthepoorandneedy.33In most Muslim countries, zakat it is collected and administered by the government. Since the 1980s,however, therehasbeena trend towardsdedicatedagenciesmanaginganddisseminatingzakat, aswell asprivatecollectionmechanisms,suchasmosques.Thepotentialvolumeofannualzakatcollectionisenormous;a2012studyestimatedthatUSD200billion-USD1trillionarespentannually inzakatandvoluntarycharityacross the Muslim world. 34 This places zakat within the 10 highest donors with respect to Official

30‘GCCtospend$150billiononeducationreform,’AlBawabaNews,14July2014.31ThedefinitionofPPP’s,asputforthbytheEuropeanInvestmentBankisasfollows,aPPPis“apartnershipbetweenthepublicandprivatesectorspursuanttoalongtermcontractualagreementandcoveringthedesign,construction,financingandon-goingoperationandmaintenanceofaninfrastructureasset”.‘PublicPrivatePartnership:ProspectsintheMediterraneanRegion’,EuropeanInvestmentBank,Febraury17,2011.<http://www.eib.org/infocentre/events/all/ppp-in-the-mediterranean-region.htm>32Primeexamplesincludebutarenotlimitedto:Jordan’sQAIAairport,andenergyandirrigationprojectsinTunisia:http://www.unece.org/fileadmin/DAM/ceci/documents/2013/PPP/High-level_Consultations/10_Tunisia.pdf33WhilethereisextensivedebateamongjuristsandparticularlythedifferentschoolsofIslam,regardingtheusesofzakat,theeightpopularlyacceptedcategoriesare:Al-Fuqara:thePoor,Al-Masakin:theNeedy,Al-‘Amilina‘Alayha:administratorsofZakat,Al-Mu’allafate-Qulubuhum:peoplewhohaveembracedIslamorwhoareinclinedtowardsit,Fir-Riqab:thoseinbondage/slaves,Al-Gharimin:thoseinDebt,Fi-Sabilillah:intheCauseofAllah,Ibnas-Sabil:theWayfarer(thosewhohavelefthomeforalawfulpurposeandforwhatevergoodreasondoesnotpossessenoughmoneytoreturnhome.34https://www.linkedin.com/pulse/20140704205505-28147646-zakat-for-development-z4d



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DevelopmentAssistance,andupto15timesmorethanglobalhumanitarianaidcontributions.35

Despitesuchpotential,zakatasadevelopmenttoolsuffersfromthreemajorconstraints.First,duetodeficitsin transparency and accountability, zakatadministration seems to be particularly prone to corruption andembezzlement, especially where cash disbursements are used. 36 Second, zakat contributions areincreasingly not reaching their potential; whether this is due to ineffective collection mechanisms or

skepticism on the part of contributors regarding the efficient use of funds is unclear.37Finally, zakat

distributiongenerallyfollowsacharitymodel,withfundsusedtosupporttoshort-termconsumptionneedsof

thepoor.Itiswellestablishedthatsuchcharitablegivingisnotaneffectivemeansofpromotinglonger-term,

sustainableandinclusivedevelopment,andismorelikelytoentrenchpovertytrapsthanclosethem.

ABankcouldactasavehicleforzakatcollectionanddistributionforthepurposesofpovertyalleviationandsocialdevelopment.Aportionof the fundswouldbe retainedandre-investedaccording toShari'ah,withawaqfgovernancestructureoverseeingthemaintenanceofsuchfundsandoutliningtheirproperuse,allowingthe fundtobecomeindependentandself-sustaining. Aprincipalobjectivewouldbetoshiftmentality from

private zakat giving to centralised giving that invests in long-term, evidence- basedmethods of combatingpovertyandvulnerability.Suchamechanismwouldalso revive theconceptsof sustainable investmentand

propermanagementoftrustfundsembodiedintheIslamicwaqfinstitution,aswellastheoriginalconceptionof waqf as a long-term funding source for public good. There would be several advantages to such anapproach. Principally, understanding zakat as a sustainable and indigenous mechanism for socialdevelopmentandpovertyreductionispreferabletorelyingonforeignaid,whichoperatesinthesamewayas

rents,whereaszakatoperatesmorelikeatax,andhencewithfewerdeleteriouseconomicside-effects.

It should be noted that the Islamic finance model is gaining increased attention and legitimacy in the

international arena. Like PPP’s, the risk-sharing feature of Islamic finance creates a wider incentive for

countries on both the donor and beneficiary end to participate. Unlike traditional loans, any return donor

countriesaccrueontheirfinancialcapitalisbasedoninvestmentreturnsinsteadofmereinterest.Thisideaof

avoiding interest, and instead receiving returns on capital through investments is the pinnacle of Islamic

finance.

35

http://www.globalhumanitarianassistance.org/understanding-role-zakat-humanitarian-response-5087.html

36

http://tribune.com.pk/story/862165/financial-indiscipline-auditors-say-zakat-system-vulnerable-to-corruption/

37

CentreofLanguageandCultureoftheIslamicStateUniversityofJakarta(2005)http://www.irti.org/English/Research/Documents/334.pdf)



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ThenextstepinrealisingtheBankconceptisabroaderviabilityassessmentthatwouldexamine:

• AnoptimisationrationalefortheestablishmentoftheBank

• AnassessmenttogaugetheinterestofWANAstatesinjoiningandfinancingtheBank’smission

• StructuralmodalitiesfortheBank’s‘think-tank’department,operationandmanagement

• Country-by-countryassessmentofWANAstatestoassessinvestmentanddevelopmentpriorities

• Evaluationofzakatcollectionanddisbursementthroughouttheregion

• Evaluation of potential legal frameworks that would establish and protect the rights and duties of all

stakeholders

4: Realising the Bank Concept

The Case for a WANA Regional Development...

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