Introduction
Political events and the overall political climate affect many areas of economic and cultural spheres. The impact of political instability, for example, may pose a risk for a country’s relationship with other nations that need to make continuous decisions about which states do they wish to trade (Baklouti & Boujelbene, 2018). Thus, the economic growth of a state may also be interdependent with institutional quality (Aziz, 2018; Dkhili & Dhiab, 2018). Investment options, especially foreign direct investment (FDI), are evaluated by businesses that seek to acquire assets that will expand their opportunities and increase their economic growth (Abidi, Antoun, Habibniya, & Dzenopoljac, 2018). Therefore, a connection between one’s interest in FDI and the country’s political environment is also based on economic stability and the lack of apparent risks (Al-Samman & Mouselli, 2018; Fernandez & Joseph, 2016). In the case of the countries of the Gulf Cooperation Council (GCC), the link between political stability and economic growth can be reviewed as well.
The existing literature presents many examples from other nations with growing economies. The analysis of the contemporary scholarship presents some arguments that support the need for countries to ensure political stability to attract foreign investment (Erkekoglu & Kilicarslan, 2016). This research paper will consider the nexus between economic and political stability of six countries – Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain, Oman, and Qatar. First, the paper will consider some previous research about these correlations to establish a theoretical base for further calculations. Then, the data and methods for analysis will be presented to show how political stability, RGDP, and oil prices are linked to each other. Finally, the research will demonstrate findings and discuss conclusions that arise from the available information.
Literature Review
The recent scholarship investigates the connection between political stability and foreign investment using examples from various continents. Developing countries, in many cases, have difficulties attracting foreign investment (Abbas & Mosallamy, 2016). They argue that any political risks and low or stagnating RGDP affect the outcomes of FDI flows. Moreover, their study shows that GDP does not have as much impact as political instability – the latter is among the most influential factors that attract or repel investors (Meyer & Habanabakize, 2018). To compare, the relationship between FDI and a country’s economic growth are bidirectional, which suggests that by changing the political climate, FDI flow increase could have a positive influence on the national economy. Thus, Meyer and Habanabakize (2018) suggest that countries should reduce political risks and demonstrate stability not only in economic growth but also in the political sphere.
To continue the exploration of the South African economy, one may consider the effect of institutions on FDI flows. Agbloyor, Gyeke‐Dako, Kuipo, and Abor (2016) come to different conclusions, showing that FDI does not have an impact on economic growth and that institutions affect this relationship in any way. Nevertheless, the authors find that the quality of government institutions, including a nation’s control of corruption, the rule of law, accountability, and government effectiveness, has an indirect impact on the growth of the state economy (Agbloyor et al., 2016; Mouselli, Aljazaerli, & Sirop, 2016; Saeed, 2017). By improving the functioning of the national system, a country increases its chances of attracting FDI, thus adding to the financial stability of the state.
For small and threatened by instability economies, the relevance of this advice may significantly change the situation for the better. Kurecic and Kokotovic (2017) examine the relevance of the connection between political stability and FDI and determine that the type of economy is valuable when discussing its appeal to foreign investments. In the case of small economies, the connection between the political climate of such countries and their opportunities for investment is substantial (Kurecic & Kokotovic, 2017). In contrast, developed economies do not depend on their political stability to attract investors in the same way since their financial independence does not rely on foreign relations on a similar level. Furthermore, Kurecic and Kokotovic (2017) discover that major FDI outflows happen in countries with a less stable political climate, further supporting the link established above. Thus, the size of a country’s economy, as well as its stage of development, determines the role of foreign investments for economic growth.
The question of whether macroeconomic factors impact the state of GDP is raised in the literature as well. Ali and Rehman (2015) consider such aspects of possible macroeconomic instability as inflation rate, trade deficit, unemployment rate, and budget deficit. The authors use the data from Pakistan to investigate the causal relationship. The factors mentioned above significantly impact the GDP of the country and have a deep-rooted connection to the opportunities that the national economy can consider in the future (Ho & Rashid, 2017; Muhammad, Islam, & Marashdeh, 2016). Implying that GDP further influences the state’s appeal as a target for investment, one can extend the link to FDI flows. Thus, it is vital to consider not only GPD and political climate as a potential force influencing foreign investment, but also the existence of macroeconomic problems that are related to inflation, unemployment, and trade.
Several studies focus on these correlations in the GCC countries, analyzing their unique resource capabilities as another substantial factor. Elheddad (2016) points out that the nations’ natural resources can have both positive and negative effects on their economies. For some states in the region, the reliance on oil has led to economic prosperity (Al Mutawa, Ali, & Ali, 2017; Amin & El-Sakka, 2016; Vohra, 2017). The GDP of GCC countries demonstrates that they are still in the stage of stable growth, as shown in Figure 1. On the other hand, the use of oil as a major resource could also deter foreign businesses from investing in GCC countries, thus harming the FDI flow and making the economy vulnerable to oil price changes (Siddiqui, Mahmood, & Margaritis, 2019). Trade openness and labor force have a direct impact on FDI flows’ increase, while corruption and similar political issues negatively affect foreign interest (Luu, Nguyen, Ho, & Nam, 2019). Thus, the author’s conclusions for GCC countries align with similar research and urge these states to decrease their dependence on oil and improve political stability in order to attract investments.
The oil price volatility becomes one of the most researched topics in the sphere of analyzing foreign investments and political stability. Tabash and Khan (2018) urge GCC countries to stabilize their oil prices in order to lower the effect of their dependence on this resource. The improvement of policies and procedures related to energy sources is positively connected to economic growth (Gazdar, Hassan, Safa, & Grassa, 2018; Habibi & Sharif Karimi, 2017; Saddam, 2015). To achieve such independence and analyze how a change in resource use may impact economic growth, scholars consider the implementation of renewable energy sources in the political plans of GCC countries. Hassine and Harrathi (2017) investigate the relationship between RGDP, trade, FDI, and renewable energy consumption in the region. There exists a bidirectional link between the factors, implying that the use of renewable energy has the potential of increasing the economic growth of GCC countries (Asif, Sharma, & Adow, 2015; Howarth, Galeotti, Lanza, & Dubey, 2017).
Another formula that has to be considered is that which comprises GDP based on the country’s political stability, energy price, and economic oneness. The latter of the three components can be determined using the globalization index. Globalization has had affected many areas of countries’ economic and political systems, creating ties and merging cultures and frameworks. According to Gygli, Haelg, Potrafke, and Sturm (2019), globalization significantly influences the economic growth of nations, supporting its place in the GDP formula. Moreover, the index accounts for direct investments as a part of financial globalization – countries with more direct investments have a higher level of globalization, which, in turn, makes them more open and economically appealing to further collaboration (Gygli et al., 2019). Political globalization is based on the ability of states to participate in international cooperative efforts. Here, one can tie in political stability as a factor affecting countries’ willingness to work together.
The importance of energy prices and the oil industry is also imperative to review when discussing the presented formula. Shahbaz, Lahiani, Abosedra, and Hammoudeh (2018) find that oil is a factor that impacts all sectors of the economy directly or indirectly. It is a resource the development and trade of which have been greatly enhanced by globalization. Countries that depend on oil trade as a major source of financial gain are vulnerable to energy prices, and their GDP is related to any cost fluctuations. One can see that such factors as economic openness, globalization, political stability, and energy price reliance determine the GDP of a country as well as its potential for growth. In the case of the GCC region, this link is especially relevant since its nations’ oil development remains a principal part of the local economy.
Table 1. The synthesis of the literature.
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