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Karen E. Young

Arab States Should Beware of Indexes Bearing Easy Money

Foreign capital blindly following emerging-market indexes can be a disincentive for real economic reform.

Money for nothing.

Money for nothing.

Photographer: Simon Dawson/Bloomberg

The taps of foreign capital are about to open on some states in the Middle East, thanks to their inclusion in key emerging-market indexes. Over the next year, Saudi Arabia and Kuwait are expected to join Egypt, the United Arab Emirates and Qatar in the MSCI EM index. At the same time, Saudi Arabia, Qatar, the U.A.E., Bahrain and Kuwait are expected to join Oman in the J.P. Morgan Emerging Market government bond index. Kuwait was classified as “secondary emerging” status in 2018 in FTSE’s Russell index, and Saudi Arabia is expected to be included in March.

Inclusion in these indexes will send tens of billions of dollars pouring into their debt and equity markets, requiring little effort by their governments. But this easy money may hinder economic reform, making growth in 2019 less about liberalization, good governance and markets ruled by law, and more about capital simply going where indexes tell it to go — where the state is large, with large natural-resource revenues and risk-averse foreign policies, so long as equity and debt markets are integrated into global financial flows.