Financial Imbalances, Middle East Industrialization, and Carbon Dioxide Emissions
El-Gamal, Mahmoud A.
Early into the new millennium, many observers expected the financial imbalances between export-oriented East Asia, especially China, and consumption-oriented advanced economies, especially the U.S., to be sustainable. However, as El-Gamal and Jaffe (2010) have shown, the period of sustained growth despite those financial imbalances came to an abrupt end when petrodollar flows—forgotten since the 1980s—resurfaced to tip the balance and make the global credit bubble unsustainable. One way to prevent petrodollar problems from continuing to resurface is for Middle-East countries to focus their efforts on enhancing intra-regional trade, especially in manufactured goods. Not only is this the proven path for overcoming the effects of the economic crisis, but it is also the path for enhancing the economic absorptive capacity of the region, thus ameliorating the cycle of petrodollar flows and the destructive credit crises that follow. One of the potential side effects of industrialization in the Middle East would be significant increase in carbon emissions. This is indeed a major concern, especially given the recent focus in the region on energy-intensive industries and construction, which are not particularly friendly environmentally. Using a large panel of 118 countries over the 40-year period 1969-2008, I show that although growth in industrial output (which includes mining, construction, electricity, water, and gas, as well as manufacturing) contributes significantly to the accelerated increase of carbon emissions, growth in manufacturing output does not. This suggests that carefully balanced industrial planning can allow manufacturing and intra-regional trade to increase without significantly contributing to accelerated growth in carbon emissions.