GCC – Catching the train

Abu Dhabi has announced that it start considering offers for its metro system by the end of the month. The UAE capital plans a 130 km city wide metro system. This announcement comes amidst a flurry of massive investments projects in various rail projects that total USD 100 billion according to MEED. Dubai itself is opening in September the first phase of a USD 4.4billion metro project while the UAE federation is mulling a plan to establish a 340 km light rail and tram network system in the whole country. In the meantime Bahrain has announced today a plan to build a 184km network in three phases on the tiny island. Saudi has similar plans and the whole GCC had earlier announced that it would establish a 1940 km regional railway linking the 6 participating countries.

In the short term, investment in such projects will help drive growth and pick up some of the slack in the economy. But such projects will also have a longer term impact on the economy. Investment in infrastructure can lead to higher rates of growth and improved living standards. Good infrastructure can improve total factor productivity which is the level of economic output which is not the direct result of increasing inputs in the economy. Productivity gains in GCC economies should be the main driver for growth for years to come. Also improved infrastructure can lead to greater efficiency, a better diffusion of technology and higher levels of competition. It is also worth noting that the correction in the housing market, especially in the UAE, will make it easier for investment flows to refocus on sectors that are in need of funds and that can potentially help the economies achieve higher and smoother rates of sustainable growth.