nep-ara New Economics Papers
on Arab World
Issue of 2010‒01‒16
eighteen papers chosen by
Quentin Wodon
World Bank

  1. A Snapshot of Geothermal Energy Potential and Utilization in Turkey By Erdogdu, Erkan
  2. On the Wind Energy in Turkey By Erdogdu, Erkan
  3. Natural gas demand in Turkey By Erdogdu, Erkan
  4. A paper on the unsettled question of Turkish electricity market: Balancing and settlement system (Part I) By Erdogdu, Erkan
  5. A Review of Turkish Natural Gas Distribution Market By Erdogdu, Erkan
  6. Turkish support to Kyoto Protocol: A reality or just an illusion By Erdogdu, Erkan
  7. A Comparative Study of the Major Economic Systems in the aftermath of the Great Recession By Shaikh, Salman
  8. Oil Rents, Corruption, and State Stability: Evidence From Panel Data Regressions By Rabah Arezki; Markus Bruckner
  9. Analysis of Stock Screening Principles in Islamic Mutual Funds Industry By Shaikh, Salman
  10. An Alternate Approach to Theory of Taxation and Sources of Public Finance in an Interest Free Economy By Shaikh, Salman
  11. Corporate finance in an interest free economy: An alternate approach to practiced Islamic Corporate Finance By Shaikh, Salman
  12. Growth Engines of the South? South Africa’s, Brazil’s and Turkey’s market constellations in comparison By Alper Duman; Arne Heise
  13. Microcredit using Equity Financing: an Alternate Approach to Equity Financing in an Interest Free Financing By Shaikh, Salman
  14. Systemic Liquidity Management in the U.A.E.: Issues and Options By Alexandre Chailloux; Dalia Hakura
  15. Ethical Crisis in Capitalism: Filling the Ethical Void with Islamic Economic Teachings in Economic Practices By Shaikh, Salman
  16. The search for co-integration between money, prices and income: low frequency evidence from the Turkish economy By Levent, Korap
  17. Are Sovereign Wealth Funds’ Investments Politically Biased?: A Comparison with Mutual Funds By Rolando Avendaño; Javier Santiso
  18. The Predictive Power of Conditional Models: What Lessons to Draw with Financial Crisis in the Case of Pre-Emerging Capital Markets? By El Bouhadi, Abdelhamid; Achibane, Khalid

  1. By: Erdogdu, Erkan
    Abstract: Turkey is one of the countries with significant potential in geothermal energy. It is estimated that if Turkey utilizes all of her geothermal potential, she can meet 14% of her total energy need (heat and electricity) from geothermal sources. Therefore, today geothermal energy is an attractive option in Turkey to replace fossil fuels. Besides, increase in negative effects of fossil fuels on the environment has forced many countries, including Turkey, to use renewable energy sources. Also, Turkey is an energy importing country; more than two-thirds of her energy requirement is supplied by imports. In this context, geothermal energy appears to be one of the most efficient and effective solutions for sustainable energy development and environmental pollution prevention in Turkey. Since geothermal energy will be used more and more in the future, its current potential, usage, and assessment in Turkey is the focus of the present study. The paper not only presents a review of the potential and utilization of the geothermal energy in Turkey but also provides some guidelines for policy makers.
    Keywords: Geothermal energy; Renewable sources; Turkey
    JEL: Q42 O13 Q4
    Date: 2009
  2. By: Erdogdu, Erkan
    Abstract: Increase in negative effects of fossil fuels on the environment has forced many countries, including Turkey, to use renewable energy sources. Today, clean, domestic and renewable energy is commonly accepted as the key for future life, not only for Turkey but also for the world. As wind energy is an alternative clean energy source compared to the fossil fuels that pollute the atmosphere, systems that convert wind energy to electricity have developed rapidly. Turkey is an energy importing country, more than half of the energy requirement has been supplied by imports. Turkey's domestic fossil fuel resources are extremely limited. In addition, Turkey's geographical location has several advantages for extensive use of wind power. In this context, renewable energy resources appear to be one of the most efficient and effective solutions for sustainable energy development and environmental pollution prevention in Turkey. Since wind energy will be used more and more in the future, its current potential, usage, and assessment in Turkey is the focus of the present study. The paper not only presents a review of the potential and utilization of the wind power in Turkey but also provides some guidelines for policy makers.
    Keywords: Wind power; Renewable energy; Turkey
    JEL: Q42 O13 Q4
    Date: 2009
  3. By: Erdogdu, Erkan
    Abstract: On average, energy demand of Turkey is mounting by 8% annually, one of the highest rates in the world. Among primary energy sources, natural gas is the fastest growing one in Turkey. Gas consumption started at 0.5 bcm (billion cubic meters) in 1987 and reached approximately 35 bcm in 2007. Turkish natural gas usage is projected to further increase remarkably in coming years. The present paper focuses the characteristics of this demand and estimates short and long-run price and income elasticities of sectoral natural gas demand in Turkey. The future growth in this demand is also forecasted using an ARIMA modelling and the results are compared with official projections. The paper reveals that natural gas demand elasticities are quite low, meaning that consumers do not respond possible abusive price increases by decreasing their demand or substituting natural gas with other energy sources. Since consumers are prone to monopoly abuse by incumbent, there is a need for market regulation in Turkish natural gas market. Based on forecasts obtained, it is clear that the current official projections do not over/under-estimate natural gas demand although past official projections highly overestimated it.
    Keywords: Turkish natural gas demand; Elasticity; ARIMA modelling
    JEL: O13 Q4
    Date: 2009
  4. By: Erdogdu, Erkan
    Abstract: Turkish electricity market law (EML) came into force in 2001 aiming at establishing a financially strong, stable, transparent and competitive electricity market based on bilateral contracts. Also, a balancing and settlement system (BSS) was put into practice in November 2004 to create a market where uncontracted generation can be traded, and actual implementation of the BSS started on August, 1st 2006 following a 21-month virtual implementation period. However, BSS has always been criticized from its beginning as transferring excessive profits to private generation companies. The present paper analyzes the implementation of BSS and argues that current BSS not only undermines the healthy development of the electricity market in Turkey but also prevents power investments due to uncertainties it created. It concludes that since the inconsistency between the objectives of EML and results of BSS in practice is obvious, Turkish policy makers need to modify current electricity market policy in line with suggestions presented in the paper.
    Keywords: Balancing and settlement; Turkey; Electricity wholesale market
    JEL: O13 Q4
    Date: 2010
  5. By: Erdogdu, Erkan
    Abstract: In Turkey, natural gas consumption started at 0.5 bcm (billion cubic meters) in 1987 and reached approximately 35 bcm in 2007. Turkish natural gas usage is projected to further increase remarkably in coming years. In 2001, a reform process was started to create and strengthen a competitive natural gas market. However, the reform has not worked out as expected so far. The present article discusses the application of auctions in Turkish natural gas distribution zones. After presenting a short summary of current literature, natural gas utilization and recent developments in Turkish natural gas market, we draw attention to our main focus, namely city natural gas tenders. Having described the tenders, we present problems associated with them. In the end, we touch upon some regulatory issues and provide some suggestions for improvement.
    Keywords: Natural gas distribution; Auction; Turkey
    JEL: O13 Q4
    Date: 2009
  6. By: Erdogdu, Erkan
    Abstract: The long-term increase in Earth's temperature is known as the global warming or the greenhouse effect. Taking into account the fact that the ice age only involved a global temperature variation of around 4 °C, it is clear climate change is arguably one of the greatest environmental threats the world is facing today. The impacts of disruptive change leading to catastrophic events such as storms, droughts, sea level rise and floods are already being felt across the world. In this context, the signing of the Kyoto Protocol in 1997 has been argued to be a historic step in reversing the inexorable increase in the emission of the greenhouse gases. The primary achievement of the Protocol has been so-called commitment of countries referred in the Annex I of the Protocol to reduce their emission of GHGs some 5% below their country specific 1990 level. On February 5, 2009, Turkish Parliament ratified an agreement to sign the Kyoto Protocol after intense pressure from both the European Union and international environmental organizations; however, so far it has not taken any step to bring about real reductions in emissions. In short, Turkey simply signed but ignored the Protocol. Present paper investigates Turkish position vis-à-vis Kyoto Protocol and critically questions Turkish policies in that area.
    Keywords: Kyoto Protocol; Global warming; Turkey
    JEL: O13 Q4
    Date: 2009
  7. By: Shaikh, Salman
    Abstract: This paper compares the fundamental postulates of major economic systems i.e. Capitalism, Socialism, Mixed economy (a hybrid of Capitalism and Socialism) and the Islamic economic system. It identifies through a review of theoretical economics the structural problems that lie in the current economic order. Poverty and Inequality have increased in last two decades and the millennium development goals are still far from achieved. The research identifies that lack of an ethical foundation, unbridled pursuit of self interest in production as well as in consumption, interest based financial ad monetary system are the major problematic issues in Capitalism against which mixed economy has also shown limited effectiveness. Socialism promises to create heaven on earth, but takes fundamental human rights and profit motive away and in the extreme case give way for an autocratic or totalitarian regime. Islamic economic system in its true sense is not present in any country. It is a blend of natural features present in Capitalism i.e. right to private property, private pursuit of economic interest, use of market forces etc used along with some distinct features derived through Islamic economic teachings i.e. interest free economy, moral check on unbridled self-pursuit and provision of socio-economic justice to achieve the goals of Socialism as far as is naturally possible without denying individual freedom and profit motive.
    Keywords: Economic Systems; Interest free economy; Interest free finance; Capitalism; Socialism; Communism; Islamic Economic System; Theoretical economics; Marxism
    JEL: A13 B52 A14
    Date: 2009–12
  8. By: Rabah Arezki; Markus Bruckner
    Abstract: We examine the effects of oil rents on corruption and state stability exploiting the exogenous within-country variation of a new measure of oil rents for a panel of 31 oil-exporting countries during the period 1992 to 2005. We find that an increase in oil rents significantly increases corruption, significantly deteriorates political rights while at the same time leading to a significant improvement in civil liberties. We argue that these findings can be explained by the political elite having an incentive to extend civil liberties but reduce political rights in the presence of oil windfalls to evade redistribution and conflict. We support our argument documenting that there is a significant effect of oil rents on corruption in countries with a high share of state participation in oil production while no such link exists in countries where state participation in oil production is low.
    Keywords: Corruption , Economic models , Fiscal policy , Fiscal transparency , Governance , Oil exporting countries , Oil production , Oil revenues , Political economy , Public enterprises ,
    Date: 2009–12–04
  9. By: Shaikh, Salman
    Abstract: According to Islamic principles for investments in stocks, market price per share should be greater than net liquid assets per share. It may suggest that this principle restricts investments in the stock of liquid companies. Creditors prefer a favorable Current and Quick ratio but shareholders are not exactly happy when the company has immense liquidity. Excess liquidity implies the company has excess funds, but it has not invested them in its operations fully. There is a trade-off between profitability and liquidity companies have to make. Cash equivalents and marketable securities usually yield a return that is negative in real terms in most developing countries. The interests of creditors are managed by another principle that if a company has financed a portion of its assets with interest bearing debt; then, the interest bearing debt should not be more than 40%. Debt financing is a double-edge sword. Leveraged companies can magnify their returns in booms, but in slumps, they lose the edge and can even go bankrupt and make both their shareholders and creditors suffer. Debt financing results in a zero-sum game in which at least one stakeholder i.e. shareholders or creditors suffer. Equity financing ensures normal returns in booms and survival in slumps. Therefore, the company will not be squeezed of liquidity as interest expense as an ‘autonomous expense’ will not feature as a significant portion of total operating expenses. But, how to become shariah compliant is a logical question to ask at this point. There are certain principles that need to be followed to become shariah compliant. This paper will discuss how a company can become a shariah compliant KMI-30 company by using economic models and established deductive knowledge in Economic, Finance and Portfolio theory.
    Keywords: Islamic Mutual Funds; Islamic Finance; MM Theory; Capital Structure; Leverage; Financial Ratios; Mutual Funds; Equity Financing
    JEL: G11 E44 G20
    Date: 2010–01
  10. By: Shaikh, Salman
    Abstract: This unique study discusses the theory of taxation in Islam and the role of Zakat in an Islamic economy. Zakat is a compulsory payment i.e. a tax in this sense paid to the government on one’s income and wealth. The Zakat rates are studied for their viability and effectiveness to fulfill fiscal needs of the government. Based on the evidence from many countries, it is argued that Zakat rates are substantial enough to generate the needed public finance given the large tax base and free the government from using seignorage and deficit financing. Its compulsory nature both as per law of the land and as per religion would ensure minimum tax evasion and its progressive and direct nature would effectively redistribute income. The effect of Zakat on the overall macroeconomy, the financial system, monetary system, property market, stock market, inflation, foreign debt, balance of payments, FDI and the on the development oriented variables like inequality and poverty are also discussed to give a holistic view of the effects of the proposed system.
    Keywords: Interest free economy; Public finance; Taxation; Inequality; Income redistribution; Islamic Economic System; fiscal policy; deficit financing.
    JEL: E62 H2 H3
    Date: 2009–12
  11. By: Shaikh, Salman
    Abstract: This paper suggests an alternate approach to corporate finance in an interest free economy by looking beyond practiced Islamic finance and suggesting alternatives for corporate finance in sourcing funds i.e. i) Ijara with embedded options, ii) limited liability partnership, iii) equity modes like Musharakah and Mudarabah iv) income bonds and v) convertible income bonds. It also suggests alternatives for corporate finance in using funds i.e. i) Islamic income funds, ii) Islamic REITs, iii) Treasury Bonds, iv) income bonds v) convertible income bonds, vi) foreign currency reserves, vii) making strategic expansion, and viii) equity investments in other companies. It also suggests methods of valuation by suggesting an alternate means of pricing capital in interest free economy and use of appropriate discount rate i.e. Nominal GDP growth rate in public finance and corporate finance in CAPM, dividend discount model, project valuation, calculating NPV, valuing income bonds and stocks. It also discusses how the problems of scarcity of capital will be solved and alternatives for insurance in an interest free economy.
    Keywords: Islamic corporate finance; pricing of capital; Islamic public finance; scarcity of capital; Interest free economy; Interest free finance; Zakat; Usury; Time value of money; CAPM; Project evaluation; NPV; FCF
    JEL: E44 G00 G30
    Date: 2009–12
  12. By: Alper Duman (Department of Economics, Izmir University of Economics); Arne Heise (Department of Socioeconomics, Hamburg University; Department of Economics, Izmir University of Economics)
    Abstract: The world is experiencing its worst recession in 80 years. What started as US sub-prime financial turmoil has developed into the first global recession since the infamous ‘Great Depression’ of the early 1930s. However gloomy the perspectives for the very short term are, there will be a recovery eventually. South Africa, Brazil and Turkey (SABT) are among those countries that may be expected as emerging market economies (EME) not only to continue to converge towards per-capita income levels of highly developed nations but also to be the best candidates – next to China and India – of serving as the locomotives of world GDP- and trade growth after the depression. Of course, whether SABT are not merely potentially in a position to create a brighter future for their people and the world economy but can transform such potentials into reality, depends on economic governance pursued by governments and collective actors in these countries. Therefore, it appears interesting to inquire into the macroeconomic governance structures of SABT in order to assess their capabilities for enhancing growth and employment and to converge to the OECD average in the medium to long run.
    Keywords: Market constellations, policy regimes, institutions, Post Keynesianism, comparative economic systems
    JEL: O11 O17 P51 P52
    Date: 2009–12
  13. By: Shaikh, Salman
    Abstract: Interest is prohibited in all monotheist religions; however, it features as an essential element in practiced capitalism. Interest based financial system has created two major havocs in last two decades i.e. in East Asia in 90s and in the Great Recession since 2007. This paper highlights the extent of development problems faced by the world. With interest at zero bound in U.S since 2008 and with unemployment at 11% level, scarcity of capital cannot solely explain this. However, interest based Microfinance has had mixed results. Interest based lending at Micro level is usually carried out at very high interest rates, more so when the lending takes place informally without institutional intermediation. Institutional intermediation serves a good purpose, but it can also be designed using equity modes of financing. This can relieve the financee and increase diversity of entrepreneurial activities as in debt based microfinance, not much diversity can happen with compulsory servicing of debt. The related questions as to how the institutional arrangement would work to carry out this system, how documentation problems be resolved, how trust level can be created, how effective monitoring can be undertaken and how the intermediaries generate finance themselves and mobilize funds are answered in this paper.
    Keywords: nterest free economy; Public finance; Taxation; Inequality; Income redistribution; Islamic Economic System; fiscal policy; deficit financing.
    JEL: L38 I31 O10
    Date: 2010–01
  14. By: Alexandre Chailloux; Dalia Hakura
    Abstract: The paper analyzes the U.A.E.'s liquidity management framework in the context of the 2008 global financial crisis and the measures taken by the Central Bank of the U.A.E. to ease liquidity pressures in the second half of 2008. Drawing also on an empirical analysis of data for 15 U.A.E. banks through end-2008, the paper emphasizes the importance of making available to banks additional instruments to manage their liquidity as well as to strengthen the monitoring of a more comprehensive set of liquidity risk indicators. As regards the former, the paper discusses the merits and scope for the U.A.E. to introduce a domestic bond market.
    Keywords: Banking sector , Central bank policy , Exchange rate regimes , Financial crisis , Financial instruments , Global Financial Crisis 2008-2009 , Liquidity management , Monetary measures , Monetary policy , Monetary unions , United Arab Emirates ,
    Date: 2009–12–01
  15. By: Shaikh, Salman
    Abstract: This paper discusses the ethical void in Capitalism which does not look prominent in welfare societies and states. But, its effects become more eminent in tough economic conditions and more so in developed regions where economic relationships by themselves will not result in win-win situation for all parties concerned in a Capitalist economy. Unbridled pursuit of self interest, moral relativism, inventive-led economic choices and apathy to communal responsibilities would lead to a society where economic interests become the sole basis of maintaining and sustaining relationships. This inner void of identity and purpose at individual level and social void in the form of a stratified society bound together only for economic interests can be better filled with incorporating religion. Humans are much more than utility driven species, they are capable of using both instrumental and critical reasons to differentiate right from wrong and need reinforcement to adopt virtues influenced by an inner urge other than material interests as in Capitalism. This inner urge can be rekindled by looking beyond utility maximization to re-acknowledge the fundamental identity that humans are moral being than just an instrument for material advancement.
    Keywords: Interest free economy; Interest free finance; Capitalism; Business Ethics; Islamic Ethics; Morality; Idealism; Moral Relativism.
    JEL: Z12 A13 A14
    Date: 2010–01
  16. By: Levent, Korap
    Abstract: In this paper, we aim to test the empirical validity of the QTM relationship for the Turkish economy. Using some contemporaneous time series estimation techniques, our estimation results reveal that stationarity characteristics of the velocities of currency in circulation and the broad money aggregate in the economy cannot be rejected through a quantity theoretical co-integrating long-term variable space. We find that there exists an about one-to-one proportionality between money and prices and money and real income, and that the exogeneity of money cannot be rejected for the currency in circulation in the economy. But, the exception here comes from the broad monetary aggregate used in the QTM equation such that money seems to be endogenous as for the long-term variable space.
    Keywords: Money ; Prices ; Income ; Quantity Theory of Money ; Co-integration ; Long-span Data ; Turkish Data ;
    JEL: C32 E51 E52 E61
    Date: 2009
  17. By: Rolando Avendaño; Javier Santiso
    Abstract: Global allocation of capital and fluctuations in asset prices are increasingly influenced by the activities of Sovereign wealth funds (SWFs). The Santiago Principles called for higher transparency, stressing that SWFs should exhibit clearer governance standards and sound portfolio management principles. Although asset allocation strategies for these funds are not known, SWFs are suspected to follow other factors besides risk-return objectives. This paper attempts to shed light on some of these concerns. The fear that sovereigns with political motivations use their financial power to secure large stakes in Western companies is shown to be unfounded. We find that SWF investment decisions do not differ greatly from those of other wealth managers. We propose to use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investment at the firm level and analyse these investments on a geographical and sector basis. Moreover, we compare target investments for these two groups by looking at the political regime in the sending and recipient country, under the hypothesis that this variable is not determinant for SWF investments. Finally, we provide a comparison of SWFs and other public funds based on governance features related to investment. We argue that double standards for regulation should be avoided and efforts to achieve higher transparency should be made by all investing actors.<BR>L’allocation globale de capitaux et les fluctuations des prix des actifs sont de plus en plus influencées par les activités des fonds souverains. Les Principes de Santiago appelaient à davantage de transparence, insistant sur la nécessité pour les fonds souverains de clarifier leurs standards de gouvernance et de renforcer leurs politiques de gestion de portefeuille. Bien que leurs stratégies ne soient pas clairement identifiées, les fonds souverains sont soupçonnés de répondre à des objectifs autres que ceux liés au ratio risque-rendement. Cet article tente de répondre à ces questions. La crainte de voir les fonds souverains guidés par des motivations politiques utiliser leur pouvoir financier pour s’assurer de larges parts dans les compagnies occidentales se révèle infondée. Nous montrons que les décisions d’investissement des fonds souverains ne diffèrent pas fondamentalement de celles d’autres gérants de fonds. Nous proposons d’utiliser les fonds mutuels comme catégorie de référence pour l’étude des allocations d’investissement des fonds souverains. Nous recueillons des données sur l’investissement des fonds souverains et des fonds mutuels sur les marchés d’actions et analysons leurs stratégies géographiques et sectorielles. Nous comparons ensuite les investissements pour ces deux groupes d’investisseurs en regardant le régime politique dans les pays émetteur et destinataire, sous l’hypothèse que cette variable n’est pas déterminante quand ils investissent. Enfin, nous effectuons une étude comparative des fonds souverains et d’autres types de fonds à partir de l’analyse de certains aspects liés à la gouvernance et la politique d’investissement. Nous déconseillons fortement l’instauration d’une régulation fondée sur le principe du« deux poids, deux mesures » et recommandons d’accentuer les efforts en faveur d’une plus grande transparence de la part des investisseurs.
    Keywords: asset allocation, benchmarks, political regimes, regulation, sovereign wealth funds, allocation d'actifs, fonds souverains, régimes politiques, régulation
    JEL: F21 G11 G18 O57
    Date: 2010–01–03
  18. By: El Bouhadi, Abdelhamid; Achibane, Khalid
    Abstract: The uncertainty plays a central role in most of the problems which addressed by the modern financial theory. For some time, we know that the uncertainty under the speculative price varies over the time. However, it is only recently that a lot of studies in applied finance and monetary economics using the explicit modelling of time series involving the second and the higher moments of variables. Indeed, the first tool appeared in order to model such variables has been introduced by Engel (1982). This is the autoregressive conditional heteroskedasticity and its many extensions. Thus, with the emergence and development of these models, Value-at-Risk, which plays a major role in assessment and risk management of financial institutions, has become a more effective tool to measure the risk of asset holdings. Following the current financial debacle, we give the simple question about the progress and some achievements made in the context of emerging and pre-emergent financial markets microstructure which can sustain and limit the future fluctuations. Today, we know that the crisis has no spared any financial market in the world. The magnitude and damage of the crisis effects vary in the space and time. In the Moroccan stock market context, it was found that the effects were not so harmful and that the future of these markets faces a compromise or at least a long lethargy. Indeed, inspired by these events, our study attempts to undertake two exercises. In first, we are testing the ability of the nonlinear ARCH and GARCH models (EGARCH, TGARCH, GJR-GARCH, QGARCH) to meet the number of expected exceedances (shortfalls) of VaR measurement. In second, we are providing a forecasting volatility under the time-varying of VaR.
    Keywords: Market Microstructure; ARCH Models; VaR; Time-Varying Volatility; Forecasting Volatility; Casablanca Stock Exchange.
    JEL: G14 C53 C52 G18 C22
    Date: 2009–12–20

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