The GCC Financial Crisis: Story Revealed (1977–1986) Impacts of Local Content Requirements in Indian Solar Policy

After more than thirty-five years of the Gulf States’ Al Manakh Crisis, the first tangible financial crisis on record for the region, this study revisits in time and investigates the causes and consequences. At a time when the Gulf States were emerging as growing economies from rising petro-dollar revenues, financial markets and institutions collapsed in 1982 due to unregulated credit markets and leveraged speculation in Gulf-based companies resulting in a USD 94 billion of outstanding debt in Kuwait, four times the country’s GDP then. The study conducts an empirical investigation of the macroeconomic causes of the financial crisis by estimating a non-linear probit regression using data covering the period 1970-1996 and a qualitative analysis of regulatory evolution in financial markets during the same period and its impact on market development and investor sentiment. The results show that government expenditure is positive and statistically significant. Associating the probability of the crisis with the government expenditure reveals deficiencies in regulatory enforcement, absence of prudent policies and asymmetric long-term behaviours from various stakeholders that remain to date. Moreover, this study is able to draw a few key findings and suggestions necessary to the causes and lessons of the past financial crises. The results supports previous literature that liquidity, or lack of, can significantly impact financial stability. Furthermore, the lack of decisive regulatory action during the three year hype (1979-1982) caused further speculation in which the government had the chance to captivate before spurring out of control. The final set of findings rising from Al Manakh crisis is the unjustified behaviour of investors towards taking extreme measures for rapid accumulation of wealth. This calls for a comprehensive enforcement of code of ethics and conflicts of interest with regards to officials and legislators. The limitations of neoclassical finance on the prevailing moral hazard caused by the past crises and investor sentiment of government dependence on bailout calls for the theoretical frameworks and applications of behavioural finance to better comprehend the intuition of decision makers, regulators and investors.