The Middle East's Study in Contrasts
"It was the best of times, it was the worst of times." Those famous lines from the beginning of the Charles Dickens classic A Tale of Two Cities also apply to the Middle East these days. Huge contrasts were apparent to the business executives and global leaders who participated in the World Economic Forum on the Middle East from May 18 to May 20 on the shores of the Dead Sea in Jordan.
In one room of the conference center, perched on the dry cliffs above the viscous blue waters, a pointed debate took place between David Rubenstein, managing director of buyout giant Carlyle Group, and Omar Kutayba Alghanim, executive director of Alghanim Industries, a large Kuwait-based family business. Rubenstein has been working carefully to create a welcoming climate for his firm in the area. Yet the 34-year-old Alghanim, one of the key business leaders at the WEF, scoffed at the need for the likes of Carlyle when there was already "an overhang of capital" in the area. He compared the arrival of private equity in a Middle East awash with oil money to offering yet another pie to the overstuffed winner of a pie-eating contest.
Rubenstein responded tartly that if he were the head of a large family business that was doing well, he wouldn't want a lot of private equity firms coming into the Middle East, either. The big family firms in the region, of course, hold a lock on many businesses, including sales of automobiles and other imports.
A few hours later, WEF participants were treated to a sometimes harsh exchange between Iranian Foreign Minister Manouchehr Mottaki and Abdulaziz Sager, a United Arab Emirates (UAE) academic. Sager, who is chairman of the Gulf Research Center, a think tank in the UAE, argued that by confronting the U.S. and interfering in the politics of various countries, Iran was putting its neighbors at risk without even consulting them. Mottaki waved off such concerns, insisting that Iran was a democracy that had the right to refuse to accept the presence of "foreign forces," meaning the U.S., in the region. "Please, brother Abdulaziz, accept the will of nations," he said.
Wars and the sort of environment required for private equity would not appear to be able to coexist easily. Parts of the region are going through bad times. Unspeakable violence continues in Iraq. Internecine fighting among Palestinians has never been worse. The possibility of a military confrontation between the U.S. and Iran has not been completely defused. Yet at the same time, much of the area is being seared not by bombs but by an economic boom. Saudi Arabia and the other Arab oil states around the gulf continue to pile up petrodollars and plough them into consumption and projects, which should be enough to sustain high growth even though oil prices have dipped somewhat.
Even Egypt, once a laggard, is enjoying gross-domestic-product growth at an annual rate of over 7%. In an interview, Rachid Mohamed Rachid, the country's trade and industry minister, confessed that the numbers Egypt is chalking up—including foreign direct investment in the $8 billion to $10 billion per annum range and export growth of 46%—are better than those "imagined" by Prime Minister Mohammed Nazif's business- and technocrat-led team when it took power three years ago.
What's going on here? Some business thinkers say that economic growth and reform in the region have picked up sufficient momentum that will be very difficult to knock off track. People have become so inured to endemic violence in certain countries that a bomb here or a small war there doesn't kill business confidence, theorizes Rachid. "There is a sense of immunity taking place, like vaccines," Rachid says. "Look at the gulf [where Iraq is burning and Iran continues to play nuclear games]—five kilometers away no one cares."
Gulf Growth Sans Government
Weighing heavily on business leaders' calculations, Rachid says, is another trend: Governments are reducing their interference in business and letting the private sector take the lead in economic development. After 50 years of sometimes disastrous political experiments, most governments in the region are finally realizing that it is in their interest to help rather than hinder private business. The change of attitude is paying off from Algeria to Pakistan. "I used to be very critical of governments five years ago, but a lot has changed," says Mohammed Ali Alabbar, chairman and founder of Dubai-based Emaar Properties, which has projects in 16 countries.
Certainly, the hot growth and the natural resources of the region are attracting more attention from international business. Martin Sorrell, CEO of London-based global advertising giant WPP Group, said that in the Gulf Cooperation Council states (a group that includes Saudi Arabia and the small Arab states around the gulf), his group's revenues, now about $250 million per year, were rising at a rate of 25% per annum.
And investment is on the rise. Dow Chemical (DOW), for instance, has just agreed to build a massive petrochemical complex in Saudi Arabia in a joint venture with Saudi Aramco, the national oil company, at Saudi Aramco's key export center, Ras Tanura on the gulf. The facility, which will include up to 30 individual plants, will be the largest ever built at one time, says Earl Shipp, Dow's Dubai-based president for basic chemicals. The company has also taken a 20% stake in another complex in Libya at Ras Lanouf.
Shipp says Dow is attracted to the gas feedstocks on offer from Saudi Aramco, the world's largest oil producer. He also says that the gulf is a useful manufacturing point for export to the fast-growing markets in Asia, particularly India. While Shipp concedes there are long-term investment risks in the Middle East, he notes that it would be wrong to regard a multibillion-dollar investment in a petrochemical plant in the U.S. as risk-free. For instance, he says, there is always the possibility that new regulation or litigation could add to the cost of doing business over the life of a U.S. plant. "There is country risk in the U.S. from a business perspective," he says. The best way to offset risk is to "be in both places."
Siting a petrochemical plant in the territory of the world's largest oil producer seems to make unassailable sense. But whether the way is now permanently clear for across-the-board, business-led growth in the region is questionable. It was interesting that all four analysts on a panel about the future of Islamists in regional politics agreed that parties with an Islamic program were gaining influence across the region—despite the economic boom. "All [the secular] political parties failed to achieve what the people want," said Abdul Hadi Majali, speaker of Jordan's Parliament. "When you fail to achieve any aspirations, then you go to revolution. That is why the Muslim parties succeed."
Focus on the Next Generation
Most businesspeople—and indeed many other residents of the Middle East—will tell you that governments still fall far short on educating and training their fast-growing, youthful populations for the ever-changing 21st century world. The benefits of the boom are also, they say, not trickling down to ordinary people fast enough. It is widely perceived in countries such as Egypt that the rich are getting richer while the poor, though finding more jobs, are also being burdened by rising costs of living.
One of the more far-sighted leaders in the region, Sheikh Mohammed bin Rashid al Maktoum, the ruler of Dubai, made the boldest gesture of the conference by pledging to set up a $10 billion foundation to invest in education and related areas throughout the region. In a speech, the Dubai ruler listed the region's very real shortcomings, including spending a tiny 0.02% of GDP on education. Add to that 18% illiteracy among youth under 15, and 43% among women, plus 14% region-wide unemployment. "We have a population where half its members are under the age of 20, and it is our responsibility to develop this human capital to the best of our ability," he said.
Benign economic times are presenting the countries in the region and others interested in its future with a real opportunity to make fundamental changes. Let's hope that wisdom prevails and the opportunity isn't wasted.
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