05/21/08by Joe Saddi, Karim Sabbagh, and Richard Shediac
A transformation is taking place in the Middle East — growing stability resulting from the spread of a diversified, open economy. Thus far, signs of this phenomenon have resembled a far-off oasis in the desert. If this economic oasis can flower, the future of the Middle East is very hopeful.
No longer dependent exclusively on oil, the region is a hotbed of new private enterprise. The government-controlled monopolies of the past are being deregulated. High tech, manufacturing, petrochemicals, and consumer packaged goods are all on the rise, and opportunities for investment abound.
Pursuing sustainability
Today, Middle East countries are using extra revenue to reduce foreign debt, boost liquidity, develop trade ties, and attract foreign investment. Governments throughout the region realize that to achieve sustainable wealth, they must develop a middle class and a thriving job base. Because the population is young and unemployment is high, this approach is even more vital: People with a stake in the future do not want to tear the fabric of their countries.
Globalization is transforming the region. Middle East firms are buying assets in the West and joining the World Trade Organization. Leaders are committed to progress, and the region’s consumers are becoming more sophisticated.
All this change, however, remains largely unseen by outsiders. The Middle East continues to be misunderstood as a result of its innate paradoxes, detailed below.
Late yet eager
There is a rhythm to the region’s economic development. First comes a long period of incubation. Then, once a decision is made, development moves with astonishing rapidity.
For instance, the deregulation of the telecommunications sector in Saudi Arabia began in 1998. Just four years later, the Saudi Telecommunications Company held a public offering valued at around $4 billion. (The U.S., in contrast, took decades to deregulate its own telecommunications sector.) And the power, water, and insurance sectors in the Middle East are preparing for similar evolutions as they, too, deregulate.
Risk averse yet bold
Faced with a prevailing aversion to risk taking in their countries, some government leaders have boldly jump-started change, sending signals to the private sector and larger society.
Bold steps to improve education are especially needed in particular countries. Jordan, deprived of the oil-based income that its neighbors enjoy, has concentrated on developing its young people. Schools have been refurbished, teachers have been trained, and the entire system will soon be networked with high-speed broadband. Qatar is also harnessing technology for learning, planning for all schools to be technology-enabled by 2012, with students and teachers continuously interacting across the globe. Saudi Arabia is building an international, graduate-level research university dedicated to science and technology, open to both women and men.
Traditional yet progressive
The Middle East’s decision makers are fundamentally progressive; they recognize that their institutions must change. But they want to prosper without losing their cultural identity. Modernization is valued, but only within traditional parameters.
This tension is exemplified by the Islamic system of banking, which is guided by sharia laws. Islamic banking has introduced sharia-compliant derivatives, hedge funds, and structured finance. This new breed of banking is now growing 15 to 20 percent annually across the globe.
Focused yet flexible
A dynamic business plan is constantly recalibrated as conditions change. The same market that is regulated one day may be deregulated the next; focus and flexibility must coexist.
Some Middle East policymakers, especially those who depend on oil, may feel uncomfortable with such flexibility. But they are getting used to experimentation. Governments are developing special economic zones and luring new capital via tax breaks and favorable regulations. Certain zones, like Dubai’s Internet City, seek to cluster industry around a central theme.
Ambiguous yet determined
Some outsiders may not recognize the depth of the Middle East’s determination to transform, because they perceive leaders as resistant to change. But Middle East leaders are seeking to learn from others while tailoring solutions for their own country. Democracy is one area in which the region is consistently progressing. For example, Kuwait’s parliamentary elections in 2006 allowed women to vote and stand as candidates for the first time.
Leaders are also determined to build more democratic governance through gradual public involvement in the political arena and increased government accountability.
Exclusive yet diverse
As the Middle East economy diversifies away from oil, human capital — brainpower and skilled labor — becomes more important. The region is opening up its borders and its boardrooms to diverse talent.
The “exclusive yet diverse” tension in the region extends to financial capital. Some Middle East countries have begun to allow non-nationals to own property, adding diversity to the population and wealth to the area. Non-nationals are also encouraged to participate in capital markets, increasing investment and accelerating development.
The road to oasis
Foreigners doing business in the region should combine an understanding of its paradoxical tensions with sensitivity to the traditions that have produced them. Any recommendations should be presented to Middle East leaders in a way that acknowledges the challenges involved.
The Middle East may be developing an economy that is different from any that preceded it. The decision makers leading the way must create the solid infrastructure and middle-class opportunities needed for the region to compete on a global level. If they can create this unique economy, the oasis blooming today will become a fertile, sustainable valley.