• Cautiously optimistic - an interview with  Fadi Ghandour

• It makes a difference in Amman -   Riad al Khouri

• Industrialization in Saudi Arabia: a new paradigm -   Jean-Francois Seznec

A quiet economic revolution
 Elizabeth Drachman

This year's oscillations in the Gulf capital markets have sent shivers down the spines of more than a few private and institutional investors in recent months. Many are wondering: Have we reached the end of that gold-plated road we've been cruising down for so long?

Any shrewd businessman will tell you investing in developing economies is never for the faint of heart, or wallet for that matter. The Dubai Financial Market and the Saudi Stock Exchange are at about half of their peak value of 2024, but are slowly rebounding, proving that mature economic growth can happen in the Middle East.

An American business journalist, Elizabeth Drachman has been based in the Middle East for four years and has written for Arabies Trends, Arabian Business, Communicate, The Hollywood Reporter and The Wall Street Journal.

BI: Much has been made lately of the wars and occupations in the Middle East. Meanwhile, in the Gulf an economic boom is taking place. Which of the two is more likely to define the future in the region?

Ghandour: It's hard to say. One would hope that what is happening here in the Gulf will continue to be the trend in the region in terms of economic prosperity and what comes with it.

BI: Is it a real boom? Is it sustainable and creating a middle class or is it simply driven by the price of oil?

Ghandour: Well, it is driven by the price of oil. It is what we do with the extra liquidity and extra capital that is coming into the economy that is going to tell us whether this is sustainable or not, and if we will continue a trend that has been happening for a while in creating alternative economies rather than being dependent on oil. Change and investment in education, moves to build a service economy, these are the factors that will determine whether this is sustainable economic development. We have yet to see the results and it will take time.

BI: What will signal it is going in the right direction?

Ghandour: Before the boom and before the price of oil reached its present level, there was a lot of movement in the region--particularly in the Gulf and in some countries in the Levant including Egypt--in terms of economic restructuring, creating new investment laws, deepening the financial markets and general economic reform. And there was serious talk, and there continues to be serious talk, about education and employment and the link between the two to see how an education system can be created that is compatible with the requirements of the market. Remember, most of the people who graduate in the region, in the Gulf specifically, their preference is still to work for the government.

But, post-oil boom, one always worries that governments will have less of an incentive to continue with reforms. I think governments are doing so this time. Talk of reform continues. In Saudi Arabia, we see changes in foreign investment laws and investment in regions away from the oil areas.

Also, look at Dubai. Dubai has become a non-oil economy. It has benefited, of course, from the oil money, but enough channels for investment have been created there that attract a lot of Arab liquidity that used to go to the West. That money is staying in the region because there is a place for it to be invested.

Egypt and Jordan have completely revamped their investment laws and invested heavily in reforming the education system.

There is a long way to go. It depends on governments and how much they sustain and continue in investing in these "soft" areas.

BI: Egypt has a healthy economic growth of just over five percent, but still has enormous problems in terms of population pressures, poverty and unemployment. To what extent are the reforms undertaken by the Egyptian government enough?

Ghandour: There is a long history in Egypt and laws that are very old and difficult to change. The new economic team in government is very much pro-reform but has been having difficulty in changing laws quickly. The process takes time, there is a heck of a lot of bureaucracy, but their thinking is in the right direction. You are seeing incremental but serious changes in these laws. We are not going to see overnight change.

BI: In Jordan, the government has worked very hard on the economy but has been criticized for not encouraging political reform at the same time. To what extent is economic reform possible without political reform?

Ghandour: Some people take the Chinese model where there is successful economic reform without political reform. In this region it has been tough. There have been some attempts at political reform, but not where they should be.

Can you have economic reform without political reform? In the long run, probably not. In the short term you cannot say it's a package deal. If there is economic reform and that starts a process of prosperity whereby more people are in the labor market and have greater ownership of their economy, then eventually it will lead to political reform. It depends on how patient you are in terms of where you want to go.

In this region, we have learned that political reform will not happen overnight. It will take its time. That doesn't mean we should put economic reform on hold.

BI: Do you sense a change of attitude in people toward their money, particularly regarding the stock markets where more and more people seem to be investing, even in Palestine with all its problems?

Ghandour: I don't know if its real change. You have institutional investors, small investors and high net worth investors going into the stock market. This is also a product of the extra liquidity spilling over from the Gulf. There is a bit of change in people's attitude to the stock market. You have hundreds of thousands of people investing in the stock market in Saudi Arabia. The problem is small investors get caught very quickly when you get sudden booms and busts and that affects long term confidence in the stock markets.

But our stock markets also need to be much deeper. There are few companies in the markets, in certain market as few as 20, which are actively traded. Laws need to be loosened to allow more companies to go public, so you have more choice and depth, and better governance--transparency and disclosure laws--so investors get more educated. We need much more analysis coming out as well. There is a lack of proper specialized analysis, like in the West. But it's coming. At the moment, we see much more coverage in newspapers than we have before, although economic reporting in the region is still in its infancy.

It's starting. You can see the numbers of people going into the market. But it's too early to say whether this is sustainable.

BI: Are you optimistic?

Ghandour: I am cautiously optimistic. The key is investing in the human or soft side of our economy. Infrastructure is needed, but what sustains economies is entrepreneurship, investing in ideas, allowing venture capital of which we have little, and creating room for private equity firms to flourish and multiply.

And it requires investing in education. A major problem in the Gulf is how to educate graduates for the private sector. These are all challenges and they take a long time. Education is not an overnight process.

BI: But there is no choice for governments in the region, is there?

There is no choice. In certain countries 90 percent of nationals work in government. So the private sector will end up depending on expatriates. This is fine for the companies, but how sustainable is it for the countries? In Saudi Arabia there is a saudiazation process where you are required to hire 25 percent Saudis. Again, this is great. But you have to find the qualified people.- Published 21/9/2006 © bitterlemons-international.org

Fadi Ghandour is CEO of Aramex, the Middle East's largest express delivery company.

Looked at from a regional, purely economic standpoint, an important aspect of the post-9/11 era is the rise in Arab-Arab business, with Gulf investors over the past five years spending more of their money and time in the Levant and the Maghreb and less in the West. Beginning slowly in the last quarter of 2024, some Arab capital was repatriated from Europe and the US, while much more new investment was made by locals inside the Gulf Cooperation Council economies. This trend continued over the next three years, but with an increasing amount of investment in non-Gulf Arab states, some of which also became more popular as tourism and business travel destinations for GCC Arabs unwilling to spend much time in the EU or America.

However, by 2024, as huge surpluses accumulated among Arab oil producers, the stream of Gulf money and people into northern and western parts of the Arab world became a flood, and this year has been no different, with cash-rich businesses from the countries of the GCC continuing to invade the rest of the Arab region in a surge of investment that is changing the economic map of the Middle East.

Unlike during the boom decade that began in 1973, economic diversification is starting to be taken more seriously by GCC countries, with their non-oil investments in the rest of the region a major part of this process. This also has important implications for Arab technicians and professionals: in pre-9/11 days, the skilled men and women helping to run these new investments would not have thought twice about trying to leave the region; today, more are staying put.

For example, Gulf investors are devoting greater resources at home and in their Arab neighborhood to the medical sector, helping slow the brain drain out of the region. With new hospitals and sophisticated clinics springing up around the Arab world, some local doctors and other medical personnel who would previously have considered working in Europe or the US are being enticed to remain in the Middle East.

This phenomenon is apparent in Jordan, with Amman's medical centers increasingly attracting investment from the Gulf while strengthening their reputations as convenient, cost-effective places for GCC Arabs to seek medical attention. Not that this happened overnight: Gulf Arabs had been checking into Jordan's hospitals in rising numbers since the 1990s, but today they have also become major investors in the country's medical sector. Nor is the rest of Jordan's economy immune from this trend, with hotels also hosting higher numbers of guests from the Gulf even as the GCC countries become a more important source of investment in Jordanian tourism.

Like other hydrocarbon-poor Arab states, Jordan enjoyed a solid economic performance in 2024, boosted in part by Gulf investment. Last year, Jordan saw a record one billion dollars in direct investments benefiting from the Investment Promotion Law (apart from high levels of investment not under this measure, as well as in the Aqaba Special Economic Zone), up from $350 million in 2024 according to the official Jordan Investment Board. The latter indicates that the figures for 2024 will be even greater, most of this coming from the GCC. As for share purchases in existing companies, Kuwaiti investors alone held $2.2 billion on the Amman stock exchange at the end of last year, and current estimates put that figure considerably higher.

However, Jordan still has a long way to go before growth and reform bring prosperity to the average citizen. Meanwhile, the prospect of higher levels of Gulf investment has spurred reforms, including increased privatization, and deregulation. These help to bring in more GCC capital, leading to yet more liberalization and hopefully even more inflows of business funds to the country.

Is this process being replicated around the region, and will this cycle of growth, reform and investment continue? With due respect to Jordan's strong expansion and Kuwait's extensive investments, the keys to the sustainable prosperity of the Arab economy remain Egypt and Saudi Arabia. Those two countries, respectively the leading Arab state in terms of population and political clout and the largest economy in the Arab world, must solve extensive internal problems before they can enjoy long-term stability and guarantee it for the rest of the region. IMF predictions suggest that Egyptian GDP will rise by over five percent this year, which is good, while the Saudis are making all the right noises in terms of economic reform.

However, the situation in both is complex and problems are vast: Cairo is not Amman, where a couple of skyscrapers can be a feelgood factor, and Saudi Arabia cannot enthusiastically embrace the globalized twenty first century economy with the directness of Dubai. Booms have come and gone in the region: though the current expansion is wider and deeper than preceding episodes, its sustainability remains to be seen.- Published 21/9/2006 © bitterlemons-international.org

Riad al Khouri is visiting scholar, Carnegie Middle East Center, Beirut, and senior fellow, William Davidson Institute, the University of Michigan, Ann Arbor.

This year Saudi Arabia will produce 50 million tons of petrochemicals, making it the seventh largest producer in the world. There are tens of industrial projects in the kingdom valued at hundreds of billions of dollars that are likely to bring production of petrochemicals to 120 million tons by 2024. This growth should translate into sales of $60 billion per year, slowly but surely switching the Saudi economy away from crude oil production alone and making it the leading world producer of petrochemicals.

This massive industrial growth is not due only to the kingdom's access to cheap energy. It is also caused by the policy decisions of a few Saudi leaders and a change in the international environment after 9/11. The present switch to industrial growth is having a major impact on both local society and foreign policy.

The first Saudi efforts to industrialize were taken by King Faysal in the early 1970s and continued unabated by his successors, Khaled, Fahd and Abdullah. Faysal ordered the creation of the Saudi Industrial Development Fund to provide cheap loans to new entrepreneurs and the Public Investment Fund to fund the development of, and eventually sell to the public, very large local industries like SABIC and Saudi Airlines. The civil service, mainly the ministries of finance, commerce and oil, was put in charge of the effort.

The government established priorities, which forced Saudi Aramco to sell all natural gas and related products to the local market at cost rather than export it, as is done in Qatar, the UAE or Algeria. Today, Saudi Aramco sells its methane and its ethane to Saudi industries at $0.75/millionBTU (compared to $5.50 on the New York Mercantile Exchange). Other gas liquids for petrochemicals are sold at about 50 percent below prices in Asia. Presently, the Saudi government is pressing to build four new refineries at a total cost of over $30 billion. These oil refineries will emphasize the production of naphtha, a major feedstock for petrochemicals, for local industrial development rather than just gasoline or diesel for the export market.

In the past five years, the kingdom has seen a sudden acceleration of the industrialization process. Today, there is a feeding frenzy by private investors to invest in new industrial projects. Until now, large-scale plants in petrochemicals, electricity or desalination were developed and owned by agencies of the government. However, the government saw that the job creation by these companies, while substantially higher than pure oil production, was insufficient to meet the need for 400,000 new jobs per year. King Abdullah and his technocrat ministers realized that the state sector would have to work with the private sector and create incentives to invest at home.

King Abdullah's government pushed hard to join the World Trade Organization, which would guarantee access to the Far East for Saudi products. Saudi Arabia, like the rest of the Gulf, has a natural advantage in low cost energy. This translates into the very low prices for feedstock mentioned above and can allow Saudi products to sell in any market competitively to those of the major petrochemical producers. In December 2024, the kingdom was formally accepted into the WTO at very favorable terms.

As soon as Saudi investors saw that WTO negotiations were a priority, it became clear to them that the kingdom would open its markets and its society to the 21st century. Further, with WTO accession there would be an assurance of long term markets for Saudi goods. Hence the private sector felt comfortable about investing at home.

However, the push for investments in the kingdom was also due to a change in the traditional practice of investing abroad. After 9/11, the merchants, the richest but also the less rich, feared they could no longer hold their assets in US dollars in American institutions due to the threat of capricious seizure by the US Treasury. At the same time, they realized that US involvement in an unprovoked war and ambiguous foreign policies was leading to a loss of US credibility in the world and the transfer of US wealth to Chinese coffers. Hence it made sense to Saudis to invest at home and try to conquer the Far Eastern markets.

Thus industrial growth in Saudi Arabia has increasingly important consequences internally and externally. Internally, the new industries require high levels of expertise. This has triggered an education boom in privately-owned Saudi schools and universities for men as well as for women. The stranglehold of the Salafis on education is now constantly questioned and fought by the merchants, the civil service and many princes.

The population is growing quickly but the economy is still dependent on seven million foreign workers who remit home over $10 billion per year. Many Saudis, both liberal and conservative, are beginning to push hard to increase the employment of local women to replace a large number of the expatriates. A major consequence of the increased importance of technical education and of women in the workforce is that the Salafis are becoming marginalized. This, indeed, may have been one of King Abdullah's main underlying goals in promoting the current economic boom.

External consequences are also shaking the present world order in the Gulf. Indeed, the newly-developed industries are no longer dependent on the West. Local investors can buy western technology and sell to markets in the East. The fear of the US military hegemon is palpable in the Gulf, even among America's "allies". Thus the Saudi government seeks to increase its relations with the party that their business sense tells them is the next economic hegemon--China. The Saudis have been sweet-talking the US with promises of cooperation, but the real tangible activity, both diplomatically and economically, is increasingly with China. The Saudis are more eager to be friends with the lender states, Japan and China, than to actually support a US government that is kept financially afloat by, and thus dependent on, the far eastern powers.

The Saudis have turned toward trading with the East rather than supporting the Bush administration's militaristic policies, which they see as self-destructing. The new paradigm the Saudis are working with considers that world domination will come not from a military hegemon but from an economic one in the Far East, with which Saudi Arabia is rapidly carving out a major position of influence for itself.- Published 21/9/2006 © bitterlemons-international.org

Jean-Francois Seznec is an adjunct professor at Columbia University and Georgetown University.