March 10, 2008

Oasis Economies - Creating a Fertile Oasis for the ‎Sustainable Future of the Middle Eastern Economy

Surrounded by tension and unnoticed by many observers, the ‎nations of the Middle East are building their own kind of ‎sustainable prosperity. ‎

Dubai, UAE, 10 March 2008 – While political tensions in the Middle East often grab international headlines, relatively little is written about a growing source of stability within the region - the rise of a diversified, open economy, no longer exclusively dependent on oil revenues, said a new report by Booz & Company.

The region’s economic development continues to gain momentum, despite being largely unrecognized. If this economic oasis can flower, it suggests the future of the Middle East is more hopeful - and more complex, than many realize.

Skepticism and Sustainability

Deregulation and privatization have become tangible very recently in the Middle East, leading people to question; if this seeming mirage is real, then why now? What is spurring it?

“Today, oil-producing countries, mainly those in the Gulf, use extra revenue to reduce foreign debt, boost liquidity, develop trade ties, and attract foreign investment,” commented Joe Saddi, a Senior Vice President with Booz & Company. They are determined to build wealth for themselves and make the current oil boom pay off in the long run.

Governments are looking at a number of ways to achieve sustainable wealth. They realize they must develop a middle class, along with the sort of job base that can sustain it. In a region where half of the population is below the age of 20 — and where the unemployment rates can be considerable— a sustainable middle class is an even more viable solution to long lasting economic expansion and political stability.

Today’s Middle East is different; “The region’s leaders are committed to catching up to, and in many cases surpassing, the rest of the world in terms of economic vitality,” commented Richard Shediac, a Partner with Booz & Company. This is largely due to visionary individuals in positions of authority who are eager for progress and willing to move quickly.

However, the region’s progress often goes unseen due to stereotyping and the region being misunderstood. There are a number of innate paradoxes governing the mind of the Middle East decision maker, which are essential facets of the region’s business culture. Understanding the attitudes and assumptions that shape the way business is conducted makes it easier to recognize future opportunities and navigate the challenges that lie ahead.

Late Yet Eager

Those familiar with business in the Middle East will recognize a specific rhythm. Economic developments move with astonishing rapidity - following a long period of incubation before a decision is finally made.

The deregulation of the telecommunications sector in Saudi Arabia started in 1998. The industry operated like many other sectors in the Middle East, but Saudi Arabia decided to open up to competition, spurred by a desire to become more efficient and by an interest in joining the WTO. “Only four years later, the Saudi Telecommunications Company sold 30 percent of its shares in a public offering valued at around $4 billion,” commented Karim Sabbagh, a Partner with Booz & Company. Investors demonstrated the market’s readiness by offering to buy $9.6 billion worth of shares. Overall, the deregulation has had major effects on quality of service and pricing.

The “late yet eager” mentality may reflect regional leaders’ desire to avoid laissez-faire economics, by developing legislation that enables a smooth transition and restructuring state-owned companies. This cautious approach ensures privatization efforts are successful and that new entrants can enter the market at a favorable time.

Risk Averse Yet Bold

The desire to modernize rapidly is expressed in bold, creative decision making. Some leaders took brash actions to effect change and send signals to the private sector and society. The private sector then followed suit - Palm Island and other initiatives in the UAE are examples of daring actions that created momentum for change. Bold decision making in one key project sets the course for others to follow.

“The need for bold steps to turn around education systems is felt strongly in the labor-abundant and resource-poor countries of the region,” Shediac commented.

In boasting; “our people are our greatest asset,” Jordan’s Education Reform for the Knowledge Economy Initiative brought together 17 Jordanian organizations, 17 global corporations, and 11 governmental and nongovernmental organizations to implement a public–private partnership model in 2003. Information and communications technology (ICT) firms sought to develop local high-tech skills, hundreds of schools have been refurbished, teachers trained, and the entire Jordanian public school system will soon be connected by a high-speed broadband network.

Qatar’s leaders have prioritized creating a cutting-edge school system that harnesses technology for learning. The country’s Supreme Education Council (SEC) is playing an integral role in the development and implementation of major reform in the schools.

A similar bold commitment to progress is Saudi Arabia with the King Abdullah University of Science and Technology - an international, graduate-level research university dedicated to scientific achievement.

Traditional Yet Progressive

Decision makers in the Middle East are fundamentally progressive, despite the region being tradition- bound. They face the challenge of how to grow and prosper without losing their cultural identity and there is a constant tension between modernizing and Westernizing in the region. Modernization is valued - within traditional parameters.

“The Islamic banking system guided by Sharia law highlights the tension,” explained Shediac. Modern Islamic banking has emerged and the region is the incubator for this industry, which is growing at a global annual rate of 15 to 20 percent.

Focused Yet Flexible

In today’s global market fixed business plans don’t exist and in the Middle East, decision makers tend to follow a five-year planning cycle, but never consider these plans to be permanent. They realize the importance of a clear direction, but with so many economic changes, strategies must be open to rapid change. A market that is regulated one day may be deregulated the next: focus and flexibility must go hand in hand.

Governments facing challenges in opening the economy to foreign investment are developing special economic zones, luring capital to contained, controlled environments. “Many Middle Eastern countries are experimenting with smaller economic oases that limit risk — a sign of focused yet flexible planning and a change from attempting transformation on a national level,” commented Shediac.

Ambiguous Yet Determined

Outsiders may not recognize the depth of the region’s determination to grow economically, from pushing to replicate practices in the Middle East that have proved successful elsewhere. The Middle East’s leaders are seeking to learn from the experiences of others, while adopting tailored solutions that will work best within their countries.

“Democracy is one such issue in which the region is consistently progressing,” Shediac commented. Some parts of the MENA region introduced universal suffrage early on, including Lebanon (1952), Egypt (1956), Morocco (1963), and Jordan (1974).

Other parts are introducing gradual reforms. During the recent restructuring of the Abu Dhabi government, a foundation was laid for municipal councils with local representation. Similarly, Saudi Arabia introduced elections at the municipal level in 2005. Women have begun to stand as candidates in these elections; they have been elected to membership in the chamber of commerce and industry in the city of Jeddah. In 2006, Kuwait’s parliamentary elections allowed women to cast ballots and stand as candidates for the first time.

Exclusive Yet Diverse

Human capital is increasingly important as the region’s economy moves away from oil dependency. The region is welcoming diverse talent, and is ensuring it can retain this talent, while nurturing its own.

The “exclusive yet diverse” tension in the region extends to financial capital. In a bid to attract foreign investment, a number of Middle Eastern countries have begun to allow non-nationals to own property, thus increasing the number of long-term residents who create wealth and add diversity to the population.

“Incentives have also been implemented for non-nationals who want to participate in capital markets; such incentives attract a higher rate of investment and accelerate development,” Saddi commented. This has prompted the region’s professionalism and transparency to increase.

The Road to Oasis

“The emergence of a new regional, diversified economy is a fundamental shift that will affect corporate investment and geopolitical activity,” stated Sabbagh. The Middle East may be developing a new type of economy, different from any other that has preceded it.

This phenomenon is being spurred by a broad group of decision makers trying to build a bridge between Middle East culture and its economic potential. They understand that if the region is to thrive, they must foster the innate entrepreneurial spirit of their people, and create the solid infrastructure needed to compete on a global level and provide a range of middle-class opportunities for people who would otherwise be disenfranchised.

If they manage to create this unique economy, the oasis blooming today won’t be a mirage, but an attractive, sustainable, fertile valley.