Don't Overlook the Middle East for Business

Posted by: Kirk Galster, Global ChamberŪ Salt Lake City on Thursday, April 6, 2017

There's an unfortunate stigma for business in the Middle East and North Africa as being unstable and high risk. That clouds the view of many business leaders, thus ensuring that they miss out on great opportunities in emerging markets in the region. Now is the time to reconsider investment there.

In the coming years, the Middle East and North Africa (MENA) region may become the most important developing economy for global opportunities. The fact is the decline in oil prices and the continuing trend away from fossil fuels is an important reason why the Middle East is becoming more valuable as an investment destination. This is contrary to popular belief that the oil industry is the only opportunity available in the MENA region. Likewise, often misguided concepts about Islamic and Middle Eastern Law or unstable political situations frighten potential investors away. As other developed economies, such as the EU, face growing instability in coming years with extreme inflation in parts of the EU and the exit of the United Kingdom and potentially other countries, developing economies will become more important. This is both in terms of diversification of revenue streams from traditional markets and the increase in expected returns in developing economies.

The Middle East consists of 17 countries and a population of about 400 million (World Population Review, 2016). Given the location and the rich history of the Silk Road as well as the Fertile Crescent, the MENA region has historically been an important location for education, commerce, and entrepreneurship. Today some of the wealthiest nations and cities in the world are located in the Middle East primarily due to oil wealth. However, as oil declines and economic trends shift away from fossil fuels, the Middle East is investing heavily in diversification of economic activities. The oil industry has left the majority of MENA countries’ economies “crowded out” due to the extensive investment in oil and lack of investment in other economic sectors (Hvidt, 2013). The economy is changing and especially among the Gulf Cooperation Council (GCC) nations.

Three distinct issues around the oil industry have caused the GCC to seek to diversify their economic activities:

  1. The finite nature of hydrocarbons,
  2. The price and demand fluctuations of oil, and
  3. The fact that the fossil fuel industry alone is essentially the only source of wealth for their economy.

State-led wealth distribution and the reliance on migrant labor further establishes an economic climate that stifles growth (Hvidt, 2013). The GCC is a political and economic alliance made up of six middle eastern countries: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman. The GCC has been taking practical steps since the 1970’s towards diversification. Early examples of this are notable projects like aluminum smelting in Bahrain, the establishment of industrial cities of Yanbu and Jubail in Saudi Arabia, and the ports in Dubai were all undertaken with the sole purpose of diversifying the economies by means of investing oil revenues into productive assets (Hvidt, 2013).

Bahrain has committed to establishing Foreign Direct Investment by establishing a Free Trade Agreement (FTA) with the United States and established that mediocrity is not tolerated in the labor market between nationals and migrant competition for labor. Kuwait has implemented a strategy to become a financial and trade hub for the region by investing $77 billion in a deep sea port. Oman allocated more than half of its total spending during 2011-2015 on infrastructure development including roads, airports, seaports, water, and housing in order to create a favorable investment environment. Qatar has implemented reform to bolster entrepreneurship, streamline regulations, and strengthen the overall legal framework for entrepreneurs including investing 5% of its GDP on education. Qatar has also liberalized the law concerning Foreign Direct Investment (FDI).

Saudi Arabia has a population of 27 million and 8.4 million are non-nationals. It literally sits on 19 percent of the world’s proven oil and has established industrial prowess within the petrochemical, crude processing and output, and oil production industry. The size and duration of their petrochemical industry and the habit of relying on it for the future ensures that challenges will lie ahead for reform. Due to this, Saudi policy has a distinctly neo-liberal flavor favoring the private sector and a market driven economy. FDI is central to the strategy of diversification by improving opportunities for foreign business operations. As a result, the 2012 World Bank Doing Business Index rating for Saudi Arabia was the twelfth easiest place in the world to do business (Hvidt, 2013).

Likewise, the United Arab Emirates aims to be  among the best countries in the world to do business. The UAE Cabinet stated, “We want the UAE to sustain its drive toward economic diversification, as this is the nation’s surest path to sustainable development in a future that is less reliant on oil. This means expanding new strategic sectors to channel our energies into industries and services where we can build a long term competitive advantage” (Hvidt, 2013). This includes a focus in sectors such as aviation and other services industries such as trade and commerce (Hvidt, 2013).

Several characteristics that classify the Middle East’s development are strong investments in technology, education, and services. For example, the GCC’s healthcare market has experienced stable growth in the past years and is promising as a reliable engine for economic diversification, driven by an ever increasing ageing demographic and increased healthcare expenditure per capita. Given the rising demand of healthcare services and the lack of supply for healthcare, governments are implementing new technology, systems of care, and expanding international healthcare partnerships (Arab Health, 2015).  Foreign Direct Investment is a primary means of growth and incentives such as Free Trade Agreements (Bahrain and Jordan with the US), duty free zones, and increased business incentives are making the MENA region a more accessible opportunity to do business and market to grow your corporation internationally.

Kirk Galster, M.S., Global Advisor, Global Chamber® Salt Lake City

Kirk served in the U.S. Army in Iraq and Afghanistan both in combat arms as an infantrymen and in military intelligence as a geospatial satellite imagery analyst. He has B.A. in Political Science and International studies with a focus in Middle East and North African conflict at Iowa State University. He studied in Jordan for a semester and took three years of Arabic while at Iowa State. He was awarded the Foreign Area Language Studies Scholarship at the University of Utah for Arabic and tested with the OPIC (Oral Proficiency Interview by Computer) at Intermediate Low. Kirk finished his M.S. in International Affairs and Global Enterprise at the University of Utah and is finishing an online MBA from Liberty University. More

References:

Arab Health. (2015, January 27). The Middle East Healthcare Industry is a Reliable Engine of Growth for Economic Diversification. Retrieved from Arab Health Online: http://www.arabhealthonline.com/press-releases/2015/the-middle-east-healthcare-industry-is-a-reliable-engine-of-growth-for-economic-diversification/

Hvidt, M. (2013). Economic Diversification in GCC Countries: Past Record and Future Trends. Odense, Denmark: Kuwait Programme on Development, Governance and Globalisation in the Gulf States.

World Population Review. (2016, August 6). The Middle East Population 2017. Retrieved from World Population Review: http://worldpopulationreview.com/continents/the-middle-east-population/

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