Middle East Trade: Globalization Puts New Pressures on the Region

by Colin MacKinnon

Globalization, the enormous revolution that has occurred in communications over the past decade or two, means that investors more than ever before can pick and choose where to put their money. And this in turn means that national economies, if they want foreign direct investment, must more than ever before compete for it.

The countries of the Middle East and North Africa, therefore, are confronting a wholly new world that is pushing them to open up to foreign capital and competition, not always their traditional stance, and leading them into unpredictable political and social change.

Here's what's been happening in the MENA and what's likely to be in store:

Investment laws are changing. Governments realize they have to make it easy, not difficult, for capital to enter national economies. Tunisia, Morocco, Jordan, and Egypt have worked to make their laws attractive, though other countries, Syria and Iran come to mind, have not.

Tariffs are coming down. The MENA countries, which have long protected their local industries with high tariffs and other barriers, have done so either to favor the economic classes who own factories (the GCC states) or the classes who work them (Algeria is an example).

But this practice is changing. The establishment of the World Trade Organization, an umbrella association whose main function is to open up markets, has encouraged lower tariffs and the reduction of other trade barriers in the region as in the rest of the world. Bahrain, Egypt, Israel, Kuwait, Morocco, Qatar, Tunisia, and the UAE have all joined the WTO. Algeria, Jordan, Oman, Saudi Arabia, and Sudan, while not in just yet, have taken the first steps toward signing up.

The free trade agreements that some MENA countries have signed will break down trade barriers, too. Morocco, Tunisia, Jordan, and Israel have each signed one with the European Union; Egypt is negotiating one. By early in the next century there should be no noticeable trade barriers between these countries and the EU. Israel and the Palestine Authority have similar agreements with the U.S.

MENA, therefore, is opening itself up to competition from tough and very skillful international companies, competition it may not have felt before. This opening will have consequences. Forced to get more efficient, local industries will, there is no other word for it, fire workers. Governments are privatizing old and inefficient state enterprises, also a process guaranteed to result in firings. Political tremors are almost certainly in the offing.

"Plugging into the rest of the world changes the way societies function and economies work."

Old-fashioned business practices will come under pressure, too, with uncertain political effects. Agency laws, for example. The common GCC practice of awarding tried and true influential families the exclusive rights to import a given line of products is due for a change. Such change will meet resistance.

Accounting and bookkeeping practices will have to be brought in line with minimal international reporting standards, not a welcome thought for some firms.

Patent, copyright, and trademark laws are being enacted or improved. Some meet international standards; most don't. But the important thing is that the concept of intellectual property, which is wholly new to some countries, the UAE, for example, is being absorbed and enshrined in law.

These changes, if they occur, will make for a revolution in the business culture of the Middle East and North Africa. How on earth will MENA deal with the pressures of globalization?

The question was the subject of a conference held in Paris in March under the auspices of the World Bank and the Paris-based Institut du Monde Arabe.

Participants had sharply differing views. World Bank attendees were largely upbeat, as is natural since liberalization is the Bank's operating credo. Some of the outside participants were not.

"Investors are free to invest in any of the 180 countries of the world and they're going to look at this region [MENA] as it compares to other investment opportunities," says Nemat Shafik, an economist with the World Bank, who delivered a paper at the conference. "So a Saudi investor can compare an investment in Tunisia to one in Malaysia. It means that competition is much greater, but it also means that if you're doing the right thing, the amount of inflows that you can get are phenomenal."

Changing Business Culture

But can the old business culture change? Can a typical family-owned company, for example, open itself up to outside capital with all the loss of control such opening implies?

"I think so," says Ms. Shafik. "Increasingly family firms are going to have to. You're starting to see it happening in some countries, but not on a large scale. It's also a generational thing. The older generation, who are old-fashioned in their business practices, send their sons off to get MBAs and the sons come back all enthusiastic about opening up the capital. That attitudinal change is almost inevitable."

Ms. Shafik points out that there are now something like 10 million people in the region with access to CNN. "Internet hookups are expanding except when you have periodic clampdowns by governments. But plugging into the rest of the world changes the way societies function and the ways economies work, incredibly. It opens up all sorts of new investment opportunities."

She cites Moroccan firms now doing layout and printing for French publishers. "The stuff is sent by satellite and they lay it out in Morocco and send it back. Those kinds of business opportunities become possible when globalization brings everybody closer together."

Still, foreign investors have hardly been rushing into MENA. From 1990 on, the region has attracted less than one percent of the foreign direct investment that went to developing countries. FDI flows to MENA were also less than one percent of the region's GDP, a disappointing figure.

Though FDI flows into MENA last year were up 19 percent over the year before, they tended to concentrate in a few countries. Eighty percent went to just three: Egypt, Morocco, and Tunisia. Political instability and fear of local justice systems have tended to keep FDI out of some other countries in the region.

A number of the Arab attendees were not at all happy with globalization and their attitudes seem to reflect a regional ambivalence toward globalization.

"One of the direct results of globalization is increased poverty, which is an inevitable consequence of increased disparity," said Muhammad Abed al-Jaberi at the conference. "The economic principle that rules the global economy is 'producing more goods with fewer workers' Economic growth in the context of globalization depends on a decrease in the number of jobs We find that globalization is replacing national borders with invisible, imperialistic borders drawn by the networks of international power that control the world's economy, tastes, and culture."

Some felt the new global order would hurt the Arab side of the peace process. "Globalization is encouraging trends which give it precedence over the requirements of a just solution to the Palestinian problem and exposes the Arab states to further tensions and fragmentation," said the seasoned Egyptian journalist Mohamed Sid-Ahmed. "Globalization seems to feed instability in the region rather than the opposite."

Thus, on the beneficial effects of globalization, opinions can vary. But everyone agrees that however good or bad it may be, globalization is upon us.