Friday, April 22, 2005

PanIIT Article- excuse the length

The Middle East: Opportunities behind the veil?


Fellow IITians across the world must be continuously hearing about the Middle East from the political context. The author would like to submit that while the Middle East might continue to be a source of increasingly political upheavals, it will also become an increasingly vibrant business destination and of particular significance to technology businesses. These upheavals are being driven by the irreversible forces of development, democracy and education.


Over the past many years I’ve had the pleasure of being based in the Middle East - one of the most misunderstood regions in the world. I’ve actually had visitors who were shocked out of their wits on landing at Dubai airport and more importantly on being taken out for a beer!!


Firstly some basics about the place itself. The Persian Gulf is a strategic region comprising of six countries and a combined population of close to 30mn people and is home to half the worlds known reserves of oil and gas. A casual visit to these countries during the years 1980 – 1990 would have left the visitor used to bustling metropolises like New York, London or even Detroit suitably unimpressed. The region had limited skyscrapers, no means of mass transportation, no facilities for cutting edge research and very basic facilities for healthcare. Today these economies have put themselves on the irreversible path towards modernity and at least the initial impression is impressive. I wanted to put a few key points of difference for the casual reader to help them understand the region better and have tried to do this by contrasting salient points in the region with that of the United States of America – the country which probably most readers are familiar with.


The Political System. The Persian Gulf is comprised of six independent countries. However unlike the United States whose political system is democratic, all countries here are absolute monarchies with all powers concentrated in the hands of the King and passed on from him to his sons. I must stress here that the system here is of absolute monarchy as opposed to the United Kingdom where the monarchy is symbolic. The monarchies here take ruling seriously and are sensitive to the aspirations of their people. Different rulers in the region have different temperaments which are clearly noticeable in the various arms of the government used to implement their policies. What this means for an expatriate executive doing business here is that decisions here can move at a tremendous pace and can also stall for months on end depending on the long terms views and aspirations of the ruling family. While some projects might seem ambitious and a waste of money to some expatriates the rulers view them as making a statement to put their countries on the map of the world similar to how an executive would consider the purchase of his first Rolex or Mont Blanc. Examples of these initiatives abound and are symbolic of differing motivations of the rulers e.g. Dubai’s focus on the property side of things – the Palm island visible from space to the drive to build two of the worlds tallest buildings to the worlds biggest mall, Qatar’s focus on large capacity industrial projects, Media (Al Jazeera), Education (Education City). Understanding the political environment is important because the expatriate really must make an effort to understand not just that power is concentrated in the hands of a few but also that he/she really must understand and appreciate the motivations and aspirations of each of these individuals so as to suitably align himself with the same to benefit his organization.


The Demographic Profile. The second main thing to note is the demographic pattern across the Persian gulf. The region has been traditionally dependent on an expatriate work force. While specifics of the demographics vary a rough ball park figure would be that in every country half of the resident population would be expatriates with an even larger proportion in the workforce. Its also important to note that as opposed to an immigrant society like the United States the Persian Gulf countries by and large have no formal naturalization policies and hence most expatriates are temporary workers with the period of the temporary stay extending from 6 months to in some cases 40+ years. Imagine if in the United States every time you went for a meeting you were more likely to meet a foreigner and this would give you an insight into the unique challenge in getting things done. Foreign companies doing business here are frequently frustrated by the non-committal nature, frequent churn and reluctance of expatriates to take firm decisions for which they can be accountable.


The GDP mix. The United States GDP is primarily a services driven one (73%) followed distantly by industry (26%) and further away by agriculture (1.4%). The Persian gulf – Industrial (59%), Services (37%) and agriculture (4%) [1]. To give a quick example of how big these differences are – while in the U.S. the hedge funds, investment advisors, stock brokers and investment bakers etc. make up large sizeable numbers of the finance world, the majority of the non-banking financial activity in the Middle East continues to be Project finance and lending. Similarly professions such as research, higher education, insurance, venture capital, consulting, public relations are in their infancy or barely present in the region. What this translates to for foreign companies looking to expand into these regions is that there is an incredible reluctance from both companies and high net worth individuals to compensate professionals in these sectors based on the same metrics in the western world. It requires a rigorous approach and in some cases quite creative structuring to ensure that the quality is maintained and revenue yield not compromised on.


The present. Having said the above, I thought I would give some good news to readers which might encourage them to do business with the Gulf. This really is the best time to do business with the Middle East. The oil prices are at an all time high and my friends in the commodities business tell me that we should expect them to stay that way for the foreseeable future. While earlier the Arab world used to primarily invest in the North American capital markets, they are increasingly looking to deploy that capital in the region to fuel its development and create similar opportunities here. The royal families without an exception are transitioning to a new generation which is primarily western educated and where key decision makers are adamant to see that their countries are as modern if not more so than the west. Entire sectors are being created which were absent earlier. An under current to the embracing of western business sensibilities is also the embracing of western values albeit in slightly modified versions. These range from simple acts such as the setup of pension authorities across most of the Gulf countries to more radical examples such as the removal of media censorship in Qatar leading to Al-Jazeera channel based there which has on multiple occasions criticized different regional monarchies and their policies.


The biggest opportunity today for foreign companies is to work alongside the local rulers and help them in realizing their objectives thereby creating wealth for themselves as well as the region. This truly is an example of a win-win situation. The region lacks expertise and most importantly human capital and the western world today lacks an innovation like the steam engine, electricity, the internet etc. that will create wealth and jobs for their populations in the near future. In the process the cross pollination of ideas and values will help both cultures better appreciate each other and should make the world a better place to be.


To conclude an interesting thought. As time goes by I am convinced that the Middle East at least for the next few years will continue to be a supply driven economy Vs. the rest of the world which has made the transition to one which is demand driven. The main reason for the same is that for the past few decades this region was artificially isolated from the rest of the world. There is a pent up demand for goods and services from the local population. While the demand for goods can easily be filled given the huge capacities our manufacturers in China seem to have on tap, the gap in the demand for local services is difficult and dangerous to fill so easily. Governments are taking a studied but determined steps to lay the framework for the creation and regulation of multiple sectors and this is really where they need the partnership of the rest of the world.

References

[1] CIA – The World Factbook http://www.cia.gov/cia/publications/factbook

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