The Real 'New Middle East'

By Afshin Molavi
Sunday, August 20, 2006; 12:32 PM

Last month, as images of war and carnage in Lebanon filled Arab airwaves, more than 10 million Saudis joined together for a common goal. A massive political protest? No. A petition calling for an end to the fighting? Not that either. A boycott of American goods? No. So, what did 10 million Saudis -- more than half the adult population -- do? They bought stock.

For 10 days Saudis rushed feverishly for a piece of the kingdom's most ambitious development project ever: a $27 billion city that will create a seaport, an industrial district, a financial center, an education and health-care zone, resorts, and a residential area. The kingdom is no stranger to massive infrastructure projects, but there's an interesting twist here: The government won't be financing this one; that task will be up to wealthy Saudi investors, public share offerings and a high-flying Dubai-based property company.

The company, Emaar Properties, the most widely traded stock in the United Arab Emirates, also happens to be the richest real estate development firm in the world, with a market capitalization near $25 billion. It's also one of the most ambitious. On Aug. 1, as war raged, the company bought a major British real estate firm. The next day it announced an expansion into Algeria. It's building nearly 100 shopping malls in India, and retail and residential properties from Casablanca to Cairo to Karachi. Oh, and it's also constructing what will be the tallest tower in the world, known as the Burj Dubai.

It goes on. As the headlines screamed crisis, the business pages told another story. The transport company Aramex, the first Arab firm to go public on the Nasdaq Stock Market, announced a 73 percent rise in second-quarter earnings. Bahrain-based Gulf Finance House, a leading Islamic finance bank with global investments, announced an 87 percent increase in second-quarter net profit. The billionaire Saudi businessman Prince Alwaleed bin Talal, who owns nearly 10 percent of Citigroup, publicly criticized management, sending tremors through the company. And the Middle East construction boom -- mostly centered in the oil-rich Arab states of the Persian Gulf -- surpassed the $1 trillion mark.

When Secretary of State Condoleezza Rice said that the Lebanon war was a sign of the "birth pangs of a new Middle East," she was both dramatically wrong and partially right. A "new Middle East" is indeed being born, but it has little to do with Lebanon or President Bush's democracy agenda. The "new Middle East" is forming in the boardrooms of new and innovative businesses, in assertive private sectors demanding reform, in booming equity markets, cash-rich banks, state-owned investment houses and individual investors with global outlooks, and in a new generation of entrepreneurs and businessmen (and women) creating real companies with real underlying values.

The folks at the Carlyle Group see this. Last week, as "Middle East crisis" graphics flickered on our TV screens, they announced a $1.3 billion fund for investment in the region. In the past, Carlyle principally saw the Middle East as a source of funds for investments elsewhere. This time it sees the Middle East as an investment target.

Carlyle is not alone. The big investment banks -- Morgan Stanley, Goldman Sachs and Lehman Brothers -- are increasing their presence in the region, and Western private equity and hedge fund money is circling.

Of course record oil prices have helped. The Institute of International Finance reports that gross domestic product in the Gulf Cooperation Council countries -- Saudi Arabia, Oman, Qatar, Kuwait, the United Arab Emirates and Bahrain -- has grown 75 percent over the past three years, making the GCC zone the 16th-largest economy in the world. Those nations will earn half a trillion dollars this year, mostly from oil and gas exports.

GCC businesses, banks and state entities are aggressively investing across Asia. Dubai's government announced some $2 billion of investments in Pakistan. GCC investments targeted at China and India are proliferating. Malaysia and Indonesia are also trendy investment spots, and investors also are pouring money into projects in Jordan and Egypt and North Africa. This brings up a new twist in the "new Middle East." The old civilizational centers -- Persia (today's Iran), Mesopotamia (today's Iraq), the Maghreb, Syria and Egypt -- are falling behind the more nimble and business-minded places such as Dubai, Qatar, Abu Dhabi, Bahrain and Oman.

That's why Egypt's economic reforms matter so much. A GCC boom coupled with cross-border investments certainly helps the region grow. But a thriving Egyptian economy would be a huge boost in the Middle East. The International Monetary Fund predicts a healthy 5.2 percent growth rate in 2006 for Egypt. The government's economic "dream team" is winning plaudits from the local private sector. A wave of Egyptian business tigers is forming. A new mortgage finance law bodes well for the future: By making homes more affordable, it could serve as the catalyst for reviving Egypt's long-suffering middle class.

And strong middle classes are the linchpin of sustainable democracies.

All of this raises a fundamental question: Are we witnessing simply a new way for elites to make more money or a lasting shift toward the kind of economic growth that will lift all boats? That's the real question U.S. policymakers ought to be grappling with, and it's the real "birth pangs" we need to be watching closely.

The writer is a fellow at the New America Foundation.


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