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Workforce timebomb drives MENA states to tackle economic reform

The first of our series on the region's economies looks at the successes and dangers of change

Earlier this month China's state-owned China Textile Machinery group began construction work on a $12.5 million fabric factory in Egypt's Free Trade Zone, around 100 kilometers east of Cairo. The factory will create around 900 jobs, not much in a country where an estimated 800,000 workers enter the labor market each year, but it's a help.

Meanwhile, against the backdrop of the international row over Asian textile dumping in the West, the factory will allow its Chinese owners to ship around 70 percent of its product to Europe and the United States since Egyptian manufactured textiles are not subject to import restrictions.

The deal offers a good illustration of the unprecedented change the economies of the Middle East and North Africa are going through as governments, some more tentatively than others, attempt to push ahead with plans to roll back the role of the state and diversify their economies.

President Mubarak may not win too many awards for political reform, but the changes to Egypt's state-run economy in recent years, under the aegis of his ambitious son Gamal, are providing a blueprint for the rest of the region, from Morocco to Oman.

It is of course the ticking timebomb of a rapidly expanding workforce that is forcing economic liberalization and political reform in this part of the world. But significant carrots have been dangled in front of MENA states as well. The prospect of European Union membership has been the catalyst for a raft of economic reforms in Turkey, which saw Ankara post its third consecutive year of growth in 2004. The radical economic surgery required to join the 25 nation bloc has also left Turkey with single-digit inflation for the first time in decades.

While Western leaders have been falling over themselves to seal trade deals with Libya since its pariah status ended last year, other Maghreb states have continued to quietly implement economic reforms, albeit at a slower pace than some of their wealthier Gulf colleagues. Morocco last year became the first African country to sign a free trade agreement with the U.S., a deal which dependent on further economic reforms being implemented could be extended to other Maghreb states and Egypt.

Even Syria is spluttering towards reform of its rigid state-run socialist economy. In addition to the tentative opening up of its banking and insurance markets, Syria is also seeking to entice Western hard currency across its border through tourism, extolling the virtues of the Roman ruins at Palmyra or the Krak des Chevaliers, sites seldom seen by Western tourists.

Bumper oil prices of course have led to record inward investment in the El-Dorado Gulf states, transforming the make-up of stock markets and economies of oil rich countries. Domestic investment, attributable in large part to increased security and restrictions in the wake of the September 11 attacks in the US, have sent Middle East stock markets soaring.

A recent report by HSBC notes that regional stock market returns range from 22 percent in Bahrain to 142 percent in Dubai.

Saudi Arabia is already the largest emerging market in the world by market capitalization (see graphic).

But even with the sharp rise in oil prices problems remain. Excess Gulf liquidity is basically finding only two homes in the region, equities and real estate development - inflating the value of both. Asset price inflation is not of course unique to the Middle East, however its linkage to the price of a barrel of crude leaves the region's economy, not to mention its free lending banks, doubly vulnerable to a sharp oil price correction.

Consequently, Gulf cash is still playing a significant role in international merger and acquisition activity. Dubai International Capital, the investment vehicle of Dubai Crown Prince Sheikh Mohammad bin Rashid al-Maktoum, recently spent $1 billion to become the third largest shareholder of DaimlerChrysler. It also splashed out around $1.5 billion to acquire London tourist attractions group Madame Tussauds. Meanwhile, Kuwait telecom group Mobile Telecommunications Company, spent more than $3.3 billion to take control of Celtel, Africa's third-ranked mobile network earlier this year.

Foreign investors are also eyeing the Gulf markets, and eagerly awaiting this year's opening of a new international stock exchange in Dubai. The new exchange is promised to be more transparent and better regulated than the existing bourses in a bid to attract Western cash.

Economic reform does not happen in a vacuum. The entire region of course continues to face worrying social, and political problems, not the least of which is continued terror being wreaked upon the region and the rest of the world by Islamic fundamentalists. So in order to tie all the threads of the region's economic progress together, starting tomorrow, The Daily Star will bring you a short overview of the individual economies of the MENA region, highlighting each country's successes and problems.

Beirut,07 19 2005
Mickael Gacklin
The Daily Star
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