by Michael Granger
The G-8 met on May 27 and pledged a boat load of aid money to help with political reform in the Arab nations. They, led by the United States, did this to help smooth the transition of the Arab nations to a better place politically and economically. According to the French revolutionary Mirabeau, the governments slept at the edge of Vesuvius. The volcano eventually erupted. The G-8 wants to seize the initiative. But who has a greater stake in political stability in the Arab countries than the wealthy Gulf nations such as Kuwait and Saudi Arabia, to name two of the more prosperous countries? The uprising in the Arab world proves that economic prosperity does not guarantee political stability. Political stability is achieved with an agreeable equilibrium between the classes in those countries. So the G-8 should form an alliance with the Gulf nations and ask them to show US the money.
Even though they are less wealthy, the rest of the Gulf governments can learn a lot from the Saudis. They have been very consistent in investing in their people. And although there is a natural yearning for individual and political rights in the human spirit, and therefore in the hearts and minds of every Saudi, Kuwaiti, etc., it is easier to accept these traditional monarchies when the cupboards are stacked with food and when their people can earn a living. The other regimes were so drunk with absolute power that they felt no compunction to give freedom or bread to people starving for both. The people mostly wanted bread, but they made an opportunistic grab for freedom. If you have bread to eat, you can be more indulgent about waiting for freedom. This is the genius of the Saudis. They use the instrument of the Islamic religion to keep their population in check, but they make sure that they are well fed, housed and clothed. The famous Reggie singer Bob Marley had it right when he sang, A Hungry Man is an Angry Man.
In the interest of the wealthy countries of the Middle East
As much as it is in the interest of the West to see political and economic stability in the Middle East, it is more in the interest of the wealthy countries in that region, among which Iraq can be counted. This is an opportunity for all the players to come together to put a stake in the ground about the future. I am not talking about superficial political statements meant to appease the public and buy time, but a real Marshall Plan. The people of that region have suffered long and now taste freedom. More should be asked of the Gulf nations because their vested interest should be matched by investments in their people. These investments should create sustainable development, in addition to large infrastructure and extractive projects.
The key question is how to begin to create sustainable development in countries like Iraq, Egypt and Tunisia. These are countries in which a significant portion of the economy has been controlled by the government. And while changes should not be made overnight, there should be a process for migrating to private ownership. For private ownership there are some obvious parastatal groups which could be candidates: The usual suspects like electric power generation, telecommunications, airlines and banking. These and other industries may well be ripe for private ownership.
Now the question of how to privatize these large parastatals without disrupting the economy will be left to the government and potential private sector owners. One approach the G-8 can be helpful with is to organize private equity investment funds capable of assisting with these transitions. Private equity firms can play an essential role in these transitions because they are focused on making companies run efficiently in order to achieve investment success and they are willing to exit these investments in favor of public ownership. One could envision private equity pools of capital with a variety of investors, both financial and strategic, purchasing these enterprises from the government, reorganizing and operating them, first as private companies, and then achieving public offerings, listing on local, regional and major exchanges, which will allow local investors to acquire ownership interests. These are the low hanging fruit in the transformation of government owned companies to private, market based businesses. But equally if not more essential is the treatment of small and medium enterprises in these economies (SME).
What Role SMEs?
What is done to support the development of SMEs in the economies will be the determining success factor. It is the foundation of political reform. The larger parastatals are important for the infrastructure on these countries. For example, just imagine the major leaps forward the Arab countries can make by increasing power generation capacity and building up their electric power grids. Or, the productivity increases achievable from modernizing the telecommunications network to tap into the full power of the Internet, which was previously constrained by the political system and the attendant lack of individual freedoms. Those limitations can be removed, allowing these countries to participate fully in the information age.
The SMEs, on the other hand, provide goods and services that people use every day. These would include light manufacturing, food processing, agribusiness, business services, etc. SMEs constitute the nucleus of these economies and the job creation engine. Providing business owners with the financial and operational support to develop their businesses into larger and stronger enterprises is where the opportunities are. Many of these SME will be candidates to become the major enterprises in these economies in the five to ten year period.
Whereas taking government controlled companies into private ownership require financing from very large institutional and private equity investment vehicles, SME’s will need a network of smaller venture capital and private equity firms that can invest and play an active role in the development of these businesses. If ever there was a role for OPIC, this is their reason for being. Since the United States has led the charge in bringing about democracy in the region, President Obama now needs to authorize the Treasury Secretary to convene a Gulf Economic Summit in Washington, in this calendar year, to develop the strategy for sustainable development of the Arab economies. We must now seize the initiative to fully integrate these countries into the world economy.