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Bringing the Right Investment to the Arab World

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The causes and determinants of the political revolutions sweeping the Arab world are still too complex and nascent to explain with the authority of an academic analysis. Yet there is an overwhelming belief that economic factors are a key part of the puzzle in searching for determinants.

The Arab Spring was not instigated by the poor underclass of the Arab world; instead, it was the educated, unemployed, disenfranchised and likely lower-middle class youth of the region that took to the Internet and the streets to protest.

The Arab Spring started in countries that had economic growth and that were lead economic reformers. Tunisia, Egypt, Libya and even Syria were 'successfully liberalizing' their economies. But the revolutions hit these same countries where the elite did not distribute the economic growth to the masses at a pace that met the rising expectations of the educated youth.

What does this say to foreign investors, like Canadian businesspeople, who want to invest in the Arab world? Undoubtedly, the Arab world needs foreign investment to: provide technological know-how and innovation in short supply throughout the region's production valuechains and energy facilities; create labour-intensive jobs; augment the technical and post-secondary education sector; and invest in infrastructural development projects needed in meeting urbanization challenges such as transportation, housing, food security and sewage systems. There are plenty of respected studies, particularly that of the United Nations Arab Human Development Report, that reiterate these points.

Moreover, there is simply not enough domestic capital and know-how to generate the kinds of employment and productive capacity needed to meet the needs of the Arab masses. Foreign investment is key to the kinds of economic growth sought by the Arab masses -- but not all foreign investment is created equal.

Good vs. bad investment

In recent years, the Arab world heavily depended on Arab Gulf countries to provide needed foreign investment. Much of this intraregional investment, however, was not labour-intensive and often invested disproportionately into real estate, mega shopping malls, tourist projects and resorts. These were further aggravators, I argue, of the social grievances of educated, underemployed young people who were striving to improve their standard of living and meet their dreams and expectations for a better life.

Foreign investment into real estate and recreation is not what the Arab world needs now; it needs investment into jobs, and industries and services that spur jobs. The Arab Gulf countries continue to have capital surpluses that can be used for good throughout the region. But the incentive and expertise of Gulf capital is not in promoting the kinds of economic activity needed in the Arab world. More importantly, the tendency of Gulf investors to invest in real estate and recreation is a detriment to the long-term political and social stability of the Arab Middle East.

The lesson for Canadian businesses: invest in increasing the productive capacity of the Arab world. There is immense opportunity with an educated and eager workforce. Drivers of the Canadian economy today are keenly in demand throughout the Arab world; specifically, construction and engineering, health services, and education providers are all in Canada's comparative advantage.

Moreover, Canadian products that have already been identified by the Department of Foreign Affairs and International Trade for their untapped opportunity in the Middle East include: wood, pulp, and paper sectors; health products; transportation equipment and machinery; water; energy; petrochemicals; and information technology and communications. These sectors will be an important part of building the Arab world in the post-revolutionary phase.

The challenge will be to ensure that Canadian investors do not appear complicit in the political trappings of the inefficiencies of the Arab bureaucracies, and of currying favour with the crony-capitalists of the region.

Here, Canadian businesses need to emphasize the virtues of good governance: dealing with a transparent, accountable and responsible political apparatus. This means Canadian businesses must demand operating in an open investment environment and duly report their dealings with Arab governments and businesses.

Canadian businesses should not forget that the Arab masses are watching their own governments, and as the wave of democratization continues they will chastise companies and foreign governments that deal with corrupt regimes.

Canadian businesses can take advantage of their positive country branding today and increase investment in the region, but by meeting the needs of the Arab economies. If they do this, they will bring positive returns -- both financial and political -- to the region.

Bessma Momani is an associate professor at the University of Waterloo and senior fellow at the Centre for International Governance and Innovation. She will be speaking at the National Council on Canada-Arab Relations' 2011 national conference in Gatineau from Nov. 26 to 27.

(This article first appeared in Embassy magazine at http://www.embassymag.ca/.)

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