World Economic Forum On The Middle East 2006

The Promise of a New Generation Sharm El Sheikh, 20-22 May 2006

INSIGHTS

WORLD ECONOMIC FORUM

World Economic Forum on the Middle East

This publication is also available in electronic form on the World Economic Forum’s website at the following address: World Economic Forum on the Middle East report: http://www.weforum.org/summitreports/middleeast2006 (HTML) The electronic version of this report allows access to a richer level of content from the meeting, including weblogs, photographs and session summaries. The report is also available as a PDF: http://www.weforum.org/pdf/SummitReports/middleeast2006.pdf (PDF) Other specific information on the World Economic Forum on the Middle East, Sharm El Sheikh, 20-22 May 2006, can be found at the following links: http://www.weforum.org/middleeast/programme http://www.weforum.org/middleeast/webcasts http://www.weforum.org/middleeastprivate (participants/private site)

The views expressed in this publication do not necessarily reflect those of the World Economic Forum.

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REF: 200606

Contents

Preface

3

Summary – The Promise of a New Generation

4

The Middle East Business Agenda

7

Investing for the Future

10

Global Integration

12

Youth and Understanding

15

Democracy, Peace and Security

18

Summit Outcomes

20

Acknowledgements

22

World Economic Forum on the Middle East

1

Preface The World Economic Forum on the Middle East 2006 set out to highlight the “Promise of a New Generation” against a background of profound challenges. Over 1,100 participants considered multiple issues, including the conflict in Iraq, the unresolved Israeli-Palestinian problem, heightened tensions over Iran’s nuclear programme, the impact of higher oil revenues, insufficient investment in essential infrastructure, slumping securities markets and, most important of all, an uncertain future for the region’s youth. The Summit was marked by a new optimism, with more open dialogue than ever before and a genuine commitment to increasing the role of the private sector. Participants focused on issues that the business world can credibly address. Moreover, the Summit generated real achievements on the steps needed to underpin economic success and invest for the future, and outlined a host of commitments for the future. The encompassing theme placed the challenges and opportunities of an increasingly youthful Middle East at the heart of the agenda for the first time. Every aspect of policy-making in the region, from job creation to peace and security affects young people. Strengthened partnerships between government and the private sector are essential. The Forum introduced students to young regional politicians to discuss the issues that mattered most to them. The Forum also launched the Egypt Education Initiative to benefit over 800,000 children. In addition, participants brought women’s issues to the fore through the Forum’s Women Leaders Programme by promoting a five-year action plan to implement private- and public- sector policies addressing the most pressing challenges women face. Participants concluded that the private sector has a key responsibility, not just for creating jobs for those entering the workforce, but also for ensuring that the workforce is productive, healthy and fairly treated regardless of the political climate. Governments can facilitate the work of the private sector by taking a longterm view on the investment of the current oil windfall and by allowing businesses more freedom to operate responsibly within global parameters. Indeed, participants took steps towards launching a private sectorfunded branding campaign for the Middle East and agreed to consider amendments to the Egyptian Open Skies policy. As the largest companies expand beyond the Middle East, many countries in the region are seeking to deepen their economic and political engagement with the rest of the world. The global integration of the region, through trade, investment and political relations, formed an additional sub-theme in the programme. Leaders from business and government discussed the steps required to move away from relations based primarily on oil and security issues towards a more positive and multifaceted global role. Global integration and harmony must take place on a cultural, as well as economic and political, level. Enhancing common understanding between faiths and peoples is key to future peace and stability. Conflict and insecurity in the Middle East continue to pose serious threats to the welfare of the region’s people, with major global implications. A final series of sessions sought agreement on the essential next steps to strengthen dialogue and underpin long-term security in order to create an environment in which the next generation can flourish and prosper. Regional governments, business and civil society leaders, and especially youth, have taken bold initiatives to transform the region. The Forum is committed to facilitating these initiatives and actions over the coming years to uphold the promise of the new generation.

Sherif El Diwany Director, Middle East and North Africa

World Economic Forum on the Middle East

3

Summary – The Promise of a New Generation

“It is our conviction that education is a fundamental human right and is instrumental in fighting poverty, eliminating gender inequality, as well as introducing democracy. Education is also the best tool to fight ignorance, dispel hatred and face terrorism. It has become a cornerstone for driving the economy forward.”

“There must be a stronger dialogue between politics and business to move the peace process forward.” Shafik Gabr Chairman and Managing Director, Artoc Group for Investment and Development, Egypt, and Chairman of the Arab Business Council

Ahmed Mahmoud Nazif Prime Minister of Egypt

The tight security in Sharm El Sheikh starkly reminded participants at the World Economic Forum on the Middle East of the most difficult challenges facing the region: the quest for peace and stability, particularly in Iraq and between the Israelis and Palestinians. While the focus was on the “Promise of a New Generation” and how to create the 80 million jobs needed over the next 20 years to stem resentment among youth, there was no denying other significant problems, including tensions over Iran’s nuclear programme, widening income gaps resulting from sharply higher oil revenues, anger among the middle class following stock market slumps and the lack of infrastructure. Discussions were candid, and intense debate frequent, as participants deliberated on five sub-themes: Democracy, Peace and Security, the Business Agenda, Global Integration, Investing for the Future and Youth and Understanding. A highlight of the event was, of course, the meeting of Israel’s Foreign Minister Tzipi Livni and Palestinian Authority President Mahmoud Abbas – the highest-level Israeli-Palestinian encounter in almost a year. The Forum launched a number of projects during the meeting, including the Egypt Education Initiative, a programme to develop an action plan to address the gender gap, and a private sector-funded branding campaign to counter inaccurate perceptions of the region. Four major messages emerged. First, businesses must take the lead in Middle East renewal. Next, the region cannot be competitive without equal opportunities for men and women. In addition, democracy, peace and stability cannot be achieved overnight, but hope for attainment rests with the region’s youth, whose future and security must be of paramount concern. Finally, dialogue must be reinforced to lead to more successful cooperative action. 4

Democracy, Peace and Security “This is an era where ground is shifting in the Middle East…and it is combined with changing forces of globalization. We can help empower. We can help the process in terms of political engagement. But it has to come from the people themselves.” Robert B. Zoellick US Deputy Secretary of State

The deteriorating situation in Iraq, the continuing conflict between the Israelis and Palestinians (particularly with the election of a Hamas-led Palestinian government) and the rising tensions over Iran’s nuclear programme confirm that democracy, peace and security remain elusive. • While democracy, peace and stability cannot be achieved instantly, dialogue among relevant parties must be stepped up. • Arab countries must manage reform and liberalization while carefully maintaining stability, security and fairness. • Businesses, politicians and members of civil society should deepen communication and cooperation. • Gender equality and youth security are key goals that will enhance the prospects for democracy, peace and stability in the region.

“Reform is one of the priorities of the Arab world. All countries and societies want to move ahead and have their own views on how to move ahead. Reform is an item for all of us to support but we have to be cautious because of the fragility of the security situation and uncertainty on the international scene.” Amre Moussa Secretary-General, League of Arab States, Cairo

World Economic Forum on the Middle East

“We have to dig deeper through technology and innovation. We must bring our people to the standard of global players to compete internationally with the best of nations”.

“The forces of globalization create tension just as they create opportunities. These tensions must be managed.” Nemir A. Kirdar Founder, President and Chief Executive Officer, Investcorp

Mohammed H. Almady Vice-Chairman and Chief Executive Officer, Saudi Basic Industries Corporation (SABIC), Saudi Arabia

The Business Agenda

Global Integration

Countries in the region must confront obstacles to economic growth such as bureaucracy, inadequate infrastructure and limited technological skills.

Global integration will bring both advantages and disadvantages to the Middle East.

• Tenacious reformers are rewarded with higher growth and more investment. • The region’s labour markets need to be open and flexible. • To attract more foreign direct investment, countries should focus on bolstering legal frameworks and cutting red tape to enhance efficiency and productivity. • Economic diversification, increased investment in information and communications technology and the broadening of the energy sector will boost the region’s competitiveness. • Young people represent the Middle East’s most valuable asset.

“We need to see more privatization. If you open your markets and give opportunities to both men and women, this region will do fantastically well.”

• Impediments to the Middle East’s integration with the global economy include the negative perceptions of the risks investors face, the poor image outsiders have of the region and the lack of the systems and infrastructure needed to be a global player. • While political and security risks are significant, they should not hide the fact that the Middle East compares unfavourably to other competing regions. • The private sector should spearhead efforts to counter inaccurate perceptions of the Middle East, remedy its competitiveness shortcomings and convince people of the benefits of globalization.

“We have to instil values such as tolerance and respect for human rights to make the process [of reform] sustainable, successful and genuine.” H.M. Queen Rania of the Hashemite Kingdom of Jordan Member of the Foundation Board of the World Economic Forum

Stelios Haji-Ioannou Chairman, easyGroup, United Kingdom

World Economic Forum on the Middle East

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“We must grow the role of the private sector. It is important that the private sector not only speak out but it should also do something.”

“We need a dialogue to listen to the needs of the young so we can turn the 'youth bulge' into assets we can be proud of.” Princess Lolwah Al Faisal Vice-Chair of the Board of Trustees and General Supervisor, Effat College, Saudi Arabia

William R. Rhodes Chairman, Chief Executive Officer and President, Citicorp Holdings and Citibank, USA; CoChair, World Economic Forum on the Middle East

Investing for the Future Thanks to revenues from high energy prices, many Middle East countries have an unprecedented opportunity to push forward reforms, while cushioning the pain that comes with them. • The oil price windfall could support significant restructuring of the region’s economies and mitigate the negative effects of reform. • The region must turn its high liquidity into tangible results, channelling funds to projects that promote growth with social equity. • Capital markets must be developed that allow easier access to capital, create more attractive investment options and promote higher standards of transparency and governance. • While the government’s role is to provide a favourable investment climate, the private sector should lead the way to reform through corporate social responsibility, sustainable practices and social entrepreneurship.

Youth and Understanding “How wonderful, how normal and how sacred it is when we sit together as brothers.” Rabbi Awraham S. Soetendorp Jewish Institute for Human Values, Netherlands

The promise of a new generation is that they will break the cycle of conflict that has bedevilled the Middle East for decades. • Education is a key driver of growth. Programmes must be devised to promote entrepreneurship and innovation. • Reforming education, particularly curricula, will instil good values in young people and encourage them to be tolerant and make peace. • Youth should be encouraged to be civic minded. Government efforts to stifle the use of new technology and communications as a tool of political activism are likely to prove costly and ineffective. The best approach is to let ideas flow.

“We must have not only a formula to provide social services, but also a strong, competitive business model to survive. A social entrepreneur must integrate social objectives into the core business, bringing in all players in the value chain to create benefits for the environment and communities.” Helmy Abouleish Vice-Chairman and Managing Director, Sekem Group, Egypt

“Religion is crucial for the peace of the world; it can either consolidate it or harm and destroy it.” Lord Carey of Clifton Former Archbishop of Canterbury, United Kingdom; Member of the Foundation Board of the World Economic Forum

6

World Economic Forum on the Middle East

The Middle East Business Agenda

The world’s greatest economies are led by businesses. Although the Middle East and North Africa (MENA) countries face enormous obstacles to self-sustaining growth, businesses can play a greater role in promoting reform and global competitiveness. The economic reform movement is still in its infancy, and entrepreneurship and investment are all too often strangled by bureaucracy, inadequate infrastructures and limited technological skills. However, the seeds of change — and hope — are being planted. Countries that have embraced reform have been rewarded with accelerated economic growth. A more pragmatic attitude on the part of government and private sector leaders has reduced conflict and encouraged cooperation. This year’s World Economic Forum on the Middle East explored both the positive and negative aspects of the region’s business climate and developed realistic proposals for its improvement. Seen from one perspective, the region seems deeply dysfunctional, torn by war and terrorism, badly lagging on many key social and economic indicators and dependent on a handful of resources — especially oil. From another point of view, however, the MENA countries look like the classic investment bargain — full of under-utilized assets and unrecognized value. As governments embrace market reform and develop their human resources, businesses and investors who move early could reap outsized returns. In other words, a turnaround story may be in the offing.

World Economic Forum on the Middle East

Which view is correct? For many of the participants at the Summit, the question has already been answered. Where some see only risk, they see opportunity. Where others see unemployment and despair, they see a new generation of workers and consumers, who only need the tools to create wealth and improve their lives. “The region’s greatest asset is its young men and women,” said Christiaan J. Poortman, Vice-President, Middle East and North Africa Region, World Bank, Washington DC. Realizing this promise, however, will take sweeping changes — political, social, economic, cultural and psychological. Participants at the Summit focused on identifying the processes to effect such change. Among the topics addressed were: • Labour market reform: Participants agreed that by reducing artificial job creation barriers and moving skilled workers from the public to the private sector, the region can unlock the creative energies of its people while discouraging the growth of a permanent underclass of low-wage foreign workers in the more affluent countries of the Persian Gulf. “What the private sector needs are free, flexible and fair labour markets,” said H.E. Sheikh Mohammed Bin Essa Al Khalifa, Chief Executive, Bahrain Economic Development Board, Bahrain.

7

Figure 1:

Regional Internet Use

Only 41 of every 1000 people in the Middle East and North Africa were Internet users in 2004 Internet Users in the Middle East and North Africa (per 1,000 people) 45 40 35 30 25 20 15 10 5 0 2000

8

2001

2002

2003

2004

Egypt is a case study in Middle Eastern tourism. Rich in culture, tradition and history, tourism is growing faster than the world average but overall receipts are slightly declining. This is due mainly to Egypt’s under-developed transport networks, reliance on a few European markets and a lack of tourism promotion spending compared to other resort destinations.

Tourism Authorities Annual Promotional Budgets (US$ Million)

114

86 71 63 56 50

Egypt

10

New Zealand

10

Dubai

18

40

Malaysia

11

Ireland

Singapore

42

Australia

• Information and Communications Technology: As of 2004, only 41 out of every 1,000 inhabitants of the MENA region were Internet users (see Figure 1). But that picture is changing, as telecom providers restructure or privatize and entrepreneurial activity accelerates. However, they require compelling content to build a consumer base for broadband and other services. “Does the Internet today provide [Egyptian families] with the right content that serves their needs in the local language? The answer is probably no,” said Tarek Kamel, Minister of Communications and Information Technology of Egypt. Developing such content, he added, is a task for the whole society, which is why Egypt is encouraging the convergence of its entertainment and Internet industries and promoting the development of computer clubs and other grassroots ICT organizations.

Box 1: Red Carpet In, Red Tape Out: Rebranding the Middle East

Thailand

• Economic diversification: Despite the region’s well-publicized security problems, travel and tourism hold great promise for future growth as some countries, such as Dubai, are already proving. However, governments need to clear away numerous obstacles, such as controls on property ownership, restricted national airline markets and burdensome visa requirements (see Box 1).

4

21

21

6

Spend per Acquired Tourist (In US$)

Since these issues are pervasive in the Middle East, business leaders discussed the roles of marketing and branding in promoting the region as a destination for tourism and inward investment. During a WorkSpace session, participants considered how the image of the Middle East might be revolutionized and proposed a number of innovative campaign ideas during the process. Participants made a commitment to create a task force of stakeholders from the private sector to fund a marketing campaign for the Middle East under the banner “Red Carpet In, Red Tape Out”. Furthermore, there were private sector commitments to ensure that sufficient money is available to fund the campaign. To underpin the effort, participants suggested bringing Middle Eastern leaders together to help stakeholders better understand what the region offers and represents and project Middle Eastern opinion leaders onto the international stage.

World Economic Forum on the Middle East

“Companies don’t yet know what is required in terms of transparency. Everybody is in the learning process.” Mohamed A. Alabbar Chairman, Emaar Properties, United Arab Emirates; Member of the Executive Committee of the Arab Business Council H.E. Sheikh Mohammed Bin Essa Al Khalifa Chief Executive, Bahrain Economic Development Board, Bahrain

• Energy: With oil prices hovering close to US$ 70 per barrel, the energy sector would seem to be the least of the region’s worries. However, most oilproducing countries have not yet stimulated the development of related industries — such as exploration, oil field support and professional services — that can boost investment and employment. “This is one of the most important unfulfilled economic potentials in the whole region,” said Vahan Zanoyan, President and Chief Executive Officer, The Petroleum Finance Company, Switzerland. • The Role of women: The MENA countries can never hope to escape the trap of poverty and technological backwardness if over half the population is excluded from meaningful economic activity. Participants debated how to reconcile the need to empower women with the region’s prevailing legal and cultural norms (see Box 2).

World Economic Forum on the Middle East

The economic picture presented at this year’s Summit was far from rosy — both in terms of current business conditions and future growth prospects — although there is no cause for despair. The Summit revealed both sides of the picture — the dark as well as the light. In the end, it will be up to the region’s policymakers, business magnates and people to decide which one will prevail.

Box 2: The Women Leaders Programme The Women Leaders Programme of the World Economic Forum gathered leaders - both men and women - from government, business and civil society to examine the region's gender gap. For the first time, the Forum brought together women ministers from across the region to construct a five-year action plan for public- and private-sector policies to address the region’s gender gap. The action plan will be a publicly available resource, aimed primarily at promoting greater cooperation and best practice exchange among the region's governments in their efforts towards greater gender equality.

9

Investing for the Future

“How much is the Arab world investing in research and development? Much less than the rest of the world. We’re not thinking of our grandchildren or our neighbour’s grandchildren. Investing in the future is key.” Khalid Abdulla-Janahi Chairman of the Executive Committee, Shamil Bank of Bahrain, Switzerland; ViceChairman of the Arab Business Council

The oil price windfall offers countries in the Middle East the opportunity to promote and support genuine reform. But investing for the future may not be easy, given the deficiencies in capital markets and the perceived high-risk business environment. To varying degrees, countries are stepping up governance standards, transparency, disclosure and enforcement of regulations. At this stage, the focus of investments should be on projects that will promote growth with social equity. While governments should provide the right climate, businesses should take the lead in driving investments and pushing for reforms in what could prove to be a significant period of transition for the region. The unprecedented oil price windfall has led to a sharp rise in liquidity in the Middle East, as well as increased government revenues in oil-producing countries and some budget surpluses. The sharp increase in private equity funds from US$ 400 million in assets under management in 2000 to more than US$ 1 billion today — some reports claim the actual figure is five times that — indicates how much of the region is awash with cash. Unlike the petroleum boom of the 1970s, much of the capital is staying in the region, although some estimate that US$ 800 billion or more of Arab money is invested outside the region (see Box 3). “In the Middle East,” lamented Aladdin Saba, Chairman, Beltone Financial, Egypt, “we have a problem of too much money chasing too few deals.” This should not be the case, but the lack of deals that are attractive to private investors only highlights the shortcomings of a region where there is much that needs to be funded. Indeed, this embarrassment of riches could turn into a tragic shame if the region fails to take full advantage of the oil boom to speed up its 10

Box 3: Challenges in the Evolution of Capital Markets Asset managers, regulators, market operators and privateequity specialists found a common purpose when they met for a WorkSpace session to find ways to enrich and strengthen Middle East capital markets. Much of the estimated US$ 2 trillion that has accumulated in the region has been invested abroad due to an inadequate investment infrastructure. Despite this, participants shared a vision of more transparent, better-regulated, globallyintegrated markets and strong regional asset managers acting as intermediaries for private investors.

Despite Great Regional Wealth Much Of It Is Invested Abroad

Geographic distribution of assets, 2005 Percent, USD trillions $1.3 – 1.5

$0.5 – 1.1

$1.8 – 2.6

100%

Outside 70

Gulf

85

Gulf

15

30

Private

Institutional

80

20 Total

Wealth held largely outside due to • Insufficient local investment opportunities

• •

Diversification of portfolios Concerns about region’s stability

*Total wealth defined as investable assets in the form of cash and equivalents, deposits, equities, bonds, real estate and other alternative investments (e.g. hedge funds or private equity). Sources: McKinsey analysis; Capgemini and Merrill Lynch World Wealth Report 2005; BCG Global Wealth 2004; expert interviews.

Participants looked forward to capital markets fully integrated into global markets and enjoying high levels of local investor participation. One vision was of an Arab economic zone, underpinned by a single monetary policy and a single currency; another was of a regional stock exchange, with sector diversity and high levels of transparency and liquidity (perhaps a Union of North African markets). However, participants recognized that the region needs to overcome significant obstacles, such as weak legal systems, poor regulatory framework, inadequate corporate governance and underdeveloped financial institutions, in order to implement any of these visions. In particular, they identified a lack of investor education as a prime cause of recent volatility in stock markets.

World Economic Forum on the Middle East

global integration and support its transformation — in short, to pay for real structural reform and cushion its pain. There are three concerns about investing — how to raise capital, where to put it and how to retrieve it along with earnings. The Middle East is deficient in all three aspects. For investors, the entry and exit paths are limited; there is no pan-regional stock exchange of a scale comparable to financial hubs in Europe, North America and Asia. Regional markets lack the disclosure standards and regulatory discipline afforded by world-class financial centres such as New York and London. Even public companies are unwilling or unable to provide adequate and reliable information to investors, giving rise to volatile performance on regional bourses (see Figure 2).

Figure 2:

Middle East Equity Indices: Volatile times

Participants agreed that there are priorities for investing. Petroleum producers must abandon their overriding focus on oil and diversify, even if the US$ 70 per barrel price is an incentive to do otherwise. The danger is that the errors made during the 1970s boom will be repeated and the windfall wasted. At that time, extra revenues were parked outside the region, with little deployed for domestic development. In one session, Egypt’s Minister of Finance Youssuf Boutros-Ghali warned that, in times of transition and restructuring, the rich often get richer more quickly. The challenge is ensuring that the benefits of investments and public spending become equitable. That means concentrating on basic public goods that promote growth and benefit as many people as possible. “The absolutely key items are institution building, education, infrastructure and health,” said Forum Co-Chair William R. Rhodes, Chairman, Chief Executive Officer and President, Citicorp Holdings and Citibank, USA. “Companies must have a culture of corporate social responsibility where they react when there is a need — for example, after a natural disaster — but also a proactive process involving ongoing engagement with community organizations,” reckoned Mazen S. Darwazeh, Chairman, Hikma Pharmaceuticals, Jordan. Good citizenship among Arab enterprises is still developing and investing for the future should not be the sole responsibility of government.

Source: Thomson Financial

To attract more institutional investors and promote stability, markets in the region need tighter regulations, stricter enforcement and dependable rule of law. “Companies don’t yet know what is required in terms of transparency,” explained Mohamed A. Alabbar, Chairman, Emaar Properties, United Arab Emirates; Member of the Executive Committee of the Arab Business Council. “Everybody is in the learning process,” added Shaikha Al Bahar, Group General Manager, National Bank of Kuwait SAK, Kuwait. “All of us here are against government intervention to influence prices, but the government should lay out the rules.”

World Economic Forum on the Middle East

As Rhodes stressed, “We must grow the role of the private sector [from the empowerment of women to remedying the infrastructure deficit]. It is important that the private sector not only speak out but also do something.” “If nobody else can do it, then government should. But it’s not their job to manage,” reckoned Arif M. Naqvi, Vice-Chairman and Chief Executive Officer, Abraaj Capital, United Arab Emirates. Government should set the right conditions, but should neither take a lead role in running ventures nor tell enterprises where to invest. Indeed, the private sector is leading the current oil boom. There is no reason to turn back: let the power of business and the markets drive the Middle East’s renewal.

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Global Integration

“To integrate into the global economy is a challenge for every country in the region.” Rachid M. Rachid Minister of Trade and Industry of Egypt

The integration of the Middle East into the global economy will deliver both benefits and disadvantages. To make the most of globalization, the region must overcome obstacles including negative perceptions of risk, the poor image of the region and the lack of capacity and necessary infrastructure to be a productive part of the global system. Focus on political and security risks should not obscure the fact that, even without those impediments, investors are likely to unfavourably compare the region to other emerging markets. The private sector must lead efforts to rebrand the Middle East, address its competitive deficiencies and convince people that global integration is worth the risk. Integration into the global economy is a challenge for anyone who dares to buy into the promise of globalization and contend with its risks. There are potential pitfalls — investment losses, income gaps and diminished competitiveness. But isolation and the status quo are not acceptable. As Anoush Ehteshami, Head, School of Government and International Affairs, University of Durham, United Kingdom, concluded, “a fate worse than globalization is to not to be touched by it.”

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For the Middle East, the touch of globalization has to become an embrace. There has been progress — with eye-catching successes in Dubai, Jordan and Egypt, among others — but the basic impediments remain: negative perceptions of risk, the one-dimensional image outsiders have of the region and the lack of infrastructure, capacity and the bricks-and-mortar facilities needed to be a productive and plugged-in member of the global economy. According to the United Nations, the Middle East’s share of global foreign direct investment rose to 1.5% in 2004, up from 1% the year before. This was far behind China (9.3%) and Southeast Asia (4.0%). The trade picture is more troubling. In 1981, the Arab world accounted for 10.7% of world exports. Today, its share is down to 4.4%. Take away oil and that figure drops to 1.7%. Image is a problem; many Arab leaders are decried as inflexible, rich autocrats, their kingdoms atrophied. H.E. Sheikh Mohamed Bin Mubarak Al Khalifa, Deputy Prime Minister of Bahrain, complained that the Arab world is unfairly tagged as a source of oil and terrorism. He has a point, but Zachary Karabell, Senior Vice-President, CoPortfolio Manager and Senior Economic Analyst, Fred Alger Management, USA, made a more compelling one. The hard truth is that, even if the political and security risks disappeared, many investors would unfavourably compare the region against other emerging markets, particularly in

“A fate worse than globalization is to not to be touched by it.” Anoush Ehteshami Head, School of Government and International Affairs, University of Durham, United Kingdom

World Economic Forum on the Middle East

terms of key investor concerns such as infrastructure, ease of access to capital, bureaucratic efficiency and education (see Figure 3).

Certainly, other regions want to deepen links with the Middle East. The presence in Sharm El Sheikh of the Prime Ministers of Malaysia and Pakistan, as well as

Figure 3:

The Most Problematic Factors for Doing Business in the Middle East and North Africa Countries 14.9%

Inefficient government bureaucracy access to financing

13.1% 10.4%

Inadequately educated workforce 8.9%

Restrictive labour regulations Poor work ethic in national labour force

markets. Indeed, the Forum’s platform for Global Growth Companies showed heavy interest in global expansion by Middle East companies (see Box 4), but called for greater efforts to create policy measures to

Box 4: The Community of Global Growth Companies Twenty leaders of the most rapidly expanding companies in the Middle East convened to discuss challenges faced by Global Growth Companies. Global Growth Companies are companies that have demonstrated a clear potential to become leaders in the global economy within five years. The companies enjoy a strong industry or regional market presence and have both the desire and ability to become a global champion.

8.2% 7.7%

Tax rates Tax regulations

7.1%

Inadequate supply of infrastructure

6.9% 0%

2%

4%

6%

8%

10%

12%

14%

16%

Percent of responses

The assembled executives highlighted the following challenges that they face in their continued expansion and internationalization:

Source: World Economic Forum's Executive Opinion Survey 2005 Source: 2005 World Economic Forum’s Executive Opinion Survey

ministers and senior officials from Japan, India, Singapore, France and the US, was testament to this goodwill and outreach. However, investors’ perceptions matter. “A lot of dollars are no longer going to the Middle East now that Hamas [won the elections in the Palestinian Territories],” Khalid Abdulla-Janahi, Chairman of the Executive Committee, Shamil Bank of Bahrain, Switzerland; Vice-Chairman of the Arab Business Council, conceded. “Perception and reality are not always different.” To make sure that they do match, participants at the Summit took initial steps to launch a private sectorfunded branding campaign for the Middle East under the banner Red Carpet In, Red Tape Out. The move is appropriate since the private sector must shed its complacency. The recent growth of private equity firms and funds in the region is evidence that business is stirring.

To reach the critical size required to access financial markets and build strong brands, the Middle East will need to become a less heterogeneous market. Local management courses and Masters programmes must be developed to address the lack of management talent and brain-drain. During the next year, the World Economic Forum will conduct workstreams to address some of these issues and will develop a specific thematic track for Global Growth Companies at our next meeting in Jordan, in May 2007.

Distribution of Global Growth Companies

“For the first time, we have seen a boom in this region led by the private sector,” said Arif M. Naqvi, ViceChairman and Chief Executive Officer, Abraaj Capital, United Arab Emirates. Businesses are looking outward, applying pressure on governments to open up Source: World Economic Forum

World Economic Forum on the Middle East

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assist them. This (in part) explains the growing number of regional and bilateral free trade agreements that Arab countries are forging even as they participate in multilateral negotiations. Saudi Arabia’s accession to the World Trade Organization was a recent milestone. Business is also promoting initiatives, such as National Competitiveness Councils, to assess and benchmark competitiveness. Efforts that are underway to raise standards of governance, transparency and accountability must be stepped up. Governments, meanwhile, are eager for companies to go global — and enterprises are responding. “This is the first time I have seen my government support me,” Naguib O. Sawiris, Chairman and Chief Executive Officer, Orascom Telecom Holding, Egypt, declared. The makeover of the Middle East, however, has to be designed and driven by the private sector. This requires corporate citizenship and daring leadership. Fortunately, the region is blessed with a large pool of skilled managers and workers. There is also a growing willingness to adopt a management mentality that emphasizes human resource development and equal opportunity. Yet business and government leaders will have to convince citizens that the benefits of globalization outweigh the risks. Developing a regional scenario road map may help; indeed, the Forum’s private meeting on the evolution of Gulf Cooperation Council (GCC) countries addressed the critical uncertainties underpinning issues of a fully diversified, prosperous economy within the global context (see Box 5).

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“When you talk about globalization, it does not necessarily attract a lot of people,” Rachid acknowledged. “The challenge is how to take the people with us.” To shift mindsets will require integrating global values to turn the new generation into promising globalization-ready citizens. As H.M. Queen Rania of the Hashemite Kingdom of Jordan put it, “We have to instil values such as tolerance and respect for human rights to make the process [of reform] sustainable, successful and genuine.”

Box 5: Scenarios for the Gulf Cooperation Council (GCC) Countries The private workshop held in Sharm El Sheikh was a key event in the process of developing scenarios examining the evolution of GCC countries within the Middle East regional and global context. Participants started with about 50 key drivers identified in a preliminary research phase and initially grouped in 10 clusters (see below). Each driver was introduced and debated among participants and, based on the discussion, additional drivers were introduced while others were re-grouped. The objective was to reach a common understanding of all the relevant drivers affecting the region. The central questions that the scenario project attempts to answer are whether the region will be able to develop and implement a vision to steer itself towards economic diversification and prosperity, and whether the GCC countries can integrate effectively into the global context.

Top-level clusters of key drivers for GCC Countries

World Economic Forum on the Middle East

Youth and Understanding

Soraya Salti Senior Vice-President, Middle East and North Africa, JA Worldwide, Jordan

More than half of the Arab world is under 18 years of age; over a third is under 13. This demographic poses tremendous challenges but also offers great opportunities for the Middle East and North Africa. There is little indication that the region will make up the 80-90 million new jobs that will be required over the next two decades. However, with new education initiatives, better inter-generational dialogue and innovative technologies, the youth of today can become the region’s civic-minded leaders of tomorrow. Education Improving educational systems remains a crucial imperative. According to a 2005 World Economic Forum survey, an inadequately educated workforce consistently ranked among the most glaring obstacles to doing business in the Middle East and North Africa. While unemployment is a huge problem, many companies in the region lack appropriately-skilled employees. Existing programmes must be overhauled to incorporate private sector input and vocational training in order to reduce the current skills gap. Benchmarks for achievement are needed, as are elearning programmes, peer-to-peer counselling initiatives and “second-chance” safety nets so that every student has ample opportunities to learn and develop vocational skills.

World Economic Forum on the Middle East

Suzanne Mubarak First Lady of Egypt

“Governments must not be afraid of free thinkers,” said Soraya Salti, Senior Vice-President, Middle East and North Africa, JA Worldwide, Jordan. Classes should be reformed to encourage critical thinking and dissenting viewpoints. Arab societies too often stifle creative and entrepreneurial impulses among young people. The Forum, which this year included a quorum of youth from the region, launched the Egypt Education Initiative whose first phase will benefit 820,000 children in 2,000 schools and over 300 colleges. Other initiatives include INJAZ, which teaches students about the needs of the private sector by bringing students into contact with the companies themselves. Peacemaking Reforming education to improve job prospects will aid in a second youth-oriented goal: creating a generation of peace-builders. Youth who see a future to live for will be less likely to seek out a cause to die for. Today, young people’s expectations for future employment are lower in the Middle East than in any other part of the world.

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“In the Arab world, we have a lot of seeds that are not blooming.” Nimah I. Nawwab Poet, Saudi Arabia; Young Global Leader

Too often, the skills to get ahead involve networking alone, and those not born with access are quickly alienated. Labour markets must be opened to encourage entry into the private sector rather than the bloated and non-meritocratic public sphere. Students must be taught the skills for a new economy. Entrepreneurial training and ground-level job programmes can work, but must be scaled up. “If we want peace,” said Suzanne Mubarak, First Lady of Egypt, “we must teach peace.” Curricula must be reformed to embrace diversity and teach the common values of all religions, rather than the values of one over another. Certain young people need to be particularly targeted. A Palestinian youth leaving an Israeli prison is at risk of succumbing to intolerance as is his counterpart leaving the Israeli army. But efforts to teach peace must extend to all segments of all societies. Islam has a long history of embracing common humanity, and learning from and respecting followers of other faiths. Historically, scientific advancement came with cultural tolerance. “We should revive values that make this civilization great,” said Ismail Serageldin, Director, Biblioteca Alexandrina, Egypt. Educational reform should encourage a dialogue between cultures rather than a clash of civilizations. In support of this impulse for cross-cultural understanding, the World Economic Forum agreed to assist developing, under the Council of 100 Leaders (C-100), a web-based information portal and local communities supporting its work in the West and Islamic worlds (see Box 6).

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Box 6: Communicating across the region: The Council of 100 Leaders (C-100) Sharm El Sheikh, Egypt, provided an excellent venue for fruitful discussions among the Council of 100 Leaders’ WestIslamic World Dialogue community. Prime Minister Rabbi Awraham S. Soetendorp, Jewish Abdullah Ahmad Institute for Human Values, Netherlands Badawi of Malaysia addressed the C-100 community in their private meeting, stressing the need for dialogue to be “effective, focused and fruitful, leading to frameworks for concrete action.” The continued sense of commitment and enthusiasm was clearly visible in all the meetings and the discussions were open, engaging and productive. The objectives of the meeting were many but included how to place the C-100 as a hub of knowledge and information on the state of West-Islamic dialogue and continuing discussions on the work of the Education sub-group to further develop the C-100 Education Project. Members fully endorsed the proposals for using the C100 as a knowledge hub and as a platform for projects on education, as well as continuing its role as a clearinghouse for action-oriented projects that advance understanding and cooperation. There was tremendous support for many activities, including highly practical commitments, such as technical help for creating a website and support in organizing local fund-raising events in several cities around the world.

Citizenship A recent study revealed that young people are more politically active in developing countries than in the developed world. In a variety of ways, the youth of today are already leading the charge toward free societies in the Middle East and North Africa. How the next generation behaves as citizens will depend on education, but also on how governments, schools and families listen to young people, as well teach them about their rights and obligations (see Box 7).

World Economic Forum on the Middle East

Mostafa El Gendy Member of Parliament, People’s Assembly of Egypt,

“Young people have a very big heart,” said Mostafa El Gendy, Member of Parliament, People’s Assembly of Egypt, “and are much more open to change than previous generations.” All too often, however, governments approach youth as a threat rather than a resource. This leads to mutual mistrust, and means that states squander the political energy of the next generation. Pushing this change is the spread of Information Technology. From blogs to SMS messaging, new forms of communication mean that millions of young people can connect instantly across boundaries of culture and nationality. In 2004, only 4% of residents of the MENA countries were Internet users. Today, the number has grown slightly and demand for the Internet is booming.

Gamal H. Mubarak Head, Policy Secretariat, National Democratic Party, Egypt

Box 7: Meet the Young: Youth Participation in Middle East To better understand the needs of the new generation in the Middle East, the World Economic Forum invited a number of young students from the region to participate in the two-day meeting. Saeed Al Muntafiq, Chairman of the Board, Young Arab Leaders, By actively engaging regional United Arab Emirates politicians from the Forum’s Young Global Leaders community and participating in various sessions (including New Approaches to Further Education, or the Revolution will be Televised), these students were able to share their vision for the future, their expectations from current leaders and their concrete plans for moving the youth agenda forward. One key area for youth is education. In this context, launching the Egyptian Education Initiative will help improve schooling through Information and Communication Technologies. The initiative will focus on different levels of education (pre-university, higher education, lifelong learning and e-learning industry development), and in its first stage will impact 820,000 students in 2,000 schools and over 300 colleges.

World Economic Forum on the Middle East

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Democracy, Peace and Security Because of the many challenges facing the Middle East today, political and business leaders attending the Forum expressed a strong desire to move faster on political participation and dialogue so that issues related to democracy, peace and security can be advanced. While acknowledging that democracy has been gaining momentum in the Arab world, many leaders emphasized that change had to come from societies themselves— on their own terms and at their own pace. Much of that change, they said, needs to come through the participation of civil society. In the Middle East, democracy, peace and security seem as elusive as ever; compared to other regions, the challenges of reform are great. However, many political and business leaders are making decisions that are defining a long-term vision of stability and prosperity for their countries and region. With much of the dialogue at the World Economic Forum on the Middle East focused on unrest in Iraq, the unresolved Israeli-Palestinian conflict and growing fears of a nuclear Iran, there was a sense of urgency for countries to increase the dialogue in a changing Arab world (see Box 8). “The challenge is to make change irreversible and sustainable,” stated M. Shafik Gabr, Chairman and Managing Director, Artoc Group for Investment & Development, Egypt: Chairman of the Arab Business Council; Co-Chair of the World Economic Forum on the Middle East. Gabr and others see democracy, peace and security as interconnected, but that achieving these objectives will take time. It was widely acknowledged that reform is taking place in the region, but that there is no “one-sizefits-all” approach. The challenge in the Arab world is to manage change in a way that preserves the best in society, giving ordinary people greater freedom and choice while ensuring security and protection from injustice. Many in the region realize the scope of these challenges and many governments are already taking important steps towards economic, social and political reform; others are following. “There are going to be problems and setbacks, but in any reform process leaders will have to make difficult choices,” said Gamal H. Mubarak, Head, Policy Secretariat, National Democratic Party, Egypt. “Any political party or leader has to change how they communicate if they want to convince people about the importance of a vision. People need to see results.” 18

While results may be slow in coming in some countries, there is overall agreement that reform is necessary and should include participation from all facets of civil society, including non-governmental organizations, women and youth. According to the IMF, more than half of the Arab world is under 18 years of age. In the next 15 years, the school-age population of the Middle East will increase by 19% to 13.6 million people. How will they define the future? “If we empower civil society to fill the political vacuum, the next generation will have choices and can exercise their freedom. This is the way to democratization,” said Mona S. Zulficar, Attorneyat-Law, Shalakany Law Office, Egypt. Zulficar and others underlined the importance of gender equality, noting that there can be no democracy without women sharing fairly in the process. According to the Inter-Parliamentary

Box 8: Dialogue on Peace and Security During the World Economic Forum on the Middle East, Palestinian Authority President Mahmoud Abbas announced an internal dialogue aimed at unifying the Palestinian political landscape in light of Palestinian Authority President Mahmoud increasing friction Abbas and Israeli Deputy Prime Minister Tzipi Livni and violence between rival parties. “The dialogue is about unifying political positions,” said President Abbas. While announcing the dialogue, Abbas reiterated his determination to seek a two-state solution, reject violence and resolve the PalestinianIsraeli conflict through a peace process, in particular, by implementing the UN-supported roadmap. “We have no way before us but to continue the peace process,” said Abbas. “Israel should accept our call to return to the negotiating table.” A meeting between Israeli Deputy Prime Minister Tzipi Livni and Palestinian Authority President Mahmoud Abbas took place during the Summit, the first highlevel meeting between the two sides in eleven months. “The meeting was very important,” Livni said. “A meeting between Israel’s Prime Minister and Abbas will be the next step.”

World Economic Forum on the Middle East

“Home-grown decisions are lasting. Imposed decisions will not stand the test of time.” Shaukat Aziz Prime Minister of Pakistan

Union, women hold only 6.8% of parliamentary seats in the Arab states. At the Summit, the Women Leaders Programme of the World Economic Forum brought together, for the first time, women regional ministers, who made a commitment to develop a five-year action plan for public and private sector policies to address the region’s gender gap.

unifying the Palestinian political landscape in light of increasing friction and violence between rival parties. On the subject of Iraq, some participants at the Summit looked at the formation of the new government in Iraq — which includes the three main factions: Shiites, Sunnis and Kurds — as progress, despite ongoing violence. However, other participants remained unconvinced that democracy, peace and stability would move forward as long as occupation continued. “Despite the conflicts that still afflict this region, the future appears bright and full of promise,” concluded Egyptian President Hosni Mubarak. “Multilateralism and democratic international conduct are needed to foster collective security and peace.”

Box 9: Global Risks and the Middle East Democracy in the Arab world has been gaining momentum, but many acknowledge that the process has to be “home-grown” if it is to succeed. “All [Arab] countries and societies want to move ahead and have their own view on how to do so,” explained Amre Moussa, Secretary-General, League of Arab States, Cairo. “Reform is something that we support, but we have to be cautious because of the fragility of the security situation and uncertainty on the international scene.” This view is supported by the World Economic Forum’s survey on the Middle East, which showed that 41% of participants said escalating violence in the Middle East was a major strategic concern for business (see Box 9). Other participants echoed the sentiments of the Arab League Secretary-General, stressing that resolving conflicts in the region — particularly the situation in Iraq and the Palestinian-Israeli conflict — is important if democracy in the Arab world is to move in the right direction and to mitigate some of the effects of instability. Although conflicts in the region are far from being resolved, there were positive signs of movement in the right direction. The Forum brought top Palestinian and Israeli leaders together for the first time in eleven months, which may pave the way for the President of the Palestinian Authority and the Prime Minister of Israel to resume political negotiations. In addition, the President of the Palestinian Authority, Mahmoud Abbas, announced the launch of an internal dialogue aimed at

World Economic Forum on the Middle East

Before the Summit, the Global Risk Programme of the World Economic Forum surveyed business participants about their perception of the broader strategic risk environment in which they lead their corporations. Most respondents identified the escalation of violence in the Middle East and the rise of terrorism as key concerns. Violence and terrorism are a major concern for almost 80% of those responding, supporting the argument that Middle East economies and business communities can only prosper in a more stable political environment. Over 25% of corporate leaders spend more than 10% of their company’s budget on ensuring business continuity and attempting to diversify activities across locations in order to balance their risk portfolio. Over 25% of business leaders turn to the World Economic Forum to identify broader strategic risks when faced with a strategic decision for their company.

How concerned is your company about these potential threats?

Escalating Violence

41%

Terrorism

38%

Nuclear proliferation

26%

Protectionism

21%

0%

10%

20%

30%

40%

50%

major strategic concern

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Summit Outcomes Davos WorkSpace: Innovative Tools and Solutions for the Middle East

Box 5:

Davos WorkSpace

Workshops conducted in Sharm El Sheikh in May 2006 by the World Economic Forum ended with participants committed to the development of transport infrastructure and capital markets in the Middle East. In addition, participants developed a plan for branding the region and identified what is needed to stimulate Middle East innovation. The collaborative efforts of participants were harnessed in four sessions convened in the Davos WorkSpace entitled: Looking for the Next Big Idea, Marketing and Branding the Middle East, Challenges in the Evolution of Capital Markets and Rethinking Regional Transport Infrastructure. Innovative Solutions The main thrust of each workshop was to find innovative solutions to the challenges faced by the region’s politicians, companies and other key decision-makers in creating a better world for a new generation. Breakout discussions followed brief presentations by industry experts. Participants were asked to share visions of 2020 and to discover how, by working together, those desired visions might be achieved. Finally, the breakout groups gathered together to present their proposals and to discover how solutions could be translated into action.

The World Economic Forum on the Middle East aimed to shape the regional agenda in pursuit of a more prosperous and peaceful future. The exchange of ideas and perspectives made possible by the interaction of high-level participants from both the public and private sector is itself a valuable contribution to this process. However, the meeting also produced some important new achievements, initiatives and commitments to work together going forward to continue the transformation of the region. What follows are the principle achievements that came out of the meeting to improve dialogue, society, business, investment and the ongoing work that participants volunteered to undertake with the Forum’s facilitation: Dialogue and Society • The Forum hosted significant business and political discussions among US, Arab and Israeli leaders, including the highest-level talks in 11 months between Israel and the Palestinian Authority. • By linking a group of students with regional ministers from among the Forum’s Young Global Leaders community, we expanded a valuable network to foster communication and exchange among young people. • The Forum launched the Egypt Education Initiative to benefit 820,000 children in 2,000 schools. • For the first time, the Women Leaders Programme brought together women ministers from across the region to construct a five-year action plan for public- and privatesector policies to address the region’s gender gap. Business and Investment • The Forum took initial steps to launching a private sectorfunded branding campaign for the Middle East under the banner “Red Tape Out, Red Carpet In”. • The Forum recognized social entrepreneurs for their achievements in promoting sustainable business practices in Egypt. • Egypt’s National Competitiveness Council published its third report. • There was agreement to consider amendments to the open skies policy for Egypt. What the World Economic Forum Agreed to Facilitate: • Under the Forum’s Council of 100 Leaders, develop a Web-based information portal. The Council will work with local communities across faiths to support its work. • Launch a regional task force to tackle corruption. • Work with high-potential, high-growth companies to develop a programme to help them integrate into the global economy.

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World Economic Forum on the Middle East

World Economic Forum on the Middle East

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Acknowledgements The World Economic Forum wishes to thank the following companies as Partners or Supporters of the World Economic Forum on the Middle East:

Strategic Partners Accenture Audi Booz Allen Hamilton CA Cisco The Coca-Cola Company Dubai Holding Economic Development Board of Bahrain Fluor HP Investcorp Kudelski McKinsey Manpower Merrill Lynch Nakheel Qatar Airways SABIC Siemens Volkswagen Regional Summit Partners Abraaj Capital Artoc Group for Investment & Development EFG – Hermes Holding Emaar Properties Gulf Finance House HSBC National Bank of Kuwait Orascom Telecom Holding PADICO PWC Logistics Telecom Egypt

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Summit Supporters Alshaya Group Arab African International Bank Commercial International Bank (CIB) MTN Group Service Provider Barco Official Carrier Egyptair

_________________________________ The World Economic Forum would like to thank the Government of Egypt for hosting its meeting on the Middle East in Sharm El Sheikh. We are particularly grateful for the support of H.E. Rachid M. Rachid, Minister of Trade and Industry of Egypt. The Forum also recognizes Egyptian TV and Radio Unit (ERTU) as host broadcaster for the World Economic Forum on the Middle East, and thanks Nestlé for its in-kind support.

World Economic Forum on the Middle East

Contributors Writers Alejandro Reyes William Montague Mark Schulman Benjamin Skinner Vidhi Tambiah, Associate Director, Global Agenda Report Contributors Sherif El Diwany, Director, Middle East & North Africa and Arab Business Council Saman Ahsan, Global Leadership Fellow, C-100 Sven Behrendt, Senior Project Manager, Global Risk Network Soren Bested, Global Leadership Fellow, Tech Pioneers & Global Growth Companies Thea Chiesa, Senior Community Manager, Aviation, Travel & Tourism Daniel Davies, Programme Manager, Middle East & North Africa Sarah Saffar, Senior Programme Coordinator, Global Agenda and Open Forum Karim Sehnaoui, Global Leadership Fellow, Arab Business Council Anand Sunderji, Community Manager, Investors Saadia Zahidi, Global Leadership Fellow, Women Leaders Programme Peter Torreele, Managing Director Editing and Production Alicia Bartlett, Icon Design Janet Hill, Editor Kamal Kimaoui, Associate Director, Production and Design Fabienne Stassen Fleming, Senior Editor Vidhi Tambiah, Associate Director, Global Agenda Yann Zopf, Media Manager Photographers Shawn Baldwin Pedro Costa Gomes Dana Smilley Tara Todraw-Whitehill

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)