How Arab Economies Cope With Globalization

What these countries are doing now is quite interesting. Most of them are trying to accumulate foreign exchange reserves. Indeed, several of the countries now have what are called sovereign wealth funds. These are huge conglomerations of capital controlled by the government. And we know that recently Citibank was able to tap one of these sovereign wealth funds for almost $5 billion. They are also acquiring other forms of assets throughout the world. They are hoarding dollars or other foreign exchange reserves correctly, in anticipation of these reserves running down. That being said, some countries like Saudi Arabia have reserves that will last for a very, very long time.

Knowledge@Wharton: Investing money overseas -- such as your example of Abu Dhabi investing in Citigroup (C - Cramer's Take - Stockpickr) -- will not necessarily lead to an increase in employment within the Arab countries themselves. Do you think that there is enough skilled labor in these economies to justify a labor intensive growth strategy?

Pack: That's a good question, because partially what has to be done is to improve the quality of the labor force. In the book, we note that the number of years of education has been going up significantly in the Arab countries, including the oil countries, but also the non-oil countries like Syria, Jordan and the North African countries. On the other hand, the quality of this education is really open to question. Moreover, they do not have large numbers of people enrolled in critical areas such as computer science, engineering, and the basic sciences. So the possibility of taking in technology from the rest of the world and generating jobs for the lower-skilled people is going to be limited by this absence of high-tier people. Then the question is: What do you do with lower-skilled people? And in principle we know what should be done; we have seen precedents in East Asia -- Korea and Taiwan -- which had very similar problems in the 1960s and 1970s.

The trouble is that questions arise about the willingness of people to take some of those jobs. There was an extraordinary example recently in Jordan, which has a free trade agreement with the United States. This means they can export textiles, and especially clothing, to the United States. A number of foreign investors have come in and established factories and sometimes joint ventures with the Jordanians. It turns out that, quite shockingly, given the unemployment rate in Jordan, most of the workers that have been hired in these factories are non-Jordanian citizens. They are Bangladeshis, Pakistanis and to some extent Indians -- but there are almost no Jordanians. Now, there is the question of why this unwillingness to work in factories occurs, but it is nonetheless a significant issue.

Knowledge@Wharton: As your book points out, the Middle East has seen relative political stability compared with places like Latin America and Sub-Saharan African. And yet, this has resulted in what you describe as "stultifying policy inertia." What policy changes do the Middle Eastern economies need?

Pack: There are some notable features in the Middle Eastern economies. There is a need for growth that is usually called "import liberalization," which involves reducing tariffs and reducing other obstacles to imports of foreign products. Then, there are a whole series of internal questions which come up and which have not been dealt with.

In the book, we have a very detailed example of the cost to potential Egyptian exporters because the country's port system does not work well; the airlines do not work well; the road system is terrible, and a host of other things that have to be addressed directly [see "How Do I Invest in Infrastructure Stocks?"]. This is so the potential for exports, which in a country like Egypt in principle is large, can be realized. So, the policy changes required are manifold. Of course, they have to deal with things that can be done relatively easily -- almost by the stroke of a pen -- such as reducing tariffs. But then they have to become very good at reducing a whole set of other obstacles to successful businesses.