How Arab Economies Cope With Globalization

The Arab economies could become part of these networks, but so far they simply have not. There is some weak evidence in North Africa that there are call centers being established. But it is very difficult to see how this is going to occur because it's pretty late in the game. If you're an American business based in Chicago, or a British business based in London, and you have to make a decision on outsourcing, would you go to China or Vietnam? Or would you go to Egypt or Tunisia or Morocco? I think that the decision has been clear. The Arab countries get very little, remarkably little foreign direct investment.

Knowledge@Wharton: Given what you have said, what might be your most pessimistic and optimistic scenarios for the Middle East over the next five years?

Pack: I think that one has to think through the political scenarios. The Middle East also includes Iran, and one simply doesn't know what Iran will do. There are large numbers of people in the Sunni Arab world who are terrified of Iran, and this may deflect a lot of attention towards nuclear weapon development and away from dealing with economic policy. But the most optimistic scenario would be that the countries reform relatively rapidly, that their ports become efficient, and their roads become good. That being said, I still think that it's going to be pretty difficult.

But if all of those things were to be put in place, I think that the countries would have a good chance of growing at a somewhat greater rate than they have been in the recent past. For countries in North Africa or in Jordan, this would mean growth of 3.5% to 4% per year, which would be unprecedented for a sustained period of time in these countries. That would be the optimistic scenario. In the Gulf, I think that those countries, assuming the oil price sticks, will do okay. Although they still face the question of what can be done for a lot of the younger people who still don't have jobs there.

The most pessimistic scenario would be a stagnation model in which they grow very slowly, the way that they have done on and off in the post-World War II period. Between 1960 and 1980, they had reasonably good growth. For the most part, in these countries, 1980 to 2000 was pretty slow. Part of the collapse between 1985 and 2000 was due to the oil price decrease. Now, most of the countries have better policymaking in place. One should look carefully at Egypt, which has a lot of Wharton trained MBAs in the government. That being said, one could conceive of a scenario in which political extremism, the threat of Iran and the absence of a determined leadership lead to stagnation.

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An exchange-traded fund (ETF ) that tracks the performance of companies in the Middle East and Africa is State Street's (STT Quote - Cramer on STT - Stock Picks) SPDR S&P Emerging Middle East & Africa ETF (GAF Quote - Cramer on GAF - Stock Picks). The current top five individual stock holdings in this ETF are Teva Pharmaceutical Industries (TEVA Quote - Cramer on TEVA - Stock Picks), MTN (Mobile Telephone Networks) Group (no ADR ), Impala Platinum Holdings (IMPUY Quote - Cramer on IMPUY - Stock Picks), Sasol (SSL Quote - Cramer on SSL - Stock Picks) and Standard Bank Group(no ADR).

A closed-end fund that tracks the performance of companies in Israel is Credit Suisse's (CS Quote - Cramer on CS - Stock Picks) First Israel Fund (ISL Quote - Cramer on ISL - Stock Picks). The current top five individual stock holdings in this closed-end fund are Teva Pharmaceutical Industries, Harel Insurance Investments (no ADR), Israel Chemicals Limited (ICL) (no ADR), Bank Hapoalim (no ADR) and Bank Leuimi le-Israel (no ADR).

Wallstrip: First Israel Fund