It is clear that prosperous nations or regions share some common factors or drivers for their high levels of economic welfare and activity. The question is what the most important factors are and more importantly does the MENA region boast these factors?
Although there may be many elements; we have highlighted three main factors that we think contain other smaller factors: Physical Capital, Human Capital, The Framework
Physical Capital
It is very obvious how important this factor is to economic activity, as a prerequisite for investments (public and private), and the ripple effect it might have on consumption.When it comes to the MENA region (mainly GCC), not only does the region have abundant resources and surpluses but these are all internal resources. This is unlike the case of other emerging markets at their nascent stages, where the physical capital was sourced through external resources (FDIs and capital markets).
Another unique point for the region is not only that these resources are huge in absolute terms they actually much more significant in relative terms. When compared to the GDP of these countries, in some cases, net foreign reserves reach 200 percent of GDP.
Most importantly is the paradigm shift of using these resources for internal investments in infrastructure and economic diversification instead of previous trends of only exporting capital and consumption. This is worth observing and is catching the eye of the foreign investor and making the region one of the most interesting infrastructure stories globally.
Human Capital
Looking at the demographics of the region we can easily advocate that the region has no shortage of human capital with 50 percent of the population below 20 years of age, according to some estimates. The devil's advocate might challenge to what extent this labor force or human capital is qualified to lead the transformation needed and to deploy the physical capital in a way that is productive and beneficial.
We have not said that the thing to focus on is the trend of improvement in the quality of the human capital (although we believe the region currently has excess capacity in qualified labor). Yet we cannot ignore the huge amounts being invested in education (building education infrastructure and external scholarships) especially when you look at the announced Saudi budgets over the past years and the increased allocation to this segment.
"The Framework"
Without "The Framework", physical and human capital would not be able to interact to generate the needed economic growth or activity. Here we refer to the framework as the set of rules, regulations, norms, agendas or policies, without advocating a method to implement, in another words you can refer to it as "The Plan of Action".
This is the area where we think the region (with some exceptions) could be lagging, a factor that has prevented the region from outperforming other emerging economies.
Lack of efficient planning and execution and in many cases corruption, were major roadblocks in the face of entrepreneurship, increased productivity and human capital optimization.
Although the "Arab Spring" brings with it some uncertainties, looking through the events and having a longer term view, you can see that finally the cornerstones of the triangle of value can be completed. Especially the weakest link (the Framework) is improving, with substantial and serious reforms that are sweeping the region. Rather than government spending slowing, recent events and announcements show that, on the contrary, spending has increased. Several major plans and projects in the pipeline have been fast tracked, as many Governments are taking major steps to deal with these pending issues and challenges.
We are strong believers that based on the above argument, the region will have tremendous opportunities in the coming years and the relative importance and representation of the region on the global arena on different levels and fronts will increase substantially.
© MENA Fund Review 2012
