January 13, 2005

The Most Important Story You Won't Hear

Well, you'll hear about it because you've developed resilience to my pedantic prose, but MSMers aren't likely to hear about MidEastern boom times which curiously correspond with the Deposition of Saddam and his wacky lads from Iraq.

A guest editorial today in the WSJ today (free site) says "The region is prospering in the wake of Iraq's liberation."

A search of newspaper and magazine stories in 2004 reveals more than 3,338 articles including the words "Middle East" and "war and terrorism"; only 102 stories linking the "Middle East" with "growth" and "recovery" can be found.

Yet definitive policies to normalize the Middle East have made regional and global market investors bullish, repatriated capital exported (or that had fled) from the region, and encouraged a sea change in foreign direct investment. The end of Saddam's regime sent a major, unconfused market signal after the West's years of disinterest in the Middle East as a Levantine backwater. Subsequently, every major capital market index in the Middle East has risen.

Regionally, stock markets rose over 30% in 2004 and represent a market capitalization of $470 billion. This has been accompanied by a surge in regional property values and a higher number of tourists. The main Egyptian equity index has increased 165%, while that of Saudi Arabia has gone up by 158%. The Saudi market's stellar performance is especially striking given the great amount of attention paid at the moment to that country's security problems. Israel's leading index has risen by 32%, the benchmark index of Kuwait's exchange by 73%, Jordan's by almost 60%, and that of the United Arab Emirates by 110%.


Rebuilding the Middle East in a free market model is going to take a lot longer than I thought. I was one of those starry-eyed neocons. I extrapolated a unique Iraqi affinity for freedom from viewing Iraqi ex-pats in Dearborn, MI.

Because something is hard, doesn't mean it won't happen. And there is nothing more important than economic freedom. Markets and FDI (Foreign Direct Investment) tell the tale -- and it's looking like a pretty good story:

Until recently, the region attracted less than 1% of global FDI and only 4% of FDI directed at the developing world. The average annual amount of FDI for the three years preceding the war (1999-2002) was only $6.7 billion. According to our research, FDI for the entire Middle East since regime change in Baghdad will be up 76% or $4.8 billion to an average of $11.5 billion for the 2003-05 period. Overall, Middle Eastern countries are striving to make their economies more attractive to foreign investment. Nowhere is this more apparent than in Iraq. A new foreign investment law was passed on September 2003 permitting 100% foreign ownership of firms in all sectors of the economy aside from oil and other mineral extraction. Profits from foreign investments into this previously highly centralized, state monopoly economy can now be repatriated freely from both tax and capital controls.

Sounds like the ingredients for a bull market to me. While I don't forgive terrorists because of poverty (most of them seem to be well off), you can't help but think increased economic activity would add -- greatly -- to stability.

Posted by jk at January 13, 2005 09:37 AM
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