Selling to the Neighbors

Newsweek International 2006-02-27 22:55:22After a century-long estrangement, some Arab economies are rediscovering a lucrative asset: each other. Take Egypt, where the value of trade with its Arab partners rose by 60 percent last year-fueled by the falling Egyptian pound, which Cairo decided to float in 2003. The cheaper currency has been a boon to manufacturers like the Olympic Group, which expects the value of its regionwide exports of white goods to triple this year, to $50 million. The company has opened sales offices in Dubai and Jidda and a refrigerator factory in Sudan. In Jordan, it's angling to buy a factory from which to produce and export home appliances and consumer electronics. "The Middle East, North Africa and Africa-this is our region," says Olympic chief financial officer Hussam Mestekawy. "We know the customers, and we now have the infrastructure to support a regional strategy. We're not the European Union, but it's a good start."

Indeed, commerce within the Middle East, the most sluggish among the world's trading blocs, is showing signs of a healthy revival. In 2005, according to new data from the Egyptian Trade Ministry, the value of trade among the 22 Arab states was equal to 22 percent of their total gross domestic product, up sharply from the single-digit rates that had prevailed for a generation. In part, that's due to rising demand fueled by record oil profits. But Arab governments have also made a concerted effort to dismantle barriers to each other's goods and services. "All of a sudden there are billions of dollars here and a big incentive to keep it close to home, and that creates the means to aggressively develop this region," says Rachid Mohamed Rachid, Egypt's minister of Foreign Trade and Industry.

In January, a dozen Arab states agreed to abolish customs duties on products traded within the Arab Free Trade Area, the latest step toward the goal of a single market of 300 million Arabic-speaking consumers. In March, an Arab summit in Algeria will ponder the creation of a Pan-Arab customs union, a move that would have been unthinkable a decade ago, before membership in the World Trade Organization became de rigueur for developing economies. "Years ago, we had socialist economies with total government control," says Rachid. "Now we have the same [free market] economic models, and this is having an effect."

The trend could help revive the Middle East as the great trading combine it was less than a century ago. Under the Ottoman Empire, the Arab world was a global commercial hub; city-states such as Damascus and Alexandria had trade ties extending from Scandinavia to China. Following World War I, however, British and French occupiers partitioned the region, effectively cutting its trade links. Ever since, efforts to create an Arab common market have been undermined by political disputes and a primitive industrial base that produced few goods Arab consumers wanted to buy. The result: in recent decades, as imports and exports within other regions rose even faster than international trade, trade in the Arab world languished. A sustained revival could accelerate a broader reversal of the economic stagnation that has fueled Muslim alienation from the West.

Skeptics linger. They point out that AFTA members retain the right to protect homegrown products-from fruit to steel rebar-from imported competition. They also question the value of an Arab-only trade club. "Countries like China are joining in with Japan, Malaysia and Korea," says Salah Diab, chairman of Egypt's Pico -Engineering Holding Co., a diversified conglomerate. "What is in Egypt's club? Jordan? Sudan? The magic solution is not making a clique with neighboring countries. It won't work." Trade within Asia amounted to $1.2 trillion in 2004, compared to $22 billion in the Middle East.

Still, a growing list of companies with regional ambitions suggests that an integrated Middle East is more than an Arab nationalist's pipe dream. Subsidiaries of Egypt's Orascom Group have built a regional network of tourist hotels, office parks and cell-phone grids. Orascom Telecom has strategic shares in a host of such networks, including one in Iraq. Over the last two years, Saudi Arabia's Savola Group has opened food-processing mills in Syria and Algeria, adding to its existing operations in Iran, Jordan, Kazakhstan, Morocco and Sudan.

Last year, the Saudi Transport Ministry announced it would open to foreign investment a $1 billion railway connecting the country's eastern and western coasts. Eventually it's meant to extend north into Jordan and possibly to Istanbul-a route that roughly follows the one plied by the old Hejaz Railway, built a century ago to carry passengers and cargo from the Ottoman sultanate to Mecca. "Regionality is opening up," says Prince Mohammed K.A. Al Faisal, president of Riyadh-based Faisaliah Group Holding Ltd., which is actively buying stakes in Arab companies with a regional strategy. "You're seeing Saudis who want to invest in companies that are trading in the gulf, and they're looking at Egypt, with its big population, and the Levant as a place they can grow." Arab banking, long ago an international leader, is also reawakening. Last year, Egyptian merchant bank EFG-Hermes Holding SAE purchased a 20 percent stake in Lebanon's Bank Audi for $450 million in anticipation of the consolidation and growing regionalism of the Beirut banking sector. "Lebanese banks are expanding everywhere," says EFG-Hermes CEO Hassan Heikal, who says he projects that 60 to 70 percent of the firm's fee revenue will come from outside Egypt over the next three years, up from 20 percent today.

Much of that activity is expected to come from the gulf states, Heikal says, where stock trading volume is now roughly equal to the markets of South Asia and Southeast Asia, combined. "With low-cost production [in Egypt] and the spectacular performance of Arab equity markets," says Heikal, "we're suddenly seeing [Arab business] groups with huge market share realizing that they're just as capable of making big investments at home as their Asian counterparts." Somewhere, the Ottomans are smiling.

China Is On the Move

Newsweek International 2005-12-12 00:24:04The conventional view of China counts three basic threats to its economic boom: corruption and disrespect for the rule of law, environmental degradation and the tide of rural migrants who threaten to overwhelm its cities. It's no accident, however, that while Beijing is officially campaigning to end corruption, impose the rule of law and clean up the environment, it welcomes internal migration. Over the past few years, China has steadily loosened restrictions on the movement of its citizens—accelerating a trend begun in the late 1970s—most recently by extending welfare benefits to peasants looking for work in urban areas. Indeed, central authorities are pushing this plan over the objections of security forces and provincial officials, who fear that huge population shifts will stoke unrest and burden social services. What this battle shows is that China's senior leaders are on the same side as a growing number of economists who believe that the benefits of a mobile labor force far outweigh the risks. By freeing its proletariat to move about the country, China has created a dynamic labor market that is closer in character to America's flexible work force than to the static societies of Europe or Japan. Increasingly, worker mobility is rated as important a factor in measuring economic health as productivity and money supply. A recent report on global employment by the Organization for Economic Cooperation and Development devotes an entire chapter to worker mobility and its potentially salutary impact on joblessness and income disparity. In part, that's due to the boost internal migration has given the U.S. economy—led by the shift of the American population toward jobs in the Southwest—which has had its mirror in the shift of China's population to the southeast. Economists say it is no coincidence that The World's most powerful engines of growth, the United States and China, also have the highest rates of worker itinerancy, while Europe and Japan lag behind. ''In the global economy, two of the most important factors are mobility of capital and mobility of labor," says Mohamed El-Erian, the incoming president of Harvard's trust funds and a noted emerging-market bond expert. ''Capital trades internationally, but labor does not, which is why domestic migration is so important." Beijing clearly understands this. Over the past few years, it has encouraged the efforts of private job-placement agencies and municipal officials to match job hunters with openings nationwide. Government representatives from central Sichuan province, for example, act as full-time brokers for the unemployed, finding jobs in other provinces, arranging transportation and even mediating disputes with employers. In southeastern Guizhou province, one of China's most impoverished areas, municipal officials have set up sister-city programs in which bright young Guizhounese are enrolled in urban training courses. ''If you're a cadre younger than 30 years old, you'll go to the city and come back with either a skill or an investor," says Daniel Wright, a director and China specialist at the National Bureau for Asian Research in Washington, D.C. ''It's a very fluid dynamic." The flow of Chinese from rural villages to cities has swelled into a mangliu, or peasant flood, and it is perhaps natural that outsiders tend to dwell on the dangers. The estimated average annual movement of 200 million rural Chinese over the past six years is historically unprecedented, dwarfing the annual average of 40 million Americans who moved during the same period, though as a percentage of population the rates are about the same. The big difference is that in the United States, migration swells the number of McMansions in suburban Phoenix. In China it has carved a grimmer landscape, as peasants advertise their availability for work with hand-scrawled placards on Shenyang street corners, and sleep six to a room in Shanghai. But the economic effect is the same: far more rapid growth than in sit-at-home countries. ''One cannot underestimate the value of labor mobility in China," says Wright. ''China's skylines and export-driven economy were built with the sweat of rural labor." Migrants are the key component of ''the China price," a corporate buzzword that implies the lowest possible amount of money buyers are prepared to pay for a given commodity and which developing countries, from Mexico to Pakistan, are struggling to beat. In Beijing, laborers from the southeastern coastal city of Wenzhou have established a garment district over the past decade that now competes head-on with the city's established clothiers. They are now major investors in Shanghai's booming real-estate market. A universal yardstick for comparing worker mobility is hard to come by. The World Bank calculates that 18 percent of American laborers spend less than six months a year in their areas of primary residence, the highest such rate in The World. In China, the ratio is 14 percent, followed by the European Union at 11 percent. Those figures, however, reflect only temporary moves, not permanent shifts—which are more important for matching skills to job openings in a dynamic economy. It's hard to find precise comparative data on permanent moves for China, but the OECD report makes clear that the rate of gross internal migration in Europe lags behind that of the United States and Asia generally. According to the report, while 3 percent of working-age Americans move within their home country each year, only 1.5 percent of Germans and just over 2 percent of the French do (and the French tend to move for reasons unrelated to work—family or retirement, for instance. Among the factors that keep Europeans from moving, says the OECD, are generous unemployment insurance and high relocation costs. ''When an American citizen loses his job in Detroit and he is offered a job in Denver, he takes his wife and children and travels across the United States to take that new position," says former French Finance minister Dominique Strauss-Kahn. ''When this sort of situation arises in France and you offer jobs 100 kilometers down the road, people say, 'Forget about it'." China's leaders have shown a clear understanding of the upside of internal migration since Deng Xiaoping first launched economic reform back in the late 1970s. Deng replaced communal work units in the countryside with a Household Responsibility System, which effectively gave farmers control over their own land and output and allowed them to generate profit. Travel restrictions were eased to allow farmers to transport their goods to markets in town, creating a demand for hostels where visitors could spend the night. By the mid-1980s, Deng was further easing the rules that had defined where farmers lived and went to market. All of this encouraged more movement between towns and cities. ''No one in the central government declared, 'You are now allowed to do these things'," says Zai Liang, a professor of sociology at the State University of New York at Albany. ''It just evolved on its own as a way to meet demand and the party cadres let it happen." The reforms made China's farms more efficient, creating a surplus of rural labor just as Deng was spreading his free-market policy to the coastal cities. After his historic ''southern tour" of booming Guangdong province in spring 1992, the migration pattern changed. Instead of just commuting to market towns, peasants began journeying cross-country for urban work on a permanent or semi-permanent basis. And far from converging exclusively on China's coastal cities, as is often presumed, the trail of labor migration crisscrosses the entire country. Migrant farmers are heading west to Xinjiang province to stake out their own plots of land, for example, while itinerant carpenters, masons and traders are participating in the construction boom there. "In general," says Kam Wing Chan, a geography professor at the University of Washington who has studied itinerant labor in China, "craftsmen and traders head west, where their skills are in short supply, while those who head for the coastal regions tend to be among the unskilled." Of course, outsiders are not the only ones who worry about the risks of mass migrations inside China. Family-planning agencies say it makes policing the country's one-child policy all but impossible. Security officials say it fuels rising social unrest and urban crime. (An epidemic of bicycle theft in the southern coastal city of Shenzhen, for example, is blamed largely on migrant workers.) Last month leaders at the Communist Party's Central Planning Committee meeting declared the objective of China's new five-year plan to be a ''harmonious society," implicitly acknowledging the fine line between an itinerant work force and a restive one. Nevertheless, Beijing has consistently defended the migrants' right to move. Early this year the government announced it would loosen Mao-era rules that restrict rural migrants from receiving education and health-care services in urban areas. Last year Prime Minister Wen Jiabao warned employers against exploiting migrants after a woman petitioned him on behalf of her husband, who had gone months without pay. For China's leaders, encouraging worker mobility is as radical as it is underappreciated. Beijing has been widely praised for assuming the risks of opening its markets rapidly to the outside world, particularly in the 1999 deal that made China a member of The World Trade Organization. But opening national borders to multinationals like HSBC or Microsoft is no more threatening to stability than opening internal borders to mass worker migration. The payoff for both gambles has been huge, measured by the tens of billions in new foreign investment and factory orders flooding into China. ''China and the U.S. are true capitalists at heart," says Tim Cook, president of Kailas Capital, who has spent much of his career living and working in East Asia. ''While much of Europe is still locked in a socialist mind-set, the Chinese have gotten over this speed bump called communism and they're simply returning to their true instincts." For all the dire warnings about migrant-worker unrest, Beijing now seems very comfortable with the risks.

© 2005 Newsweek, Inc.

The Secrets of Gao Li Dai

Institutional Investor 2005-11-01 00:30:21Full Article (.pdf)

State of Fury

Newsweek International 2005-10-24 00:31:50A senior U.S. security official on a visit to Beijing last year was having drinks with Chinese counterparts when the talk turned to rising social strife. The American assumed China's poor western provinces, plagued by ethnic and religious tensions, were the most restive. Not so, said his hosts. "Their biggest nightmare is Manchuria," says the official, who requested anonymity because he deals frequently with China. "That's where all the state-owned industries are being sold and that's where the unions are the most organized. They're in a race against time." Manchuria is reasserting itself as China's epicenter of unrest. According to official figures, one in 12 major demonstrations in China last year occurred in Liaoning province, which along with Jilin and Heilongjiang provinces make up the industrialized northeast region of Manchuria. That ratio is down from one in six back in 1999—a reflection of rising protest elsewhere, not less unrest in Manchuria. "Liaoning has by far the highest number of protests in China," says Murray Scot Tanner, a senior China analyst at the RAND Corporation. "And we've actually seen an increase over the last couple of years." Nationwide, economic restructuring has eliminated some 50 million jobs since the late 1990s. The cuts devastated Manchuria, long a vortex of rebellion and intrigue. The Manchus swept out of the area to conquer China in the 17th century, and ruled until 1911. For much of the early 20th century, great powers struggled for influence over the region's oil and gas, key ports and railways. As part of a former industrial powerhouse, Manchurians combine a knack for organization with a growing anger that their fortunes are falling as others, particularly along the southern coast, thrive. The northeast, home to 10 percent of China's state-owned enterprises and 13 percent of their work force, has seen its share of industrial output slide from 16.5 percent in 1978 to 8.6 percent in 2002. (During the past decade, the number of state-owned companies nationwide has declined by half, and they now generate about 40 percent of non-farm GDP.) State largesse, once regarded as a tonic for Manchuria, has turned out to be slow poison, says economist Chi Hung Kwan, because it drags out the death of state enterprises. With its nest of militant trade unions, the region is notorious for the kind of organized protests that so rattle Beijing. While union chieftains all over China are approved by and traditionally loyal to the state, they are becoming more responsive to angry workers for fear of losing their relevance. Already this year, more than 10,000 laid-off workers have demonstrated for higher unemployment payments at Anshan Iron and Steel, one of China's largest mills. Tens of thousands of workers went on strike over pay disputes, housing and dining-hall issues in the port of Dalian, where local authorities had also blocked anti-Japan rallies before the anniversary of Tokyo's surrender in World War II, fearing the protests might turn against the local government. Paramilitary police were called in to quell protests after 212 coal miners died in a gas explosion near the city of Fuxin. Trouble also looms from North Korea, just over Manchuria's southern border. Last year Beijing replaced a militia policing the border with units of the regular Army—a measure, U.S. security officials say, of the government's fear that starving North Koreans could raise tensions by taking local jobs. The impact of a North Korean collapse on Manchuria, says Tanner, "is a major and underestimated reason why Beijing doesn't want to put the screws on Pyongyang" over its nuclear arms program. Geography works against Manchuria in other ways. Its industrial base was founded by Japanese occupiers in the 1930s, built on by Mao in the '50s, and then largely forgotten when China opened its economy in the late '70s. It was the coastal cities, not the cold, remote northeast, that attracted foreign investment. Manchuria never got the investment needed to wean itself from state help. Visiting Liaoning in June 2003, Prime Minister Wen Jiabao made the development of the northeast and the west a top national priority, effectively equating once proud Manchuria with China's most impoverished region. "Location is probably Manchuria's biggest liability," says Albert Keidel, a China expert at the Carnegie Endowment for International Peace. "It's simply no longer a core area of the economy." In recent years, Minxin Pei and other top China analysts have warned that regions like Manchuria, left out of the boom, are in danger of becoming "failed" states or worse: failing "predator states." As Beijing transfers responsibility for projects and services to the provinces without extra financing, larceny has become a common means of public funding. When the government launched its sweeping restructuring plan in the late 1990s, it was party-connected factory bosses (not foreign multinationals) who gained control. The process in Manchuria was so corrupt, Beijing felt compelled in several cases to replace local regimes, not just individual officials. The proletariat was furious. As factories failed in Manchuria, 9,000 protests broke out between 2000 and 2002 alone. At the Shenyang Molding Co., where Cheng Youzhi worked for 32 years until 2001, the company was declared bankrupt, relieved of its work force, and sold to its old director for one quai, or about eight cents. "The new owners are now rich," says Cheng, who would speak only under a pseudonym for fear of retaliation. "All the employees were sent home and then they sold the company, bit by bit." That sense of alienation helps explain why the region, which is relatively wealthy, is China's most volatile. Although per capita income in Liaoning, at $2,037 in 2004, is well above the national average of $1,272, its middle class is bitterly nostalgic for state-guaranteed jobs and benefits. Skilled engineers, welders and line managers who once held prestigious jobs are now driving cabs, hawking fruit and working on construction sites. They have no medical benefits and, in many cases, no pensions. Today, analysts say, Manchuria has all the ingredients for a widespread, violent backlash. For Beijing, time may well be running out.

© 2005 Newsweek, Inc.

Banking on Reform

Institutional Investor 2005-06-30 17:43:03 One of the worst-kept secrets in the Syrian Arab Republic is tucked inside a squat concrete office building on an obscure, pothole-ridden street off Harika Square in Old Damascus, the heart of the oldest city on Earth. Up a few flights of well-worn stairs is the office of Yassar Sahloul & Sons Co., Syria's largest money changer. Female receptionists in pantsuits and head scarves greet visitors, and stewards offer cardamom-scented coffee from silver trays. The din of automatic bill-counters riffling through stacks of bank- notes resounds through the lobby and the wood-paneled corridors while clerks rush about in search of signatures and stamps.

In an economy clogged by decades of foreign exchange controls and state ownership, Sahloul & Sons and its smaller competitors are the main arteries of capital to and from the outside world. They operate on the margins of legality -- technically, Syrian law imposes tight restrictions on who may buy dollars or other foreign currencies, and for what purposes. Still, the money changers are tolerated by the government for one compelling reason: Without them, the economy would implode.

"We have been very important to the Syrian economy in the past," says Zouheir Yassar Sahloul, who along with his six brothers launched the company in the early 1980s. "But much is changing, both here and in Lebanon, and who knows what these changes will bring?"

Most of the counterparties for Sahloul and other dealers lie across the border in Lebanon. For four decades, ever since Damascus nationalized its banking industry, Beirut banks have secured much of Syria's savings and financed its commerce. It is a relationship that has survived decades of war, dictatorship and political conspiracy. Today, however, this financial connection -- and the health of the Syrian and Lebanese economies -- is threatened by the political shock waves that have rattled the two countries since the February bombing that killed former Lebanese prime minister Rafik Hariri.

Many Lebanese believe that Syria and its president, Bashar al-Assad, were behind Hariri's assassination. Hundreds of thousands of people took to the streets to demand an end to Syria's 29-year military occupation of their country, an unprecedented show of popular will that forced Assad to withdraw his troops in April. Protesters attacked migrant Syrian laborers, spat on Syrian tourists and trashed the cars of visiting Syrian businessmen. Four months after Hariri's assassination, many Syrians remain afraid to travel to Beirut. For their part, Syrians retaliated by withdrawing millions of dollars in deposits from Beirut banks, forcing Lebanese authorities to defend their currency by selling more than $1 billion of the country's reserves to buy Lebanese pounds. The financial turmoil and political uncertainty have jolted the country's economy. Most economists now expect Lebanon to show no growth this year, compared with expectations of 5 percent expansion before the killing.

"We always thought of Lebanon as this delicate flower," says Abdel Salam Haykal, the president of the Syrian Young Entrepreneurs Association. "And it suddenly became the mouse that roared."

The Bush administration stopped short of accusing Assad of ordering Hariri's murder but made its suspicions clear by recalling its ambassador from Damascus and signaling its desire for the removal of Assad as part of its campaign to democratize the Middle East. Since March, when French President Jacques Chirac told Bush at a dinner in Brussels that Assad was unlikely to survive Syria's withdrawal from Lebanon, administration officials have been meeting with potential alternatives to the regime, including Syrian political exiles. Operations by U.S. forces along the Syrian border with Iraq have put additional pressure on Damascus.

"It will not be a military intervention," says Murhaf Jouejati, a Syrian specialist and a visiting assistant professor of political science at George Washington University. The administration "thinks there will be a coup d'etat if they impose the hardest tasks as preconditions for better relations, such as cutting ties with Hezbollah. It'll be all stick and no carrot."

With its main financial lifeline to the global economy at risk, the Assad regime faces a dilemma. The government has to accelerate reform if it wants to revitalize a stagnant economy and lessen the country's dependence on Lebanon. But opening the economy would force the 39-year-old leader to relax his tight grip on society and would threaten the entrenched interests of a powerful business clique with close ties to the regime.

Syria's conservative Parliament and hidebound bureaucracy have blunted many of Assad's reform attempts by simply ignoring his legislative initiatives. Two years ago the government passed a law allowing the establishment of private banks for the first time in more than 40 years, ending nearly a decade of pitched battles between the Finance Ministry and Parliament. So far three private lenders have opened their doors in Syria; another three have licenses and are expected to begin operations within the next 12 months (see box). The banks are struggling because regulations limit the interest rates they can charge on loans. The Finance Ministry has yet to provide several key supporting measures for the banks, including an interest-bearing facility at the central bank and a database for credit evaluation.

Mohammad al-Hussein, the reform-minded Finance minister, admits he faces an uphill struggle. Responding to complaints from Syria's new private bankers, he recently drafted a proposal to reduce the country's stamp tax, which includes an onerous levy of 6 to 6.25 percent on the value of loans and promissory notes and a separate charge on private banks' total capitalization. It isn't clear, however, when or if Parliament will act on Hussein's proposal.

"I'm not satisfied with the pace of change," he tells Institutional Investor in an interview in his office, which is appointed with opulent inlaid chairs and a bookcase filled with meticulously labeled files. "We're fighting to attract foreign investment, and this [tax] is the kind of thing that has to be lifted or at least reduced to the lowest level possible."

Other needed, and long-overdue, reforms are not yet on the agenda. Syria's big state-owned companies need to be restructured, but the government has ruled out privatization because of the social and political instability it might cause. The government also has no plans to reduce subsidies, which make up 20 percent of the budget and are eroding the country's financial health. The World Bank estimates Syria will post a budget deficit of 4 percent of GDP this year, compared with a surplus of 3.5 percent two years ago, despite the surge in the price of oil, the country's main export. The government continues to buy domestically grown grain and cotton at double the price on world markets while selling gasoline and heating oil at steep discounts.

"The Syrians are very determined to avoid social disruption," says Joseph Saba, director of The World Bank's Middle East and North Africa division. "But things cannot continue as they are."

Unless Assad makes a bold commitment to reform, the country will continue to struggle economically. "To deal with this conclusively requires a major political decision," says Hussein. "Otherwise there will be no meaningful change."

Assad's plight is emblematic of the ferment in the wider Arab world. The war in Iraq unleashed widespread protests against the U.S., but the country's first free elections in January have inspired a clamor for economic and political reform in the region. Tentative moves toward more-pluralist government in Egypt and Saudi Arabia have raised hopes among Syrians for similar reforms.

The need for economic revitalization in Syria is urgent. The economy sputters along on a mix of black-market dealings and oil exports. Growth slowed to an estimated 3 percent last year from 3.4 percent in 2003, according to Hussein. That rate is insufficient for a country whose population is expanding by 2.45 percent annually, and where some 200,000 people enter the labor market each year. Unemployment is estimated at anywhere between 10 and 20 percent. The crucial oil sector is declining rapidly. It generates 37 percent of government revenues today, down from 51 percent in 2002, despite the strength of global prices. Domestic subsidies and declining production are to blame. Economists estimate that the decline in output will accelerate from 2008 and turn Syria into a net oil importer by 2012.

Meanwhile, the forces of globalization are knocking on Syria's door. Damascus signed free-trade agreements last year with Turkey and the European Union that oblige Syria to slash import duties and nontariff barriers, which currently add 20 percent to the price of imports, according to World Bank estimates. "We need to find new sources of public revenue," says Hussein.

The secular state's failure to foster growth is fueling an increasingly powerful Islamist movement. It is barely two decades since Assad's father, Hafez al-Assad, ruthlessly suppressed a Muslim Brotherhood uprising by sending tanks to raze the town of Hama, killing thousands. The challenge for Bashar is to coopt Islamist elements without getting trapped in their potentially lethal embrace. Fundamentalism is particularly strong in Aleppo, Damascus' rival city to the north. The most senior religious leader there, the government-appointed Grand Mufti Ahmad Hassoun, was widely anticipated to be elevated to mufti of all Syria. The expected promotion has been put on hold, however, while the government searches for a successor with enough experience to manage Aleppo's sectarian tensions.

"We still have extremists amongst the men of religion here," Hassoun says from the diwan, or meeting room, of his home. "And I am in a struggle with them."

Analysts characterize Assad as both a would-be reformer and a dutiful son reluctant to dismantle his father's legacy. Powerful forces block the path to reform. Assad must contend with the still-potent Ba'athist retainers and hangers-on from the former regime who keep Syria manacled to its socialist past. "The old guard is not just three or four guys in senior positions but 10,000 fossilized bureaucrats," says Flynt Leverett, who served as senior director for Middle East affairs at the U.S. National Security Council during President Bush's first term and as a senior Mideast analyst at the Central Intelligence Agency. "That's the real obstacle to change."

Syria's oligarchs, known as the New Old Guard, are another powerful impediment. As in other Arab states, many of the country's business elite have gotten rich alongside, or on the shoulders of, the generation of young leaders who have succeeded their fathers to power. Consider Rami Makhlouf, who over the past several years has accumulated some of Syria's most lucrative franchises, including a cell phone company and the country's only network of duty-free retail stores. Makhlouf is a maternal cousin of the president.

These conservative forces help explain the hesitant leadership shown by Assad since he assumed power in 2000. His youth and his background as a London-educated ophthalmologist led many at home and abroad to view him as potentially more liberal-minded than his father. He did introduce some reforms early on, slashing duties on imported cars, banishing military uniforms from schools, phasing out rent controls and lifting press restrictions. A new weekly newspaper, the Lamplighter, briefly emerged as a symbol of a Damascene spring. By the summer of 2001, however, the regime began clamping down again, arresting activists and closing down the Lamplighter. In the past year restrictions on dissent have loosened again and independent newspapers have proliferated, but Syrian dissidents are understandably wary.

"It could well be that nothing has changed, and that this is all just talk," says lawyer Anwar al-Bounni, a senior member of the Human Rights Association in Syria.

The forced withdrawal from Lebanon has raised the stakes for Assad. Analysts in Damascus and Washington say they are watching such prominent officials as Asif Shawkat, chief of Syrian intelligence and Assad's brother-in-law, for signs of a coup. Assad could strengthen his position, they say, by finding ways of preserving the country's vested interests in Lebanon, which Syria accumulated during its occupation. Analysts say Syria will try to build a new network of proxy officials in Lebanon, probably through the patronage of Syrian intelligence agents with legitimate businesses in the country.

Perpetuating Syrian dominance will be especially difficult, however, now that Lebanon has enjoyed a taste of real autonomy. As Institutional Investor went to press, Lebanon was preparing to hold a three-week-long rolling election beginning in late May. Saad Hariri, the late prime minister's son, and Walid Jumblatt, the nation's wily and charismatic Druze leader, are expected to emerge as key players in the country's first freely elected government in a generation.

It's difficult to overestimate the importance of Lebanon to Assad's regime. Military occupation has enabled Syrian businessmen and politicians to extract rich tribute. Some $20 billion has flowed from Lebanon to Syria in the form of remittances from Syrian workers and the sale of cheap Syrian goods, which have displaced Lebanese products, according to a study published recently by An-Nahar, a Lebanese newspaper. Illicit trade has been equally lucrative. Joe Faddoul, an independent Lebanese economist and consultant, estimates that Syrian interests have earned $1 billion to $2 billion a year in Lebanon by selling heating oil on the black market, siphoning electricity from the state electricity utility and rigging bids on road and port projects.

Lebanese banks have been the first port of call for capital fleeing Syria's tight controls. The Syrian Finance Ministry reports that deposits at Syria's state-owned and private banks total some 600 billion Syrian pounds ($11.4 billion) and estimates that an equal amount is sloshing around the black market. Those domestic funds are probably dwarfed by the amount of Syrian-controlled money held abroad, says Finance Minister Hussein. Unofficial estimates suggest that Syrian interests have some $10 billion deposited in Lebanese banks alone.

Hussein hopes to lure some of that capital back home with a raft of financial reforms. In addition to his proposal to reduce the country's stamp tax, he has drafted plans for a stock exchange and capital markets authority. Although Hussein is confident his proposals will become law by the end of this year and the ministry is working with The World Bank to establish listing requirements, he acknowledges that it could take years before Syria has a diversified set of companies worth offering. "We're laying down new laws so that people will feel safe remitting some of that money," he says. "We want to move toward a more liberal, capitalist economy, but there is still this great debate over what a liberal, capitalist economy is."

Lebanon faces equally daunting challenges. With a population of only 3.8 million, the country boasts a per capita income of $4,000, nearly three times that of Syria. Notwithstanding its relative prosperity, however, the country struggles to service a public debt of 180 percent of GDP, the legacy of a massive postwar rebuilding program that did little to address the economy's core problems -- an overbanked financial sector and a reputation among foreign investors for political risk, red tape and corruption.

The political and economic uncertainty spawned by Hariri's assassination has badly hurt growth prospects. Government officials expect the economy to stagnate this year after growing by 4 percent in 2004, and foreign investment is expected to halve, to just $500 million. In the weeks following Hariri's death, Beirut spent nearly 13 percent of its $11.6 billion in foreign exchange reserves to defend its pound, Riad Toufic Salame, governor of the Central Bank of Lebanon, tells Institutional Investor. He emphatically denies that any withdrawal requests were refused, and the pound, which fell nearly 4 percent after the killing, has recovered to trade at about 1,512 to the dollar. "The market took a blow," Salame says. "But we reacted accordingly, and exchange rates are now stable."

THE BACKWARD STATE OF SYRIA'S financial system today is an unfortunate departure from the country's rich commercial history. In the eighth century Damascus boasted The World's most sophisticated banking system, based on the silver dinar, which was minted by the Umayyad Caliphate and circulated from Scandinavia to China. A draft order -- known in Arabic as a sek, from which the English "check" derives -- signed against an account in Syria would be honored in Canton. For the next 12 centuries, Damascus served as the financial hub of the Levant. What is today Lebanon existed only as a strip of cities along the coastal frontier of Greater Syria.

It took the colonial ambitions of the U.K. and France in the 20th century to extinguish Syria's long and prosperous trading tradition. With the breakup of the Ottoman Empire at the end of World War I, Paris and London agreed to divide the Middle East into their own areas of influence. The new, arbitrarily drawn borders and restrictions on travel effectively isolated a diminished Syria from its traditional markets in Turkey, Persia and Palestine as well as from the coastal cities enclosed within the tiny new nation of Lebanon. Both countries were made French protectorates. The rest of the Middle East, including today's Israel and its occupied Palestinian territories, Jordan, Iraq and the oil-rich Persian Gulf states, was carved out for the British. Suddenly, to travel from one colonial fiefdom to another, merchants required exit and entry visas, neither of which was easily obtained.

Syria gained independence in 1946 only to endure a series of coups and countercoups. In 1963, following the collapse of the United Arab Republic, a short-lived attempt at Egyptian-Syrian unity, the pro-Soviet Ba'ath Party seized power in Damascus. The party's Moscow-educated leaders pursued a policy of economic nationalization, and by 1965 the Syrian economy was almost entirely state-run. Former air force pilot and then-Defense minister Hafez al-Assad mounted a successful putsch in 1970 and was declared president of Syria a year later. He put an end to the country's political turmoil and liberalized the economy somewhat, deregulating such sectors as tourism and transportation. But he kept the banks under state control, which, not surprisingly, chased the remnants of the country's financial community across the border into Lebanon. Today many of Lebanon's top commercial bankers are Syrian-born, including members of the Azhari family, who occupy senior positions at BLOM Bank, the country's largest lender.

Nabil Hchaime, assistant general manager of Lebanon's Banque Européenne pour le Moyen-Orient, or Bank BEMO, remembers the day more than 40 years ago when his father closed the Damascus branch of the British Bank of the Middle East (later purchased by HSBC Group) and emigrated across the border. "Lebanon was the only country with free movement, good education and health services," says Hchaime. "And that's where capital escaped to."

Since the nationalization of Syria's banks, the country's cash requirements have been met largely by private financiers, ranging from the mighty Sahloul to entrepreneurs working from single offices. By contrast, the country's state-owned banks have failed to provide the capital the economy needs to grow. Official lenders typically require borrowers to secure loans with collateral, usually in the form of real estate, which only wealthy Syrians can provide. Few credit officers have the expertise or daring to lend against a balance sheet or business plan.

"We have banks without bankers," says M. Ayman Midani, a Damascus-based financial consultant. "Our lenders are overwhelmed by regulations. They cannot take initiative and therefore cannot take risks. As a result, there is little business investment."

The state's heavy hand has been a boon for money changers. "This is a cash culture," says Fouad Assi, president of Assi Co., a diversified company that includes foreign exchange dealing. "That's why people feel so comfortable dealing in the black market."

Samir, a veteran money changer who won't reveal his last name, works on the top floor of his family's shop in Souk Hammadiya, which snakes out from the courtyard of the ancient Umayyad Mosque, the dazzling heart of Old Damascus. With nothing more than a telephone, a fax machine and an address book, Samir can arrange money transfers and foreign exchange within 24 hours. Dollars, euros, British pounds and even Japanese yen, he says, can be summoned from the souk's many private vaults. He keeps the money in vinyl bags and locks it in a safe behind his desk.

"I have confidence in the people I deal with," Samir says, showing off a bundle of Syrian pounds the size of a cinder block. "We never count money around here."

The market is cyclical, he explains. In the spring, local currency traders buy Syrian pounds in anticipation of demand from Gulf tourists who summer in Syria. The pounds are smuggled to Lebanon and dispatched to Gulf money changers. When the season ends the Syrian central bank dispatches a clerk to Sahloul & Sons, which as the largest money changer acts as a virtual clearing house, to restore the exchange rate by purchasing surplus pounds. "He arrives with a large vinyl bag and doesn't leave until it's full," says Samir.

For years Samir and his partner ran a lucrative trade arranging remittances for Syrians with family in the U.S. "That was a $50,000-a-year business, and I would take a 2 percent commission," Samir says proudly. The September 11 terrorist attacks put an end to that business, he says. "After 9/11 no one wants to risk the attention of the FBI."

As Samir speaks, a messenger, known in the souk as a forex mule, arrives with an empty black vinyl bag. He dutifully hands Samir an order for $155,000 worth of Syrian pounds to be smuggled into Lebanon, deposited into a local account and then wired to the Paris branch of Lebanon's Banque SBA. Samir casually inspects the order and enters it into a bulging file as the messenger fills his bag with cash -- without bothering to count it.

This informal financial system has kept the country's cash-based economy afloat for decades, but Syria needs a modern banking system and capital markets that can leverage liquidity and finance growth. That is why Bank BEMO's Hchaime has returned to Syria, where he was recently named general manager of Banque BEMO Saudi Fransi. The new private bank's controlling foreign shareholders -- Lebanese, Saudi and French lenders -- own 49 percent of the bank. The balance is held by private Syrian investors, none holding a stake of more than 5 percent.

"It took us three years to get a full banking license," Hchaime says, "and since then we've been lobbying for more services. Right now we're aiming for a share of the trade finance business, but this is just the beginning."

Is Assad listening? Syrians had better hope so. Their future prosperity depends on bankers like Hchaime fulfilling their ambition.

Moving Beyond Oil

Newsweek International 2005-06-27 23:03:20Saudi Arabia is still widely seen as the classic oil state, with all the dysfunction that label implies. So it may come as a surprise that today it flourishes mostly outside the oil patch. In 2005, non-oil activity should grow by 6 percent, three times faster than the oil industry and its fastest clip in more than two decades, estimates the Samba Financial Group. Brad Bourland, Samba's American-born chief economist, says that the real excitement in Saudi Arabia today "has nothing to do with oil." Since the late 1990s, Crown Prince Abdullah has been trying to reduce Saudi reliance on oil wealth. The result: construction and real-estate markets are booming, thanks to a move five years ago to allow foreign ownership of property. A revised banking law and low interest rates have energized the financial sector, and new lending last year matched oil revenue as a driver of money-supply growth. Since 1999, the non-oil sector has expanded far more steadily and strongly than the oil industry (graph). "Five years ago the Saudis realized they had reached a point where they needed to make the leap beyond brick-and-mortar development" and to wean themselves off oil, says a Western diplomat with years of experience in the kingdom. "At the time I was not confident they would do it. And now five years later they have made numerous steps in the right direction." An aggressive privatization program has driven up Saudi share prices by 520 percent since 1999, an indicator that is by definition a measure of confidence in Saudi's non-oil sector, because the state oil company, Saudi Aramco, is not publicly traded. Last year the telecommunications, manufacturing and construction sectors powered the non-oil sector's expansion of 5.7 percent, and also accounted for some of the hottest IPOs. The sale in recent months of shares in such state-owned giants as Saudi Telecommunications Co. and insurance provider NCCI have provoked so much interest that scuffles among punters have erupted in banking halls, where stocks are purchased. The boom has been remarkably Saudicentric, so far. Past periods of expansion were wholly petroleum-led and powered by multinationals. But after the 2003 bombing of an expatriate compound in Riyadh, the foreign business community all but vacated the kingdom. British Airways, which once did a lucrative trade on its London-to-Riyadh route, recently ended the service due to lack of customers. Because the Stock Exchange is not widely open to foreigners, nearly all of the new money in the market comes from Saudis, including billions that have been repatriated from the United States since 9/11. That explains why the rise of Saudi Arabia as a non-oil economy has only recently begun to attract international notice. Yet nothing could be more important to the kingdom's battle with extremists than creating an economy that is not dependent on and distorted by oil. After 9/11, it was widely noted that one possible source of the anger feeding Saudi extremists was the dramatic decline in per capita GDP, which had fallen by two thirds since the 1970s, due to the drop in real oil prices and one of the fastest population-growth rates in The World (currently about 3.5 percent). Today there is no question that the spike in oil prices since 2002 has accelerated economic growth, but the Saudi economy had been growing 4 to 5 percent since 1998, driven by the non-oil sector. The result was a marked rise in per capita GDP from $8,092 in 1999 to $9,574, the forecast for 2005. If prosperity is a decisive weapon against terror, the Saudis are gaining ground. Perhaps prompted by the emphasis U.S. President George W. Bush has placed on advancing democracy in the Middle East, international attention has focused on fledgling experiments with elections. Yet that's not what excites average Saudis. As the kingdom prepared for its first municipal balloting this March, Riyadh's Arab News reported with some dismay that while citizens showed little interest in registering to vote, they were lining up early and in droves for a first chance to buy shares in a state-owned bank. The dismay may be displaced. No vote will directly attack the high unemployment (officially 10 percent, but by some estimates much higher) that has created an idle pool of potential recruits for Al Qaeda. While the oil sector accounts for one third of the economy, and much of its recent growth, it employs relatively few people. The non-oil sector accounts for the remaining two thirds of the economy, and is its real long-term hope for growth and jobs, a point not lost on the crown prince. A Saudi official close to the monarchy says the acts of terror going back to 9/11 have "turbocharged" reform. Business is now charging ahead at companies like Advanced Electronics Co., which started out in the early 1990s as a partnership between the kingdom and the Pentagon, working mainly on military contracts. Since then the Saudi government has encouraged AEC to pursue private customers, and it now makes circuit boards and switching systems for companies like Loral and Lucent, as well as Saudi telecom and transport firms. Last year profits rose 300 percent, to $123 million. "We need local capabilities that go beyond oil," says Ghassan Al Shibl, AEC's president and chief operating officer. "The government is shifting the burden of growth on companies like us." The cornerstone of the government's diversification drive is a commitment to invest $30 billion by 2010 to make Saudi Arabia The World's leader in petrochemicals, like plastics and rubber. Unlike petroleum itself, these products are recession-resistant, and would help the kingdom weather cyclical slumps and attract "downstream" industries like tires and synthetic textiles. Over the last 12 months, the government has announced $8.7 billion in deals involving foreign companies in the Jubail industrial zone, home to The World's largest petrochemical complex. If the Saudi drive to diversify the economy is starting to pay off, however, its "Saudization" campaign-the effort to replace foreign workers with Saudis-is not. The kingdom of 26 million people still relies on 6 million expatriates, from blue-collar workers to computer engineers. Most young Saudis still prefer a secure government job and pension, but the bloated civil service is no longer hiring. In February, hundreds of thousands of college graduates answered a call for a handful of public-sector jobs. The government recently extended a filing deadline for taxi licenses because so few Saudis applied. The number of Saudis pursuing medical, engineering and teaching degrees continues to lag behind those studying languages, literature and religion, officials say. Changing the work culture will be as big a challenge as creating the jobs necessary to bring down unemployment. The regime hopes to transform all this with its most potent fiscal injection in years. After a period of belt tightening that cut government debt from 119 percent of GDP in 1999 to 66 per-cent last year, the 2005 budget calls for a public-spending program that some economists say amounts to the country's second modernization drive, after the hectic period of road- and bridge-building 30 years ago. It includes a mandate to train young Saudis through a network of vocational schools, as well as the multibillion-dollar stimulus for non-oil-related industries. Slowly, the good news is trickling out of the kingdom. The new budget allows for an unprecedented level of foreign investment, which at about $1 billion annually still amounts to a fraction of Saudi Arabia's $248 billion GDP. International banks including JP Morgan and Deutsche Bank have applied to set up branches in Riyadh. Increasingly, European and Asian firms are filling the vacuum left by U.S. rivals, who are still shying away from the country. After Dow Chemical abruptly withdrew from talks on a $4 billion petrochemical project in 2003, Japan's Sumitomo quickly took Dow's place. French companies have been particularly active in scouting openings in sectors like tourism and transport: a subsidiary of the French railway giant Societe Nationale des Chemins de Fer has expressed interest in a share of a planned rail system linking Riyadh and Jidda on the Red Sea to Jubail on the Persian Gulf coast. It is tempting to dismiss Saudi reform efforts as a mirage that will be swept away by windfall oil profits. Some Saudi analysts say the government is already backtracking on such initiatives as a more transparent budget process. Yet those who emphasize the conservative side of the monarchy ignore how dramatically Saudi Arabia has changed since it was established just 80 years ago, blossoming from an isolated desert kingdom into the largest economy in the Middle East. At the least, the monarchy has never been under more pressure to change, or shown more seriousness about moving beyond oil.

Letter from Jordan: Kingdom of Corruption

The Nation 2005-05-30 18:12:54Poetry as political manifesto has a long history in the Arab world. The Prophet Mohammed frequently won over converts to Islam with elegant recitals. Caliphs often deployed serrated verses from their court poet to undermine rivals. So in January, when revered Jordanian poet Haider Mahmoud wrote a thinly veiled ode to King Abdullah II warning him about deepening corruption in the Hashemite Kingdom, the palace quickly went to work--on him. Mahmoud was attacked in Jordan's state-controlled press as a traitor, and his son was pressured into resigning his position at the foreign ministry. Jordan's then-prime minister, Faisal al-Fayez, ordered the mayor of Amman to fire Mahmoud as general director of the city's cultural center. (Faisal backed off after learning the position was unpaid, but Mahmoud resigned anyway.) The offending poem--titled "Saray," a Turkish word for "the palace," but also "the sultan"--became known to Jordanians only after it appeared in a London-based Arabic-language newspaper because no local publisher would touch it. Mahmoud, who generally avoids controversy, says he wrote "Saray" out of concern that Jordan's vertiginous corruption threatens the integrity, and perhaps the very survival, of the monarchy. "It was not an attack," he says. "I care for this country. The poem was a message from the people to the leader against the corruption around him." Mahmoud got off easy. These days, public criticism of the Hashemite monarchy can lead to official harassment, detention, arrest and imprisonment--usually in rapid succession. Since February 1999, when Abdullah assumed the throne after his father died of cancer, Jordan has become increasingly authoritarian. At a time when several Arab regimes are at least feinting toward political reform, Jordan is goose-stepping backward. Freedom of assembly has been restricted, and the threshold for dissent has been ratcheted down as political prisoners accumulate and oppositionists are rattled out of bed for interrogation. Journalists have been intimidated or bribed into spying on colleagues and sources. Street demonstrations have been all but eliminated by laws that require protesters to carry permits that are prohibitively difficult to obtain. The tax burden on ordinary Jordanians has intensified as living standards steadily recede. The appeal of Islamic groups is rising inversely to the monarchy's diminished credibility, even among the kingdom's traditionally secular, closely knit and increasingly restive tribes. Corruption, defiantly uninhibited compared with the low-key looting that percolated under the late King Hussein, has soared. And although diplomats tend to absolve Abdullah of wrongdoing--he is deceived, they imply, by courtiers scheming behind his back--a growing number of Jordanians believe that the 43-year-old monarch is not only aware of the plundering but may be very much a part of it. "I don't think the monarchy enjoys any popularity with the people," says Toujan Faisal, a former member of Parliament who was jailed for 100 days three years ago after she accused the government of graft. "King Hussein tolerated a margin of corruption, but not the extent to which it exists now." In short, Jordan has degenerated into the kind of despotic kleptocracy the Bush Administration says it will no longer tolerate. But tolerate it the White House does, inclusive of the roughly $450 million in annual economic and military aid that has become the standard rate for maintaining Jordan's peace treaty with Israel and its support for America's "war on terror." True, Washington has always indulged Jordan, a buffer state between Israel and the other Arab nations--the country is even shaped like a bottle stopper--by turning a blind eye to its human rights abuses. And it was Hussein, after all, who installed as heir apparent the little-known and unseasoned Abdullah just before he succumbed to cancer. In February the State Department gave Jordan a delicate reproach in its annual human rights report. But beyond that, the kingdom is under little public pressure to fight corruption and allow its rubber-stamp Parliament and feeble political opposition to assert themselves. "The Hashemites are the fair-haired boys," says a US government official. "The King is such a sycophant, telling Washington what it wants to hear and bashing people like [Syrian president] Bashar al-Assad, that they get away with everything." Americans got a glimpse at the dark side of their plucky Arab ally early this year, when President Bush was asked at a news conference about Ali Hattar, a Jordanian mechanical engineer who spent a night in jail and was fined after he publicly condemned Jordan's peace treaty with Israel and called for a boycott of US goods. Bush was unaware of the case, which had been otherwise overlooked by the Western press. Hattar was only the most recent target in a series of controversial arrests and detentions that have followed Abdullah's ascension to power. In December 1999 Khalil Deek, a US citizen, was arrested in Pakistan and deported to his native Jordan on suspicion of having links with Al Qaeda. He was interrogated without a lawyer present and jailed without charge, only to be released two years later for lack of evidence. Faisal, the former parliamentarian, was jailed in March 2002 for "spreading rumors that incite disturbances and crimes," among other charges, and was freed after a monthlong hunger strike. The former university lecturer says she was imprisoned only after security agents tried to buy her silence with offers of money and luxury cars. "I asked for reform and was offered only bribes and then jail," she says. In January security agents staged a midnight roundup of Islamic leaders who had criticized government policies while leading Friday prayers. Several were taken to a police precinct and left there overnight. According to the government, the men were detained for violating the state's laws on preaching and spiritual guidance. "It was very, very savage treatment," says Abdul-Lateef Arabiyat, former secretary-general of the Islamic Action Front, who like most of Jordan's established Muslim leaders is fiercely moderate. "This would not have happened under King Hussein." Then, in early March, leaders of Jordan's Professional Associations Council, a federation of white-collar unions, called for a sit-in to protest a draft law they say would neutralize their ability to organize and mount the closest thing Jordan has to political opposition. Police shut down the demonstration by cordoning off the council's headquarters, the fourth time this year that authorities have banned such an assembly. Security agents also detained a television news crew that had filmed the incident and confiscated its video. "Even during martial law [during Jordan's 1970 civil war], public gathering was a right for the people," says Hussein Mjali, who in March resigned as head of the Jordanian Bar Association to protest the draft law. "Now it is a gift from the ruler." The steady erosion of civil liberties is matched only by the seismic growth of corruption. A large share of the private fortunes that fled war-torn Iraq has been deposited in Jordan, where it is leavening an underground economy that had already thrived off the UN-run Oil for Food program. Enormous villas have mushroomed in Amman's most fashionable districts, and luxury cars choke the city's roads. It is a gross and potentially destabilizing display of wealth in a country with an annual per capita income of $1,700, chronic unemployment and a population growth rate of 2.6 percent. And in harmony with Jordan's growing tolerance of corruption, this month King Abdullah agreed to overturn the 1992 conviction of Pentagon outcast Ahmad Chalabi, now a deputy prime minister in Iraq's new government, for his role in the collapse of a major Jordanian bank. "There is a new look to the corruption in Jordan," says journalist Abdullah Abu Romman. "Traditionally, we'd say the corrupt man is a thief. Now we look up to him as someone who was smart enough to avoid getting caught." Enter the Shaheen brothers. From humble beginnings as West Bank vegetable merchants, Khaled, Riyadh and Akram Shaheen have established themselves as the Jordanian government's contractors of choice. According to a 1999 Times of London story, the Shaheens have known Abdullah since Khaled met him at a sports event in Dubai nearly ten years ago. Khaled, reported the Times, "went on to shower [the King] with gifts, including, allegedly, a Porsche." Not long after Abdullah's coronation, the government dropped Mercedes-Benz as its fleet automobile and logged a massive order with BMW--which had only months before tapped the Shaheens as its local distributor. Since then, the Shaheens have rung up one major contract after another. In 2003 a Shaheen-controlled company was given a large share of a contract to train Iraqi policemen, even though it had no experience in such work (the value of the Shaheens' share is unknown, but the total cost of the operation could surpass $1 billion). In March 2004 a Shaheen subsidiary won a $72 million Pentagon contract to supply fuel to coalition forces in Iraq. The deal was canceled a week later because the company was unable to meet its obligations. It turned out the Shaheens knew nothing of the oil-supply business beyond what they learned by smuggling more than 7 million barrels from Iraq in 2003, according to an investigation by Britain's Financial Times and Italy's Il Sole 24 Ore. A government spokesperson said there is no relationship between King Abdullah and the Shaheens. Business continues to come the Shaheens' way despite their poor credit history. In 1995 Jordan's Arab Bank sued the family to recoup $40 million in outstanding loans. Five years later the Standard Chartered Bank of London filed suit against the brothers for unpaid debts worth $77 million. "The Shaheens have been a factor for years," says a diplomat in Amman. "They have given the consistent impression that this is not a level playing field. And it doesn't help when they talk about having top-level protection." Charges of corruption have even tainted Jordan's awqaf, the charitable trust that in Islamic countries is an important source of finance for social welfare programs. Ghazi Zaben, a first-term parliamentarian, recently opened an investigation into awqaf funding, and is also looking into allegations that the former minister of awqaf and Islamic affairs, Ahmad Hilayel, profited from hajj-related travel packages. Hilayel, who was replaced in a recent Cabinet shuffle, was attacked in Mecca late last year by pilgrims angered at what they said was price-gouging by companies related to him. Zaben, a plastic surgeon by trade, said he launched his investigation because of discrepancies between what the awqaf was reporting as allocations to his district and what his constituents were actually collecting. "These numbers don't add up," says Zaben, leafing through a file of documents several inches thick. "At this point we can't say the awqaf is corrupt, though we do know [Hilayel's wife] has stakes in companies that arrange trips to Mecca and those crowds obviously thought they had a good reason to beat him up. That's why we're having these hearings." Corruption probes in Jordan have a way of getting blocked, however, and Zaben says he has already been pressured by Hilayel's "good will messengers" to back off. "Frankly, I don't think I'll get very far," he says. "But it's worth it. Perhaps it will encourage other MPs to launch their own investigations." Zaben represents the Central Badia district, a cluster of villages linked by rutted, single-lane roads. It is inhabited largely by the Beni Sakhr, a once-powerful tribe that has been diminished over the years by poverty entrenched by official neglect. Like many Bedouin tribesmen, the Beni Sakhr lack the skills needed to survive in a modern economy, and the state has failed to provide them with adequate education and vocational training.Zaben considers himself fortunate to have secured the state funds needed to build a new highway that will dramatically cut the time it takes to get from one end of Badia to the other. Projects like this, he says, help him compete with the Islamists for influence among his constituents. "People are now more religious," he says above the din of a steamroller smashing chunks of granite into a foundation for the new road. "What else do they have?" Zaben tours his district, a mere forty-minute drive from Amman, in his son's late-model Jeep Cherokee. He is warmly welcomed as he calls unannounced on homes made of cinder-block walls and corrugated steel roofs suspended by narrow, roughly hewn wooden beams. The average income here is about half the national level and most families rely on the awqaf to get by. Beni Sakhr tribesmen used to be well represented in Jordan's armed forces until the government required new recruits to have at least a high school education. "We're not getting the schools we need," says Awad Shamoor, a minor sheik, after greeting Zaben in an outdoor circle of tea-sipping notables. Shamoor, a security guard at a high school, makes about $100 a month. He is affluent by Badia standards, with two of his seven children in college. To finance their tuition and other expenses, he has been selling strips of his estate--land that has been in his family for generations--to wealthy Palestinians. "I used to own 200 dunams [about 800 acres]," Shamoor says between sips of tea. "Now I'm down to ten." As Shamoor's estate has dwindled, King Abdullah has expanded his--or at least that's how some Jordanian dissidents are interpreting a May 10, 2000, government memo. In the memo, a copy of which has been obtained by The Nation, the Aqaba Regional Authority informs the land registrar of a decision "to register all the land that belongs to the treasury that is in field no. 1 and also the land no. 51 which is in field no. 3 from Aqaba land, in His Majesty Abdullah's name"; in a similar memo, dated less than a year later, the registrar orders its regional offices to "register land in Naour, Lipat, Bilalal, Um Qasyr, Samek, in the name of His Majesty, Abdullah, [and] to cancel land use...from list no. 7...for municipal use and re-register it in the name of His Majesty Abdullah (God protect and preserve him)." The government spokesperson acknowledged "swaps" between crown property and public land, but only to expedite public-works projects. In such exchanges, she said, the value greatly favors the state rather than the crown. Rumors of a royal land grab have simmered for years. In 2001, according to a source close to the palace, Abdullah sold for $43 million property his father confiscated under martial law in 1982. The palace denies this. Laith Shubuilat, a former parliamentarian who has spent much of his political career in opposition, says a recent decision to let the army control Jordan's largest freshwater reserve will give the King de facto control of it. "The army is the King's power base," says Shubuilat. "The King is robbing the government and the army is his bagman." Perhaps not surprisingly, there is in Jordan today a transcendent nostalgia for the light touch of the late king. Six years after his death Jordanians of all ethnicities and sects--even among those who oppose the monarchy--speak mystically of Hussein as if he were still among them, like a twitch in an amputated limb. It is why many cherish the 25-year-old Prince Hamzah, Hussein's son by Queen Noor, who bears an uncanny resemblance to his father and is said to have inherited his legendary charisma and body language. Days before his death Hussein made the elevation of Abdullah as his successor conditional on Abdullah's maintaining Hamzah as crown prince and heir apparent. Last year Hamzah abruptly vacated his offices to make room for a primary school run by Queen Rania for the children of Amman's rich elites--a conspicuous and somewhat ironic move in a country with a failing public school system. In November Abdullah relieved Hamzah as crown prince--a gesture, the king declared in a televised message, that would allow his half-brother "more freedom of movement." Following the announcement palace officials phoned journalists and recommended they keep the reporting to a minimum. "We were told it was purely a family matter," says Randa Habib, Jordan bureau chief for Agence France-Presse. In response to his dismissal, Hamzah sent the king a verse from the Koran, published by several Jordanian newspapers, about the hypocrisies of unjust leadership. Stephen Glain, a correspondent for Newsweek International, is the author of Mullahs, Merchants, and Militants: The Economic Collapse of the Arab World (Thomas Dunne/St. Martin's). From 1998 to 2001 he was the Wall Street Journal's Middle East correspondent, based in Amman.

The Merchant Marine

Newsweek International 2005-03-28 08:19:55The new port of Gwadar will be unveiled April 6 as the "Dubai of Pakistan," even if it lacks the theme-park glitz of the Gulf's fantasy city. The point, say Chinese officials, who bankrolled 80 percent of the $248 million project, is that this new deepwater cargo port is "strictly commercial." But hawks in Washington and New Delhi believe Pakistani President Pervez Musharraf has given Beijing the nod to use Gwadar as a port of call for the Chinese Navy. "Gwadar's a strategic location, just 400 kilometers from the Strait of Hormuz," says William Triplett III, a Washington-based conservative analyst who warns Gwadar will become a Chinese naval base "on little cat feet."

Alarm bells are ringing in Washington, where some see a pattern in Beijing's naval build-up, combined with a foreign-port building spree and efforts to secure maritime oil-transport routes. An internal report circulated among Pentagon officials late last year says Beijing is assembling a "string of pearls"--including ports, listening posts and naval agreements from Pakistan to Bangladesh to Burma--to protect its fragile oil-supply routes. Gwadar is critical, because it would provide the Chinese a listening post for monitoring ship traffic to and from the oil-rich Middle East, according to the report, which asserts that China is building up naval power at maritime "chokepoints... to deter the potential disruption of energy supplies from potential threats, including the U.S. Navy." China's naval outreach program is of concern to New Delhi, too, and was an underlying theme during U.S. Secretary of State Condoleezza Rice's visit to India last week.

Until a few years ago, China's hunt for energy resources was confined largely to the economic sphere, spearheaded by its state-owned oil and gas firms. But Chinese officials came to see U.S.-led conflicts in Afghanistan and Iraq as wars over oil, just as its own oil demands were booming. Two years ago China surpassed Japan as The World's second biggest oil importer, after the United States. Now crude-oil prices are hitting record highs, topping $57 a barrel last week, amid warnings from strategists of a coming "energy cold war." What began as a commercial rivalry for oil supplies engaging the United States, Japan and China now seems poised "to spill over into the political and military spheres," according to Chietigj Bajpaee, a researcher for Civic Exchange, a Hong Kong think tank. In the event of conflict over Taiwan, say mainland strategists, Beijing should expect the United States to try to starve China of oil with a naval blockade.

China is now lavishing funds on its Navy, long a neglected arm of the military services. Since George W. Bush took office, China has been building up its fleet of amphibious assault ships and submarines, and last December launched its first in a new class of nuclear subs, years earlier than anticipated by U.S. intelligence. In November, Japan chased a Chinese sub out of its territorial waters, near a disputed and gas-rich area of the East China Sea. Almost as soon as Beijing apologized for that incident, a Chinese research vessel intruded into Japanese waters, apparently surveying the seabed for oil and gas deposits.

Meanwhile, India has pursued closer military contacts with the United States, and last year issued a new naval doctrine stressing the need to protect energy routes and respond to Beijing's inroads in the Arabian Sea. Ziad Haider, an analyst at the Henry L. Stimson Center think tank in Washington, says the port at Gwadar could monitor U.S. naval activity in the Gulf, Indian naval activity in the Arabian Sea and future U.S.-Indian maritime cooperation in the Indian Ocean. Gwadar may not be a full-fledged Chinese naval base, says Haider, "but it could facilitate a [Chinese] naval presence."

China also helped build the Chittagong port in Bangladesh where, says the Pentagon report, Beijing is "seeking much more extensive naval and commercial access." Beijing is even discussing a deal with Phnom Penh that would provide Chinese patrol boats and naval training to Cambodia. The Pentagon report puts far more stress on the billions of dollars in military aid China has provided the junta in Myanmar "to support a de facto military alliance." China has helped build several ports, road and rail links from the Chinese province of Yunnan to the Bay of Bengal, and a listening post on Myanmar's Coco Islands to monitor sea traffic. Myanmar is well positioned for policing the chokepoint that concerns Beijing most: the Malacca Strait. Eighty percent of China's energy supplies pass through this pirate-infested waterway, which is 1,000 kilometers long but only 2.4 kilometers wide at its narrowest point. Last year pirate attacks in the area left more than 400 ship-crew members dead, injured, taken hostage or missing. Less than a year ago, Chinese counterterrorism forces conducted the first exercise simulating the rescue of an oil tanker from attackers.

Another solution may lie in the Isthmus of Kra, a neck of land linking Thailand's north and south. Thai and Chinese authorities have discussed building a canal across the isthmus, which would allow oil tankers from the Middle East to bypass the Malacca Strait. This "Asian Panama Canal" carries a price tag somewhere between $20 billion and $28 billion, and Washington is watching its development closely. "We know [the Chinese] are looking at a variety of things with regard to the security of the Malacca Strait," says a State Department official. "We have a particular interest that these proposals are not exclusionary or against our interests."

Last month Thai authorities revived an alternate plan for a $700 million Kra oil pipeline and refinery, in which Chinese firms have been invited to participate. Bangkok will tread cautiously, says Paitoon Sayswang, an adviser to Thailand's Senate, because "Thais don't want to take on the risk of a turf battle between China and America." No Asian state does. But if they stand on an oil-supply route, there may be no way to avoid the struggle.

© 2005 Newsweek, Inc.

Yet Another Great Game

Newsweek International 2004-12-20 08:47:39If a report circulating among senior members of America's defense establishment is any guide, the Sino-American war for future petroleum supplies has already begun. According to the 80-page study, Beijing has identified the United States as "a paramount threat to its energy security and economic stability" and is busily establishing a "string of pearls"—forward deployments of surveillance stations, naval facilities and airstrips—to safeguard the petroleum-transport route from the Persian Gulf to the South China Sea. Once it controls Asia's vital sea lanes, the report goes on, China may then move on some of The World's key oil reserves—perhaps by replacing the United States as Saudi Arabia's patron and protector, or by seizing a strategic oil pipeline in the Russian Far East. The Chinese, the report says, "equate energy security with physical possession or control of energy supplies" and "have a tendency to see securing their energy security as a zero-sum game." Nowhere is that more clear than in sub-Saharan Africa, where Chinese oil and natural-gas companies have over the past several years inked deals with regimes such as Sudan's, ostracized by the West for its complicity in atrocities committed against villagers in Darfur. "It's very effective and farsighted diplomacy," says John Tkacik, a China expert at the Heritage Foundation in Washington. "They look to where their opponent is not and discreetly place their pieces in unclaimed areas of the map, which in this case is Africa." In staking out Africa, however, Beijing is setting itself up for a seismic rivalry with the —United States, which has identified the region as key to its efforts to diversify its oil sources away from the unstable Middle East. In the aftermath of 9/11, a U.S.-Israeli study group recommended that Washington prevent "rivals such as China" from horning in on Africa's natural resources, while the Pentagon study says, "Chinese companies are investing in East, West, and North Africa and [the Chinese Army] has sent troops to pro-tect its energy investments in Sudan" —an assertion long rumored by human-rights groups and other Africa experts but never confirmed. In turn, Amer-ican oil companies have raised their profile in Africa amid rumors that the United States is planning to build a military base in the oil-rich Gulf of Guinea. "In Africa," says Jamal Qureshi, an oil-markets expert at PFC Energy in Washington, "you've got new players, with China as a possible counterweight to the U.S. There could be elements of confrontation." Before 9/11, U.S. oil companies generally kept their distance from such countries as Sudan, the Democratic Republic of the Congo and Libya, due to political risk, concerns over human-rights violations, sanctions or all three. True, U.S. firms have done business with autocracies like Nigeria, despite the Bush administration's public snubbing of President Olusegun Obasanjo. But until now, such deals have been cut on a piecemeal basis—unlike those recently struck by state-owned China National Petroleum Co. (CNPC) as part of an official policy of nurturing diplomatic ties in exchange for oil concessions. During the cold war, China reached out to Africa in political solidarity with its nonaligned nations, and to block them from having relations with Taiwan. Indeed, Africa accounts for a dwindling share of the 27 or so countries that still recognize the island state over China. Now China is supporting developing countries as part of a transparent bid for economic gain, and its petrodiplomacy extends worldwide. In October Beijing agreed to buy up to $100 billion in Iranian petroleum and gas and to help develop a major Iranian oilfield near the Iraqi border—evidence of an evolving Sino-Iranian alliance that is featured in the Pentagon report. Earlier this year Beijing signed a 25-year deal to develop natural-gas reserves in Iran—despite U.S.-led sanctions—and it is increasingly active in the Gulf states. Iranian Oil Minister Bijan Zanganeh recently said that the strengthening Tehran-Beijing link was "neutralizing" U.S.-imposed sanctions. "Japan is our No. 1 energy importer for historical reasons... but we would like to give preference to exports to China," said Zanganeh. Africa, though, remains the new oil frontier for both China and the United States. Since Chinese President Hu Jintao's February goodwill mission to oil-producing states, Beijing has signed agreements with Algeria, Gabon and Nigeria, and is discussing similar deals with Niger, Chad, the Central African Republic, Congo and Angola. In return for access to raw materials in Africa, China is financing and building roads, dams, airports and energy grids, signing free-trade agreements and even promoting Africa at home as a tourist destination. Within the next half decade, according to energy analysts, Africa is expected to account for nearly a third of the oil China purchases overseas, up from 25 percent today. Once oil-independent, China has over the last decade become increasingly reliant on imports, which now account for 60 percent of its oil consumption, up from 6.4 percent in 1993. Within the next five years, according to Beijing, China will be importing 50 million tons of oil and 50 billion cubic meters of gas annually. Even for a country more concerned with human rights, those kinds of numbers would remove many inhibitions. In 2001 Beijing identified Sudan as the springboard for its campaign to triple its overseas oil production within four years, despite U.N. sanctions against the Sudanese regime. CNPC now dominates a consortium of Asian companies drilling Sudan's fields under license by Khartoum. Through a subsidiary, CNPC took a lead role in building a 1,500-kilometer-long pipeline from the main oilfields to the Red Sea and built a refinery near Khartoum with a 2.5 million-ton processing capacity. Safely distanced from the chaos in southern Darfur, these facilities have helped swell Sudan's oil output to 345,000 barrels per day, up from 270,000 in 2003, and provide an estimated 8 percent of China's total oil consumption. The sales have also helped finance Khartoum's arms purchases from Beijing; the government is thought to be nurturing a Sudanese arms industry with Chinese technology. "Khartoum is emboldened and encouraged by China's assistance," says Jemera Rone, a Sudan specialist for Human Rights Watch. "It is using petrodollars to manufacture arms, many of them knockoff versions of Chinese weapons." The Sino-Sudanese ties are complicating U.N. efforts to isolate Khartoum for its alleged complicity in massacres and rapes in southern Darfur. Beijing has blocked or diluted several U.S.-sponsored draft resolutions condemning Khartoum, and has signaled it will veto further sanctions. Washington, which needs Chinese support in Security Council matters regarding Iraq, is unlikely to push Beijing on Sudan. While the United States appears to have conceded Sudan to China, it is active elsewhere in Africa. U.S. President George W. Bush has made a point of meeting with leaders of such countries as Chad and Congo, which in the past barely registered on Washington's foreign-policy map. The African Oil Policy Initiative Group, a confederation of oil executives, members of Congress, White House officials and consultants, has recommended that the United States work openly with Nigeria to secure Africa's oil-rich areas and enhance the prospects for foreign investment. It has also urged the Pentagon to build a naval base at the oil-rich islands of So Tome and Principe, and to permanently deploy a large force of U.S. troops there. Some analysts even suspect that the deliberate way in which the United States lifted sanctions on Libya earlier this year was a move to check China's growing influence in Africa. If China sees energy security as a zero-sum game, so, it appears, does its American rival.

© 2004 Newsweek, Inc.

Freeze-out the Arabists

The Nation 2004-11-01 21:13:45Ronald Schlicher is a senior official in the State Department's Bureau of Near Eastern Affairs, an enclave for America's Arab specialists. He is the kind of Middle East expert who would presumably be in the vanguard of officials bound for Baghdad to run the US Embassy there. A twenty-two-year veteran with experience in places like Cairo and Jerusalem, including a six-month assignment in postwar Iraq, Schlicher was this year presented one of the most distinguished honors among foreign-service officers. Schlicher was awarded the American Foreign Service Association's annual prize for producing the year's best "dissent channel" cables--tightly written and cogently argued memos to Washington taking issue with particular aspects of US foreign policy. In effect, Schlicher was recognized for his constructive criticism of President Bush's policies in the Middle East, a region Schlicher, a fluent Arabic speaker, knows as well as anyone in government. But Schlicher, now Iraq desk officer in Washington, is not boasting about his prize. In fact, like the State Department's other Arab hands, he's not even giving interviews. American diplomats, both active and retired, say he is outraged at the way America's most talented Arab experts were until recently blocked from playing any meaningful role in the administration of postwar Iraq. "This administration doesn't like naysayers," says Edward Walker, a former US ambassador to Egypt and Israel and now the president of the Middle East Institute in Washington. "Ron challenged US policy and they shut him out." American Arabists are an embattled priesthood within the nation's foreign policy elite. Like the China hands of the 1950s, who were purged by McCarthyites, the State Department's Middle East experts have been marginalized over the years for "going local"--associating themselves too closely with host governments and being critical of Washington's wholesale support of Israel. It was Arabist denial of the true character and ambition of Saddam Hussein, their critics say, that caught Washington off guard when the dictator invaded Kuwait in 1990. "Arabists," said Francis Fukuyama while a Reagan Administration appointee on the State Department's policy planning staff, "are more systemically wrong than other area specialists in the foreign service." Such comments could easily be applied to the neoconservative cabal that continues to pilot Bush foreign policy despite the mess it has made of Iraq--after dismissing prescient State Department advice. Although junior State Department officials have enrolled in Arab-language courses in record numbers over the past three years, it could take years to restore the Arabists' ranks. The US Embassy in Baghdad will have fewer Arab specialists relative to its size and importance than any other American mission in the Arab world. John Negroponte, the current ambassador, had never served in the region before his recent appointment. The Bush Administration is so short on Middle East expertise that Christopher Ross, a veteran Arabist and former ambassador to Syria, was summoned to Baghdad out of retirement. "Chris is a rare entity with his language skills," says Robert Keeley, a former US ambassador to Greece and a member of Diplomats & Military Commanders for Change (DMCC), a group committed to Bush's re-election defeat. "Yet the Pentagon took such charge of the occupation of Iraq that people like him are few and far between." An Arabist exodus is part of the price Americans are paying for Bush's destructive hurtle into a needless war. Weeks before the invasion, John Brady Kiesling, who has been posted both to Israel and the Arab world, resigned in protest against US foreign policy along with two other State Department veterans. "Why does our President condone the swaggering and contemptuous approach to our friends and allies this Administration is fostering, including among its most senior officials?" Kiesling wrote to Secretary of State Colin Powell. "Our current course will bring instability and danger, not security." The subtext was clear: By listening to fabulists in the Pentagon and White House, instead of his eyes and ears in the nation's outposts abroad, the President was leading the country into disaster. Kiesling left behind a foreign service that would reap the whirlwind he prophesied. "I spend all day writing memos, fighting dumb ideas," says a State Department official. "We fought the turfing-out of the [Iraqi] military tooth and nail, and [former US proconsul in Iraq Paul] Bremer wouldn't listen. We warned them again on the need for a more transparent rebuilding process, and they did nothing." Says a top Arabist who recently left the Near Eastern desk but requested anonymity because he remains in government: "I never felt like a pariah except in Washington." In an Administration that penalizes those who see The World as it is versus what the President wishes it to be, it was inevitable that the Near Eastern Bureau would be attacked as an obstacle to the New Crusade. When, in the run-up to war, Powell tried to dispatch a team of Arab specialists to help rebuild Iraq's government ministries, Defense Secretary Donald Rumsfeld and his aides vetoed the list of names. The State Department's Future of Iraq Project, which accurately predicted widespread looting and insurgency after Saddam's removal, was intercepted and buried by the Pentagon. "It is a peculiar feature of the Bush Administration and neocon ideology to treat foreign policy issues largely in military terms," says Charles Freeman, US ambassador to Saudi Arabia during the first Gulf War. "It is a diplomacy-free foreign policy, and this has cost us dearly in terms of our image and influence abroad." Freeman, who is also a member of DMCC, laments how "Powell's enormous talents have been squandered in favor of numerous military adventures." Even if a re-elected Bush were to clean house, he says, the damage done to the mechanics of American diplomacy has been all but irreversible. "So long as an important part of our body politic believes that security can only be established at gunpoint, an assumption that is belied by history, the United States will remain in international isolation," Freeman says. The Arabists are used to watching from the sidelines as events unfold. Under Richard Nixon, the United States cemented its pro-Israel bias despite State Department warnings that it would fuel growing anti-Americanism in the region. Their frustration grew during the Middle East peace process of the 1990s, which became a policy colossus that smothered Washington's other interests in the region. The Arabists' nemeses are familiar to anyone concerned about the integrity and direction of US foreign policy: Deputy Secretary of Defense Paul Wolfowitz, Under Secretary of Defense for Policy Douglas Feith, Deputy Under Secretary of Defense Bill Luti, National Security Council senior director Elliott Abrams, former Defense Policy Board member Richard Perle--all of whom have since the Reagan years counseled a get-tough approach to the Arabs and unconditional support for Israel that explicitly excludes input from the State Department. Officially, the State Department disputes that there is any tension between the Near East desk on one side and the White House and Pentagon on the other. Adam Ereli, the department's deputy spokesman, said it would be "splitting hairs" to suggest Iraq would be more stable today had the Future of Iraq Project's report been given a serious hearing. Arabists acknowledge that the Pentagon and White House have been belatedly reaching out to the same diplomats they so recently undermined. With Washington isolated diplomatically, US troops mired in Iraq and the November presidential election around the corner, Bush aides have been frantically plundering the Near Eastern desk for advice, with some positive results. At the State Department's urging, Iraq's interim Prime Minister, Iyad Allawi, was given the authority to divert reconstruction funds away from large contracts tendered to big US firms and toward smaller projects to boost employment (that authority has been seriously impaired, however, by the US government's decision to allocate $3.5 billion in reconstruction funds to training and equipping Iraqi police and other security forces, protecting oil supplies and preparing for the January elections). Iraq's minority Sunnis now have a larger voice in the interim government after months of ill-advised Pentagon backing of Ahmad Chalabi's Shiite-dominated factions. Yet Arabists harbor few illusions about the future. A second Bush Administration would mean another four-year quarantine for the Arabists, at least on the policy-making level. True, the State Department is the primary US representative in newly "sovereign" Iraq. But just as Bush aides neglected postwar Afghanistan to focus on its real priority--Iraq--they now seem to be resetting their sights on the gold ring: Iran. Widely overlooked in the investigation of alleged Pentagon espionage involving Israel is that it reportedly revolved around a presidential directive that prescribes a tougher posture toward Iran. The Bush Administration's call for a Security Council resolution to short-circuit Tehran's nuclear ambitions looks ominously like the force majeure it triggered for regime change in Iraq. Paul Hughes, a US Army colonel, remembers a remark made by senior Pentagon official Harold Rhode, prominent among the neocon faithful, as the two men were on a flight to Kuwait just before the US invasion of Iraq. The battle for Iraq, Rhode de-clared to Hughes and a detail of British officials, was the first step in the battle for Tehran. "We all exchanged glances and rolled our eyes," said Hughes. "The Brits couldn't believe it." Rhode denied through a spokesman he has ever made such a remark, though State Department and Pentagon officials say the neocons have made it clear they would target Iran in a second Bush term--particularly if Wolfowitz or Condoleezza Rice runs Foggy Bottom. The Arabists' biggest fear is that a re-elected Bush would not call for the customary resignation of his senior-level policy-makers, which would allow them to remain in government without having to go through the Congressional confirmation process some of them would not survive. That, say officers on the Near Eastern desk, would all but extinguish the last line of official dissent against the Administration and its ruinous agenda for the Middle East.

Slow Death

Newsweek International 2002-10-07 One of the most potent threats to Middle East stability doesn't come in a canister or chemical-weapons factory. It wasn't hatched by militant Islamists inside madrasas or sleeper cells. It is largely ignored by diplomats and heads of state, yet it figures more prominently among Arab concerns than America's war on terror. And toppling Saddam Hussein can't possibly solve the problem.

IT IS CHRONIC ILLIQUIDITY-the main source of rising unemployment and stagnant economies in the Arab world. The problem is not merely weak revenue, but a lack of modern banks and financial tools to lure cash out of burgeoning black markets and into the faltering daylight economy.

From Syria to Morocco, Arab financial institutions are too primitive and regimes too inept to meet their economies' basic need for capital. Arab banks are reluctant to lend money, and Arab stock markets hardly trade. Starved of cash and burdened by overvalued currencies that price their goods out of world markets, Arab manufacturers export well below their potential. The Middle East's share of global trade is stagnant, and trade between Arab countries make this the only region in the non-developed world where the broadest measure of the liquid-money supply is dropping (charts). Foreign investors have abandoned Middle East equity, and foreign direct investment in the 22 Arab economies is now less than half the global average, as a percentage of gross domestic product.

No matter what happens in or to Iraq, a worse region-wide crisis is brewing. From 1990 to 1999, the per capita value of Arab economies grew at just under 1 percent while their populations grew by 4 percent. If the Arab economy cannot absorb its growing population of idle and increasingly angry youths, the Middle East will remain a sanctuary for militants just as moderate, middle-class Arabs flee the region. "The Arabs are going the way of Africa," says Taher Gargour, a Middle East analyst for HSBC Investment Bank in London. "You only have to draw a straight line from where the Arab economies were a century ago to where they are now to get an idea of where they're going-and the answer is very worrisome."

From the death of Muhammad in the early seventh century to the end of the Fatimid dynasty 500 years later, Arab Muslims presided over the most prosperous empire The World had yet seen. It reached from the Strait of Gibraltar to the Central Asian steppes, and its subjects included Jews, Christians, Persians and the peoples of the Mediterranean. The Arabs occupied a land bridge between the developed economies of the East and the primitive markets of the West. Arab kilns and looms produced ceramic bowls, glassware, ironwork and textiles. During the Crusades, reported the Spanish geographer Ibn Jubayr, Christians and Muslims traded in peace and civility even as "the warriors are engaged in their war." Arab currency was held from Scandinavia to China, and a draft order signed against an account in Damascus would be honored in Canton. These were known in Arabic as sek, from which the English "check" is derived.

The free flow of goods and money informed the character of early Islam. Part of Muhammad's appeal was his reputation as an honest merchant, and the hajj, or pilgrimage to Mecca, was big business. "May your hajj be accepted, your sins be forgiven and your merchandise not remain unsold," went a salutation of the period. The Dome of the Rock in Jerusalem was commissioned by caliph Abd al-Malik largely to divert pilgrims from his commercial rivals in Mecca. "The Muslims of the last period were more active and reasonable than they are now," says Suheil Sakkar, a professor of Islamic history at Damascus University. "Arab industry-textiles, smiths, jewelers, carpentry-was a source of great profit. This is what made them a great civilization."

As late as the collapse of the Otto-man Empire a century ago, the Levant was a robust economy of 40 million people with no borders to impede the flow of goods and services. On the eve of World War I, Egypt's trade was worth nearly half its GDP, a ratio close to that of Britain then and greater than South Korea's today. Now it is just 8 percent of GDP and falling (yet still higher than those of most other Arab nations). The question, then, is: what happened to the Arab economy?

The Arabs no longer have anything-save oil-that The World wants to buy. Most Arab products like textiles, building materials and foodstuffs are made largely for domestic markets and are inferior to exports from Asia or Latin America. Those that are competitive can't find the capital to grow. Decades of government bungling have chased so much capital underground or into exile that bankers are afraid to lend and borrowers have given up on finding credit. The result is an increasingly premodern, oil-dependent, cash economy.

Arabs are fleeing with their money at an alarming pace. In Lebanon, up to 3,000 people between 25 and 50 years old emigrate each month. According to a report from Cairo investment bank EFG-Hermes, there was as much currency coming into Egypt from 1991 to 1998 as there was going out. In the next three years, $15 billion fled the country. "We are forecasting an economic crisis in five years," says Omar Abdullah, a coauthor of the report. "It will be a turning point. The least painful option will be [an International Monetary Fund] bailout. I'm no fan of the IMF, but compared to the government's capability, it would be a blessing."

The grim state of affairs has deep roots. After World War I, Britain and France divided the Arab region into tiny emirates-of-influence. In carving up the Arab map, the Europeans sired a litter of new national economies with their own centralized systems of laws, taxes and fiscal management, which created a commercial dissonance that prevails today. Syrian agriculture products, for example, are often kept out of markets in neighboring Lebanon because of laws aimed at protecting Lebanese farmers. The Arab League has tried to dismantle barriers that estrange Arab economies from each other, but with little success. The British and French, according to economists Roger Owen and Sevket Pamuk, "put an end to the system which, in Ottoman times, had permitted almost complete free trade between Anatolia and the Arab provinces of the empire."

The cold war further isolated the Arab world. In 1958, in defiant response to U.S. President Dwight Eisenhower's demand that Arab leaders stand with America or with the communists, many Arab states turned to Soviet central planning. It was the climax of Arab experiments with socialism that began when Egyptian colonel Gamal Abdel Nasser took power in a 1952 coup and nationalized the economy. The architect of Egyptian socialism was technocrat Aziz Sidqi, who in 1960 pioneered a five-year plan that put industries from steel to Arabian horse breeding under state control.

Egypt was to the Middle East what Japan was to Asia: the model everyone else followed. Sidqi's initiatives so undermined the Egyptian economy that by the late 1970s it could no longer sustain its defense budget, and in 1979 Anwar Sadat was forced to make peace with Israel. In return, Cairo demanded-and won-generous aid from the West, without having to reform its economy. Egypt emerged from the cold war with a shoddy industrial base and bureaucrats ill prepared for an increasingly competitive global market. Sidqi's regime left Egypt with little export revenue to pay for necessary imports, and the country fell deeply into the red. By 1987 Egypt was spending 70 percent of its meager export earnings to pay external debts, and was forced to enter an IMF-World Bank debt-rescheduling program.

By then, Arab governments had started losing control of their economies. The oil boom of the 1970s masked the inability of Arab regulators to audit capital and use tax revenue to provide basic services. Today's petro-states keep solvent by selling oil as fast as they can pump it. Others survive on a vast gray market. In many ways Iraq is one of the most dynamic economies in the Middle East because of an enormous smuggling trade that has evolved around more than a decade of United Nations sanctions. Lebanon and Syria maintain a huge underground trade in everything from illegal drugs to agricultural goods.

The collapse of oil prices in the 1980s, and the Arab response to it, helped set the stage for today's looming liquidity crunch. Petroleum-producing states were forced to cut back on investment, which reduced the wages Arab guest workers in the Persian Gulf were able to remit back home, drying up a crucial source of capital in the non-oil-producing Middle East. Rather than cutting interest rates to stimulate demand,

Arab governments kept credit tight and local currencies strong to pre-empt rising prices and social unrest. The need for stable currency rates cost Arab central banks a fortune in foreign reserves and rendered Arab exports uncompetitive. Some Arab governments tried to borrow and spend their way back to health. Now Lebanon's debt burden is equal to 170 percent of its GDP, and Jordan's is 100 percent, which means they can ill afford to address the liquidity problem by lowering interest rates.

Meanwhile, years of war and central planning eroded what were once world-class financial systems. Arab banks are risk-averse, and formerly efficient credit markets are stifled by Nasserite red tape. When the Middle East peace process began in the early 1990s, Arab pledges of reform encouraged investment bankers to promote the Middle East as the next big emerging market. After a few big privatizations, the regimes slowed reform and investors departed for Eastern Europe and East Asia.

The challenge today is how to revitalize those dormant financial systems and harness the Arab world's huge reservoir of unreported capital. In "The Mystery of Capital," economist Hernando de Soto focuses on the problem of Egypt's "dead capital," though he could be writing about nearly all the Arab states. "Outside Cairo," de Soto writes, "some of the poorest of the poor live in a district of old tombs called ‘city of the dead.' But almost all of Cairo is a city of the dead-of dead capital, of assets that cannot be used to their fullest. The institutions that give life to capital-that allow you to secure the interest of third parties with your work and assets-do not exist here."

Talk to any Arab businessman, and he will trace the root of the problem back to dying capital markets. Abdel Raof Essa is the owner of Domiat Egypt Co., one of the top companies in Damietta, a port famous for furniture makers. Family-owned for four generations, Domiat copies chairs, desks, bureaus and commodes that embellish the palaces of Europe. It started exporting a decade ago, and last year all of its $3 million in sales went to buyers in the West and Japan. This makes Domiat-which is based in a concrete blockhouse adjacent to a stable of goats, donkeys and water buffaloes-one of the relatively few Arab companies that make things The World wants to buy.

You'd think Egypt would promote Domiat aggressively. But no. Like other manufacturers throughout the Middle East, Domiat is plagued by the legacy of state planning: high taxes on imports, an inept monetary authority, cautious bankers. Rules on importing wood are so strict that Essa has to hire a special agent just to store his materials. The cost of the agent might be partially offset by a tax refund for exporters, but auditors never respond when Essa applies for one. "This government is worse than useless," he says. "Our ministries don't help us, and our embassies do nothing."

Essa would turn to private financial markets to expand, but none exist. To buy equipment or material, he has to use his own money. Lacking enough property for collateral, he has a tough time getting a bank loan. He cannot take out a second mortgage on his home because mortgages don't exist in Egypt; the government recently passed a mortgage law, but long-term retail lending has yet to evolve. He wouldn't think of raising money by listing on the Cairo and Alexandria Stock Exchange, where shares trade at record lows. "We are on our own," says Essa.

"We're lucky because we have been exporting for some time and know the business. But those who rely only on the domestic market are very weak now. They have no revenue at all."

That beggars the government, too. In Egypt, estimates of gray-market commerce run as high as 30 percent of the official GDP of $87 billion. "What this means is that the economy does not respond to monetary and fiscal stimuli," says Mahmoud Mohieldin, adviser to Egypt's economics ministry. "Ninety percent of Egyptians don't care about a tax cut, because few ever pay taxes except for a sales tax. So you can reduce taxes as we are doing, but it will have no impact, and that erodes the credibility of the government's ability to manage the economy."

There's not much credibility left. Take forward markets, which would allow companies to hedge against currency swings that now plague the economy as the government loses its battle to protect the Egyptian pound. Egypt once had The World's third largest futures exchange, in Alexandria, but it was closed under Nasser and has yet to revive. "A forward market has been on the table for the last three to four years, but nothing is done," says Munir Fakhry Abdel-Nur, the managing director of Vitrac, a jam maker battered by the rising cost of imports as the pound falls.

The Abdel-Nur family owns 35 percent of Vitrac's listed stock, which is stable mainly because the market is in a deep sleep. The index has lost half its value over the last two years, and daily turnover has declined from $250 million to about $20 million. No one expects a turnaround soon. Egyptian shares trade at some of the lowest multiples in The World-three times earnings, five times earnings-yet still there are no buyers.

So moribund is the exchange that Naguib Sawiris-one of three brothers who run the Orascom Group, Egypt's biggest conglomerate-is trying to delist his shares by purchasing them in the market. Orascom companies account for 20 percent of the market's capitalization. "They're trading at 10 percent of their value, and [exchange regulators] are saying I have to pay the original list price," Sawiris says. "They're making it up. This is the problem with Egypt. There is no faith in the government's ability to manage the economy."

Even Lebanon, once known as the Hong Kong of the Middle East for its nimble banking system, is parched of liquidity. Nazem Ghandour returned home to Lebanon in 1992 from studying in London to help rebuild his father's sugar refinery after two decades of civil war. Within three years the mill had captured half the country's sugar market. When sales declined after the government began to subsidize smaller, less efficient refiners, Ghandour's banks called in their loans. "We took all the financial precautions," he says. "We were hedged, but the financiers failed us. That is the reason most Middle East businesses fail." Ghandour planted mushrooms on the site of the closed refinery and has since become Lebanon's top mushroom farmer-but he had to borrow the seed money from friends and family.

At least Lebanon has commercial banks. Neighboring Syria, which only just passed a banking law and is now taking license applications from foreign banks, has none. Inspired by the Soviets, the government channeled funds to state-run enterprises, in large part to prevent the Sunni business class from getting too powerful. As a result, there is no such thing as credit in Syria. Shop owners carry their take home each night in plastic bags. Couples pay for homes with suitcases full of cash. The winner of the annual lottery picks up his winnings in bundles of bills and carts them off in vinyl luggage. Syrian manufacturers are among the most sophisticated in the Arab world, but non-oil exports are worth only 7 percent of its $17 billion GDP. According to Jordanian economist Riad al Khouri, the average factory worker in Syria generated $9,900 in revenue annually in the five years ending 1999, almost no change from $9,600 a decade earlier.

In the Syrian port of Latakia, Haitham S. Joud and his brothers run Joud Trading Co., a maker of washing machines, dryers and refrigerators for export to Europe. Sales are good and the company plans to use its own cash to expand, rather than apply for a loan from banks in Beirut, which charge notoriously high interest. "We do 80 percent of our transactions in cash," says Joud. "We're lucky we have it. Smaller companies have to go to the gray market. They can't even borrow against their homes."

Like other Arab regimes, Syria talks about reform but does little to follow through, fearing the loss of control that would come with real change. So the government satisfies itself by reveling in the past; at the grand opening of Damascus's annual trade fair, political leaders celebrated themselves as the progeny of the commercially savvy eighth-century Umayyad clan, the first of the three Arab-Muslim dynasties. "Compared to the present, those times look pretty good," says a Western diplomat in Damascus. In recent years, while Syria has claimed annual growth of 2 percent, Western embassies privately figure the economy is shrinking by 2 to 4 percent.

It will come as a relief if the economic decay leads only to liquidity crises and IMF bailouts. At a minimum, the post-World War II rise of radical Islam coincided with economic decline and intensified with the collapse of oil prices in the mid-1980s. Religious militants were never much of a problem in the days of the caliphate. True, there were the Kharijites, or Outsiders, who murdered the nephew of Muhammad and spent the next centuries plundering caravans and killing the odd minor official. The hashish-smoking Assassins stalked powerful figures as different as Saladin and King Richard the Lionheart, rivals of the Third Crusade. But in general, Arabs were too busy with trade to pay much attention to the radical fringe.

It may seem arcane, with war hanging over Iraq, to dwell on dead capital in the Arab economy. Indeed, there is an economic argument to be made that freeing Iraq from Saddam could unleash the potential of a nation that was once the industrial heart of the Arab world. But the effect would be fleeting without deeper change, and rehydration is the key. Far from bankruptcy, the Arab world is awash with cash. If the United States wants to address the root cause of Arab malaise, it might convert the billions of dollars in aid it showers each year on Israel, Egypt and Jordan into narrowly defined programs aimed at modernizing financial institutions that can leverage the region's vast and inert hidden capital. Washington could also quit rewarding Arab regimes that have plundered their economies and throttled enterprise with inept leadership and oppressive government. Those measures would give the growing pool of dangerously idle Arab youths some hope of finding jobs, and the dwindling middle class a reason to stay and rebuild.

UNREAL ESTATE: DREAM HOUSE Construction has stopped on Beit Palestine, or House of Palestine, the grand mansion commissioned by Munib Masri, a patriarch of the most influential Palestinian family on either side of the Jordan River. Nearly complete and perched atop the highest mountain in Nablus, the villa seems to levitate, Olympus-like, above a city that was known as the industrial heartland of the Palestinian territories before the current intifada shut it down, along with the rest of the West Bank.

The mansion is an extravagant monument to the Masri family vision of a rich Palestine emerging from the economic decay of the Middle East. Masri, a flamboyant 68-year-old, has embroidered Beit Palestine with luxury trimming - fireplace mantels, statues, tiled floors - all collected from his travels in Europe. Thousands of wooden crates containing baroque and Victorian fixtures are stacked on the grounds, awaiting installation. Think Hearst Castle in the Holy Land and you get the idea. Once finished, says Masri, Beit Palestine will open its doors to the Palestinian people. "I have an obligation to them," Masri says, scampering up a catwalk to the main dining room. "When the Israelis tear out a tree, we plant a tree. When they destroy a house, we build a house." Even an unfinished Beit Palestine is a hopeful symbol to Palestinians, particularly compared with the devastation of Yasir Arafat's compound, leveled by Israeli forces last month.

The Masri family, with Munib and his 64-year-old second cousin Sabih at its head, has been the leading investor in the Palestinian Authority and Jordan since the Arab-Israeli peace process began a decade ago. Arab leaders hailed Masri investments as a valuable peace dividend. Even now, Sabih Masri in particular continues to invest, against the counsel of some family members. Sabih says the Masris can afford to bet on the region since most of the family fortune is invested elsewhere, particularly Saudi Arabia and the United States. But he acknowledges the risks.

"I'm an optimist," he says from his office, adorned with Southeast Asian antiques. "At the end of the day, Israel will have to accept the fact that peace is inevitable."

Many Palestinians have invested in their homeland, but few if any are so powerful as the Masris. Sabih has close links to the monarchies in both Saudi Arabia and Jordan and is friendly with Lebanese prime minister and real-estate mogul Rafik Hariri. Maher Masri, Sabih's nephew, is Yasir Arafat's trade minister. Another nephew, Taher, has served as Jordan's prime minister. Munib's current home in Nablus, where he awaits the completion of his mansion, is considered one of the few places Arafat will sleep without a bodyguard present.

The Masri empire has been expanding rapidly since Sabih made a fortune supplying the U.S. Army during the 1990 gulf war. Their holdings now include hotels, telephone grids, water projects, supermarket chains, port developments, an investment bank and auto dealerships scattered about the West Bank and Jordan. Most significantly, Sabih Masri owns critical water rights and is poised to play a role in what one day could be the region's most vital asset: a pipeline linking the Dead Sea and Red Sea that would provide the region with fresh water for generations. "Both King Abdullah and Arafat know the economy is the issue and Sabih Masri is one of the biggest investors in the region, if not the biggest," says Mahmoud Awwad al-Kharabsheh, a Jordanian lawyer and parliamentarian. "No one can outbid Sabih Masri. His money allows him to influence important decision makers."

In a region dominated by largely unpopular leaders, the Masris are genuinely admired. Sabih favors cabs over limos, and Munib and his two sons are involved in a rare Israeli-Palestinian joint effort, planning a day-care center in the Old City of Jerusalem. Israelis tend to see the Masris as a force for moderation. Palestinians see them as an authentic Palestinian voice - one wealthy enough to command Israeli respect. The Masri influence wasn't always so dominant. In 1990, with a weak global economy and the first intifada raging, their prospects looked grim. At the time, says a person close to the Masri family, "Sabih couldn't cover a .20,000 check." Then the Masri luck turned, thanks to Saddam Hussein.

After Iraq's invasion of Kuwait in August 1990, Masri leveraged his contacts as a food distributor for the Saudi Arabian Army to win an exclusive contract to provision U.S. troops during Operation Desert Storm. In six months, say people close to the enterprise, Sabih Masri made a billion dollars. Masri won't comment, except to say, "I'm a lucky man."

The end of the gulf war raised hopes that the Middle East would become a hot emerging market. It was a heady time for Palestine Development and Investment Ltd., or Padico, a holding company launched in 1976 by Sabih Masri and other investors. Padico controls critical local assets, including the telephone monopoly and the stock market, which enjoyed a bull run in 1999.

Now, Padico is struggling to survive the second intifada. It has a 35% stake in the Jacir Palace-Intercontinental Hotel, a 19th-century landmark that reopened in September 2000 after a $US55 million ($100 million) restoration, only to be shuttered almost immediately by clashes between Palestinian youths and Israeli troops. Padico's agribusiness has been devastated by Israeli road closures, which delay shipping and send the rate of chicken deaths and egg spoilage skyward. Yet Sabih continues to buy local. "Sometimes," says Taher Masri, the ex-prime minister , "I will remind Sabih of the political risks. But he keeps his own counsel."

Perhaps Masri's most vital asset is water rights in a desert kingdom facing a dire water shortage. Though Masri has said he'd be happy to sell his stake in the Disi Reservoir, which is costly to maintain, its value could be inestimable once Jordan, the Palestinian Authority and Israel resume work on the $US6 billion Dead Sea-Red Sea water pipeline, in addition to desalination plants estimated to be worth several billion dollars. "Masri is thinking about the long term," says Labib Kamhawi, an ethnic Palestinian trader in Jordan. "Whoever controls water in this region controls the region." No family has risked more than the Masris on what now looks like slim prospects for peace. But none stand to gain more if the dream comes true.

Sea Change

The Wall Street Journal  1997-07-23 How Beijing officials out-negotiated AT&T on marine cable plans, reducing the U.S. giant to a supporting role in a trans-pacific project and introducing an unlikely new player.

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