MENA Scorpion Economies (Part-III)

A Sting in the Tale!

A skip south down the coast from Bahrain, the United Arab Emirates has a vibrant open economy. Concerted efforts have been made to develop away from a reliance on oil and gas, now operating a substantial industrial base, combined with a robust and quite imaginative service sector. The establishment of free zones has been a significant facet of this diversification policy. The reform of property laws for example, gave a major boost to real estate and the tourist industry. Premium life styles, uber-entertainment and luxury retail is sprouting all over in the Gulf Region.

United Arab Emirates continues to hold a robust economy, protected near zero sovereign debt and by major overseas assets made possible during the period of rising oil prices. In particular, the government has assured continued investment at high levels, especially for long-term construction, communication and public projects.

Middle East and North Africa (MENA) countries – although some may say that North Africa is not strictly in the Middle East – most people would know that they share close cultural and religious ties. Nonetheless, according to The World Bank ‘sustaining recovery and looking beyond,’ 2011 report, over the last decade the region has expanded global trade, growing the share of world exports by some 20 percent. However, this is not enough for positive employment growth across the total MENA region in the longer-term. Basically there is a need to progress up the value chain and expand global reach.

Conventional wisdom informs that the region has restricted potential to export or achieve economies of scale, consequently disabling expansion in global trade. Traditional services such as hotels, restaurants and public administration, remain somewhat nominal exportable services. But modern services such as third party insurance, off shore call centres, logistics, transport and communication services, however, can engage in export services as well as profit from cost-reducing improvements and economies-of-scale.

The service sector has been an important source of economic growth and employment creation in MENA countries in recent years, indifferent to whether the country was an oil importer or exporter. Manufacturing is beginning to make reasonable economic contributions to growth in Tunisia, Iran, Egypt, Qatar and Jordan; and moderate-to-good job creation in Algeria.

Yet when it comes to manufacturing industry, it is not yet apparent that MENA would possibly aim for the established Asian route of manufacturing-led economic expansion. The World Bank continues:

‘However, this assessment bears watching since MENA’s manufacturing sector, although representing a low share of value added, compares favourably in size to East Asian countries at the time of their growth takeoff half a century ago.

However, even though MENA countries attract fairly modest foreign investment to manufacturing sectors compared to other sectors, such capital infusions mould disproportionately more jobs than overseas investment in other sectors. This suggests potential for MENA manufacturing growth if the countries become more engaged in global trade and more open to inflows of investments from abroad.

The bottom line? Nongovernment services and manufacturing can serve as engines of both job creation and income growth in MENA. However, the jury is still out on which of the two sectors will emerge as a sustainable source of long term growth. The details of the respective country policy reform programs will determine which, if either, of the two sectors comes out on top.’

One of North Africa’s great prides is the Moroccan economy; characterised by liberal free market practices and governed by microeconomic market forces. It has astonishing young population, with over half under the age of 25 year. Over the last two decades the country has followed a policy of privatisation of broad range of market sectors: Agriculture, Mining, Maritime Fishing, Textile and Garment Products and Tourism, to name a mere handful.

 

Aerospace industry, for example, is a fast growing sector, with prominent firms such as Labinal, Teuchos, Aircelle, DL Aerotechnologie, Safran Group, DAHER, EADS, Creuzet, setting up production units in Casablanca and Tangier. Today, the sector is made of 50 companies, providing 5000 jobs and has $394 million in revenues.

 

Automotive industry has had long ties with France, prompting Renault's presence in Morocco through the L90 Project. The new Renault-Nissan plant in Tangier represents an investment of €1 billion.  The new plant’s annual production capacity of 400,000 vehicles will play a part in ensuring the continued success of the Entry range across the world. The Tangier factory is the world's first zero carbon and zero effluent automotive plant. It is the southern Mediterranean basin's biggest automotive plant, with an estimated total staff of more than 6,000 by 2015.

There is Polydesign Systems (a branch of Polytech Netting), which relocated in Morocco to supply Ford Motors in Spain and won over other markets of Renault and PSA; currently representing 60 percent of turnover.

Telecommunications in Morocco has also emerged as one of the fastest growing broadband Internet markets in the world, growing at a rate of 200 percent by adding a total of 135,000 DSL lines, for a installed base of 179,000 lines.

 

The economy is characterised by an openness and curiosity towards the world. With particular attention to France, Morocco’s primary trade partner of Morocco. France is also the primary foreign investor, which has given key economic investment, especially in the automotive industry. The agricultural sector is very diverse and manufacturing sector is has been developing steadily during the last years, positioning Morocco as a major player in the world markets.

 

Moroccan government vigorously encourage direct foreign investment, adopting a number of initiatives intended to improve investment climate and turn Morocco into one of the most business friendly countries in the world. As a result 120 Americans firms, including Boeing, Dell, Proctor and Gamble, Coca-Cola, Time Warner are operating in Morocco. Including in excess of 150 Moroccan businesses representing hundreds of US products and services.

So for MENAs, they need to think about and act on both the formulation of innovation strategies and direct investment in innovation programs in the Middle East. Think of opportunities and threats, local and global, the discontinuities and eventual disruptions, plot the trends and forecast both the technological and market outcomes.

Build a culture of learning and innovation so that fear of failure is circumvented; be bold in small start project that scale-up to a disruptive proposition that owns the market and becomes the archetype; build incubator models and infrastructure, and arrange the capital investment streams and support initiatives.