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.