Levant

Economy under occupation

by Executive Staff
written by Executive Staff

The perpetual strife afflicting the Palestinian Territories has taken its toll on the Palestinian population, whose aspirations for a viable state have withered away over the past 60 years of conflict with Israel. The consequences of the conflict are evident to any objective observer, including the diminishing area of any future Palestinian state due to settlement expansions, an increasing number of Palestinian civilians who have been killed or injured and the damage to Palestinian social fabric punctuated by the schism of political power and the recent Israeli offensive on Gaza. 

Perhaps the most nuanced aspect of Palestinian suffering is the state of the Palestinian economy. The systemic economic hindrances imposed upon the Palestinian economy by the Israeli government are considered by most experts to be the primary impediment to allowing the Palestinian economy to reach its full potential. The World Bank (WB) identifies three principal “paralytic effects” of Israeli policies on the Palestinian economy: access to economies of scale, access to natural resources and access to an investment horizon. Moreover, the bank also cites physical impediments such as road blocks, closures, earth mounds and the ongoing construction of the separation barrier deemed illegal under international law as a “paralysis confronting the Palestinian economy.”

Further exacerbating this paralysis is the political and economic division of the West Bank and the Gaza Strip. The lack of a contiguous Palestinian land mass and the Israeli economic blockade of the Gaza Strip have resulted in the divergence of the West Bank and Gaza in terms of the effects on total GDP, which stood at an estimated $4.14 billion in 2007, according to the Palestinian Central Bureau of Statistics (PCBS). The PCBS also noted that Palestine’s total GDP for 2008 is expected to comprise 70 percent of that in 1999 (prior to the second intifada). Per capita GDP fell nearly 30 percent from its height of $1,610 in 1999 to $1,099 in 2007 and is expected to decrease by 7.4 percent in 2008, according to figures by the PCBS and the World Bank. Furthermore, the effects on real GDP of the West Bank and Gaza cannot be accurately gauged due to Israel’s continuing economic blockade and its subsequent military offensive. The IMF  and WB estimates that results from the first quarter of 2008 are slightly negative and project modest growth of 0.8 percent in 2008 “due to a continued, yet marginal drop in economic activity in Gaza, given its already-low base, matched with a modest rise in economic activity in the West Bank.”

The inevitable emergence of Gaza’s alternative economy as a result of the Israeli blockade was estimated to provide nearly 90 percent of all products entering the strip each month, equivalent to about $40 million of contraband, said Palestinian economist Omar Shaban in an interview with Bloomberg. Facilitated by a series of tunnels between Egypt and Gaza, goods that traveled through the tunnels ranged from vegetables to Viagra and served as the main lifeline of the civilian population of Gaza. The associated costs of these improvised means of transporting goods is evident in shops and markets across the strip where an Apple iPod Nano, that lists on Amazon.com at around $150, would cost $500 in Gaza, according to Bloomberg. The Israeli offensive that started on December 27, further intensified the upward pressure on essential items such as food, which has seen a 20 percent and 23 percent rise in prices in the West Bank and Gaza respectively, according to the World Food Program (WFP). The price of one kilogram of tomatoes in Gaza during the Israeli bombardment is said to have risen from about 1.5 shekels ($0.40) before the Israeli onslaught to 7 shekels ($1.75), an increase of over 400 percent, according to Reuters. To date Palestine still does not have its own currency.

Gaza’s imports/exports before Israel’s blockade, during the blockade and after ceasefire deal with Hamas

Source: Paltrade

Increase in obstacles* in the West Bank, Dec 2006 – April 2008

– ‘Baseline’ figure is the number of obstacles erected in the West Bank as of August 2005, which was 376
* Obstacles are defined as checkpoints, partial checkpoints, earth mounds, road gates, road blocks, earth walls and trenches
Source: OCHA

Israel has hobbled the means of transporting palestinian products in a competitive manner

Trade with Israel

The inherent nature of the Palestinian economy, being small and resource poor without its own airport or seaport, predicates that the majority of its economy relies on its ability to trade ­­within its territories and with its neighbors. Trade flows constitute nearly 85 percent of GDP, the vast majority of which (85-90 percent) is with Israel, according to the World Bank. This dependence on the state of Israel can be seen as a direct result of Israel’s economic policies. After Israel invaded the West Bank, it engaged in a policy of “integration” and, in theory, sought to eliminate the barriers that stood between the two economies. This resulted in a rise in Palestinian income as workers took up jobs inside Israel. Palestinian dependence on the Israeli economy at the time of the Oslo Accords in 1993 was immense. Trade with Israel represented more than 90 percent of total trade volume and the trade deficit stood at 45 percent of GDP, according to the Royal Economic Society. After the second intifada in 2000, Israel announced that it intended to end all Palestinian employment in Israel, effectively pulling the rug out from under the Palestinian economy.

Since the Israeli siege on Gaza came into effect in June 2007, essentially stopping all intra-Palestinian trade, the conventional trade of Palestine has relied solely on the internal and external trade of the West Bank. The numerous restrictions and administrative blockades imposed upon the Palestinian residents of the West Bank by the state of Israel have crippled the means of transporting Palestinian products in a competitive manner, thus creating enormous amounts of uncertainty and hobbling shippers’ abilities to compete in regional and global markets. The result has been a perpetual decrease in the amount of Palestinian trade over many years, even before the blockade and the construction of the separation barrier. According to the World Bank, between 2000 and 2006 the amount of West Bank enterprises that made a significant amount of sales outside of their home cities decreased from 60 percent to below 40 percent.

Such increased levels of uncertainty continue to add to the anguish of Palestinian enterprises that are becoming subject to increasingly high fixed costs per kilometer within the West Bank and by default the rest of the world. A recent survey conducted by the World Bank commissioned Palestinian Trade Center (PalTrade) identifies several parameters that increase costs for transporters inside the West Bank. The survey identified as much as a 40 percent increase in distance covered to reach key areas such as Jerusalem and the Allenby Bridge (connecting the West Bank and Jordan) as a result of Israeli policies that do not allow Palestinian trucks to take a direct route. The survey also points out increases of up to 70 percent in labor costs due to delays caused by road closures without announcement, flying checkpoints, unexpected variations on restrictions on cargo and movement of vehicles and people, losses due to inability to deliver on time and the waste of resources waiting and trying to predict certain outcomes.

Intra-West Bank trade routes and effect of impediments

Source: World Bank
Labor costs per kilometer*
* Labor costs computed on the basis of the combination of various vehicle types
Source: World Bank

Ultimately, trade dependency on Israel has proven to be detrimental to the Palestinian economy. In order for trade to thrive, Palestinians must have access to global markets and alternative trading routes. As Executive went to press, the Rafah border crossing between Egypt and Gaza remained closed by Israel and Egypt, as it has been since the Hamas takeover of Gaza in June 2007. Although the crossing could potentially provide an enormous amount of respite for the ailing Palestinian economy, this has yet to materialize. Even when the crossing was “operational,” it proved not to be a viable alternative to accessing the global market as the crossing operated only 16 percent of its scheduled working hours between June 2006 and March 2007, totaling a daily loss of $500,000 worth of exports according to the United Nations Office for the Coordination of Humanitarian Affairs (UNOCHA).

A viable palestinian state would need a sustainable economy free to trade and operate its businesses

Trade to the east

Trading through Jordan is also uneconomical due to the fact that all goods moving to and from Jordan must first cross the Allenby Bridge controlled by Israel. This is “a cumbersome and inefficient process that adds to the cost of shipping and discourages West Bank shippers from using the Jordan routes,” says the World Bank. Goods traded through Jordan are subject to redundant searches, parcel volume restrictions and lack of adequate storage facilities for sensitive products like vegetables and medical supplies. The only silver lining is that due to the recent increases in Israeli restrictions, coupled with some improvements in Jordanian logistics, Queen Alia Airport has become slightly more competitive for handling large volumes than its Israeli counterpart Ben Gourion, which tacks on $1,150 for “security surcharges” per metric ton, according to the World Bank. Nevertheless, the World Bank states that Palestinian traders still prefer Ben Gourion because of “better service, easier access and more frequent flights.”

Positioned at the heart of the Middle East, on the Mediterranean, Palestine has tremendous inherent potential. The promise of a thriving and prosperous Palestinian economy is as logical as it is fleeting in the face of the ongoing Israeli persecution of the Palestinian people. Undoubtedly, a viable Palestinian state would need a sustainable economy free to trade and operate its business without the current hindrances imposed upon it by the ongoing Israeli occupation.

Unless realities on the ground change, the economy of Palestine looks set to remain a burden shouldered by Palestinians, rather than a operable underpinning for a future Palestinian state.

0 comments
0 FacebookTwitterPinterestEmail
Comment

Turkey’s return to the east

by Claude Salhani
written by Claude Salhani

The deep involvement by Turkey’s prime minister in the recent conflict between Israel and Gaza marked Ankara’s return, after an absence of nearly a century, into the fold of Middle Eastern politics. This was something Mustapha Kemal Ataturk, the architect of the post-Ottoman Turkish Republic, wanted very much to avoid.

Indeed, much to the chagrin of many of his compatriots, Prime Minister Receb Tayyip Erdogan’s Islamist Justice and Development Party openly sympathized with Hamas in the recent war in Gaza, and that despite cordial relations between Turkey and Israel and Turkey’s neutral stance in the Arab-Israel conflict.

For many Turks, the prime minister’s change of direction in foreign policy is seen as a serious deviation from Kemalist tenet. Ataturk, the architect of the new republic, was a great visionary who wanted to take Turkey out of the Levant once and for all, and bring it into Europe, where he felt Turkey belonged.

“The larger problem that many either don’t see, or want to ignore, is the fact that Turkey’s identity is going through a speedy transformation,” says Tulin Daloglu, a Turkish journalist in Washington. Erdogan, some observers feel, is gradually eroding what Ataturk had put together and they are not comfortable with the notion.

“My first reaction is negative. Erdogan might have strong emotional attachment to Hamas,” says Daloglu.  “But Turkey should not be competing with other leading countries in the region. It should be [working] in full cooperation with them.”

Shortly after the collapse of the Ottoman Empire at the close of World War I, Ataturk shifted Turkey’s horizons from its traditional eastward leaning to align it with Europe and the West. That included strict separation of religion and politics along the lines of France’s ‘laïcité’. Ataturk and subsequent leaders of modern-day Turkey have labored hard to make this dream of Europeanizing Turkey a reality.

But Europe did not do enough to help speed up the process, as it is perhaps somewhat reluctant to admit a country of more than 70 million Muslims into the European Union. As can be expected, Europe’s failure to seize that opportunity to befriend an important and moderate Muslim country risks sending the Turks back in search of alliances in the Levant, and even beyond, into the former Soviet republics of central Asia. The European Union failed to grasp the importance of bringing in a large — albeit Muslim — nation into the EU, a step that would have solidified European-Arab relations.

Still, in spite of the nearly 100 years during which the Turks stayed away from the Middle East, the three centuries the Ottoman Empire spent incorporating much of the Arab world seems to have left some traces of affinity, at least insofar as the current prime minister is concerned.

But with the continued rebuttal by Brussels, Paris and Vienna of Turkey’s application to join the EU, the inevitable was bound to happen: Turkey’s rapprochement with Arab Islamists and its involvement in the Middle East conflict as a mediator. The latter role was certainly facilitated by the political void left when the United States under the presidency of George W. Bush showed little or no interest in trying to mediate the various problems related to the Middle East crisis. Washington’s refusal to negotiate with Damascus is a prime example of the disastrous policy followed by the Bush neoconservatives and one upon which Ankara jumped to take the relay.

That being said, it is not too late for the Europeans to save the day. In fact, Turkey’s flirtation with Hamas may come as a mixed blessing to the West. On the one hand, a rapprochement between Ankara and the Arab world — particularly with the Islamist organizations, such as Hamas — will prove useful in mediating a future settlement of the Middle East conflict. When the current war between Hamas and Israel finally runs its course, a Turkey acceptable to Palestinian Islamists will prove to be quite an asset. Turkish troops positioned in a newly created buffer zone between Hamas and Israel could be one of the few armies in the world acceptable to both sides. Turkey has the largest, toughest military in the Greater Middle East, more likely than not, on par with Israel’s. Some of their units have seen action in the mountains of Kurdistan, where Turkey has been fighting a guerrilla war against the PKK (the Turkish Workers Party) for several decades now.

The drawback is that Turkey’s reemerging friendship with the Arab world, and its continued exclusion from Europe, will further ‘Islamize’ Turkey. The end result could be that instead of Turkey acting as a buffer between Europe and the Arab/Muslim world, a role Turkey played during the Cold War as a NATO front-line for the Iron Curtain, Europe may wake-up one day to find Turkey suddenly on the other side of that border.

Claude Salhani is editor of the Middle East Times and a political editor in Washington, DC.

0 comments
0 FacebookTwitterPinterestEmail
Comment

Fortress America in Baghdad

by Paul Cochrane
written by Paul Cochrane

Opened in the midst of the slaughter in Gaza and the twilight of Bush’s presidency, the new American embassy in Baghdad garnered less coverage than when its astronomical budget was first publicized in 2005.
The opening was more than the completion of the largest and most expensive embassy in the world. It marked the day the US diplomatic corps moved out of Saddam Hussein’s former palace and handed it over to the Iraqi government, five days after US forces officially came under an Iraqi mandate on New Year’s day.
Many Iraqis are eyeing warily the move from one palace to what is essentially an even larger one. The embassy is far grander — albeit minus the gold plated bathroom fixtures — than anything Hussein ever built during his nefarious reign.
It is on a level of Cold War era grandeur, similar in scope to the colossal project Nicolae Ceaucescu attempted in Bucharest, the centerpiece being a palace the Romanian leader wanted to be seen from space.
The 104-acre embassy complex, which is the size of approximately 80 football fields, nearly turned into a similarly sized white elephant as costs ballooned to $700 million and the project taking nearly two years longer than expected. In that time it became a symbol of the quagmire Iraq has become for the US, with no end in sight and costs spiraling upwards. But with the embassy finished and operational, it now represents the most prominent symbol of ‘fortress America’ today and, moreover, that America wants to stay in Iraq for longer than Barak Obama’s presidency will last.
As the International Crisis Group commented in 2006, “the presence of a massive US embassy co-located in the Green Zone with the Iraqi government is seen by Iraqis as an indication of who actually exercises power in their country.”
Visible from space and larger than the Vatican, the embassy draws historical comparisons to the Crusader castles of the middle ages. All that is missing is a crocodile infested moat around the walls.
But secure it certainly is, nestled inside the Green Zone, with a 4.5 meter thick perimeter wall to protect this city within a city that includes a power station, a water treatment plant, schools, restaurants, swimming pools and a shopping area.
With an annual budget of $1.2 billion, the 5,550 Americans and Iraqis working at the embassy — half listed as security — are certainly not roughing it. The residence of the US ambassador to Iraq is 1,500 square meters, while the deputy chief of mission has a “cozy cottage” measuring 900 square meters.
Tough though a posting to Baghdad may be for the diplomats, State Department, FBI, and federal agents that are to work out of the embassy, it is far from the realities of the “red zone” that lies beyond the walls, of power cuts, broken sewage pipes and violence.
That the US needed a secure site is understandable, given the track record of attacks on US embassies. In Beirut, the Americans are in their third embassy in less than 30 years, while the former US embassy in Tehran stands as a memorial to the overthrow of the Shah, and resultantly the American presence in Iran, the walls covered in colorful murals depicting the US as an oppressor, imperialist and warmonger. As Ayatollah Khomeini said in December, 1979: “This place is not to be considered an embassy but rather a ‘spy center’.” Following the US embassy hostage crisis in Tehran, the US had to resort to the somewhat farcical position of operating out of the Swiss embassy.
A drive past other embassies in the region indicates how seriously security is taken, with the Istanbul compound a veritable fortress, as is the one in Amman, with armored personnel carriers lined up outside and reportedly surface- to-air missiles within the sandstone complex.
But as Niccolo Machiavelli points out in the section on fortresses in that Bible of realpolitik, The Prince, “If they are beneficial in one direction, they are harmful in another.” Indeed, despite US ambassador to Iraq Ryan Crocker saying at the launch that the new embassy is a testimony to America’s commitment to a “long-term friendship with Iraq,” given the US role in the country over the past nearly six years it is hard to see the embassy as a symbol of friendship. Furthermore, with the embassy a fortress, it doesn’t exactly give off the impression of amiability. But that is the Catch-22 situation in which America has placed itself due to its foreign policy decisions over the years in the Middle East. At the same time as presenting itself as a beacon of hope, democracy and freedom to the world, to gain access is akin to entering a maximum-security prison.
As Machiavelli remarked: “So, all things considered, I commend those who erect fortresses and those who do not; and censure anyone who, putting his trust in fortresses, does not mind if he is hated by the people.”

PAUL COCHRANE is a Beirut-based journalist

0 comments
0 FacebookTwitterPinterestEmail
Comment

Power for a Persian rapproche

by Riad Al-Khouri
written by Riad Al-Khouri

As instability in the region shows no signs of abating, the launch of a dialogue between the new administration in Washington and Iran is seen in the West and the Middle East alike as important for durable peace. While helping to solve long-standing regional issues, including problems like Gaza that affect stability in the Levant and beyond, talks between Tehran and the US could also shore-up the iffy American position in the region.

At the same time, Tehran’s need for friends and partners internationally will nudge it along the path to Washington. As with any sound diplomacy, a new approach to Iran needs sticks as well as carrots. Regarding the former, Germany said late last year that it wanted further sanctions to be imposed against Iran, hitting the bank and transport sectors. The suggested new measures aim to give the incoming US administration further means of pressure on Iran in any future dialogue, offering the carrot of incentives along with the threat of tougher sanctions over Tehran’s nuclear ambitions.
Iran, a leading oil and gas producer, denies seeking atomic weapons and says that its nuclear program aims to provide energy for a growing population when reserves of fossil fuels run out. At first glance, such an argument may appear strange, given that Iran has a massive reserve of hydrocarbons — especially gas, in which it is a world leader. For the time being, however, Tehran’s internal energy equation is precarious, but not because of lack of gas or crude oil underground. Rather, it is a question of politics and pricing.
One problem in this respect is that Tehran’s populist government tries to keep the poor happy through a subsidy system. Direct and indirect subsidies on goods in Iran amount to the equivalent of many tens of billions of dollars a year. However, under increasing financial pressure, Iran is considering a measure that would abolish costly subsidies on fuel and electricity, while compensating poorer people with cash. Currently falling oil prices encourage this and similar steps, which are part of a wider plan to make the country more efficient. Gasoline and electricity, among other basic items, are very cheap in Iran, but if the proposed measure comes into effect, prices of such vital supplies will rise at least fourfold.
Yet the point is being made in Tehran that prices need to become a reflection of real economic forces for the system to be reformed and that 60 percent of the money saved would, in any case, be used to boost the spending power of people with low and middle incomes. One of the basic problems of the Iranian economy is that despite the country’s wealth of varied natural resources, oil revenues still account for 80 percent of foreign currency receipts, making Tehran highly vulnerable to petroleum price shifts. The inability to diversify is partly due to lack of foreign investment and other forms of failure by Iran to engage with the world economy.
Meanwhile, crude output might fall drastically and the Islamic republic could even cease exports because of ageing oil fields and a lack of foreign technology. Crude oil production may drop to as little as three million barrels per day (bpd) by 2015 from over four million last year and the country could even halt petroleum exports (having shipped about 2.3 million bpd overseas in 2008).
Is this unthinkable? No. Without major new investments in Iran, its output and exports of crude oil will surely drop over the next few years. Though the Iranians are the second-largest producer in the Organization of Petroleum Exporting Countries, Tehran faces the prospect of an eight percent annual decline in production over the next decade because of the twin problems of lack of investment and old technology. Sanctions by the West and the tight credit market resulting from the global crisis have continued to cut financing for Iranian projects, while a lower demand for energy has already caused crude oil prices to sink. As a result, Tehran is looking for new partners to develop major projects, but because of sanctions, cannot find them in the technologically advanced West.
One of the problems for Iran’s energy sector is that it extracts less oil from the ground because of lack of adequate projects to enhance recovery. New developments using high technology could help compensate for natural declines in mature oil fields. But unless current impediments facing the oil industry are removed, rising internal demand may force crude exports down to one million bpd by 2015. This makes reconciliation with the West even more urgent.
The alternative is more Western-Iranian enmity, which risks destabilizing the Levant, the Gulf and eventually the whole world.

Riad al Khouri is senior fellow of the William Davidson Institute at the University of Michigan in Ann Arbor

0 comments
0 FacebookTwitterPinterestEmail
Comment

Death and deceit for Gazans

by Peter Speetjens
written by Peter Speetjens

Whatever happens in Gaza, blame Hamas! That was the official line of Israel’s well-oiled PR-machine and it was largely swallowed by most Western politicians and mainstream media. Hamas started it, so the argument goes, and if you hit someone, you may expect to be hit back. Hit Israel and expect to be hit back hard.
This is of course a quite simplistic view of things. First of all, Hamas did not start it. As Israeli columnist Uri Averny pointed out, the cease-fire between Hamas and Israel held for months. It was Israel that provoked Hamas by sending an army patrol into Gaza killing three Hamas militants allegedly digging a tunnel. Gaza’s ruling party replied by firing a salvo of Qassam rockets into Israel.
Now, one may argue that shooting homemade rockets into Israel is not the most effective way of promoting one’s cause and that it is time to find another method, but one is on thin ice to claim that Hamas initiated the conflict. In fact, as Averny also pointed out, it was predominantly Israel that did not live up to the conditions of the cease- fire, as it refused to lift the economic blockade that has strangled Gaza since 2007.
Nearly every international aid agency last year sounded the alarm. UNRWA reported last summer that half of Gaza’s population lived on food handouts, while unemployment amounted to 70 percent and that 87 percent of the population lived under the poverty line of $2.40 a day. The World Bank last year warned that the Gaza economy ran the risk of “irreversible collapse.”
Yet these gloomy observations hardly made headlines and they fell on deaf ears among Israel’s diehard supporters — and Hamas’ many enemies — who claim Hamas is to blame for the sorry state of Gaza’s economy. The fact that Israel has failed to implement the Oslo Agreement since 1994, long before Hamas even came to power, does not change things a single bit. That’s just politics, stupid!
The 1994 Paris Protocol on Economic Relations between Israel and the Palestinian Authority stipulates, “there will be free movement of industrial goods, free of any restrictions, including customs and import taxes between the two sides,” and “the Palestinians will have the right to export their industrial produce to external markets without restrictions.”
More importantly, the question of who is responsible for what in the latest wave of death and destruction in Gaza cannot solely be answered by determining who started it. Even if Hamas initiated the Israeli attack by firing rockets, that does not justify disproportional military retaliation. No courtroom in the world allows one to endlessly stretch the required link between cause and effect, as the right to self-defense is limited by the principle of proportionality. Yes, Israel has the right defend itself. No, it cannot respond in any way it wishes.
To put it in simple terms: if you hit someone in the face, the recipient is entitled to hit you back. They, however, are not entitled to bring out a crowbar to break both your knees, bomb the electricity plant in which you work and kill your whole family. On January 18, the day Israel unilaterally announced a cease-fire, Hamas rockets over a period of some three weeks had killed three Israeli civilians and 10 Israeli soldiers were killed. Over the same period, at least 1,300 Palestinians were killed, an estimated one third of whom were children. The immense material damage has since been estimated at nearly $2 billion.
Finally, the role of international media, such as BBC and CNN in the spectacle of death was highly embarrassing. Not allowed into Gaza, their reporters stood quite literally on the Israeli side of things. Their job was essentially to read out Israeli press releases and make sure that any accusation of wrongful conduct from Palestinians or the United Nations was countered by a smooth-talking Israeli press officer who, no matter what happened, blamed Hamas.
Israel bombed not one, but four UNRWA schools filled with refugees? Hamas is known to fire rockets from UN sites. Israel bombs a UNRWA truck killing its driver? Hamas is known to have fired at UN trucks in the past. Israel bombed a mosque filled with people? Hamas is known to hide weapons in mosques.
The Western media proudly claim to be objective, as they show both sides of the story. Yet, giving equal attention to both sides of a conflict that is essentially unequal, means taking sides. The war takes place in Gaza, Palestinian victims outnumber Israeli casualties by at least 100 to one and yet the New York Times publishes an equal number of photos of destruction in Gaza and Israel, therefore producing a false impression of the conflict.
To me, the war and its coverage are best summed up by a fragment starring BBC reporter Bethany Bell. Standing inside Israel, she first told us that some 60 air strikes hit Gaza overnight. We see black smoke behind her. Meanwhile, she continued, 12 Hamas rockets were fired into Israel. One of them hit a kindergarten. The kindergarten, Bell said, was empty.

Peter Speetjens is a Beirut-based journalist

0 comments
0 FacebookTwitterPinterestEmail
Comment

Terror.com

by Mohanad Hage Ali
written by Mohanad Hage Ali

Last November, senior military leaders in the United States took the unusual measure of briefing the president on “a severe and widespread electronic attack on Defense Department computers.” According to a Los Angeles Times’ report, the attack, which was believed to be originating from Russia, targeted combat zone computers and the US central command overseeing operations in Iraq and Afghanistan. Nevertheless, the security services’ primary concern was whether its non-state enemies could acquire the capability to conduct cyber attacks against Western targets.
More than two years earlier, US authorities warned there was a threat, posted on a website affiliated with Al Qaeda, to attack the stock market and banking services online. The threat was apparently issued as revenge for the detentions in Guantanamo Bay. The US Homeland Security Department called it an “aspirational threat”.
The magnitude and consequences of such attacks are best comprehended when the Internet economy’s size is taken into consideration. Internet dealings and transactions today are a vital part of Western economies. According to a University of Texas at Austin study, the Internet economy “supported an additional 650,000 jobs in 1999 as revenues soared to $523.9 billion” in the US alone. The same study, conducted just under a decade ago, noted that even then the Internet economy “directly support[ed] 2.48 million workers, more than the insurance, communications and public utilities industries and twice as many as the airline, chemical and allied products, legal, and real estate industries.” This growth has prompted the Organization for Economic Co-operation and Development (OECD) to ask in a 2008 report, “has the economy become an Internet economy?” The OECD also stated, “increasingly, the largest productivity gains for businesses come from using online networks in some form.”
The online economy is growing to the extent that hacking a single company’s website for a day costs millions of dollars. For instance, BBC news reported in 2004, “three- quarters of UK companies have been hit by security breaches in their computer systems over the past year, costing billions to industry.” It was noted in the same report that “the average computer incident costs large companies $165,000 a time.”
The US warning against Al Qaeda cyber attacks in 2006 held some credibility as the Internet played an increasingly significant role in its operations. The new threat cyberspace poses was also shown when U.K. based extremists used the Internet to recruit other members, including teenagers. Through password protected web forums and chat rooms, they indoctrinated and prepared those recruits to launch suicide operations. Even the explosives used were home prepared according to “recipes” widely distributed on Al Qaeda web forums.
The militants’ success in exploiting the Internet was most apparent in last year’s failed Exeter bombing. Nicky Reilly, a 22-year-old of Irish background, entered the Giraffe restaurant’s toilet in Exeter to assemble his bomb before detonating himself. A slight mistake in his “internet bomb recipe” prompted an early explosion inside the lavatory, which left him with facial injuries. According to the police investigation, militants situated on the Pakistan-Afghanistan border area “groomed” Reilly through online chat rooms to become a suicide bomber. Sitting on his computer for long hours everyday, he watched more than 2,000 Al Qaeda videos, researched possible targets and then downloaded a bomb recipe.
In that same year, the trial of Aabid Hussein Khan’s Bradford terrorist cell exposed the Internet’s extended or unconventional use. This cell, which was plotting to attack the Queen and members of the royal family, not only compiled detailed information about different targets from the Internet, thus lessening the need to physically survey the area, the cell members also allegedly sought recruitment and training from the World Wide Web.
This British online terror saga started right after the Afghanistan and Iraq invasions, with the case of a young Moroccan immigrant named Younis Tsouli — whose online alias was Irhabi 007 — who dazzled the Western intelligence agencies for years before his capture in a tiny West London flat. For two years, Western intelligence services chased the 22 year-old Internet hacker, trying to uncover his real identity. Irhabi 007’s Internet activities involved propaganda, distributing training manuals, instigating others to commit acts of violence, hacking websites and distributing a hacking manual online. He was dubbed “the master” of online attacks, hacking, programming, and digital media design.
According to some reports, Irhabi 007 was making “explosive new use of the Internet,” specifically through websites and password protected forums that “cater for would be Jihadists.” Tsouli disseminated training manuals and propaganda material online, and then began helping radicalized youth to perpetrate attacks.
So far, Internet staged and planned attacks have failed to achieve their goals, but will 2009 be the year cyber terrorism makes its mark?

Mohanad Hage Ali is political editor at al-Hayat newspaper

0 comments
0 FacebookTwitterPinterestEmail
Society

IWC – Gianfranco D‘Attis (Q&A)

by Executive Staff
written by Executive Staff

IWC brand manager, Gianfranco D’Attis and famed IWC watch designer Kurt Klaus recently made a stop at Cadrans in downtown Beirut to promote their new Vintage line in commemoration of the International Watch Co.’s 140th anniversary. The Swiss company has a long history in the Middle East. Executive Magazine sat down with D’Attis to discuss customers, sales and strategy.

E What is IWC’s best selling model in the Middle East market?
We have a number of watches in our portfolio. The basic watch range includes the Aquatimer, the Ingenieur, the Pilots and the Portofino. That is the basic entry price, from $3,000 to $10,000. Then we have the manufacture pieces, made with precious materials. These are basically the Da Vinci line, the Portuguese and some complications. The best selling line overall in the Middle East, with about 50 percent of commercial turnover, is the Portuguese. The second best selling line, with 25 percent of the market, is the Pilot. Together they make about 75 percent of the turnover, not only in the Middle East, in fact, but worldwide. These are icon products. These are products that are differentiating themselves from the competition, because they are unique.

E How long has IWC had a presence in the Middle East?
IWC has been in the Middle East for over 30 years. Cadrans has already been working with us for 30 years. Richemont bought IWC seven years ago. Then we started integrating their platforms five years ago. So for the last five years we have been aggressive, expanding in the Middle East, increasing brand awareness, investing in marketing, and investing in boutiques and sales staff. The brand has really been developing quite fast in the last three to five years and it is performing extremely well. We have a team of six people in Dubai and we are constantly expanding. Now we are trying to penetrate the Indian market, which is a very strategic market for IWC in the future. As mature markets will be under pressure over the next two years, we believe that emerging markets will be absorbing the pressure and that they will deliver profits. This will help the brand to balance turnover and performance.

E What are the strongest markets for IWC in this region?
The strongest market is obviously the UAE. We have our largest regional distribution there with two boutiques and about five points of sale. The second strongest market is Turkey, because we also manage Turkey from Dubai. Then immediately after Turkey, you have Lebanon, because the Lebanese like IWC. They like it because it is also a strong brand in Europe, because it is understated, it’s chic, it is more or less what the Lebanese are looking for in a watch.

E How many points of sale do you have in Lebanon?
Right now we have two points of sale. We are working with two partners, Cadrans and Atamian. We are also planning to open a boutique sometime in the next 12 months. When Solidere opens its new addition, we will be present there.

E Does IWC keep the number of its points of sale low in order to maintain brand image?
We are actually reducing the number of points of sale and upgrading existing ones to boutiques. We really want to have a selective distribution network. For instance, five years ago we had 1,200 points of sale around the world and we are reducing that to about 800. The strategy is really to make it exclusive, selective and to upgrade the existing network to boutiques.

E Do you foresee a time when IWC watches will only be available in IWC boutiques?
That would be the ideal scenario. But obviously we need strong partners on our side in these special times. IWC is not a retail brand, IWC is a wholesale brand. That is why we need to find the right balance. Retail is for image, wholesale is to find a new customer that may not necessarily want to come down to a boutique. He likely has a special connection to our partner and we may not be able to reach him.

E What was IWC’s profit for 2008?
We do not publish profits or sales numbers. This is strictly forbidden by the group.

E Is IWC a publically traded company?
Richemont is publically traded. IWC is just one brand within this holding company Richemont. They hold brands like Cartier, Montblanc, Vacheron, IWC and Panerai.

E What percentage of totals sales does the Middle East represent for IWC?
We have aggressively developed the share of turnover in the Middle East. We started from nearly zero percent five years ago and today it is between five and 10 percent. When IWC got its start in the region 30 years ago, it had a small but important turnover. We had very personal relations in the Middle East with certain big families. In Oman, we were producing special quantities for the Sultan; in Dubai we were doing something for the sheikh. IWC was a very niche brand for special families in special quantities. So it was an important market, but the turnover was not very significant.

E What do you see as some of the biggest challenges that IWC will face in the near future in light of the ongoing global financial crisis?
Luxury in general will suffer because people are scared for the future. They don’t know when the economy will turn around. We feel that products in the price range of $7,000 to $20,000 will not be greatly affected and products below $5,000 will be much more affected. So this middle segment will be suffering, but the high-end should remain strong.

0 comments
0 FacebookTwitterPinterestEmail
Executive Insights

Talent recruitment for the human capital agenda

by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb
written by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb

In today’s economic environment it is easy to focus on a company’s financials and ignore what has for the past two decades been an increasingly challenging priority — talent acquisition. Given the number of companies reducing workforce numbers by the thousands or going out of business, it might even seem that human capital is in oversupply. While the immediate recruitment requirements of many companies may be more easily met these days, human capital issues still account for some of the greatest challenges businesses face. Recent Booz & Company research and experience with multinational clients highlight key challenges faced by human capital leaders.

  • Escalating competitive pressures. These include the demand for new skills and capabilities, ever-higher standards for productivity and a less-benign regulatory environment that increases the need for employee education.
  • Labor market changes. These include an aging workforce, a lack of qualified workers in key industries and professions, and Generation Y workers’ expectations for employment relationships.
  • The changing nature of work. These shifts include greater emphasis on knowledge work, the extinction of the apprenticeship model, a lack of linear career paths and increased demand for immediate results.
  • Competition in a “flatter” world. This is shown in globalization, industry consolidation, collaboration across organizational and geographic boundaries and the need for rapid knowledge capture, dissemination and protection.

While these challenges are common across companies, industries and even countries, knowing how to respond to them has been and will be a source of competitive advantage. These challenges are as critical as ever in Middle Eastern and North African (MENA) countries. The global financial crisis offers organizations in the region the chance to build their talent pool. In a region of unprecedented growth that is experiencing talent shortages, it is crucial to invest in recruitment, nurture leaders, and redesign workforce practices to build capability and competitive advantage. Effective recruitment starts with a forward-looking vision and long- term plan for talent acquisition. For the past decade, finding enough of the right people has been a challenge. A key lesson for human resources is to develop “employee insight” by using employee segmentation. Employee segmentation is the basis for modern human resources and customized career alternatives for a diversified workforce. In the MENA, the primary effort has been to recruit and build capacity. Now, with its variety of talent segments (e.g. skilled expatriates, local workforce, interim employees), using employee segmentation may be an opportunity for companies here to build capacity and capability. Understanding employee segmentation is one strategy. Understanding and effectively using one’s brand is a complementary strategy. Employer brands that attract talent often articulate a clear, shared purpose above the profit motive. Few MENA companies take full advantage of employer branding, but those that do will reap the benefits of attracting and retaining the best people. Forecasting talent needs is essential. Organizations must be prepared to act whenever exceptional people appear — even in economic hard times.
One German industrial company, ThyssenKrupp AG, established a special hiring fund in its technologies business. The budget is dedicated to building the talent pool in that specific business and it is separate from the traditional hiring budget. The imperative is to find the talent, hire them and then decide how to deploy them in the business. In highly competitive talent markets such as the MENA region, strategies that focus on leadership, learning and adaptability will be critical to the human capital agenda, while successful leaders obtain higher levels of employee engagement and retention. The best training and learning programs are closely integrated with the business, driving change, innovation and value. While the learning function should resemble a sophisticated, efficient and cost-effective adult education enterprise with measured outcomes and ROI, the individual also takes an active role in learning. This linkage between individual learning and organizational goals is critical, as individuals begin to ask themselves what they need to learn to have an impact on the bottom line rather than being told by managers and trainers.
Human resource’s capabilities, competencies and focus must be tightly aligned with the company’s business priorities. A business savvy HR function will realize that people are competitive assets and will design a compelling strategy to realize that asset’s value. This strategy habituates high performance in the people who work in every function, region and business unit of the company. Saudi Telecom’s human resources strategy, like its operational strategy, is designed around the needs of customers. Using a shared-services model in which human resources is a strategic partner with the business units, human resources professionals think in terms of providing services. Either they are able to develop the right training for customers inside the company or the business units are allowed to obtain the training they need from outside vendors. Human capital development remains at the forefront of MENA’s development agenda. While the region has not been immune to the financial crisis, MENA organizations may still be able to use the crisis to move from more tactical recruitment efforts to developing and implementing a human capital agenda that builds and develops much needed workforce capability.

Rabih Abouchakra is a partner and Bahjat El-Darwiche and Soon Rabb are principals at Booz & Company

0 comments
0 FacebookTwitterPinterestEmail
Executive Insights

Ziad Ferzly

by Ziad Ferzly
written by Ziad Ferzly

The Middle East region, especially the Gulf, has experienced a great boom over the last few years. With rising oil prices and ambitious projects, many thought this would continue ad infinitum. However, the global economy has gone into a recession and the Middle East is not immune. The financial market crashes around the world and region have been followed by economic downturns that are having a severe impact on companies everywhere. As people come to grips with this shock to the system, they must adapt to new realities. This recession is real and must be dealt with decisively. Managers need to admit that there is a problem. It is important to avoid getting sucked into collective self-deception, whereby company stakeholders put on blinders and convince themselves that they are immune to the decline and can ride out the storm without consequence. Companies need to be as proactive as possible because the longer they wait, the more difficult it will be to recover.

During the boom, most companies grew, even if they were not professionally managed. Many investors made money whether they evaluated investments properly or not. As the saying goes, a rising tide lifts all ships. Yet things have changed. The wave has crashed. The ensuing flush of the system will help ensure that the stronger, better prepared players are the true survivors. Prudent companies are the ones who take this time to properly restructure their operations. Companies should follow these restructuring guidelines:
• Stabilize the situation — A company that is experiencing significant difficulties should first stabilize the situation. In extreme cases, the goal is to survive long enough to go through the restructuring process in a proper and timely fashion. Generating cash and cutting expenses are of paramount importance. The company should identify major problems and attack them quickly. It should address the root of the problem, not the symptoms.
• Appoint a restructuring team — This is the team that should lead the company out of trouble. With a combination of key internal managers and select outside restructuring advisors, this core group will be responsible for executing the entire restructuring program that will be put in place.
• Gather data — It is important to base plans on real life data collected internally from the relevant groups. Data should be gathered on production, sales, pricing, costs, customers, etc. The company must have a full understanding of the situation. Data will ensure that decisions are grounded in reality, not conjecture.
• Change leadership — Often, there needs to be a change in the top management of the company. Some managers can stay, while others must go. Strong and effective leadership should be established. The company cannot afford to have weak or incompetent management, especially in difficult times.
• Assess capabilities — The restructuring team will assess the company’s capabilities, strengths, and weaknesses. The team will then generate ideas on the options available. There needs to be a match between the capabilities of the company and the options chosen.
• Recalibrate strategy — How does the company create value? What changes need to be implemented? Where is the company headed? The restructuring team should clarify objectives and adjust strategies in a deliberate manner to focus operations and the organization on common goals.
• Develop a realistic plan — After assessment and strategic recalibration, the team should devise a playbook or turnaround plan for the company to follow. The goals should be realistic and achievable given the current state of the company and market conditions.
• Renew organization — The new vision and strategy for the company may require a new organizational structure for better execution. People need to be empowered and, at the same time, held accountable for their actions and decisions. Their rewards should be properly aligned with the company’s long-term performance.
• Improve processes — There are core processes to the business that need to be improved. Other processes might be outsourced. Whether improvement happens in terms of time, cost, or quality, addressing the different facets of the operation will produce a better run organization. This requires a thorough analysis of various processes and matching new processes to the capabilities of the employees in the new organizational structure.
• Conduct financial restructuring — The restructuring plan will inherently have a major financial component in place. Whether this relates to creditors, investors, employees, or suppliers, the financial plan that is put in place needs to go hand in hand with the strategic plan that the team has put in place. Proper financial management is critical to the success of this effort.
• Manage stakeholders — There is a wide variety of stakeholders for companies: from shareholders and employees to suppliers and customers. As the company goes through its restructuring process, it needs to effectively communicate with various stakeholders to make sure that they are aware of what is happening and, when possible, participate in helping the process succeed.
• Measure and show progress — The way to gauge progress is by measuring the results of decisions and actions taken. Whether the parameters chosen are financial, operational, customer-oriented, or otherwise, measuring performance is essential to tracking the restructuring effort. Data should be gathered throughout the process. Showing progress will excite stakeholders and will give the restructuring team the validation it needs to continue with the current plan.
Conglomerates and investment firms should consider a restructuring — as described above — of the parent, holding, or management company first, and then of the portfolio, i.e. the individual companies or investments. The restructuring team needs to:
• Decide on an overall strategy — The team should ask itself: What businesses or industries do we want to be in? Why these industries? What makes us qualified to hold and potentially manage all these companies? What is the right mix of company holdings that serves our overall strategy and goals?
• Review current holdings — The following questions should be asked: Does the current portfolio of companies and investments make sense in light of the prevailing conditions? Do the companies fit within our overall strategy? Are we too heavily skewed in one direction and do we need to make adjustments to our portfolio? Do we want to keep all the companies as they are today or do we want to entertain the idea of corporate transactions such as mergers, acquisitions, or divestitures?
• Set a strategy for each company — For each of the companies in the portfolio that the restructuring team decides to keep, they should put together a targeted strategy depending on internal data gathering, industry statistics, and market conditions. The team should follow the restructuring guidelines highlighted above.
Studies have shown that companies that went through successful restructuring efforts had a few characteristics in common:
• They were low cost producers, and had very efficient operations.
• The management teams led by example. They did what they asked their employees to do.
• They focused on the internal operations of the company addressing issues such as quality, productivity, and differentiation.
• They had an internally consistent strategic plan.
• They had a change in top management, used outside restructuring advisors, or both.
There are many companies that should have gone through a restructuring program over the last few years, but did not realize the need given their apparent success in the market. Now is a good time to act for those companies, and also for others that are experiencing difficulties because of the economic downturn. Many will not make it through this year. Companies need to ensure that they are strong enough, focused enough, and prepared to weather the storm. Those that restructure now will be well positioned to capitalize on opportunities ahead of their competitors as the economy improves. It is time to restructure.

Ziad Ferzly is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions, and governments around the globe.

 

0 comments
0 FacebookTwitterPinterestEmail
Executive Insights

Rethinking private equity – part I

by Imad Ghandour
written by Imad Ghandour

The sharp reversal of economic fortunes in the Gulf has sent all private equity (PE) houses back to the drawing board to redesign their investment strategy. Some are optimistic the Gulf will bounce back quickly, while conservative investors predict this recession will be deep and long and are waiting for the recession tornado to vanish so they can pick up from the carnage good companies at attractive valuations. The bulk of PE houses, however, are focusing on a selected number of defensive sectors to invest in, with the consensus being that education, healthcare, and fast moving consumer goods and related industries will survive the downturn.
Starting with education, this article is the first of a three-part series — which will also run in March and April issues of Executive — covering the dynamics of investing in each of these defensive sectors:

Back to school
Education is one of the largest global industries, yet one of the most fragmented. It is estimated that the global market size for education services is $2.5 trillion and it is ranked amongst the top three industries depending on how you count. Yet, it is one of the least represented sectors amongst listed companies. The largest education company by market cap is Apollo in the US, with a market cap of only around $7-10 billion. Just a handful of companies have revenues exceeding the billion-dollar mark.
Yet education takes a significant chunk of household and government expenditures. In Saudi Arabia, the education and vocational training budget comes second after defense, with more than a quarter of the budget allocated to it. In most societies, household spending on education is only exceeded by accommodation expenses. Furthermore, governments are offering subsidies to investors, and many are privatizing their educational system. This means an even larger pie for private sector operators.
The education sector is divided into several subsectors. The largest and the most fragmented is K-12, or primary and secondary education. Adult education and vocational training come second. Other notable sub-sectors are early childhood education (pre-school) and testing (e.g. GMAT, SAT, TOEFEL, etc).

Cash is king
From an investment point of view, education has very interesting characteristics. It has stable and predictable cash flows: students pay upfront for the service, and once a student enters a school or a university, he is likely to stay there until graduation. In the GCC, population growth and rising incomes imply continued growth in demand, and most likely shortage of supply.
Parents (clients) have limited price influence on tuition and thus tuitions increases are ahead of inflation and margins remain healthy and stable. In the GCC, for example, it is very common to have net margins of 25-35 percent.
The main challenges for institutions are the upfront investment in real estate and recruiting good teachers. Schools and universities, in particular, need a significant investment in purpose-built facilities, and investors have to balance the economics of being close to the urban demand centers and the escalating cost of land as you get closer to such centers. The other challenge is recruiting quality teachers in the wake of a shrinking global population of teachers but a growing population of students. Symptoms of teacher shortage are already evident, resulting in escalating costs.
Given the attractive investment characteristics of education and limited number of investment opportunities, listed educational institutions usually trade in the 20-30 times their earnings. This creates a significant arbitrage opportunity for investors who build new schools and eventually sell them at high valuations.
PE houses are not flocking to education for one main reason: opportunities are scarce. Yet the most creative PE players were able to enter the sector early, and will probably cash out handsomely, even in turbulent times!

Imad Ghandour is head of Statistics and Information Committee, Gulf Venture Capital Association and board member, Maarif Education and Training Holding Co, Saudi Arabia

0 comments
0 FacebookTwitterPinterestEmail