Banking & Finance

Capitalism – The new world economy

by Executive Staff
written by Executive Staff

It is easy to be pessimistic. Especially when the president of the United States, the supposed beacon of prosperity in the world, concedes that “this sucker could go down.” The question becomes, how far down can we go? Around the world, analysts, thinkers and social commentators have predicted the end of the financial and economic environments as we know them… and they are probably right. The resulting financial landscape that will prevail will be inherently different than what we knew before this all started. The financial earthquake that began in the US real estate sector has inevitably resulted in tremors being felt throughout the world’s markets. These tremors come as a stark reminder that, unchecked, the greed that caused this crisis to occur has severe ramifications for the global economy.
In the minds of most analysts the current global financial crisis has erased any doubt that the world is on its way to several years of recessionary growth rates. What remains to be seen is the magnitude of how long and hard the fall will be. “The financial crisis is a major event that has had repercussions that have brought about a [global] recession,” said Fadi Osseiran, head of BLOMINVEST Bank. “The depth and length of this financial crisis will affect the shape of this recession and it is really premature to try to understand the full impact this will have.” Marwan Barakat, head of research at Bank Audi, stated that the IMF has recently adjusted that global growth estimates for 2008 down to 3.9% from a previous estimate of 5% and predicts a 3% growth rate for 2009, indicating the commencement of a global recessionary period.
Looking out the window in the Middle East. however, one can see that the sun is still shining. And like the annual spat of rain that tarnishes the windows of the Gulf’s high- rises, this storm will soon blow over — albeit leaving a few clouds in its wake. The wider Middle East in general has managed to weather the global economic downturn of the past year relatively well. Barakat explained that this is mostly due to vast amounts of liquidity available linked to petrodollar revenues, the diversification of investments, and the conservative nature of regional banking.
On the other hand, the culmination of the subprime mortgage saga seems to have had a humbling effect on initial statements by many who previously attested to the region’s relative immunity to the crisis. What has transpired in regional markets lately shows that the troubles battering major financial institutions in the US and EU have indeed affected the status of a number of financial institutions in the region. “The Gulf markets have been hit hard,” said Mounir Rached, vice-president of the Lebanese Economic Association and former senior economist at the IMF. At the time of publication, the markets of Dubai and Saudi Arabia had thus far taken the worst beating, down by about 40% each, and the MSCI of Arabian Markets Index is down by a third year-to- date. “Regional investors and funds in general were negatively affected by the global financial crisis,” added Ziad Shehadeh, instructor of Monetary Economics at LAU and head of the Credit Department at Arab Investment Bank.
All in all, however, in these times of global recession the economies of the region look to be better off than most as the effects of the global financial crisis continue to emerge.

Liqidity flowing from the desert
The region’s massive sovereign wealth funds (SWF) and wealthy investors stand high above the dry valleys of the US and Euro-zone markets like massive reservoirs ready to burst open and inundate western markets with a flood of much needed capital. The UAE alone is estimated to hold a massive $875 billion in its SWF, followed by Saudi Arabia (at some $330 billion) and Kuwait (approximately $213 billion). SWF investment strategy has also recently been focused on diverse investment aimed at increasing capacity and a substantial amount of this investment has already gone into buying up equity in western financial institutions. Last November, the Abu Dhabi Investment Authority (ADIA), the world’s largest SWF, bought 4.9% of Citigroup for $7.5 billion. Earlier this year Citi sold off a further 7.8% ($14.5 billion) to a group of investors that included Saudi Arabia’s Prince Al Waleed bin Talal and the Kuwait Investment Authority (KIA – Kuwait’s SWF). Merril Lynch also sold a special class of stock to KIA for a price tag of around $2 billon. Both Citi and Merril stocks have been heavily damaged in recent months with KIA losing $270 million on its Citi group investment. As Executive went to press, Citi’s market price had declined by more than 50% since the SWF investments.
Despite these losses, the region’s SWFs do not seem to be pulling out of western markets anytime soon. The nature of their investment strategy is regarded as long-term, and there is an expressed notion that regional governments and their SWFs are not in the business of bailing out the ailing western financial institutions that spawned the global financial crisis. “We are not responsible for saving a bank, an economy or anyone,’’ said Bader Al-Saad, managing director of the KIA in an interview with Al- Arabiya. “We are long-term investors and we have long term social and economic obligations to our country.’’

Shoring up the markets
The obligations that al-Saad was referring to have already been fulfilled to some extent, and not just in terms of monetary policy. The moves by regional governments to shore up confidence have also come at a sizeable cost. Although minuscule in relation to the infusions of developed nations, the UAE central bank has recently promised to inject a further $19 billion into its markets, bringing the total to $32.7 billion, with other regional SWFs such as ADIA, KIA, and the Qatar Investment Authority (QIA) following suit. More importantly, we are seeing assurances being made by regional governments and their respective SWFs to maintain the infrastructure and operations of financial institutions throughout the region. Mirroring the actions of many developed countries, the UAE has issued a federal guarantee of all savings and deposits in their markets, as well as guaranteeing inter- bank lending. QIA has also announced that it would contribute between 10% and 20% to the capital of local banks in order to boost their capacity to finance developmental projects. Saudi Arabia, the region’s largest economy, also made $40 billion available to its banks and cut interest rates. While these actions are indicative of a major issue in regional markets, it has been widely accepted that there is enough liquidity, and the will to inject it, to keep the Middle Eastern markets healthy and wealthy for some time to come. “I don’t think there is a [liquidity] problem. They have enough liquidity to step in when needed,” said Osseiran, “they have accumulated reserves for a while now as a result of oil revenues.”
With everything more or less taken care of on the home front, the issue of SWFs influence and standing in a global economy is now increasingly becoming the question, as opposed to a question on the minds of politicians and economists the world over. The idea of large chunks of the American and European economic and financial landscape being bought up by regional governments is in itself an idea that is politically problematic. Even al-Saad conceded that “disasters in the United States, Europe, and Asian nations do create interesting investment opportunities, especially in the real estate and financial industries.” It is not rocket science to assume that these regional governments could use their influence over western and specifically US financial institutions to leverage their own economic, political, and strategic interests on a global stage. “The West, broadly speaking, will have to come to the realization that the global economic power equation is shifting,” said Sven Behrendt, visiting scholar at the Carnegie Middle East Center.
In order to pacify those critical of the nature of SWF investment and ownership being used for political purposes, ADIA and the IMF established the International Working Group of Sovereign Wealth Funds (IWG) in May of this year. The group, composed of a wide range of SWFs, recently published their “Generally Accepted Principles and Practices” outlining their “Objectives and Purposes”. In short, this document touts the financial impetus for the actions of SWFs but stops short of saying that SWFs will not use their influence for political ends. “The IWG report focuses heavily on SWF internal governance issues and often prescribes measures that appear to be self- evident,” Behrendt said. “They do not address the fears that western economies have with regards to foreign government intervention in their economies.” Instead, the report focuses on increased transparency and corporate governance and states that “if investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.” This is hardly the language of reassurance that developed countries were looking for.
As this new economic power paradigm begins to take shape, the question is: what will the global financial landscape look like once the dust has settled? With western economies in, or on the brink of recession, and larger growth patterns in emerging markets such as the Middle East and the BRIC (Brazil, Russia, India, China) economies, it is becoming increasingly evident that things will never be the same again. “One of the things happening now is a realignment of the world economy, making the US relatively less important,” said Riad al-Khouri, co- founder and principal of KryosAdvisors.
Nonetheless, the retrenchment of the traditional players, in terms of economic power, should be taken with a grain of salt. According to Behrendt, the estimated value of the world’s SWFs is around $1-1.5 trillion, including assets managed by central banks. Moreover, Morgan Stanley estimates that the total size of SWFs could reach $12 trillion by 2015, about $2 trillion dollars less than the GDP of the US in 2007. The sheer size of western financial institutions and the amount of real output they produce will ensure that the US and the Euro-zone will remain at the forefront of the world economy in the foreseeable future. “For the time being, the US will maintain its spot at the top [of the financial world] in general as there is no real viable alternative to the US market that can sustain the global economy,” Shehadeh said.

Back to oil
Being an oil-based regional economy has certainly helped the Middle East cope with the effects of the global economic downturn and the recent financial crisis. Now that the price of oil is on the decline many observers are drawing parallels between this decrease and a worsening economic situation in the region. Indeed, the effect of a decrease in the price of oil will have a direct impact on the revenues of the regional players. “The Gulf countries will be affected by oil prices, in terms of price and volume,” Rached said. “They are going to sell less at a lower price and will behave differently with less money from oil.” However, these decreases need to be put into perspective. “All the government budgets of the GCC countries were made according to the oil price of $60 last year,” Barakat pointed out.
With oil having reached levels of close to $150/barrel it is simple mathematics to deduce that surpluses are ever present in the coffers of the oil rich states in the Middle East. Even with these surpluses, oil is still seen as the premier conduit in which the global financial crisis seeps into the real economy of the region despite the fact that governments have been diversifying their wealth in order to reduce dependency on oil revenues. “It is still the case that the overwhelming importance of oil and gas in the region mean that higher revenues from hydrocarbon exports will cause a boom and lower prices and lower exports will create a problem,” al-Khouri said. “Gulf countries have diversified their economies but they are still dependent on oil,” added Osseiran.
In any case, this substantial decrease in prices is not expected to last forever and does have good effects for the global economy as a whole. OPEC nations have called for an emergency meeting that is to be held shortly, in which supply is expected to be cut. According to Deutsche Bank estimates, different countries in OPEC require different price levels in order to balance their budgets in a time of a global financial crisis. Iran and Venezuela both require oil prices of $95/barrel, whereas Saudi Arabia needs $55/barrel. “The price of oil will go down and probably oil exports will go down,” al-Khouri said, “but not by too much because there are still parts of the world that are growing and will pay higher prices for oil and/or import larger amounts.”

Lebanon
The conservative nature of the Lebanese banking sector, guided by the central bank’s Riad Salameh, has allowed it and Lebanon’s economy to sidestep many of the direct effects of the global financial crisis. Barakat explained that tight regulations and conservative investments have allowed Lebanon to avert the worst of the global financial crisis and maintain the financial infrastructure to deal with the situation. Regulations in Lebanon pertaining to the restrictions on structured products, leverage requirements, and a high rate of deposits are seen to have pre-empted widespread exposure to the global financial crisis. Moreover, the ownership model of banks in Lebanon has contributed to more conservative investment models. “Banks [in Lebanon] are owned partially or totally by their managers which means that usually they are not looking for short term profits,” Osseiran pointed out. “These owners have an intrinsic stake in the bank.”
Despite a global recession in the works, Lebanon is expected to see growth of around 6% in real GDP for 2008 and around 5% in 2009, according to IMF figures. Such growth rates in times of global recession are indicative of the unique situation in which Lebanon finds itself. Much of this growth can be attributed to the recent political settlement in Lebanon that has increased confidence across the board. “According to the signals we are getting, regional investors are looking at Lebanon more and more in this period because of the political settlement that we had this year,” Barakat exclaimed. “Now Lebanon is back on the radar screen.”
Despite the advantages that come with Lebanon’s unique situation, not all of the news is good. Lebanon is expected to see a decrease in exports across all sectors due to a decrease in demand from trading partners. “There is no doubt that our exports will be affected,” Rached stated. “Exports to Europe, whose share is about 30%, will decline.” However, since the relative scale of exports is not considerable, and accordingly the Lebanese economy can manipulate it with relative ease, this potential problem will be looked upon as rather secondary in nature. “Our share in the world export markets is so tiny, it won’t make any difference really,” Osseiran said. “The Lebanese are able to adjust their products according to markets and prices.”

Who is paying and with who’s money?
Since this crisis began to take shape, there have been unprecedented calls for global coordination by presidents and prime ministers alike. “No country — not even the biggest — can make it just on their own at a time like this,” stated British Prime Minister Gordon Brown on the back of an emergency EU meeting. “We are all in it together and we have to work to solve it together,” the PM concluded. Yet, despite these words of encouragement and the rallying of global markets subsequent to actions of governments, including regional ones, by and large it is the people of the world who have to pay the bill for the greed of investment bankers.
The majority of the bail-outs have come from taxpayers’ pockets and there have been reports of money being printed and freed up by central banks and the Federal Reserve. As Suheil Kawar, senior lecturer at the American University of Beirut, pointed out, “The Bank of England has made facilities worth £50 billion pounds [$79 billion] to individual banks and the Federal Reserve is just printing money now.” According to Rached, “We have a contraction. Money is not growing in the US and this is a situation that is more important than inflation.” Add lower interest rates to this equation and the global economy is left with a situation that applies a great deal of inflationary pressure on the already prevalent problem of increasing global inflation. The UK, for instance, has recently reported a 5.2% increase in its consumer price index for the month of September, the highest level recorded since March 1992. The US has also registered a similar increase of 5.4% for the month of August, even before the major bailouts began to occur. Moreover, with all the mergers, takeovers and acquisitions taking place, issues relating to monopolies have been tossed aside as an unimportant consideration in times of crisis. “Issues related to government monopolies are not a priority now. The major concern is to provide stability,” Shehadeh explained. “The mergers we are likely to see are going to be cross-border and global in nature.”
All of these factors are contributing to the creation of a global financial environment with fewer players and less purchasing power to go around. How the world’s population ended up paying for the mistakes of investment bankers on Wall Street is a matter that will be discussed for decades to come; especially the next time a financial instrument like a toxic mortgage back security comes along and breaks the back of the world’s financial institutions. For the Middle East the next few years will be essential in proving to itself and the world that it can weather a global financial crisis, the resulting recession, and play a more relevant role in the global economy. “The challenge will be to continue to handle things better because we are just at the beginning of the economic crisis,” Osseiran said. “[Regional] governments will have to adjust themselves to the new era of lower oil prices, how much they are going to spend and how they can sustain budget deficits.”
That challenge, if overcome, will have a galvanizing effect on the region’s economy and set the stage for a Middle East that may start to set the rules of the financial world rather than follow them.

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Banking & Finance

Private equity‘s cash and courage in these times of crisis

by Imad Ghandour
written by Imad Ghandour

The repercussions of the catastrophic events witnessed during the past few weeks will be felt throughout the globe and in every corner of the financial system. Private equity will be no exception. Even in the Middle East, many miles and economies away from the epicenter in New York, the first nine-month data show a dramatic drop in PE activity, and we should expect further deterioration as the aftershocks of the collapse are felt in the last quarter of 2008 and well into 2009.

Slowing to a halt?
The private equity industry elsewhere has begun feeling the slowdown as early as late 2007. Since the beginning of the year, deal activity dropped significantly, and private equity houses are barely closing deals these days as bank lending tightened to a halt. According to Dealogic, global deal volumes dropped by 74% to $180 billion, a four-year low. In the US, deals worth $62 billion were done in the first half compared to more than $400 billion in the similar period last year. Despite the fact that PE funds were flush with cash (they have more than $400 billion of unused funds), banks were simply not lending. PE has one healthy leg, but the other leg was severely impaired.
Fund raising was not initially affected, but was eventually caught in the storm as the crisis escalated. Although private equity funds raised close to $324 billion in the first half of the year, fund raising agents predict next year to be slow or dead. With investors under stress to revaluate their stock portfolios, private equity is taking a temporary backseat while investors shift their attention and money elsewhere. Furthermore, investors will be asking themselves: why invest again when PE firms still have hundreds of billions of unused cash?
In the region, and despite the global gloom, the fundamentals that supported the growth of private equity are still as valid today as they were two years ago. The leading private equity houses like Gulf Capital, Abraaj, and HSBC have enough unused cash from the recently raised funds to finance future acquisitions for years to come. It is estimated that around 40-50% of the funds under management (totaling $13 billion by end of 2007) are still unused.

The money marches on
Local PE funds have been doing deals with limited bank financing and the tightening of bank lending will not change their business model. They have relied, and will continue to do so, on bottom line growth to substitute for smart financial engineering. With the local economies and government spending still on a growth trajectory, corporate profits will continue to grow.
Deal flow is expected to continue if not improve. Access to debt and equity markets will be limited as stock markets plummet and banks tighten their lending criteria. Consequently, families will find private equity as one the few readily available sources of capital open for business in this conservative environment. Investment companies around the GCC will be re-organizing their portfolio after being hit by losses in some of their investments, and again, after tightening bank lending. Governments tendering public assets will find that competition will diminish significantly as Western firms face trouble at home and local firms hesitate in an uncertain environment.
Valuations will see a haircut from their 2007 levels as investors today seek better returns with bargain deals available everywhere. Even if the stock market recovers to ‘normal’ levels as it is driven up by retail investors, valuations of PE deals will be influenced more by the recovery of the global stock markets rather than by the local ones. Investors willing to write $50 or $500 million checks have the globe as their oyster, and will invest in the best opportunity available whether it is in a Saudi private company or a listed company in NASDAQ.
History has shown that private equity investing in times of crisis yield the best returns. PE funds that invested in the 2001-2003 period made hefty returns as they exited in the peak years of 2006 and 2007.
I have been a strong proponent of private equity growth in the region and I have echoed my opinion and optimistic projections repeatedly on the pages of Executive, throughout the media and in conference circles. My outlook has not fundamentally changed.
As Warren Buffet has professed earlier: cash and courage in the time of a crisis are priceless.

Imad Ghandour is the chairman of the Information & Statistics Committee — Gulf Venture Capital Association

 

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Banking & Finance

IPO Watch – Easy does it

by Executive Staff
written by Executive Staff

The GCC is set to experience delays in initial public offerings especially during the last quarter of 2008 as governments have taken measures to stabilize market conditions around the region. Arab countries were following the leads of governments in developed economies, which had their hands full in trying to rein in financial markets that have spiraled out of control due to a global financial market crisis that started with the meltdown in US subprime mortgages.

With nervousness sweeping the financial planet, GCC-based analysts say that local companies have adopted a strategy of ‘wait and see’ for now, bringing about the delay of several IPOs scheduled to be launched in October and late 2008.
According to figures from Ernst & Young, the number of successful IPOs in the region had reached 36 with a value of $12.4 billion, compared with 63 worth $14.3 billion in 2007. Although market experts agree that there will be many delayed IPOs in Q4, many say that these delays will be short-lived and activities in the IPO markets is expected to pick up steam again towards the end of 2008.
The precise extent of the slowdown is unpredictable. Figures circulated in Saudi newspapers boldly put the number of estimated IPO postponements on the Saudi Stock Exchange at 80, citing unnamed stock market experts. Sources were quoted by Saudi media as saying that state- owned entities such as Saudi Arabian Airlines and the Saudi Railways Organization could postpone IPOs, which equity watchers had tentatively expected for 2009 or 2010.
The trail of IPO delays has been building in 2008 already prior to the global financial tempest in September/October. Companies citing “volatile markets” as the main reason behind cancellation or postponement in their IPOs included such well-established firms as Abu Dhabi-based Al Qudra Holding and Dubai-based Emirates Post in August, and Future Pipe Industries, which shelved its flotation on the Dubai International Financial Exchange at the end of April.
Within the second half of October, consumer goods company Trarem Afrique withdrew its IPO in Morocco and UAE investment firm Gulf Capital announced it will delay until 2010 looking at its IPO which it had planned for 2009.
Gulf Capital linked its postponement explicitly to the latest surge in market turbulences. Similarly, the Qatari unit of Vodafone Group delayed its IPO that was scheduled for last month after the capital markets regulator asked it to delay the launch due to market conditions.
Other Saudi companies named as potential flotation delayers are Al-Tayyar Travel, which had announced listing plans in May of this year, and Zamil Group Holding Company, which is on record in the Zawya IPO Monitor for a general intention to go public in 2009. Saudi IPO plans account for about 40% of Zawya’s IPO pipeline for 2008/09, which holds 167 entries.
However, despite all the meltdowns, financial crisis, and turbulent markets, several companies with IPO plans in the pipeline will likely proceed as scheduled, experts say.
One company that stated its determination to go through with its IPO is the Mazaya Qatar Real Estate Development Company, a unit of Kuwait’s Al-Mazaya Holding. Company officials said the firm will go ahead with its IPO in November despite turmoil in financial markets. Al-Mazaya seeks to raise $137 million by offering 50 million shares priced at QAR10 ($2.75). The real estate investment firm will list its shares on the Doha Securities Market and plans to raise its capital to QAR1 billion ($275 million).
The biggest catch in November, by information available at time of this writing, will be Bahraini real estate firm Naseej whose subscription period is scheduled for Nov 18 thru Dec 4. The subscription target is $265 million, representing 40% of the startup company’s paid-in capital.
Then there are IPOs scheduled for October/November by Jordan’s Alentkaeya for Investment and Real Estate Development and Al Ameer for Development and Multiprojects, a conglomerate planning to expand operations. Between them, the two firms have $12.6 million in equity to offer.
The Riyadh-based Al-Ittefaq Steel Products Co., one of Saudi Arabia’s three largest steel producers, said it plans to offer 30% stake in an IPO in the fourth quarter of 2008.
Experts agree that the global financial crisis will put a minor dent in the region’s market capitalization growth for 2008. The insurance and financial sectors will be hit the hardest but not in the same way as their counterparts in the West. The damage to the local financial sector will be pale in comparison.
Analysts agree that the current turbulence in the local exchanges has a short shelf life and doubt that investors will lose their investment appetite for the region. Stocks in the MENA region recouped some of their losses in the second week of October while Q3 profits results show a strong trend. Furthermore, governments of the Gulf Cooperation Council have taken several measures to shore up the banking sector, thus minimizing any serious damage.

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Banking & Finance

Better to trust astrologist than economists with Nobel Prizes

by Zafiris Tzannatos
written by Zafiris Tzannatos

As recently as one month ago, some industrialized countries were still hesitating to admit that their economies were heading for a recession. Today the turmoil in financial markets may create a depression at a global scale. After the last crisis resembling today’s, the Wall Street Crash of 1929 that led to the Great Depression, the Dow Jones achieved its pre-1929 level only in 1954.

To make any forecast at this point in time would make astrology look respectable. But looking at the Nobel Prizes this year and in 1997, when a similar crisis emerged, provides some lessons for the future.
The 2008 Nobel Prize in economics was awarded to Paul Krugman this October just after the onset of the financial crisis. Krugman is an American economist who has been a critic of Long-Term Capital Management (LTCM), a hedge fund discussed below.
The 1997 prize was awarded to Myron Scholes. It came after many years of strong performance of financial markets but just before the financial crises in East Asia, Russia and Brazil. Scholes (together with Fisher Black who died in 1995 and could not therefore co-share the Nobel) came up with “a new method to determine the value of derivatives,” a framework for valuing options. The so called ‘Black-Scholes’ model became the global standard in financial markets. Trillions of dollars of options trades have been executed each year using this model.
Scholes and Robert Merton, another distinguished financial economist with whom he co-shared the Nobel Prize, were members of the board of the aforementioned LTCM. The fund was initially highly successful with annualized returns of over 40%. But following the application of the model, its equity ended up to be only 4% of its borrowed assets by the time of the 1997 financial crisis. It failed spectacularly after losing nearly $5 billion in less than four months. The Federal Reserve was so concerned about the potential impact of LTCM’s failure (of “only $5 billion”) on the financial system that it arranged for more than one dozen banks and firms to provide sufficient liquidity for the banking system to survive.
The hedge fund had more troubles. In 2005 its partners were implicated for avoiding paying taxes on profits from company investments. In the relevant court case, it was argued that the partners were not eligible for tax exemptions resulting from the millions of accounting losses their company generated but had no economic substance. Interestingly, the US taxman and courts decided that there was no economic basis in clever accounting practices, but politicians did not see much ground for introducing regulations in the financial markets.
Notwithstanding its analytical eloquence, today some would say that the Black-Scholes model is using “the wrong numbers in the wrong formulae to get the right prices.” And on the day of his award, Krugman argued that the original $700 billion rescue plan of the US administration to purchase toxic mortgage-backed securities was based “on a theory that … actually, it never was clear what the theory was.”
While the toxicity of fictitious assets on the real economy is known, what is also historically known is that a more promising solution to crises like the current one is for governments to provide financial institutions with more capital in return for a share of ownership. The question whether this “equity injection” is a return to (partial) nationalization and therefore socialism is an ideological one.
The British government was the first to adopt this injection approach and, following it, so did the other major economies of Europe and the EU at a more general level. Europe’s rescue plans already amount to more than $2.2 trillion (compared to $700 billion in the US). In our own region, while the UAE pledged $19 billion for its banks, Qatar said it would take stakes of up to 20% in banks, and Saudi Arabia is coming along with similar measures.
After a delay, the US administration reversed its course and, like the Europeans, will offer banks capital infusion and buy equity stakes rather than bad mortgage securities. What explains the original US choice? In Krugman’s own words “the initial response was distorted by ideology … a philosophy of government that can be summed up as ‘private good, public bad’.”
Still, nobody (except perhaps the astrologist) knows whether the European and GCC rescue policies will work. The LTCM’s loss (of only $5 billion) in 1997 is dwarfed by the write-downs taken today. The potential size of the current ‘black hole’ if measured by privately traded derivatives contracts — which played a critical role in the unfolding financial crisis by encouraging recklessness — ballooned to $62 trillion at the end of 2007 from practically nothing a decade ago. This figure dwarfs the money set aside by the Europeans and Americans, not matter how correct their policies might be.
If there is a bright spot amidst the current economic chaos, it is that future Nobel Prizes in economics may not need to be antidotes about correcting practices adopted on the basis of a previous award.

PROFESSOR ZAFIRIS TZANNATOS is a former advisor to the World Bank and chair of the economics department at the American University of Beirut.

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By Invitation

Putting the ‘I‘ and ‘T‘ of the region‘s ICT development

by Hana Habayeb
written by Hana Habayeb

Over the past several years, countries in the Middle East and North Africa (MENA) region have come a long way towards developing their telecommunications sectors. The region’s telecommunications players have seen unprecedented growth, which had scarcely been predicted by analysts even as late as 2002. While the region has seen significant success in improving access to and use of communications technologies, there remain difficulties in encouraging the use of communication tools for the purposes of knowledge exchange. Use of the Internet remains limited, with limited development and uptake of locally-relevant information technology applications.

The region has made great strides in developing ICT infrastructure. Driven by the forward-looking policies of regulatory authorities and policy makers, broadband infrastructure is widely available in most countries and most mobile licensees provide coverage to over 95% of their countries’ populations. Liberalization of telecommunications sectors has driven the success of regional players, allowing their expansion to neighboring countries. The market capitalizations of the top three regional players range between $18 and $34 billion. The ensuing competition has promoted the adoption of communications technologies with mobile penetration exceeding 100% in a number of countries.
Within the broader framework of ICT development, and paying particular attention to information technology, the region’s policy-makers have tried to address concerns of affordability and unequal access to the Internet. Projects such as PC for every home initiatives, IT clubhouses, and Internet community centers have strived to make the Internet affordable to large portions of the population. They have been supported by the recent wave of e- applications development — from e-government to e-learning initiatives — there is not a country in the MENA region that is not implementing such initiatives.
In the area of education, a number of public private partnerships and capability building projects have been developed to promote computer skills, curriculum development, and to improve children’s frequency of Internet access. In the realm of higher education the GCC region, lead by Qatar and the UAE, has begun to host a number of International universities. Saudi Arabia is launching its own King Abdullah University for Science and Technology with a multi-billion dollar endowment and strengths in graduate-level scientific research.
However, there remains a concerning communications information gap. While regulations and policies have seen the launch of a number of initiatives to promote ICT development and Internet adoption, the region’s appetite for Internet has not yet matched that for basic communications services.
A number of reasons explain the gap between interest in communications technologies and their use for knowledge exchange and information technology development. While affordability is often posited as an explanation, there are deeper reasons for the slow development of information societies in the region that policy makers need to address.
While countries in the region have made significant progress in the areas of training and curriculum development, a serious skills gap between what the region’s educational institutions are providing and what industry demands remains. In a survey of Arab executives, 30% sited the lack of qualified personnel as the most important challenge to successful innovation. The knowledge gap is furthered by the limited investment in research and development: by investing 0.2% of GDP in research, development and innovation, the Arab region falls far behind the world average of 1.7%.
The lack of Arabic content is another hindrance to the development of information societies in the region. Common to over 360 million people, the language has seen few successful efforts to develop content for this market. Major examples of Arabic online content and portals exist (including news sites and portals such as Jeeran.com, Maktoob.com, and Nassej.com), but they have a very small impact in terms of the amount of content an active online community requires. Arabic content is currently estimated at 0.5% of global online content. The Internet is its content; without sufficiently attractive, engaging, and informative Arabic content and applications, it will be difficult to effectively promote its use and adoption.
The lack of applications and content is partially driven by a regional investment bias towards traditional investment. For instance, of the private equity and venture capital funds in the region, those that focus on real estate have a combined size of more than $2.3 billion. Those that focus on technology, communications, and media are of a combined size of a little more than $1.6 billion. Within the ICT sector, investment in IT is much less popular than investment in telecommunications, as evident by the tremendous appetite at the most recent IPOs of telecommunications companies.
Given its experience, achievements, and remaining challenges, the MENA region must now carefully consider its trajectory. Strategies to improve access to communications services have been largely successful; however, the region must reexamine its efforts to include the I and T in ICT.
Success does not stop at connecting communities and schools to the Internet — this is a simple matter of infrastructure. Success comes in ensuring that this infrastructure is leveraged as a means to access and create greater knowledge and information. Success is not simply in the introduction of new e-curricula and training programs — success is in aligning educational institutions supply with industry’s demands, it is in the deepening of students’ intellectual curiosities. Success is not only in governments and NGOs pushing ICT applications — success is in the bottom-up, organic development of these applications on a larger scale.
A number of efforts can be undertaken to support a shift towards a more sustainable information society. To encourage information content and applications development on a large scale, we must start looking to the region’s small and medium enterprises, and support them in the areas of finance, administration and innovation.
Much financing in the region is skewed towards more traditional and ‘stable’ investments such as real estate. With that in mind, the region should encourage ICT innovation funding. It should consider providing soft loans for startups, creating innovation funds and competitions that encourage SMEs to produce, rather than governments to provide applications. The UAE has started down this path by launching an ICT Development Fund to provide grants, scholarships and advisory services to support ICT innovation.
The region must also look towards reducing and eliminating red tape barriers to innovation. Regionally, starting a business requires an average of 32 days; in Australia, it requires two. The region must take immediate action to modernize legislation and streamline registration processes in order to reduce this startup time and encourage entrepreneurs to continue innovating.
Public-private partnerships are an excellent medium by which governments have supported local SMEs. Jordan’s Education Initiative is a success-story of such an initiative. Bringing together over 35 international and local partners to develop infrastructure and curricula, Jordan encouraged the development of world-class applications, the injection of capital, the transfer of technology, and the sharing of ideas.
As a result of considered government involvement and regulatory perseverance, the region has come a very long way in a remarkably short period of time. While these actions have spurred the growth of communications technology, information technology is developing at a slower pace. The region’s next moves must further the goal of leaping from communications to information. Evidenced by its success on the communications front, the region has tremendous potential and there is no telling what it can achieve once it has attained the goal of becoming a sustainable information society.

Hana Habayeb is an associate at Booz & Company.

 

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By Invitation

Women in politics and the media double standard

by Zeina Loutfi & Ramsay G. Najjar
written by Zeina Loutfi & Ramsay G. Najjar

From Hilary Clinton to the Sarah Palin media frenzy, the topic of “women in politics” has never been hotter. It has even gone way beyond being the subject du jour to being a staple of the entertainment world, dominating political parody shows across the spectrum. At the other end of the globe, with Lebanese parliamentary elections looming ahead and social and political reform being lauded across the region, this is also a campaignable subject in the Arab world, with a host of regional conferences and local talk shows dedicated to it.
The topic has never been more powerfully thrust into the limelight, with the media playing a significant role in bringing it to the forefront, but not always favorably. Although the intended message is to seemingly increase awareness and highlight how women are now, more than ever, poised to play an increasingly important role in the world of politics, the actual discourse and outcome are alas only serving to pull women back.
To start with, coining the topic as “women in politics” is actually a testament to the persistent problem. The proliferation of media segments, articles, and conferences in both the Middle East and the West tackling the subject of “women in politics” can only imply that that there is a need to discuss and debate such an anomaly — almost as if we are debating something as bizarre as “man in outer space.”
This indicates that the core challenge lies in the positioning of the issue itself. This cannot be truer when it comes to women and their never-ending quest to reclaim their rights. For example, for as long as this topic has been debated, the fight has always been about equality with men. Does this mean that men are perfect and complete, and that women are only slowly striving to reach that perfection? Shouldn’t it rather be that a woman should be demanding the rights that are equal to her role in society? Women represent 50% of society and therefore should claim the rights that are commensurate with their role and position. The real positioning therefore should be a struggle for women to be equal to themselves and their potential, rather than wasting energy on fighting with men.
Moving from positioning the issue to communicating it, one needs to look at how the media has been covering the women candidates in the run up to the US elections. Analyses point to the media attacking female candidates based on their gender, focusing more on personal criticism and putting them down more for their appearance, family life or other personal matters. Examples abound from criticizing Sarah Palin that by running for Vice President she is either potentially jeopardizing her children’s upbringing or the position itself, as she cannot both raise five children and run the country, or mocking her as a former beauty queen who wears red lipstick (too feminine) while at the same time she is being made fun of for hunting moose. To belie any possible media partisanship, let’s not forget Hilary Clinton being derided as too cold or tough, whereas a man may never be described this way for the same attitude or actions. All of this only points to the media’s role in promoting the perception that expectations of women politicians are different than what is expected of male politicians. But aren’t they supposed to be equal?
Regarding the role of media in building the political image of women in our part of the world, if what is said is true about the media being a mirror of society, one would really think that all women care about is fashion, makeup, tabloids, video clips, and cooking. Men also have their fair share of publications dedicated to their horses, watches, and sports, yet these are easily balanced if not outnumbered by the many that focus on “the real issues.”
At the same time, regional coverage of female candidates sometimes borders on marveling at an unnatural phenomenon, while seeming to uphold the conception that there is a “woman way to govern.” Whether this is characterized by empathy, and an emotional, more peaceful or even motherly approach, this only reinforces the misperception that women politicians are a different “breed,” which in fact only sets the cause back.
Many would argue that there is only so much the Arab media can do, in the face of the social and religious barriers that women politicians face, overcoming one obstacle only to stumble across another. From female suffrage to the right to stand for election, women now face the challenge of social norms and purposeful religious misinterpretations that hinder their being elected to office.
Despite this, what the media can do is highlight that there is only one way to govern regardless of gender, and that is to agree on one system of values and then hold candidates accountable to that. The real role that media should play is to increase political maturity by highlighting candidates’ political programs and allowing the public to elect the winning politicians and hold them accountable for their performance and certainly not their gender.
In effect, positioning the cause properly and communicating the right messages that can raise awareness and shift social norms will go a long way, yet there is only one factor that can overhaul this cause and catalyze this endless evolutionary journey towards claiming women’s confiscated rights, and that is that women finally shake off their inaction, stop waiting for others’ conscience to kick in and actually make their voices heard, loud and clear.

Zeina Loutfi & Ramsay G. Najjar, S2C

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Capitalist Culture

USA – A storied campaign

by Michael Young
written by Michael Young

By the time you read these lines, John McCain or Barack Obama will have been elected president of the United States. If it’s Obama, we can assume that the decisive turning point in the election campaign came when the American financial system began melting in September on a mountain of bad debt. For some reason, few of them convincing, the Democratic candidate was perceived as “being better on the economy.” In fact, neither McCain nor Obama by the end seemed to really know what was going on.

And who could blame them, when the greatest minds in the world financial markets were not themselves quite clear on how rotten the credit crisis was? But that mattered little. Election campaigns, like politics in general in the US, have increasingly become a question of presenting a compelling narrative — a rousing story that candidates can offer up to voters that makes it more likely they will be elected. This strategy provokes a reflex among voters not so very different than the one felt when they consume a product. With narratives so central to American politics, candidates have effectively defined their identity in the way they feel they can make headway, regardless of where the truth lies.
So, if the economy was responsible for bringing John McCain down, then that was partly because his narrative left not enough room for a public perception of his financial expertise. A war hero who endured great suffering in Vietnam, McCain’s image was nevertheless never viewed by voters as adequate for someone who could lead an economic revival. As a Republican, he was also perhaps tarred by the brush of the Bush administration’s financial errors (though the Democrats were just as responsible for the credit mess). Finally, a wealthy man, McCain must have lost ground in the eyes of those who felt he would be unable to understand what economically vulnerable Americans were going through.
And if Obama happened to lose, then that’s because the narrative he managed to create was somehow undermined by McCain in the month after the financial crisis hit. McCain had managed to score points against his rival when the discussion was about national security experience. But Obama may have nipped that in the bud with the appointment of Joseph Biden as his vice presidential candidate. And even in key battleground states, for example Michigan, McCain was showing signs of surrender in early October, as he shifted his strategy to discrediting Obama personally.
The politics of narratives are interesting, and disturbing, because the candidate who wins is not the one who necessarily has expertise in what it takes to be president; he or she wins by managing to create an impression of such expertise through the shaping of the personal narrative, then hoping to compensate by learning on the job. For example, what made Obama a more credible “economic” candidate than McCain? The Democrat had no particular qualities as an economist, nor did he play a key role in preparing Senate finance legislation. By the same token, McCain displayed great toughness as a prisoner during the Vietnam War, but the candidate never looked like he had an especially strong grasp of foreign affairs and security policy because of that experience.
Narrative politics are not new, whether in the US or other countries. The essence of politics since the era of modern media, and even at times before, has been the ability to fashion political programs to mobilize the masses. In authoritarian systems, especially those based on populist leaderships, the narrative tends to be centered around enmity and a sense of victimhood, with violence lingering never far away. In democratic systems, however, the latitude for personal choice is far more pronounced, so that candidates have a need to persuade, therefore more room to reinvent themselves. And like all products on the market, considerable imagination is allowed in the marketing.
The months ahead will allow the purchasers — sorry, the American voters — to see if they bought the right thing. It will also allow the rest of the world to determine if they backed the right candidate with respect to their own interests. But an irony stands out: as the capitalist system takes a major hit, one that has prompted states to intervene in the market from the US to Western Europe, one place where the free market remains alive and well appears to be in the realm of narrative politics. Every politician has a story to sell and the nonsense debt just keeps growing. It may all be sub-prime, but consumers are demanding more and the markets are not soon about to collapse. Where can we buy some shares?

 

Michael Young

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Measuring business‘ burden

by Riad Al-Khouri
written by Riad Al-Khouri

Economic indices have become even more popular over the past few years with, for example, the numbers churned out by the World Bank and International Finance Corporation’s annual Ease of Doing Business (EDB) survey being among the most widely anticipated and cited. The function of the EDB index, which tracks the time and cost of key aspects of doing business, is to tell a country how it is doing and so help it identify weaknesses to be addressed and strengths that could attract investment. The latter, however, were unfortunately not prominent for many of the region’s economies in the latest EDB, published in September, which, among other laggards, reported Lebanon in 99th place (down from 98 last year) among 181 countries globally and Palestine (listed as “West Bank and Gaza”) 131st, modestly up from 132.

Yet the picture is more complicated as the EDB index is actually a composite of ten sub-indices that can vary widely, as they do in the cases of Lebanon and Palestine. One of the worst components of the overall index for both is the ‘Enforcing Contracts’ sub-index, in which Lebanon was 118th worldwide, up one notch from the previous year, and Palestine 123rd, although it also improved slightly from last year’s 122. The Enforcing Contracts index is determined by following a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. A firm in Lebanon requires 37 procedures and 721 days to enforce commercial contracts, compared to an average of about 44 procedures and 689 days regionally and 31 procedures and 463 days in the more advanced countries of the Organization of Economic Co-operation and Development (OECD). Further, enforcing a contract in Lebanon costs almost 31% of the claim compared to about 24% regionally and 19% in OECD markets. To enforce a contract, Palestinian procedures are 44 in number, taking a total of 700 days and costing 21% of the claim.
On the positive side, the Lebanese and Palestinian components measuring the ease of paying taxes are among the best in the world, Palestine ranking 25th (though with a slippage from 23 last year) and Lebanon placing 45th worldwide, but down nine places from the previous year. The ‘Paying Taxes’ sub-index shows what a medium-size company must pay or withhold in a given year, as well the administrative burden in paying. These measures include the number of payments an entrepreneur must make (27 in the case of Palestine); the number of hours spent preparing, filing, and paying (154); and the share of their profits they must pay in taxes (about 16%). Generally, components of this measure are positive, though the number of payments compares badly with the region (23), let alone the OECD (13).
Somewhat like the Palestinians, the only component of the EDB index where the Lebanese seem to shine is the Paying Taxes sub-index, in which on the global level, Lebanon ranked ahead of the US but regionally placed behind Iraq. A medium-size firm in Lebanon has to make 19 tax payments annually, less than the regional average but more than the OECD. It takes a firm 180 hours to prepare, file and pay its taxes in Lebanon, significantly less than the MENA average of about 216 and the OECD’s 211. Also, companies in Lebanon pay 12% of profits in tax, less than the regional average of close to 13% and the OECD average of about 18%. However, that is not the whole picture and the bad news is that a company in Lebanon pays just over 24% of its profits in labor tax and contributions compared to around 16% for the region and about 24% in OECD economies; so overall, companies in Lebanon pay 36% of profits in tax compared to just over 33% regionally and about 45% in OECD countries.
In conclusion, though Lebanon and Palestine’s performances in the EDB are generally mediocre, when the overall index is dissected into its components, a mixture of good and bad emerges. The 10 components of the general indicator are varied and are themselves divided into different elements; so the lesson from this is that indices should be dissected and not just taken at face value. A second point is that comparisons within regions and globally are valuable: a seemingly low score by a middle-income country like Lebanon or an emerging economy such as Palestine could actually be very healthy if compared to neighboring economies. Finally, look for a temporal comparison: an index might seem bad but its improvement over the past few years could itself be a good sign — will that be the case for the Lebanese and the Palestinians in the next EDB?

 

Riad al Khouri, co-founder and principal of KryosAdvisors, is senior fellow of the William Davidson Institute at the University of Michigan

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India‘s fusion with US power

by Paul Cochrane
written by Paul Cochrane

Over the last 1,000 days India has been trying to get its nuclear status green-lighted by the United States despite not being a signatory to the Non-Proliferation Treaty (NPT) or the Comprehensive Nuclear Test Ban Treaty.

The US Senate’s ratification in October of what is known in India as the ‘123 Agreement’ — in reference to Section 123 of the US Atomic Energy Act — will cause a profound shift in geo-politics for Asia, the Middle East and the West. For behind the deal is big power politics involving the two giants of Asia, China and India, the region’s basket cases, Afghanistan and Pakistan, and Washington’s perennial thorn-in-its-side, Iran. There is also the US- led ‘war on terror’ to consider.
In inking the 123 Agreement, India now has access to nuclear reactors, fuel and technologies from the US — 34 years after New Delhi first conducted a nuclear test in the Rajastani desert. The deal has also put the US top of the list to supply the nuclear technology, valued at $100 billion over the next 20 years and will enable India to develop 200 nuclear warheads as well as indigenously designed nuclear submarines. Sizeable arms deals and economic cooperation agreements have also been inked, with the US expected to get the proposed $10 billion Multi Role Combat Aircraft deal and replace Russia as India’s biggest weapons supplier.
But in the bigger picture, what the bilateral agreement has achieved for Washington is a new ally in Asia that can pressure Iran, with whom India has energy agreements yet still little desire to see Tehran become another nuclear power in the neighborhood. India can also act as a bulwark against the emerging dragon, China. Just over the border from India, in the Tibetan Autonomous Region, are an estimated 500,000 troops of the People’s Liberation Army (PLA), as well as Intercontinental Ballistic Missile (ICBM) bases. It has long been a trigger point and could be again, with numerous skirmishes occurring between the PLA and Indian troops over disputed border areas high in the Himalayas.
By bringing India — the world’s largest democracy at some 1.2 billion people and counting — onboard the US has a country that borders other states of concern whose democratic credentials are dubious at best: Pakistan, Myanmar, and Bangladesh.
The agreement may also well be the Bush administration’s last positive foreign policy achievement. It certainly put a smile on the face of American president when Indian Prime Minister Manmohan Singh told Bush that “India loved him.” But while the agreement is advantageous for Washington, it yet again sends signals of hypocrisy and double standards to the world. There are only four countries that are non-participants in the NPT: Israel, India, Pakistan and North Korea; but with the exception of Pyongyang, whose nuclear arsenal is still in an embryonic stage, the US has strong relations with the first three. Iran on the other hand, which is cooperating with the IAEA, is continuously under pressure to rein in its nuclear program.
The thawing of relations between New Delhi and Washington have, however, come at a time of heightened terrorist attacks within India by Islamists. Although homegrown, the attacks have links to Pakistan.
Islamabad was, after all, fingered as a perpetrator of the terrorist attack on the Indian embassy in Kabul in July, and there are allegations of financial support for Indian jihadists coming from Pakistan and Bangladesh. The deluge of fake Indian Rupees, which are a contributor to inflationary pressures, have also been traced to state-of- the-art printing presses in Pakistan. Furthermore, during meetings at the White House Bush and Singh reportedly discussed the prospect of Pakistan imploding and its notorious Inter-Services Intelligence (ISI) becoming “a state within a state.”
New Delhi is now mulling a beefed up anti-terrorist law and its National Security Agency has been briefed by the US Department of Homeland Security on how to set up a similar body to better integrate its intelligence services which, according to one analyst I spoke to in New Delhi, are still operating with a World War II mindset. Additionally, the Indian press has reported growing pressure on New Delhi to send troops to Afghanistan.
In the global ‘war on terror’, India clambering onboard the US train can been seen as a boon, but for the more skeptical, India has sold out in this new alliance and Washington DC has once again shown its Janus face when it comes to nuclear issues. Iran and China are the biggest losers in this, while the world has become an even more uni-polar place.

PAUL COCHRANE is a freelance journalist based in Beirut

 

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President Palin? God help us

by Claude Salhani
written by Claude Salhani

The gossip around Washington these days compares Republican vice presidential candidate Sarah Palin to a ‘post turtle’. Not familiar with the term? Don’t worry, most urban folks aren’t.

Say you’re driving in the countryside and you see a turtle sitting on a post. First, you know it didn’t get there by itself. Second, you know it doesn’t belong up there. Third, it doesn’t know what to do while it’s up there. And fourth, you wonder what kind of dumb-ass put it up there to begin with.
The frightening reality is that this ‘post turtle’ could end up being the next vice president of the United States of America. Even more worrying is that she could also be president.
Republicans, or at least the ones who placed Palin on the post, believe she is highly qualified for the job. The reason is that she is so politically hollow inside that she can easily be molded by the neocons. Think Bush II, but far easier to influence and control. In defending Palin many Republicans have said she is qualified for the vice presidency (and therefore possibly the presidency, especially when the president is 72 years old and has a history of heart problems) because “she lives next door to Russia.”
Republican Party big shots and their supporters have gone on record with that statement, as unbelievable as it might sound; Fox News was the first to announce that Sarah Palin was knowledgeable in foreign affairs because “she is right up there in Alaska right next door to Russia.”
Frank Gaffney, a syndicated columnist, said that Palin has picked up foreign policy “by osmosis” as a result of Alaska’s geographic location.
The governor’s office in Alaska’s capital Juneau, where Palin works, is about 1,230 miles from the closest point in Russia. My office for the good part of the last 15 years was only 0.19 miles from the White House. Does that qualify me for the presidency? At least I could actually see the White House from my office.
Still, McCain’s wife, Cindy, told ABC News’ George Stephanopoulos that “Alaska is the closest part of our continent to Russia. It’s not as if she doesn’t understand what’s at stake here.” Appearing on ABC’s Charlie Gibson, being questioned about Palin’s lack of foreign policy experience, McCain was asked if in all honesty he could feel confident having on board someone who is as green in international affairs (about the only time anyone is likely to call Palin “green”) as his running mate. Until a year ago Palin had never applied for a passport or travelled outside the United States.
McCain replied that one of the key elements to America’s national security requirements are energy and that Palin “understands the energy issues better than anybody I know in Washington, D.C., and she understands Alaska is right next to Russia. She understands that.”
Hmmm.
Well, glad she got the geography part right, ‘cause she sure flunked in economics. When asked by CBS anchorwoman Katie Couric how the $700 billion economic bailout package the Bush administration and Congress negotiated would help taxpayers, this is how she replied: “What the bailout does is help those who are concerned about the health care reform that is needed, to help shore up our economy, helping… oh, it’s got to be all about job creation too, shoring up our economy and putting it back on the right track, so health care reform and reducing taxes and reining in spending has got to accompany tax reduction and tax relief for Americans and trade, we have to see trade as opportunity not as competitive, scary thing, but one in five jobs being created in the trade sector today, we’ve got to look at that as more opportunity, all those things under the umbrella of job creation, this bail out is a part of that.”
Wow! Yes, she sure is ready.
Kathleen Parker, a well-respected conservative columnist had this to say in the National Review website after watching the interview: “A candidate who is clearly out of her league,” adding that “If BS were currency, Palin could bail out Wall Street by herself.”
Just how clueless Palin is and how controlled she is by her Republican minders was made all the more obvious in the vice presidential debate where it was more than obvious that the governor of Alaska was getting immediate feedback and directives on her portable telephone via text messaging.
I wonder if the fact that Governor Palin “lives next door to Russia” will facilitate any dealing she may have with the Machiavellis of foreign politics? How would she stand up to negotiators with such as Russian Prime Minister Vladimir Putin, a former KGB officer?
The Palin saga has of course has provided late night talk shows with a gold mine of ammunition. Jon Stewart of the Daily Show cut to the chase, describing a Fox News commentator who supported the “living close to Russia” thesis as a “moron.”
Steve Benan, writing in the Washington Monthly described it as “the dumbest argument I’ve ever heard.”
“Palin and McCain are a good pair,” said the Tonight Show’s Jay Leno. “She’s pro-life and he’s clinging to life.”

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

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