Executive Magazine

Potholes and checkpoints along Lebanon‘s knowledge economy path

by May Wazzan October 3, 2008

written by May Wazzan

Those who had previously destined the ‘knowledge economy’ (KE) to buzzword status have probably changed their minds by now. The concept has had immense implications for the behavior of governments, businesses and individuals. It is difficult to make out a single unified and clear definition of the KE. In the simplest terms, a KE is an economy where the generation and utilization of knowledge is the main source of growth.

According to the World Bank, the four central pillars that determine a country’s readiness for a KE are education, innovation, information and communication technology (ICT) and the economic and institutional environment. Based on those, the Bank designed a measurement tool (the KAM) which at present shows Sweden heading the race with a ‘KE readiness’ score of 9.58. Lebanon, scoring 5.00, ranks 69th amongst 140 countries, nine positions lower than it did a decade ago. Regionally, it ranks 8th. A couple of years ago, Fadi Aboud, President of the Lebanese Industrialists Association, wrote an article titled “Lebanon’s Place under the Sun” where he told about his nightmares of Lebanon fatally falling behind. He now says, “The nightmares will naturally persist since the pace of reform and change is still slow. Lebanon is slipping behind other countries in the region and around the world in developing a knowledge-based economy.”

Stifled innovation
Amongst the pillars, Lebanon scores the lowest regarding innovation. In the past four decades only 33 US patents were distributed in Lebanon. As little as 0.5% of GDP was spent on research and development (R&D) in 2003, according to a recent World Bank report. The latest available statistic on the number of internationally published research papers dates back to 1990-1995. It was 500 papers, down from 743 during the 1970-1975 period.
On the brighter side, the country does have a national Science Technology and Innovation Policy (STIP). Peter Tindemans, a UNESCO consultant who worked with the National Center for Scientific Research (CNRS) on devising the policy stated that, “there was great enthusiasm among stakeholders. STIP was prepared by three very active working groups of persons from universities, CNRS institutes and industry.” Dr. Hassan Charif, CNRS advisor, explained that the budget increase promised to CNRS has failed to materialize. Moreover, he said, “what we received in research projects this year amounts to only half of what we usually get.” The new government has endorsed the STIP. Given the necessary commitment, STIP can become a cornerstone of Lebanon’s KE because it aims to mobilize and foster collaboration between the government, the scientific community and the private sector.
Private initiatives that promote technology and innovation, albeit very shy, are not completely missing in Lebanon. Berytech is a business incubator which houses technology related startups and SMEs. “It bridges the gap between research and commercialization,” said Tania Mazraani, business development and communications director at Berytech. She also explained some of the challenges, such as the country’s unstable and risk-adverse environment, costly and underdeveloped ICT infrastructure, high barriers to entry, and limited funding opportunities for entrepreneurs. Since its instigation, Berytech has distributed over $150,000 worth of grants for technology start-ups and has recently launched a new fund that “will be investing from $100,000 to $1,200,000 in any single investment, a range not generally served by formal venture capital funds,” she said. As a side note, it has to be mentioned how disappointing the suspension of the Beirut Emerging Technology Zone (BETZ) in Damour was. This national initiative could have been a noteworthy accomplishment for Lebanon.
Lebanon scores higher on the ICT pillar than it does on the other three. Nevertheless, Gabriel Deek, president of the Professional Computer Association in Lebanon, explained that the country missed out on the late 90s internet hype and has not yet caught up. IT companies are faced with massive “disablers” such as expensive telecommunication, deficiency in R&D activity and interest therein and the limited size of the local market. “The government lacks awareness… there is no centralized decision-making process for the sector,” he said. As a member of the national ministerial ICT committee created in 2000, he said the committee met only once.

E-government
The use of ICT in government falls under the e-government strategy, an imperative element of the National E-Strategy launched by the Office of the Minister of State for Administrative Reform (OMSAR) in 2003. Tania Zaroubi and Najib Korban, Senior ICT Project Managers at OMSAR, explained that despite the existence of an e-government strategy, its action plan misses proper high authority commitment especially with regards to funding. Nevertheless, OMSAR has been active in initiating a number of e-government projects. “The human resource capacity in the public sector creates a serious obstacle,” said Zaroubi. Kabalan explained that the unwillingness and resistance of some long due mindsets and agendas is impeding the government’s e-readiness.
The legal framework is also holding back the development of the ICT sector. This brings us to the country’s low score on the economic and institutional environment pillar. A KE is characterized by a regime which rewards investment in knowledge, encourages competition and portrays overall competent legal standards, along with well functioning labor and financial markets. According to the Heritage Foundation, Lebanon’s business and investment freedom, property rights and the regulatory regime that “deters foreign capital” all need to be improved. For example, although a law protecting intellectual property rights was voted by Parliament in 1999, enforcement is still condemned to be weak. Fadi Abboud explained that “the private sector has been the most innovative player and the major driving force behind development… but we need to create the right environment to help boost its efficiency. The only way to mobilize a private sector is to leave it alone and to stop creating obstacles.” Lebanon ranks 9th regionally and 73rd worldwide with respect to the Index of Economic Freedom.
Surprisingly, Lebanon ranks 6th amongst MENA countries with respect to the Education pillar, whereas it is known to have the highest literacy rates in the region. 48% of university-aged students were enrolled in tertiary education in 2003, the highest rate in the Arab World. Moreover, almost 26% of university students were enrolled in scientific, technical and engineering disciplines known to support KE readiness. AUB has collaborated with two international universities as well as Siemens to design an electrical and computer engineering PhD program and an IT masters program. This scheme, which is funded by the European Commission, is a vivid example of the networks and objectives of KE Higher Education institutions.

How to grow the knowledge economy
Education for the KE involves more than providing access and increasing enrollment — these conditions are necessary, yet not sufficient. For instance, globalization has implied a role for universities in importing and exporting knowledge. Several higher education centers in Lebanon have strong international affiliations. The need to seek quality assurance by importing international standards is recognized. Although Lebanon has been a higher education destination for Arab students, international universities are gradually seizing more opportunities to open campuses in the Arab World. Therefore efforts to continue attracting non-Lebanese students to the country are crucial. Unfortunately, sending qualified Lebanese to settle abroad is not knowledge exportation. A World Bank report shows that in 2000, 38% of highly educated Lebanese nationals lived in OECD countries. That number is probably even higher today.
Finally, an economy’s ability at leadership and vision-making, and its ability to diffuse knowledge through a healthy set of social networks and civil society are also necessary for the move towards a KE. A country’s social capital is hard, if not impossible, to measure. Yet, simply put, the nature of a county’s social capital can either smoothen the road to a KE or create frustrating checkpoints beyond which the road is blocked. In this context, corruption and lack of accountability are examples of facets that can create major setbacks. Analyzing how the nature of Lebanon’s social capital affects the pursuit of a KE is food for thought and an interesting issue for further examination.
It seems that most potholes on Lebanon’s road to a KE have already been acknowledged and quite a few of the required strategies have been devised. However, major checkpoints are delaying their implementation and the state of Lebanon’s KE is deteriorating. Given the country’s unrest, this issue faces the threat of being pushed further and further down the agenda. Meanwhile, the country continues to send off its most valuable asset — its human capital. The KE is a promising pursuit for Lebanon and for the mindsets that have adhered to their eagerness to learn and progress. It may as well be the country’s present chance to get back on a durable development path.

MAY WAZZAN is a Lebanon-based consultant who works on economic development projects

October 3, 2008 0 comments

Capitalist Culture

USA – Presidential posturing

by Michael Young October 3, 2008

written by Michael Young

With the American presidential election coming up next month, it is worth asking what aspects of capitalist culture will a new administration adopt, particularly as regards the Middle East. Will the defense of open markets and open minds be high on the agenda of the new president, and how does John McCain differ from Barack Obama in that regard?

An interesting answer to these questions comes from Fouad Ajami, writing in the Wall Street Journal of September 10. Ajami, a professor of Middle East studies at the Johns Hopkins University School of Advanced International Studies in Washington, was one of the intellectual godfathers of the Iraq invasion, someone close to the neoconservatives in Washington and a firm believer in America as beacon to the world.
In his article, Ajami argues that signs of the public’s misgivings with Obama are the result of its uncertainty about the candidate’s capacities in foreign policy. But Ajami also sees a deeper problem: Obama and those supporting him have abandoned what traditionally have been the two rival views of American power: one view that focuses on America as America, and on defending a more exclusive form of American nationalism; and another view that focuses on America as a country that can shape the world. The first represents a more “isolationist” approach to America in the world, against the second, a more “imperial” one.
For Ajami, Obama and his supporters have broken out of this old duality. “In their view, we can make our way in the world without the encumbrance of ‘hard’ power. We would offer other nations apologies for the way we carried ourselves in the aftermath of 9/11, and the foreign world would be glad for a reprieve from the time of American certitude.” Ajami goes on to explain that “Obama proceeds from the notion of American guilt: We called up the furies, he believes. Our war on terror and our war in Iraq triggered more animus. He proposes to repair for that, and offers himself (again, the biography) as a bridge to the world.”
This is, in its own way, a devastating reading of what lies ahead in the United States. For all the details over specific foreign policy options today being discussed in the election campaigns, there is a more fundamental vacuum in both parties when it comes to defining America’s destiny abroad. Obama seems to accept an America in decline, seems to embrace an America that accepts global moral relativism so that the country will refuse to impose its values on others. McCain, from an older generation, has proven less timid in reaffirming established American values, but in the coming years can his approach endure in a changing global environment? Both men have not yet found, nor greatly concerned themselves with, developing a new foreign policy ethos for the U.S.
That will have important repercussions in the Middle East, where the US continues to be heavily involved. McCain, more than Obama, has referred in his rhetoric to spreading democracy in the region. However, at this point that seems more an empty statement of intention than the outline of a policy the candidate is dying to implement. Indeed, few candidates seemed more committed to democratization than George W. Bush; the ideal was even at the center of the president’s second inaugural address. Despite this, the Bush administration has pretty much returned to the habits of administrations past, back to business as usual with Arab despotisms, most recently that of Libyan leader Muammar al-Gaddafi.
In light of that, it might be a bit much to expect that McCain will push even harder than Bush on democracy when the situation in the Middle East, now characterized by the rise of Iran, imposes ever closer cooperation with Iran’s adversaries, all of whom happen to be autocrats.
And what of Obama? The Democratic candidate has repeatedly said he would open a “dialogue” with Iran — and in all likelihood he might do the same with Syria. The real issue is not dialogue in itself; it is whether Obama is clear about what the conditions of the dialogues need to be, and what he must gain for talking to the other side. If that is not clear, and nothing in Obama’s comments in recent months on the aims of a dialogue suggest it is, then the US could face a problem in the region as it pursues dialogue for dialogue’s sake, its justification being solely the fact that George W. Bush refused to engage in dialogue.
The dearth of foreign policy lucidity on both sides of the electoral divide is worrisome. McCain seems more certain of the America he wants, which is better than Obama; but the country that George W. Bush leaves behind is not one that can afford to remain locked in the same foreign- policy mindset, regardless of Bush’s unsung successes. As for Obama, his inexperience suggests that the America he leads may be one cast adrift in the world, without a compass. We in the Middle East had better beware.

Michael Young

October 3, 2008 0 comments

Comment

Beirut‘s long wait for the WTO

by Riad Al-Khouri October 3, 2008

written by Riad Al-Khouri

The Arab world continues to underperform economically and remains a minor player in the area of international business, despite the oil boom and rise of sovereign wealth funds. That failure is partly because so much of the region still lies outside the globalized economic system, including regional and international treaties and bodies.

In particular, the region remains seriously under- represented in the World Trade Organization (WTO), with ten out of 22 Arab League members not having acceded. Moreover, there is a suspicion that states already part of the organization are not making effective use of their membership while those countries that are in the process of acceding, or otherwise outside the WTO, could enhance significantly their positions.
At the same time, there is a great deal of interest in the WTO in the Arab region, and several countries have completed their accession over the past few years while other states are in the process of acceding or have otherwise expressed an interest in doing so. Yet, along with this momentum, there is a large knowledge gap among Arab officials, the media, civil society organizations and the public as to what the WTO is and how it operates.
Against this background, and in a difficult and complex regional context where political and security policies play a part, six Arab countries are negotiating to join the WTO. Among these, the case of Lebanon is one of the most interesting. Lebanon was one of the founding members of the precursor to the WTO, the old General Agreement on Tariffs and Trade (GATT) in 1947, but pulled out a few years later. Now the Lebanese are edging back to membership, though the path has not been smooth. An application to join the WTO was submitted in January 1999, yet getting on to a decade later Lebanon’s accession is still not a done deal. Most other applicants have acceded in a lot less time.
Progress in negotiating halted due to conflict with Israel in 2006 and the political instability around it; the latter could prove to be a stumbling block, with legislation piled up in parliament. Certain measures the government will have to take to qualify for WTO membership may be unpopular, and enacting these amid political tension could be difficult.
At the last WTO meeting on Lebanon’s accession, in May 2007, among the issues raised was the state of intellectual property rights (IPR) in the country. Current economic reforms include several draft laws on intellectual property, and Lebanon appears to be on the road to better protection of IPR. However, it was not always so: in 2000 the private US Business Software Alliance watchdog group estimated Lebanon’s piracy rate as the highest in the region — today, it is clear that piracy, while still a serious problem, is not as widespread as it was a decade ago. As recently as last year, Lebanon remained on the US IPR official Priority Watch List, the positive initiatives started by the Lebanese government in early 2006 (including the formation of a police High Tech Crime Unit) interrupted by political unrest. The good news is that for 2008 Lebanon is no longer in the ‘Priority’ category, but has been shifted to the less serious ‘Watch List’. (Interestingly, Israel remains on the former, while some of Lebanon’s regional colleagues in the latter category include Algeria, Egypt, Kuwait, Saudi Arabia, and Turkey.)
Respect for IPR is a key condition of WTO accession; not coincidentally, Lebanon acquired observer status at the WTO shortly after passage of the 1999 Copyright Law. Problems exist not only because of deficient legislation. Lebanon’s tarnished reputation as a haven for piracy is partly due to lack of awareness. Experts (mainly from Western countries and companies) come to Beirut to address businesses, the general public, the media, as well as information technology companies on the need to respect IPR. Promoting the benefits of using legal software and other IPR goods focuses on awareness and education more than on enforcement; yet, the going is tough in an atmosphere of economic difficulty and lack of respect for authority.
Lessons of earlier accessions in and out of the region suggest that countries like Lebanon should promote open deliberations in parliament and in the media on the accession process. Another important point for acceding countries to keep in mind is that they should tap the experience of recently acceded WTO members in similar developmental circumstances. For example, some Arab countries that are seeking to join the WTO have consulted Jordan and used its expertise to aid the accession process, an interesting and successful example of South- South cooperation. Hopefully, such practices will spread, easing the transition of countries like Lebanon into the WTO.

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

October 3, 2008 0 comments

Comment

Our cyber susceptibility

by Paul Cochrane October 3, 2008

written by Paul Cochrane

Over the summer the spectre of cyber warfare gained international significance, spurred on by reports of cyber attacks that crippled Georgia’s infrastructure in the wake of Russia’s ‘intervention’ in South Ossetia.

Reportedly carried out by nationalistic Russian hackers rather than by the Kremlin itself, the incident has shown how vulnerable a country’s critical national infrastructure (CNI) is to cyber attacks. Even presidential campaigns are open to attack, with senators John McCain and Barack Obama’s systems allegedly hacked into by the Chinese.
The dark side of technology has also come to the attention of the private sector in the Middle East, with a handful of banks in Dubai hit by ATM card theft and fraud in September. Furthermore, cyber crime continues to rise in the region, with some 50 million incidents of hacking against the public and private sectors in March, up from 15 million in December 2007, according to a study by internet security firm Trend Micro.
How seriously Middle Eastern governments are taking cyber crime is difficult to gauge however, particularly in terms of prevention and awareness. Additionally, businesses and governments are reluctant to announce cyber attack incidents so as to not cause concern to shareholders and the public, while statistics like the one above need to be taken with a pinch of salt as internet security firms have a vested interest in making out that cyber crime is worse than it may actually be.
Nonetheless, last year’s Virtual Criminology Report by NATO, the FBI and other agencies stated that cyber spying is one of the biggest security threats nations face, with 100 countries having experienced some form of cyber warfare. Britain’s secret service, MI5, went as far as saying the country was “four meals away from anarchy” if there was a serious interruption to CNI and the distribution of food.
That countries are starting to take the threat seriously was highlighted at a conference I attended in Crete in September organized by the European Network and Information Security Agency (ENISA), which was set up in 2005 to investigate internet security problems and make recommendations for EU member states on how to protect themselves. What struck me was how long the EU has taken to tackle the issue on a collective basis, and that between three to five years are needed for all EU countries to be at a common level of protection. Furthermore, in a speech given by Jorgo Chatzimarkakis, German Member of the European Parliament (MEP), he said that he “couldn’t understand politicians who doubt the importance of this endeavor” to tackle cyber crime. ENISA itself was at risk of not even getting established at one point, while few MEPs know much about cyber crime. Meanwhile, a speech by Lord Toby Harris stressed how ambivalent Britain’s political establishment is about information security, with less than ten out of the 1,400 members of the House of Commons and the House of Lords taking a serious interest in the subject. In a country where six government departments have reported system compromises over the past year, many multiple times and identity theft is estimated at $3.4 billion a year, this almost beggars belief. But while the EU is starting to take on the challenge of improving cyber protection for governments, businesses and consumers, the fact that ENISA’s budget is only $11.5 million a year indicates that more needs to be done and for regulations to be enacted.
Naturally, I started to think about how the Middle East is prepared for this phenomenon when so many EU countries are just setting up Computer Emergency Response Teams (CERTs) and Disaster Recovery Plans (DRP). The picture is not overly rosy, with the International Data Corporation estimating that total internet security spending in the region will only touch $9.3 million by 2009, with the UAE, Saudi Arabia, Kuwait, Qatar and Bahrain the top five investors. When you consider that security systems for small networks of 100 computers cost roughly $15,000, and those involving 1,000 computers $30,000, the region’s spending is woefully inadequate to protect CNI and businesses. What is being done on the legal front also needs to be addressed.
For instance, how protected are governments and businesses from cyber attacks when European countries do not have a Data Breach Notification Law? Are there units of law enforcement adequately trained to take on e-crime? And are there DRPs and CERTs in place for when the seemingly inevitable happens?
Such questions need to be asked as the region gets more connected, and will gain further importance if many Arab countries go ahead with plans to build nuclear power plants (NPPs). After all, a NPP in Baxley, Georgia, was shut down for 48 hours in March after a software update was installed on a single computer, and in 2003 a NPP in Ohio had its safety monitoring system disabled by a virus.
National responses to the problem and heightened regional cooperation are undoubtedly necessary to protect CNI and citizens from what is a global phenomenon that will only continue to grow.

PAUL COCHRANE is a freelance journalist based in Beirut

October 3, 2008 0 comments

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Nuclear non-state reality

by Claude Salhani October 3, 2008

written by Claude Salhani

Amid fears of nuclear proliferation in the Middle East, as Iran appears to be on track to develop its nuclear capabilities and other countries are certain to follow, is it still feasible to dream that nuclear weapons may one day be abolished altogether? Some experts still believe it is.

Yet we are entering a new era where the poles of power as we knew them are shifting. I call this the post-nuclear exclusivity era, where the monopoly once held by the Big Five — the United States, the Soviet Union, China, Britain and France — no longer holds. Today you can add to that list Israel, India, Pakistan, North Korea and very possibly Iran.
Libya admitted to having invested in trying to develop a bomb with North Korean help. But spooked by the US invasion of Iraq and nudged on by Muammar al- Gaddafi’s son, Saif al-Islam, Libya turned over its bomb-making kit to the Americans in exchange for better relations with Washington — and it worked. Libya has stopped trying to blow planes out of the sky and just last month US Secretary of State Condoleezza Rice flew to Tripoli to meet with al-Gaddafi.
But now there is also another name that may be added to this list, that of non-state entities. And here lies the real danger when it comes to nuclear weapons.
The one nuclear story with a happy ending is South Africa which voluntarily dismantled its program under the supervision of the International Atomic Energy Agency after Apartheid was ended, getting rid of two evils in the same decade.
While the Big Five held the monopoly on nuclear technology the dangers associated with them were minimal. Throughout the decades of the Cold War, with the US possessing more than 10,000 nuclear warheads and the Soviets some 8,000 and each pointing at the other side’s major cities, none were ever fired. There were one or two tense moments — such as the Cuban missile crisis in the 1960s when the Soviet Union deployed missiles to Cuba and President John F. Kennedy threatened to take them out — but luckily the worst was averted.
In essence, nuclear weapons of mass destruction acted more as deterrence as no country, the logic went, would attack another if it possessed nuclear weaponry. This quite possibly is what today keeps India and Pakistan from fighting another war.
Iran realized this when it was confronted by Saddam Hussein’s Iraq in the 1980s in a “conventional war” lasting eight years and claiming 500,000 Iranian lives.
However, non-state entities — groups such as al- Qaeda — are trying to obtain weapons of mass destruction not for deterrence, but rather with the intent to maximize the damage caused and inflict the greatest number of casualties possible.
So when it comes to the powers possessing WMDs today, is its still feasible to believe that those countries would be at greater risk of being attacked if they didn’t possess nuclear weapons? This is the question George Perkovich, vice president for studies at the Carnegie Endowment for International Peace and director of its non- proliferation program, and James M. Acton, a physicist by training who lectures at the Department of War Studies at King’s College London, ask in the latest issue of the Adelphi Paper (No. 396) published by the London-based International Institute for Strategic Studies.
The authors believe the following to be the case: “None of today’s nuclear-armed states would fall prey to major aggression if they all eliminated their nuclear arsenals,” they wrote. Indeed, who would attack the US, Russia, France, Britain or China today, with or without a nuclear arsenal?
And if India and Pakistan managed to retain cool heads despite their differences and their border disputes, perhaps, just perhaps, they could get rid of their WMDs?
Countries with nuclear weapons are not the danger here, and although many analysts in the West may disagree, the danger does not come from so-called “rogue” states, either real of imagined members of President George W. Bush’s “Axis of Evil.”
Assuming for a moment that Iran were to develop nuclear weapons, and assuming its leadership was adventurous enough to use them, the rulers in Tehran know full well what the reply would be like.
So today’s real concern has more to do with terrorist groups trying to acquire weapons of mass destruction: not only nuclear, but also chemical and biological, too.
As Brian Michael Jenkins — who has just recently released the book Will Terrorists Go Nuclear? — wrote, “There is no doubt that the idea of nuclear weapons may appeal to terrorists.”
Today, it is that new threat that ultimately will prevent the abolishment of nuclear weapons — at least until the threat of nuclear terrorism dissipates, and that may be a few years still.

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

October 3, 2008 0 comments

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Pakistan’s president: Mr. 10%

by Peter Speetjens October 3, 2008

written by Peter Speetjens

In its urge to fight the forces of evil, Washington seems ready to dance with the devil in nuclear-armed Pakistan. In the latest chapter of a tragic political saga, Asif Ali Zardari was elected president on September 6, a feat welcomed by Condoleezza Rice as “a good way forward.” The US Secretary of State praised Zardari’s will to fight terrorism and his warm words of friendship towards the US.

Zardari’s affability towards the US should not come as a surprise. Were it not for Washington, the 53- year-old would still be behind bars. His resurrection at the helm of troubled Pakistan is the icing on the cake of a very colorful career and must go down in history as one of the most dramatic political comebacks ever.
Born in Karachi as the son of a wealthy businessman, Zardari’s path to glory started with his marriage to the late former Pakistani Prime Minister Benazir Bhutto. Prior to that, his name was featured as a polo-playing playboy in the local gossip pages. His (arranged) marriage to Bhutto was widely seen as one of mutual convenience. He had his father’s money, but no name. She could do with the money, while a husband on her side greatly advanced her political prospects in conservative Pakistan.
Widely known as “Mr. 10%,” Zardari owes his nickname to the hundreds of millions of dollars he allegedly received in kickbacks on major defense deals and privatization schemes completed during his wife’s reign. The money trail leads well beyond the Pakistani border, as Bhutto and Zardari own a string of bank accounts and houses around the world, including a nine- bedroom mansion, complete with an indoor swimming pool and helicopter landing pad, in Rockwood, UK.
While never formally convicted in Pakistan, a Swiss judge in 2003 ruled that Zardari and Bhutto had accepted $15 million in bribes from two Swiss firms. Bhutto however, appealed the verdict. In Britain, Lord Justice Collins judged that there was a “reasonable prospect” that the Pakistan government would be able to prove that Rockwood had been bought and furnished with “the fruits of corruption.”
Interestingly, Zardari only avoided an embarrassing appearance in British courts by claiming dementia. Fortunately, according to his doctor, his mind is working just fine again. A comforting thought, as Bhutto’s widower presides over a nation in great political and economic turmoil, as well as a big red button saying “Doomsday.”
Other serious accusations against Zardari include having attached a remote control bomb to the leg of a businessman to force him to pay his 10% and the 1996 murder of his brother in law, Murtaza Bhutto, who had openly humiliated Zardari and called for his resignation. Zardari spent a total of 11 years in jail. He was only released in 2004, thanks (indirectly) to a US-brokered power-sharing deal between Bhutto and former military leader Pervez Musharraf.
Until then, the US administration had firmly supported Musharraf, yet grew increasingly frustrated with the latter’s tactics on the North Western Frontier, where al-Qaeda and the Taliban have found refuge. Musharraf refused to send in the Pakistani army in an all- out assault and refused to let American soldiers operate on Pakistani soil. And so, Washington decided he had to go.
Gradually, Musharraf was no longer portrayed as a steadfast partner in the war against terror, but as the military dictator he had been all along. Back came the call for democracy. Back came Bhutto. Having been ignored for years, she was dusted off and saddled up for a glorious return to her native country. In return, she was said to be greatly concerned about the rise of Muslim extremism and the need to tackle the safe havens near the Afghan border, which was no doubt one reason for her assassination in late 2007, arguably on the orders of tribal leader Baitullah Mehsud.
Her death came hardly as a surprise for Musharraf, who knew all too well how unhealthy it is to be considered pro- American in Pakistan. Nicknamed “Busharraf,” he survived several assassination attempts. In addition, the ousted military leader was well aware that the Taliban were, to a large extent, created by the Pakistani army, elements of which do not want to see their baby thrown out with the bathwater.
Finally, a significant part of the Pakistani population support or sympathize with their Muslim brethren near and across the Afghani border. In short, taking on Pakistan’s western tribes is likely to lead to a stepped-up bombing campaign within Pakistan, which could threaten the state’s very survival.
Add to this the opportunist Zardari with his alleged taste for easy money. Officially, he is only a caretaker until his son graduates from Oxford, yet many fear he may prove unwilling to give up his seat. He is yet to abolish the extra powers Musharraf had created for the presidency and is yet to re-install Iftikhar Muhammad Chaudhry and other judges, who aimed to tackle the country’s abysmal corruption record. Many analysts fear that Pakistan got rid of military rule, only to get a civilian dictatorship in return.

Peter Speetjens is a Beirut-based journalist

October 3, 2008 0 comments

Banking & Finance

Investment – Lawsuit for losses

by Executive Staff October 3, 2008

written by Executive Staff

The recent economic crisis that has shaken America to the core has only put forth the many underlying problems major US institutions are confronted with. Last month, prior to the crisis, Abu Dhabi Commercial Bank (ADCB) announced that it had filed a major lawsuit against American financial brand names such as Morgan Stanley, the Bank of New York Mellon and ratings agencies Moody’s and S&P.

The lawsuit, which was filed at the US district court in Manhattan, targeted Cheyne Structured Investment Vehicle (SIV), a complex financial structure previously highly rated. The statement provided by ADCB said that the legal action alleges, amongst other things, that “ADCB was misled about the quality of the underlying mortgages in which the Cheyne SIV would invest.”
In spite of the fact that the Cheyne Finance fund had been selling investments and had enough cash to repay commercial paper due through November, Standard & Poor’s cut Cheyne Finance’s ratings on August 28 by six notches, quoting the deteriorating market value of its assets as a main motivator to its decision.
The scandal stems from a previous valuation on August 15 by Standard and Poor’s, which described the Cheyne notes as one of the highest investment grade. The downgrade seemed to take place at a spiraling speed, with prices deteriorating over a very short period of time. Reports of the downgrade prompted questioning in the financial community regarding the quality of the overall ratings process.
Cheyne Finance is one of dozens of structured investment vehicles, known as SIVs, considered to be playing a pivotal role in the fixed income markets. Such vehicles usually operate by issuing commercial paper, thus borrowing money using short term notes and then investing the money in longer term securities that boast higher returns.
However, the subprime crisis that took over the world and the subsequent liquidity crunch plaguing the markets have weighed heavily on companies that depend on commercial paper. They were thus faced by daunting funding shortages, with investors increasingly wary of advancing any funds in such a volatile context. Many SIVs were rumored to be selling off bank some of their assets in order to reimburse investors.
ADCB said in its statement that “it had also held talks with other banks and investors in the six-member Gulf Cooperation Council about joining its class action and based on these conversations, it expected additional investors to join or support the legal action as required.”
“This is the next step in a process aimed at recouping the losses ADCB has already incurred, and additionally, this is an important step in paving the way for other GCC investors to ensure they are provided an opportunity to recover their own losses. This is the right thing to do and ADCB has taken a proactive early lead to protect itself and other investors,” said Eirvin Knox, ADCB’s CEO.
The bank brought the action on behalf of all investors who bought investment grade Mezzanine Capital Notes which were issued by Cheyne Finance, a wholly owned subsidiary of Cheyne Finance Capital Notes.
ADCB seeks unspecified money damages and class-action or group status on behalf of everyone who invested in the vehicle launched by Cheyne Finance Plc from October 2004 to October 2007.
Bloomberg reported on August 25 that “Cheyne’s structured investment vehicle, premised on short term borrowing to buy higher-yielding assets, collapsed last year. Investors have recovered about 55 percent of the face value of their holdings in an auction of Cheyne’s assets.” It also added that the SIV had owed about $5.7 billion in senior debt, according to its receivers at the accounting firm of Deloitte & Touche.
Also named as defendants in the lawsuit are two units of the New York-based credit ratings firm Moody’s Corp, as well as the Standard & Poor’s Ratings Services, a unit of the McGraw Hill Companies Inc.
ADCB is a full-service commercial bank which offers a wide range of products and services such as retail banking, wealth management, private banking, corporate banking, commercial banking, cash management, investment banking. It is owned to 64.8% by the Abu Dhabi government through Abu Dhabi Investment Council and its shares are traded on the Abu Dhabi Securities Market.
This lawsuit might further impede investors’ confidence of the US market, something that US companies are not in need of in the light of the very unsettling financial context.

October 3, 2008 0 comments

Financial Indicators

Global economic data

by Executive Staff September 27, 2008

written by Executive Staff

Employment in manufacturing and services in affiliates under foreign control

As a percentage of total employment, 2005 or latest available year

The shares of foreign affiliates in manufacturing employment show considerable variation across OECD countries ranging from under 15% in Denmark, Italy, Portugal, Switzerland, Turkey and the United States to 35% or more in the Czech Republic, Luxembourg, the Slovak Republic and Ireland. Employment in service sector foreign affiliates is lower in all countries although as noted above, comparability is affected in several countries by the exclusion of employment in banking and insurance services. In the period from 1999 to 2005, employment in foreign-controlled manufacturing affiliates grew or remained stable in all countries for which data are available except Spain and Ireland, where the rate slightly fell and in Belgium, Luxembourg and the United States where the shares have remained fairly stable. Particularly sharp increases were recorded by the Czech Republic, Norway, Poland, Sweden and the United Kingdom. Over the same period, employment in foreign-controlled service affiliates grew or remained stable in all countries for which data are available, except Belgium. The biggest increases were recorded in the Czech Republic, Ireland, Poland and Sweden.

Share of ICT in value added

Share of ICT manufacturing and ICT services value added, 2003

The ICT sector grew strongly in OECD countries over the 1990s. For the 1995-2003 period the share of ICT services has grown most in Ireland, Finland, Hungary and Sweden. In 2003, Finland’s ICT manufacturing sector’s share of manufacturing value added represented 22% of total manufacturing value added. In 2003, the ICT manufacturing sector represented between 1.2% and 22.2% of total manufacturing value added in OECD countries. The average share for the 25 OECD countries for which data are available was about 6.5%. The Telecommunication services sector is largest, as a percentage of business services value added, in Hungary, Portugal, Australia and Finland. It is smallest in Greece, Korea and the Netherlands.

Obese population aged 15 and above

As a percentage of population aged 15 and above, 2005 or latest available year

Half or more of the adult population is now defined as either being overweight or obese in no less than 15 OECD countries: Mexico, the United States, the United Kingdom, Australia, Greece, New Zealand, Luxembourg, Hungary, the Czech Republic, Canada, Germany, Portugal, Finland, Spain and Iceland. By comparison, overweight and obesity rates are much lower in the OECD’s two Asian countries (Japan and Korea) and in some European countries (France and Switzerland), although overweight and obesity rates are also increasing in these countries. Focusing only on obesity, the prevalence of obesity among adults varies from a low of 3% in Japan and Korea to over 30% in the United States and Mexico. Based on consistent measures of obesity over time, the rate of obesity has more than doubled over the past 20 years in the United States, while it has almost tripled in Australia and more than tripled in the United Kingdom. The obesity rate in many Western European countries has also increased substantially over the past decade. In all countries, more men are overweight than women, but in almost half of OECD countries, more women are obese than men. Taking overweight and obesity together, the rate for women exceeds that for men in only two countries — Mexico and Turkey.

OECD renewable energy supply

Million tons of oil equivalent (Mtoe)

In OECD countries, total renewables supply grew by 2.3% per annum between 1971 and 2006 as compared to 1.4% per annum for total primary energy supply. Annual growth for hydro (1.1%) was lower than for other renewables such as geothermal (5.8%), combustible renewables and waste (2.7%). Due to a very low base in 1971, solar and wind experienced the most rapid growth in OECD member countries, especially where government policies have stimulated expansion of these energy sources. For total OECD, the contribution of renewables to energy supply increased from 4.7% in 1971 to 6.5% in 2006. The contribution of renewables varied greatly by country. On the high end, renewables represented 78% in Iceland and 39% in Norway. On the low end, renewables contributed only 1% to 2% of supply for Korea, Luxembourg and the United Kingdom. In general, the contribution of renewables to the energy supply in non-OECD countries is higher than in OECD countries. In 2005, renewables contributed 40% to the supply of Brazil, 31% in India, 15% in China, 11% in South Africa and 3% in the Russian Federation.

September 27, 2008 0 comments

Financial Indicators

Regional equity markets

by Executive Staff September 27, 2008

written by Executive Staff

Beirut SE (1 month)

Current Year High: 3,470.63 Current Year Low: 1,761.53

The Beirut Stock Exchange’s numbers, as tallied by BLOM Bank’s BSI, pointed lower in August. The BSI closed at 1,855 points on August 22, falling back under the 2,000 points line but still up 23.5% from the start of the year. Real estate company and market cap leader Solidere led the market down, dropping 13.43% from the end of July to Aug 22. Analysts pointed to profit taking as reason for the steady index losses throughout the review period. In a bit of a change, headlines on the BSE in August were not entirely dominated by politics. One factor that influenced the market was the recurrence of tales on uneasy merger discussions between Audi Saradar Group and its shareholder, Egyptian investment bank EFG Hermes. According to media reports in London, the Audi Saradar Group issued a statement on August 22 saying that it appointed Georges Achi as chairman after Raymond Audi stepped down because he accepted a post in the government.

Amman SE (1 month)

Current Year High: 5,043.72 Current Year Low: 3,003.07

While the short-term picture for the Amman Stock Exchange index was no better than that for the GCC bourses, the ASE could stay above water when compared with performance of international exchanges since the start of 2008. Closing at 4,186.44 points on August 24, the ASE index lost 9.57% from the end of July but is still almost 14% up from the beginning of the year. Jordan Phosphate Mines and Arab Potash Co, industrial stocks that had been high flying in earlier months on hunger by Arab investors, came crashing with share price losses of 29.6% and 36.9%. Despite these reversions of their fortunes, the two companies ended the review period at share prices that were higher than three and five months ago, respectively. As the ASE authorities noted, share ownership by non-Jordanian investors at the end of July 2008 represented just under 51% of the cumulative market value of all companies on the ASE.

Abu Dhabi SM (1 month)

Current Year High: 5,148.49 Current Year Low: 3,398.33

Nothing permitted the Abu Dhabi Securities Exchange an escape from the August down-drag. At 9.25% loss from July 31 to Aug 24, the ADX general index was less than half a percentage point better off than its sister exchange in Dubai and closed at 4,496.39 points for the last session of the review period. For the third time in 2008, the ADX was in the red at the end of a month when compared with its reading at the start of the year. For every gaining scrip, the ADX saw 4.4 stocks on the losing side. Among sub-indices, insurance lost the least, about 1%, and real estate by far the most, a whopping 16.96%. Of 10 companies that could achieve gains during the review period, five were insurers and two were foreign telecommunications companies. The real estate heavyweights Aldar and Sorouh were twinning at the bottom of the performance record at more than 18% down each, outdone only by a 23.16% drop of Fujairah Building Industries. In plans for increasing its appeal, the ADX intends to introduce derivatives trading toward the end of next year.

Dubai FM (1 month)

Current Year High: 6,291.87 Current Year Low: 4,162.97

As observers attributed the slump in Arab markets on anything from lower oil prices allegedly causing some institutional investors to book share profits in the Gulf for compensation to corruption uncovered in Dubai real estate companies and to having too many shady analysts, investors in the Dubai Financial Market could pick their favorite explanation why they were suffering — but suffer they did with index close at 4,883.15 points August 24, representing a 9.74% loss when compared with the last close in July. Debutant Dar al Takaful was joined only by another insurance company and an investment firm in the positive list while red splashed over almost all other stocks. The real estate sector was shaken by international investment bank Morgan Stanley hinting at the possibility of a weakening Dubai property market by 2010. Then real estate got whacked by new investigations into corruption at developers, some of which were not even publicly traded but tied in with Dubai Holding. Three majors, developer Union Properties, mortgage firm Tamweel, and construction group Arabtec Holding all ended the period more than 23% lower. Market heavyweight Emaar Properties shed 11.43% and closed August 24 at a 52-week low.

Kuwait SE (1 month)

Current Year High: 15,654.80 Current Year Low: 12,039.00

In the first part of August, the Kuwait Stock Exchange was tested by a 553-point slide. Although the middle of the month brought some stabilization to the KSE, the index lost 2.38% by its August 25 close at 14,620.70 points when compared with the last session in July. The industrial index fared best during the period and was able to add 2.64% whereas the non-Kuwaiti stocks sought the bottom with a drop of 7.49%. The runner-up in underperformance was the real estate sector whose sub-index moved 5% lower after being among the KSE’s better bets in the weeks before. By adding more than 54%, Burgan Group, a holding with interests in services, food, and lasting consumer goods, was the best gainer on the KSE. Among companies at the tail end of summertime performance, engineering firm Heisco and, of the non-Kuwaiti stocks, investment bank Shuaa Capital were notable victims of selling pressure with share price losses of at least 20% each.

Saudi Arabia SE (1 month)

Current Year High: 11,895.47 Current Year Low: 7,697.24

Whilst retaining the red lantern in GCC stock market action in 2008, the Saudi Stock Exchange bucked the Gulf markets’ summer slippage trend. With a close at 8,899.27 points on August 24, the TASI added 1.81% from the end of July. The insurance sector, just about the most volatile performer on the SSE in the past 18 months, provided the two strongest gainers with 24% (Tawuniya) and 15.75% (SABB Takaful) in the review period. The banking sector sub-index paced the overall gains of the SSE by adding almost 5%, ahead of the insurance sector’s 3.6%. The bourse’s regulators had important news for the world in August. First, the SSE started applying a new level of disclosure by publishing for each listed company the names and shareholdings of investors whose stakes are larger than 5% — which was seen by some analysts as factor that led to instinctive selling after the new rule was announced in July. In a second step, the Capital Markets Authority allowed foreigners to invest in shares through swaps. This indirect opening to non-resident investors was perceived positively by international analysts who saw it as step toward full market access.

Muscat SM (1 month)

Current Year High: 12,109.10 Current Year Low: 6,641.63

The index graph for the Muscat Securities Market showed the same V-cut in mid-August that afflicted other regional markets. With a 4.57% loss from end of July, the MSM index also was far from doing well in the review period which it closed at 10,245.89 points on August 24. Freshly floated, Sohar Power Company was the market leader with a 28.83% gain since its August 18 listing date. A long distance back in second place with a 9.96% share price leap was The National Detergent Co. — a scrip that, volume-wise, had been rather high on thin suds for the past six months. The banking index, down by 1.66%, scored the least losses in the review period while the services and industrial sub-indices on the MSM ended 7.73% and 10.35% lower. It serves to remember, however, that the latter two indices did well in 2008 to date, with gains of 25% and 28% compared with the start of the year.

Bahrain SE (1 month)

Current Year High: 2,902.68 Current Year Low: 2,520.19

Scarcely a bright day on the Bahrain Stock Exchange, except for two positive sessions on August 13 and 14. The BSE index closed the August 25 session at 2,703.52 points, 3.3% in the red from the end of July. The market thus ended our review period over 200 points down from its year high in mid-June. Banking and services were at the low side of the market with drops of 3.77% and 3.74% but investment stocks did not do much better and only the insurance and hotels & tourism values ended the period nearly unchanged. Gulf Finance House, which had reported $220 million in first-half earnings in late July, was the worst performer and dropped 15.05% between July 31 and August 24, followed by Nass Corporation which shed 8.3%. On the top, Al Baraka Banking Group gained 18%, leading the mere six climbers of August.

Doha SM (1 month)

Current Year High: 12,627.32 Current Year Low: 7,484.19

The bears were sniffing out the peninsular heat of Qatar last month as the Doha Securities Market’s general index erased a good portion of earlier increases and closed at a level it was last at in mid-April: 10,858.60 points on August 24 represented a 6.13% weakening from the end of July. A total of 19 stocks recorded drops of at least 5% over the period, many big names among them, from The Commercial Bank of Qatar (5.58% down) and Industries Qatar (6.57% lower) to United Development Co (minus 12.57%) and Barwa Real Estate (the period’s biggest loser, at minus 17.77%). No sector was spared from the slaughter, although the insurance index was about 3.3 percentage points better than the general index. The top gainer of the period was Qatar Cinema and Film Distribution Co, which added 17.65%. At about rank 43 out of 43 DSM-listed companies by market cap, the company in the entertainment business experienced a solo August rally after announcing 87% higher H1 2008 profit.

Tunis SE (1 month)

Current Year High: 3,252.00 Current Year Low: 2,445.51

The Tunis Stock Exchange spoiled investors with the best performance of regional exchanges in the review period and the Tunindex added a touch above 6% at its close of 3,220.50 points when compared with the July 31 close. Gainers outnumbered losers by almost six to one and the best performance arose from newcomer Poulina Group Holding. The conglomerate with a strong leg in food industries started trading on August 18 and its share price appreciated 40.5% by August 22. Insurance firm Astree was the period’s underperformer; it saw almost 21% of its share price erased.

Casablanca SE (1 month)

Current Year High: 14,925.99 Current Year Low: 11,394.32

The Casablanca Stock Exchange slumbered with a daily average turnover in the review period that was about a third lower than the average daily turnover since the start of 2008. Index developments were downward but modestly so and the bourse’s general index closed at 13,904.43 points on August 22, which constituted a drop of 1.63% from the July 31 close. While losers outnumbered gainers 2 to 1, share price losses were mostly unspectacular when compared with those in other regional markets; only three companies saw their shares drop by more than 10%. Market heavyweight Maroc Telecom reported an 18% increase in first-half profit to $590 million.

Egypt CASE (1 month)

Current Year High: 11,935.67 Current Year Low: 7748.97

After a third straight month of index losses, the Cairo and Alexandria Exchanges have turned into a souk full of presumably great deals, with a price to earnings ratio of 10.4 times that is currently the lowest in the MENA region. One must expect, however, that this attractive status in pricing will offer little consolation to investors who were struck by the Egyptian bourse’s 11.91% negative journey from July 31 to August 24, not to mention the significant share price losses in June and July which added up to a 26.3% drop between the end of May and the market close on August 24. Chores of companies saw their market cap dwindle by half of more during those 12 weeks. On a sordid allegation to the side, the murder of a former Lebanese singer in Dubai was said to have driven down the share price of one major company on CASE, due to rumors that the dastardly crime was instigated by the company’s chairman.

September 27, 2008 0 comments

Banking & Finance

Money Matters by BLOMINVEST Bank

by Executive Staff September 26, 2008

written by Executive Staff

Regional stock market indices

Regional currency rates

Qatar gas company raises $1.5 billion for tanker purchase

Qatar Gas Transport Company (Nakilat) has raised $1.5 billion from banks to finance the construction of 25 new liquefied natural gas (LNG) tankers. Sumitomo Mitsui Banking Corporation arranged the deal with 12 banks providing the debt. Nakilat is also expecting to raise a further $1 billion from the bank market in the next 18 months. The debt was split between a 17-year $925 million senior bank facility, a 17-year $125 million subordinated debt facility, and a 12-year $450 million bank facility provided by export credit agency Korea Export Insurance Corporation (KEIC). Nakilat’s second quarter profit in of 2008 was $14 million, an increase of 63% compared to the same period in 2007.

Zain launches $4.5 billion rights issue

Kuwaiti mobile giant Zain launched a $4.5 billion rights issue on August 17. Existing shareholders have until September 18 to take up the rights issue. The extra capital will be used to finance future expansion plans and meet financial commitments. Zain has expressed interest in one of the two mobile phone operators in Lebanon that are expected to be privatized in spring 2009. The company is also planning on buying stakes in state-owned operators in Algeria and Iran by the end of 2008. Governments in both countries have given their approval to sell their respective stakes in Algeria Telecom and Telecommunication Company of Iran.

Tunisia prepares for ‘Open Skies’ with Europe

Tunis is negotiating with the European Commission (EC) for an ‘Open Skies’ deal and expects to reach an agreement by the end of 2009. The accord stipulates that Tunisia harmonize its air traffic management system with the EU, introduce new safety and security standards and comply with standards set by the International Civil Aviation Organization (ICAO). Meanwhile, the EC is launching a one-year study to harmonize air traffic management with members of the Euro-Mediterranean Aviation Group, which includes Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, the Palestinian Authority, Syria, Tunisia and Turkey. The EC is preparing individual plans for each country to bring their aviation practices up to EU standards. Europe is seeking to establish bilateral agreements with each country, with a view to eventually extending the European Single Sky to the eastern and southern Mediterranean. Discussions with Tunisia and the Euro-Mediterranean Aviation Group follow the successful 2006 Open Skies deal with Morocco. Tunisia’s efforts to become a hub between Europe and North Africa also saw Tunis Air order new Airbus planes worth $2 billion, including three A350-800s, three A330-200s and 10 A320s.

September 26, 2008 0 comments