Revolutions and democracy movements across the Middle East and north Africa are profoundly altering the dynamics of an already complicated and conflicted region. Investors fear nothing less than instability and the uncertainty it brings, but with these shake-ups could come opportunities.

Countries such as Libya, which have been mostly closed to foreigners, could suddenly open up, and lucrative investments could result. Even countries such as Egypt, which had been one of the top destinations in the world for FDI, could offer more opportunities should the country become more democratic and transparent. This is not to say that everything will turn out fine in all of these countries. Things could very well go horribly wrong, but the potential for more trade and investment into countries that had previously been closed or ignored is very much a possibility.


Yet these countries that find themselves with the opportunity to open up their economies to foreigners have a tricky road ahead. Some countries that have opened up have indeed benefited, but others have found themselves worse off. Pedro Conceicao, chief economist for the United Nations Development Programme Regional Bureau for Africa, works extensively with countries that are grappling with these issues. He says that while he encourages countries to liberalise, it would be naïve to just throw the economy open and expect everything to go well.

A lesson from Russia

Consider the example of Russia in the years immediately following the collapse of the Soviet Union, when president Boris Yeltsin announced that the country would go ahead with dramatic market reforms that were known as 'shock therapy' and aimed to follow the example of Poland’s 'big bang'.

In Russia’s case, the country was attempting to convert the world’s largest state-controlled economy into a system similar to that of the free-market US. This strategy was recommended by the World Bank and International Monetary Fund. Among the many reforms, price controls were removed and privatisation was encouraged. The result was complete chaos.

Hyperinflation made life difficult for many, especially the elderly. Some entrepreneurs became billionaires almost overnight, but Russia’s economy fell into a recession in the mid-1990s and collapsed in 1998. While the country’s economy and stability have improved significantly since then, it is an example that many countries will seek to avoid if they should find themselves in a similar situation.

Then again, there are also the examples of China and India – they undertook a slower pace of liberalisation that has paid off. Therefore there are sound arguments for opening up. A liberalised economy properly managed can create capital flows and transfer technologies and expertise.

The gradual approach 

Manoj Gidwani, director of Indian professional services group SKP Group, works in helping foreign firms set up in India and agrees that his country’s policy of opening up more gradually has worked well overall. He says: “I definitely think it is good to start slow and have the right checks and balances at each level. The first step of liberalisation taken in 1991 was good, but was still extremely controlled in all sectors. Over the years it has opened up, but there is still a lot of protectionism in Indian FDI policy.”

Mr Conceicao believes countries can also draw a good lesson from China. He says: “The story of China is often misunderstood. People think of China as a planned and rigid economy, but its history of development is actually a really interesting story of empowerment and experimentation. The government encouraged small projects and experiments and looked at what worked and what didn’t. Special economic zones were one area where they had real success.”

When to proceed with caution

Yet how exactly a country should proceed if a revolution or uprising changes the game is largely up for debate. The process is dependent upon the country and its characteristics, as each situation is different. Shock therapy might even work for some, such as Poland. But the overlying message from the experts appears to be to proceed with caution and gradually open up various sectors where advantages are held. This process should be both deliberate and carefully organised, with a plan that will ensure that the benefits reach the larger population.

Analysts agree that the approach should take into account both the macro and real economy. On the macroeconomic side, the main challenge is volatility, with many countries booming when FDI flows in, but falling into recession when flows dry up, as was the case in much of south-east Asia in the late-1990s. There are traditional measures that can help prevent this, such as floating the exchange rate, accumulating reserves in a central bank or tightening fiscal policy. However, there is general consensus that countries need to do much more than the usual steps.

Mr Conceicao says: “The domestic economy is often challenged by the banking system, so how you regulate that is important. One policy floated is the idea of having a counter-cyclical banking regulatory policy so you have banks hold more reserves when times are good and less when bad.

“There is also the idea of imposing capital controls. Brazil did that. There are limits to how effective it is and it can be circumvented, but it’s an important part of the policy toolkit. The bottom line, though, is that the volatility of capital inflows is a big challenge. If it is not well managed, it can backfire.”

Degree of diversification

Another important aspect is the diversification of the economy. Oil-rich countries frequently fall into the trap of relying too much on their reserves. This might work for certain countries such as Kuwait and Saudi Arabia, but an over-reliance makes them much more vulnerable to changes in oil prices. One example frequently cited by economists as following the right development path is Qatar. Starting out as an oil-rich nation, its government has successfully turned its capital, Doha, into a major international financial centre, and furthermore the country is getting more involved with the refining process.

But when it comes to the macroeconomy, countries do need to make use of the assets they have. If a country has vast reserves of petroleum or minerals, it would be foolish not to try and develop them into the economy. Egypt, for example, has always been a hub for tourism, and its government was wise to help this industry along. Analysts urge countries to look at what is working, leverage that to the economy’s benefit, and then try to diversify into other sectors.

On the real economic side, the composition of the inflows is hugely important. If the flows are loans or equity investment, their impact can be very different than more long-term FDI. Lending can be particularly volatile, especially as obligations are fixed and the loan can be in a different currency. Should the domestic currency suddenly lose its value, these loans can bankrupt the country.

Yet perhaps the main challenge on the real economic side is ensuring that the fruit of opening the economy actually translates into benefits for the larger population, via improvements such as more jobs, better living standards and a higher quality of infrastructure. Here, Mr Conceicao says, is where policy becomes extremely important.

He says: “I’ve seen countries get investment into certain sectors, such as energy, but these can end up being isolated from the rest of the economy. Some sectors are more capital-intensive and do not necessarily generate jobs. And sometimes in these contracts the revenues are not always negotiated in the best of terms.

“So microeconomic policies are important to ensure that investment coming in is linked with the rest of the economy. This can be done by having local suppliers and content requirements.”

Investment side

On the investment side, investors point to several areas where a country can help encourage them to embark on a project. These include creating investment promotion agencies (IPAs), the establishment of free trade or free economic zones, and an abundance of transparency. 

Of the three, it is transparency that investors say is most important, as it can help in many other areas such as preventing corruption. Kyle Stelma is the director of Dunia Frontier Consultants, a firm that provides consulting services to investors and corporations operating in frontier and emerging markets. While he says that IPAs and free zones are helpful, they are not necessarily the golden ticket to economic success.

He says: “The biggest thing is to provide access to useful information. This underpins every other thing out there. It can be really hard for companies to find market data and country and company information, so anything a country can do to facilitate that is helpful. Even something as basic as a website providing information can be a huge help.”

Deciding factors

Interestingly, there was little consensus among investors and analysts to suggest that IPAs were crucial to attracting investment. Some suggested that they could be helpful, but that ultimately it was the facts on the ground and condition of the market that mattered most. One individual highlighted the Jordanian IPA as one of the best in the business and as an example of where an IPA can facilitate investment. But unfortunately many agreed that all too frequently an IPA can become yet another regulatory hurdle.

The same appears to be true with free zones. Investors say that these can certainly add value, and if done properly they can facilitate investment. Examples frequently cited are those in China and the United Arab Emirates, where they can act as a shortcut to existing regulations and protect investors from abrupt changes in policies. But then again there can be free-trade zones that in the end are not really free trade and can actually create more problems and make the investment process more complicated.

Mr Stelma says: “Again it all comes back to an availability of information. Investors don’t mind Byzantine rules as long as they are aware of them and they don’t change dramatically overnight. If the only thing a free zone did is offer a tax holiday, but was completely open about the 150 steps and time it would take to make an investment, I think people would still be interested."

Mr Conceicao concludes that it is also hugely important for investors to avoid a “herd” mentality, and countries should do their best to prevent hysteria from building up unrealistic investor expectations. 

He says: “Ultimately you have to look at the fundamentals and avoid the herd behaviour. People invest in fashionable places and then they all go there at the same time. I’m not saying don’t go. But it is important to do a very thorough analysis of what is driving the attractiveness.”