Editor's Note:

This is the third in a series of SUSRIS "Items of Interest" providing transcripts from the recent Middle East Policy Council (MEPC) Capitol Hill conference series panel on the Future of the Middle East: Implications for the United States. The panel, held on June 26, 2007, featured five distinguished specialists on Middle East affairs, introduced by MEPC President Chas W. Freeman, Jr. Parts 1 (Amb Freeman) and 2 (Dr. Gause) were distributed separately and are posted on the SUSRIS.org web site. Additional panel presentations will be distributed via SUSRIS over the next several days.

The Future of the Middle East: Strategic Implications for the United States
Middle East Policy Council Capitol Hill Conference Series on U.S. Middle East Policy

Moderator/Discussant

• Chas W. Freeman, Jr., President, Middle East Policy Council

Speakers

• F. Gregory Gause, Political Science Professor, University Of Vermont

• Fareed Mohamedi, Partner, Head Of Markets And Country Strategies And Practice, PFC Energy

• Afshin Molavi, Fellow, New America Foundation

• Wayne White, Former Deputy Director, Near East And South Asia Office, INR, State Department; Adjunct Scholar, Middle East Institute

• Anthony Cordesman, Arleigh A. Burke Chair In Strategy, CSIS

Fareed Mohamedi
Partner, Head Of Markets And Country Strategies And Practice, PFC Energy
Washington, DC
June 26, 2007

I will talk about oil, but I won't talk about oil with the gas pump. I would like to actually talk about the economics, the economies of the Gulf. I actually have become very optimistic about the economies of the Gulf and see them as potentially a way out for the whole region. This is sort of an engine that could get us out from the mess that the whole Middle East faces, ultimately a development crisis that the region is facing.

My colleagues accuse me of -- they say that my medications are working very well -- and that they make me very happy and that I'm missing all of the doom-and-gloom in the region. I give you that -- I can suggest those medications. But bear with me a little bit.

I would like to also pick up on one other thing Greg [Gause] said about state capacity. I just read this book by Charles Tilly, Democracy, and I highly recommend it. He basically puts state capacity on one side of the - on the Y axis and democracy on the X axis, and then he traces paths that states have taken. The basic line is that if you have weak capacity, you're not going to get democracy. Destroying states doesn't work. In fact, usually, it's the other way. Get up the side of state capacity and then you'll most likely get up more rapidly.

I see that is what is happening in the Gulf. That is what makes me optimistic. It's not the buildings that are going up. It's not the snow slide, or whatever, the snow mountain in Dubai. It's the public-private partnerships that I think that the Gulf governments have discovered, and they, in a sense, discovered this 10 years ago in the crisis years of 1990 to 1995 when Saudi Arabia effectively went bankrupt and the Gulf was in the doldrums of lower prices and all of that.

They have -- in those days, they said, look -- they looked over at Asia and said, we could have - there is a twofer in Asia. There is a model for us. We can have authoritarianism with market capitalism. We can have it both ways. And that is what the Asians have taught us. We have to get governance right. We have to have a strong state. We have to invest in all of that. And we can harness private capital. The way the Saudis have done it is through the multinational corporations coming in and they created a very nice sandbox for them to work in. And they thought that in a sense, this could be a model. To some extent Dubai is a pioneer on this front, but certainly all of the other Gulf countries have caught onto this. Clearly the Saudis have.

What was unprecedented about the last five years, which made me even more optimistic, was that this could become a model for the rest of the region. And, again I'm an economist and this could be -- I'm being a little bit of an economic determinist -- and all the bad stuff is going to continue to happen alongside of this. And possibly the bad stuff could derail this, but this process I think is very important. And it is deepening. The private sector has caught on, and in a sense, you have a cycle in place where you have good public policy, private sector investment, good public policy encouraged by that. You see the opening of different sectors on many levels.

I was always very skeptical, for example, about Islamic banking. I always thought, ah, that's just merchant banking and they're calling it something else. Well, if you think about it, all banking is just old stuff repackaged. I mean, either you get a rifle as in Michael Moore's film when you make a deposit or a teddy bear or a Koran. I mean it's - to a certain extent, it's pretty much selling money. But what I find very interesting about Islamic banking ties in with this public-private partnership was that - for example, the Central Bank of Bahrain created completely new banking regulations, completely new accounting standards, a completely new way of rating these Islamic banks. So suddenly you have development going on and not just another bank that is trying to get you to issue deposits, investing in a snow slide. And I think that's very important.

The second element of this is that they have harnessed globalization. What is Dubai if not getting into creating exports and services. Similarly, the Gulf is getting tied in to Asian growth, to European/Western growth. And it is exporting capital and is creating in a sense - it's not making Mickey Mouse watches and selling them all around the world, but they're getting into business services in other areas that are becoming the center of that.

Third, I think that harvesting energy in a new way is very important. The old energy upstream investment, that's all going on. Saudi Arabia is going to expand its oil production capacity from 10 to 12.5 million. Qatar is going to be the new center of global gas. And the way that, in a sense, that will connect all these regional markets in gas. But I think there are two innovations that are going on in the energy area, which I think is adding to this. One is the national oil company's capacity has been enhanced. And as the most important institutions in these countries --remember I said you enhance state capacity you may get closer to your democracy and development. In the same sense here you enhance the most important institution in your country which is the national oil company you enhance state capacity. And there's a really interesting thing that is going on in that front. And secondly, energy has become a place that the private sector is allowed to invest in and has become very much excited about that. I think that this could spread both demonstration effect and financial effect, into rest of the Gulf.

Ultimately, 25 years from now, reconstruction funds for Iran and Iraq. I'm thinking about it in the same way, that in 1975 if you sat in Singapore and you looked at the Southeast Asian region, you would never call it "the sexiest place to invest your money" as we do today. You had just had a massive massacre -- the genocide in Cambodia, the Vietnam War, all of that. Today after all of that bloodletting -- you have nothing of that scale in the Middle East -- you see this public-private partnerships that came together to create one of the most dynamic economic centers of the world.

I think that the greatest danger to this is potentially an attack on Iran. I see that as a disaster for the region, and that private capital that came in will run away.

[Part 4 will provide the presentation of Fareed Mohamedi, Partner, Head Of Markets And Country Strategies And Practice, PFC Energy]

[Reprinted with permission of MEPC]