On business in MENA, a short comment (Edited Tues 18 Jan to add thoughts on decision making cycles)
I've owed this comment for a while, and meant to make it as part of another more ambitious item I have been working on, but time is precious so let me take this moment to fill in....

Regardless, some thoughts provoked by some recent meetings and the like that I was invited to, reflecting on the business climate here, etc. The United States is launching an enormous push on economic development for the region, and the Embassy folks are reaching out trying to get their heads around how to put into effect the new marching orders - I've shared my limited wisdom as I know the Economic sections hither and thither quite well (useful for getting things done sometime).

Let me preface these comments with two preliminary items - nothing I note here is a huge revelation, or shouldn't be, and second, no single phenomena is unique to the Arab-Islamic Med Basin, and many things I mention are indeed identifiable in the West. However, it is a matter of degree and form - we are all human and despite the idiot racialists pretensions, one race and species of lying scum with intermittent redeeming characteristics for the sheer novelty value of it.

Dominance of the Oral over the Written or Renegotiability
Among the first things one has to come to understand in doing business in the region is that the dominance of oral over written and the aversion to direct contradiction make coming to and sustaining agreements rather more work than in the developed world. This is really made so by weak and often corrupt court systems. This is a trivial observation that everyone knows, but what is harder to convey is the degree to which this is true (certainly it varies from place to place as well) and the real drags are (a) the degree to which even ordinary agreements can not be assumed to be readily enforceable - but worse (b) the degree to which ad hoc oral renegotiation on need is not only accepted by felt to be a good thing. Why feel? Why not thought? Because I am thinking of the gut feel of the businessman that creates the "ether" - the unsaid fabric of what everyone unconsciously "feels" to be "right." This regardless of what they may analytically think, because under pressure I find gut feel usually triumphs over intellectual analysis - although it might be better not. Let me illustrate with myself as an example. I know, understand very well how these things are worked out here in the region, in general. It's no shock when a supplier or service provider comes back on deadline and asks for an extension or even wants to renegotiate the price (despite there being a fixed price contract) because he or she "needs" more time and money. However, my gut feel is "bzzzzt, you're out" - I speak to situations where there are not real extenuating circumstances - I don't believe in breaking service providers knuckles if there is a genuine issue. My gut feel colors at the very least my sensation of dealing with the person - the supplier is "wrong" in my book (as well as by contract). However, in his book -oddly it is usually his book and not her book, controlling for percentages- he likely feels "right" for in the local "balance book of right and wrong" it is "right" that the wealthy party cut the poor party a break, it is right the supplier stretch out at need, the payer stretch out at need. The formalities of written documentation are not rules, they are rough guidelines that should bend in the wind of need.

One can make the argument, and it feels convincing if one has not seen the aggregate inefficiencies raised, that the personal over the impersonal is more humane, more flexible, kinder to the little guy. On a one on one basis, this is often true. The problem is that the accumulated kindnesses (if we can be a bit abusive and call them that, delays in payment, daisy chains of delays in payment) result in some very clear deadweight losses. Too much capital ends up tied up in working capital to cover payment delays, to cover contracts being informally changed. A wider margin of error has to be withheld from being put to work, for everyone's ultimate benefit, because of small kindnesses. Nevermind it is the smallest operators who also suffer the most by having the most problem with free cash, with liquidity.

My sole quasi-original observation, however, here is that despite the fine words one hears from locals who intellectually understand the problem, their gut feeling - when push comes to shove - sends most into sympathy "for the little guy" - and this same sympathy often plays (when not trumped by connections) in court, regardless of facts. Play in court of course can have a broad meaning including ultimate judgment against the "victim" but only after sympathetic hearing to the most ridiculous delaying maneuvers.

Mentality, difficult to change even after intellectually the change is well understood to be necessary.

An added thought on this; one reads from people like Naomi Klein of multinationals buying laws and courts. I will not deny this occurs, although as usual Klein and her kin focus on the "evil" multinationals as if they were the source of such practices, rather than simply playing ball like the locals. I will assert that pure cases of corruption are rare (the gains versus the downside for a multinational being unbalanced) and that no one on the international side is happy about such things - even if you can buy your way out of an issue, the uncertainty involved is quite unwelcome. Other cases, pressure such as Microsoft's for passing modern intellectual laws often strike me as Quixotic, given that the laws frequently are essentially unenforceable (at least on a consistent basis) given local law enforcement capacity (and this for ordinary crime, let alone esoteric crimes "only foreigners care about.") Potemkin village laws I like to call them.

Of course, one should not pretend that in situ it's only the locals who begin to acquire dodgey practices - I had lunch recently with an IT manager at a major bank here - a major bank which has one of the world's largest banks as a 50 percent equity partner. He amusingly told me of his recent to do when he found out some key software in the bank was in fact pirated and that the major partner, which controls their budget for these things had refused to make it right. Stupid decision, I have to say, because an operational audit will eventually uncover this and... boom, nasty liability.

Regardless, the general unpredictability of relations that should be more predictable, more rule based - clearly rule based rather vague and negotiably rule based - is a real drag on getting things done here in the region. As cited above, it means you have to hold cash back in reserve "just in case" that you might not otherwise. Of course this is not unique to MENA - one has similar challenges throughout the developing world. Certainly, however, one can say that all things being equal, MENA has probably among the most severe challenges outside of sub-Saharan Africa (and with less excuse).

Now, perhaps the most vexing part of this is the feeling part evoked above, for you holding someone's feet to the fire on delivery terms or whatever rapidly become "the bad guy" - for all that most parties will admit in the abstract late payments, late deliveries, non-respect of contractual terms on delivery and product quality ... but Abu Mohammed, my cousin is a different matter.... that is when push come to shove, gut trumps intellectual appreciation.

I would be remiss in not noting that this kind of uncertainty raises the general cost of doing business and financing (although foreign actors perversely can often access better rates and terms because... well we pay on time as a general matter, it's harder for us to escape judgments through shenanigans and generally the reputational risk is greater - again a case of where the 'flexibility' of local habits actually penalizes the locals more than it gains for them, although this penalty is rarely understood and perceived as such). Clearly, for example, on bank credits, you have to get massive extra collateral as regardless of the law, you know it will be a bitch to get a hold of it, and it will take so long that only collateral that holds its value is worth calling collateral. Sadly, local businessmen and women do not seem to grasp this - above all the issue of the time value of money aspect of the value of collateral, since one has to build in the expectation of a significant delay in seizing collateral even in the case where one wants to do that. The implicit costs there are clear, I think.

When one asks why a developing country is... well not developing, one should frequently look to the degree to which these practices are acting as a deadweight drag on the economy, locking up value. That, and of course, the empty seeking of rents, but more on that in a moment.

A last comment in this section, one of the things that makes it very difficult to work out these issues noted supra in a timely manner is the aversion to direct confrontation, coupled with an aversion to taking responsibility, that strongly marks Arab culture. I emphasize this is not unique to Arab culture, and to varying degrees it is very human. However, I do maintain that the degree to which aversion to direct confrontation (i.e. contradicting anything directly) combined with an aversion to clearly taking responsibility for 'bad' things - or something than could bring dishonor in a wide sense - is strong enough in the region to be a marked input into the "problems of doing business" in comparison with other regions. Not unique but certainly problematic.

I ask you simply to reflect on Arafat - not from a moral perspective but as an objective leader. His entire leadership of the Palestinian cause was a string of defeats, bad decisions, poor analysis. But he never admitted an error, and never showed signs of grappling with it (I note that Ibn Bush shows signs of the same mediocre leadership qualities). I personally find Arafat to be too quintessentially old school Arab for words. A stereotype almost, but nicely illustrative of a general cultural challenge. One should not exaggerate, I should add, but he is an illustration of a tendency I see across the board, although it does strike me as more a Mashreqi tribal Arab sort of thing than say North Africans, who are really in another world in many respects.

However, I'll reemphasize: among the problems of the Arab world is the weaknesses you see in Arafat style political leadership are equally evident in its business leadership. I rather suspect that this "school" of decision making, while certainly rooted in deep cultural roots, also emerged out of the combined caldron of the tail end of Turkish rule and European colonial rule. Neither of which were particularly conducive (for all my deep sympathy for the Turks and sense the Arabs continue to blame the Europeans and Turks for sins which neither created in the Arabs) to developing healthy decision making habits in the Arab elite. But here I get speculative and historical. Perhaps Tamerlane will correct me.

Tijari Culture versus Modern Entrepreneurial Culture
I dislike the abusive use of modern to mean good and even more abusively to mean "whatever are current faddish practices are" (although its even worse when dressed up as 'international best practices' when 'international faddish business crap thinking and empty minded faddish conventional thinking without real solid analytical weight' is actually meant).

Nevertheless, let me use the term modern here.

One of the items I think I have evoked here in the past, is my dismay at the incomprehension on the part of the American officials making economic policy in re MENA in regards to the underlying economic habits in the region. I frequently hear from them (largely Americans I add, even the most well traveled and educated Americans being too frequently deeply afflicted with a messianic sense of optimism and sense that inside everyone there is an American - although this comes in somewhat more and less positive forms, but may still be better than my cynicism) that Arabs / People of the MENA region, etc. are naturally entrepreneurial and economic go getters. This is in support of a naive belief that if the US can herd the MENA region into its latest project, the Middle East North Africa Free Trade Zone, that some great economic flowering will ipso facto take off.

Let me first say that I am great believer in free enterprise and free trade, and fully support the basic concept of encouraging the region to open up to more trade (although the how and the like are interesting questions, but I shall try to touch on that separately).

However, I am rather against the superstitious belief that some magical dynamism exists that will naturally make any given free market (or rather freed market) flourish. I am painfully aware that underlying habits and expectations on the part of market actors may very well, in the short and medium term, engender market failures and even collapse that can very easily discredit the idea of free markets and trade. There are many levels to the challenge evoked here, some of which are deeper rooted than others.

First, in my experience, entrepreneurial culture does not largely exist in the region, in the sense Americans and even most Europeans would mean it. There are many reasons for this, but let me plunge into what I mean precisely. At the heart of the region, and even in very large economic units, I do not believe that the concept of longer term risk taking has developed. The economic dynamism is a trader dynamism, the Tijari or Bazaari, as my old mentor who did his time in Iran before the Shah went down would put it. The trader who does not hold an open position over a period of years (not in his mind) but opens and closes his economic exposure on a transaction basis. Now, it is true that Arab Socialism never managed to destroy the Tijari (or Bazaari) instinct, which one must admit does admit commercial and free market risk taking. However, it is equally true in the region that it did limit it, and further, that because of the mode of "longer term" development (almost exclusively either in colonial and thus completely foreign at the responsible level or in the hands of the state, even in conservative countries), longer views on risk taking did not emerge. Or emerged weakly.

Now, let me add that what I am calling Tijari culture exists everywhere in the world. The Arabs and others of the MENA region are not alien freaks (although we sometimes write about 'them' as if they were - for all that my feeling after so long is that the superficial and attention grabbing differences are among the least important in terms of 'getting along'). However, what I am speaking to is the dominance of a particular approach. The six month to one year cash horizon, shall we say? A culture (even if physically transformed into a modern office or store) of the stall in the Bazaar or Souq, the Doukkan, with its wares and the aggresivity in sales limited to the prospects readily in view, with a fairly limited and conservative sense of what products to push into the market, and a more gut than not based sense of selling. I may be exaggerating but I rather think this touches the true vein of economic activity in the region.

I wish to add that there are good historical roots for these very deep seated behaviours; in a highly uncertain world without good safety nets and systems to allow one to rebound from a risky venture, it makes a great deal of sense to adopt a Tijaari outlook on risk. It is something easy for "us" in the developed world to forget - that economic behaviour "we" view as irrational or backward usually has some very solid and rational roots, even if it may have (well) outlived its usefulness. If.

The issue of launching risky ventures - I mean venture here in a semi-technical sense of the longer term business prospect with a good degree of risk attached, as in venture capital - is a complex one and it is easy to be too judgmental about this, in a negative manner, in an unhelpful manner. It's easy to say 'they' should do X. It is harder to justify rolling the dice oneself when one's own nest egg is in the same situ.

But what comes to mind is the assertion, again heard multiple times from USG officials (and ones I like I may add) that "the Arabs" (or the Iraqis or ....) are natural entrepreneurs .... and they stop at that. In some ways I agree - the degree of sheer trading experience and energy locked up in the Tijaari, the Bazaari culture in the region is amazing. I have often thought that had I a large chunk of change to risk, that I might take a group of Tujaar from say an Moroccan souq and train them in ForEx or the like, and then let the little bastids loose. Their trading instincts are killer - if they master the data and the market, knowing a short term position to take and what kind of risk they want to take on it. The issue is that is not the same set of economic habits that are necessary to make longer term value added venturing work. In fact, I would argue many of them are exactly contrary to what is needed for making a venture work.

Now, the importance here, in terms of "Western" action in economic reform to achieve "our" economic and political goals, is that the reactions anticipated are not necessarily there. I can cite a few examples. Of course there is Iraq, but it is not precisely a fair example as to be frank Iraq so rapidly went off the cliff that the difference between venture investing and Tijaari investing never had time to emerge. It would have, but it did not have time. However, what was dangerous in initial economic policy assumptions was that the Iraqis would, because of their entrepreneurial instincts, take advantage of the free market opportunities magically opening up. I expressed at the time my contempt for the simplistic misreading - although I do at the same time hold that given time to develop the right instincts that would have developed, but only over time.

If I may share an somewhat off track anecdote, to illustrate short term thinking (and my apologies in advance as I will not be very clear on details for reasons): I was working on selling a local industrialist on a financing package some time back, for a new project involving decorative stone tile production. Nice project actually, good combo of tech and labor, fit with resources available. However it needed a serious up front investment, and despite the somewhat khayali numbers, a 3-5 year glide path to clear profitability. Of course their numbers showed 1 year. I was arguing for a certain facility with a ten year tenor or term, denominated in dollars, but not an issue as sales were in Euros and Dollars. I recall the headaches I had on this, because the local entrepreneur kept insisting the rate was too high. Now as I recall the 10 year tenor was something like prime plus 6 to 8, fixed. And this emerging market. Maybe a few hundred bp in either direction, but no matter, a good deal I thought given it had an insurance wrapper etc. But no, my man kept insisting that he could do this at prime plus 1 to 2 percent, meaning he was claiming to be able to raise debt for a speculative industrial development at say 3-5 percent. We had the most ridiculous back and forth, until I switched over to his language and asked point blank, how many years. ..... 1 year. He say zero difference between financing a speculative project with essentially a revolver on the local market, and locking in a fixed term ten year with an insurance wrapper. All he saw was the sticker, and no sense of long term versus immediate horizon, or issues attached to short term financing against a project with long term capital needs, esp. in a volatile environment. There is of course more to this, but I wanted to illustrate a real issue.

Rather more on point are the two free trade agreements the United States has executed in the region, one of which is active and the other is yet to be ratified but on the table - Jordan and Morocco respectively. In both instances the American economic officials have been surprised by the lack of "entrepreneurial" response to the accords -whether in effect or in preparation. They should not have been. Had they understood that what they are calling - in no small part for marketing / agitprop purposes - entrepreneurial behaviour is simply Tijaari activity - short term, largely focused on keeping risk exposure to a transaction by transaction level, never prospecting too far beyond the known..... In Jordan historically one can see a quire extraordinary pattern of Jordanians following foreigners (who prove the model) into activities or keeping themselves to rent seeking aspects of the value chain (playing the landlord to Chinese and Pakistani textile factories exploiting the no tariff and no quote loophole - why the Muhajirine of Pakiland are such the dope risk takers I have no idea, but they are. I suppose having rolled the dice....). In the case of Morocco, although the country has been given a political gift of an FTA - which the US has ratified but the Moroccans are very typically foot dragging over (with completely idiotic and misplaced political opposition - including bizarrely stupid fears US investors are going to "take over" Morocco - a comically stupid idea), local actors have done zero prep, although the FTA would kick in almost immediately once the Moroccans (finally) get their act together, and the opportunities would be in exports to the US, not US exports to a market barely the size of the New York Metro area with a buying power of Bed Stuy (a poor fucking area in Brooklyn my peeps).

Now, as to the issue as it happens this past weekend my old mentor, who happens to be an old Citi hand in the region (Iran, Lebanon as they went to hell..., great stories although he only tells them to people like me), but then moved on to private equity with substantial experience in emerging markets, was in town. I set up a meet between him, me and Embassy since they love this kind of thing, and we all rapped. One of the items we, he and I, brought up with Embassy was they were mistaking Tijaari - or as he put it Bazaari - activity for American style venturing / entrepreneurial behaviour. The local entrepreneur/tijaar who exports to Europe can follow a lot of his old fashioned instincts. There are some ethnic circuits to follow in setting up his exports. He can do the truckload or small shipment across the Med, and although he's not truly competitive, there is enough price slack in the Euro market, and enough trans Med transport that his ad hoc export strategy, which remains a trader strategy at its heart, can work. It is not going to be brilliant, and it's progressively getting squeezed by the Eastern Europeans - who perhaps are not so different, but face an easier cost and transport structure than he does given his highly atomized and ad hoc approach - but it still works. And so long as he is getting by, he's okay in his mind, since he sees his business in terms of a per trade net result basis. Long run his game is losing the margin, but that's not directly clear from his trade by trade view where the natural noise of fluctuations obscures the trend. He feels the pain but blames it on either the moment or the "evils" of globalization. Nevermind he is not investing back in the business - retained earnings are not enough, and the size is too small to leverage effectively.

However, the other key point is the degree of atomization of the economic fabric. My first point gets to some of the reasons why, but also the Tijaari loves being his own boss, but hates the idea of formalizing this, or outsourcing any decision making. He also has a relatively limited vision of the return he wants - again the Tijaari vision is a trade by trade (deal by deal) vision. That puts real limits on what one is willing to prospect and the amount of capital that is going to be seen as acceptable to tie up.

A side comment: why the atomization? I can't answer that well. It doubtless runs deep in the sense of "at least in my affairs I am free" in societies that in living memory have been oppressive modernizers. It also doubtless has much to do with familial prejudices and as well the poorly organized legal structures available (in effect - on paper with few exceptions most of the region provides fairly adequate legal coverage).

Another issue to consider, although this is far more variable from country to country is the degree to which Big Daddy, the State is expected to hold hands. Arab Socialism, but not just Arab Socialism, also some older ideas of what the State should do for the Believers. Nevertheless, even in countries where economic activity remained largely in private hands, the idea of state guidance and assistance remains strong.

Now despite my predilection for free markets, let me say that while I am in general an opponent of 'industrial policy' I do feel that for small countries a free market oriented 'industrial policy' can have some place if well done. If.

Regardless, there is no small degree of passivity - connected to the Tijaari culture as I argued supra - in developing new activities and markets. In many ways this is rational risk aversion in an environment were property rights are fluid (not just because of state action, but also powerful private actors squeezing people out - something we can often forget in our classic liberal circles, that government is but one mode of expression of rent seeking and expropriation), but is not well adapted to seizing the moment as it were. I recently (some weeks or more ago) sat in on an investment promotion conference where local businessmen kept asking the American delegation (US Gov) what USG was doing to sell local production in their country. They sincerely and very literally expected "The Government" (USG or their own) to be opening markets for them, in a very literal sense. The fairly well spoken (and yet political appointee) American ambassador was rightly categorical -it's up to "you" - the locals - to sell yourselves. An atomized economic fabric that hates cooperating but expects its central government to hold its hand. Bloody impossible challenge in most respects, for all that some degree of governmental accompaniment is indeed necessary.

Well, given this short comment has gone on a while and I doubt there will be much commentary given the esoteric nature, I will close by suggesting that the Bush Administration has it right in focusing, as the USG people tell me, on economic development over the frilly political and social development aspects - maundering on about women's rights and political liberties - but they need to grapple with the real potential and fabric, rather than the somewhat imaginary fabric they think they are working with.

They also need to grapple with what will really bring foreign money as well as leverage local capital (which unlike sub Saharan Africa is truly substantial) into more productive investments.

I hope to get up the gumption to finish my commentary on my vision for private equity as a development lever shortly, but my closing suggestion for the region is that if the US and the Europeans want to make significant progress in reforms, it is best to put their money into public-private investment funds managed with a view to returns and good investment management to set the proper standards as well as to bring financing to 'innovative' projects. I refer readers to Drucker re the concept of innovation - I am not referring to California VC type activities.

However, there also needs to be specific action to help develop real entrepreneurial action. That is not easy. Equity funds are not enough. Entrepreneurship incubators are likely necessary. They should try to be commercial, but with a subsidized return. More on this later. Inchallah.

[Edit: Addition]

I noted I forgot to add the following section last night:

Decision Cycles: Centralization and Risk Aversion
Among the other items one notes doing business in the region is the slow decision cycle, maddeningly slow in fact. Siezing opportunities occurs where they are familiar, but in my experience, drops off markedly once the situation becomes too different or is entirely novel. Nothing surprising there, given what I noted in regards to risk aversion, and as well an economic fabric where new relationships are riskier than need be due to fluidity in enforcement of understandings. Of course, one should recognize that all new business / commercial relationships and new undertakings are risky inherently. Riskier than need be is the key phrase here. As in everything I speak to in this note, we are looking at matters of degrees and accumulated frictions that when viewed in isolation do not always seem "that" different from developed countries - however when taken in aggregate, all together, the accumulated frictions become significant.

I've touched on this before when commenting on an article some months back on the poor performance of Arab armies, an article that echoed the same things I heard from some milintel types training Arab strat staff: information hoarding, tendancy for key decisions to always ride all the way up to the highest level, for the highest level decision makers to not refer to their supporting analytical staff, but consult amongs themselves (CEOs, Generals), for the decision to be taken in private and handed down as if from Moses. Not unique to the Arab world, to be sure, but again, it is matter of degree and the accumulation of issues.

The slow decision making cycle, even relative to say my (limited, impressionistic) exposure to say Asia, is a real drag, and I think derives from the risk aversion, coupled with the extreme centralization of information and power at the top. Add to this the atomized attitude towards economic activity - the degree to which information is hoarded rather than shared (information hoarding occurs everywhere, in all cultures, so let me stress again, the degree and manner is the key here) - and you get a decision process that is slow, poorly utilizes the business' (often impoverished) analytical structures (analystis, accountants, etc) and will frequently jump over to informal networks to the exclusion of the formal networks. Now, let me note that informal networks are very important, and excessive informational ridigity from formalism is as much as error as utter ad hocness.

A point of illustration from my old fund. One of the companies in the portfolio - one with some serious investors I may add, even Citi - was in a financial death spiral. Everything was clearly broken and my research on the business model showed that the original proposition had just failed to pan out anywhere. Very clearly a case of either write off or radical remake if one believed in the management enough. Problem was, looking at what management had been doing (overspending, flitting from one "strategy" to another, having recourse to ad hoc revenue streams...., lying to me about where issues were) said, no management really had not even done that brilliant of a job with a broken business model, and had not seriously grappled with the brokenness. In my analysis, it was a clear case of pull the plug and walk away. Others in the Fund differed. Several big players, not Citi of course - I am sure they ran the same analysis I did, wanted back in, and with our drag along rights, we had an option to grab a chunk of the firm for near nothing. Of course that was an implicit 90 percent write down and really begged the question of why did we want (x% plus of what was likely zero value). The other portion of the context was I was there at the Fund because the state side investors felt the Fund was fucking up (it was as long time readers know) and needed to be made right (or pull the plug); this was an important decision point to prove rational business analysis was being imposed in the Fund. Now, the top decision makers in the Fund were really old school Arab types (the main American partner had been yanked, barely avoided getting sued I am led to understand). Theoretically the investment process required an analytical memo, and then an investment committee decision, then negotiations through an investment officer based on the decision (which might be an interim one, such as see what deal was avail).

I kept finding that the formal decision process was meaningless. Write whatever memos I wanted, the real process was the Big Cheese would then go and have personal convos with the CEO of the portfolio firm whose oral representations were put on the same level as my analyses. Oral over written, relationship over analysis. However, not 100 percent, rather the Big Cheese tried to negotiate parallel to the formal process - and in his view this was 100 percent correct. Result, no clear view emerged on what to do, contradictory information flowed or not, and the management of the portfolio company played me off against the Big Cheese, feeling (correctly) he would want to go in on his gut, regardless of how shitty the real deal was. However, at the same time, the old man also liked to keep the options open, pointlessly so. He liked to have the sense of holding court, and keeping the potentially valid options open. Like a Tujaar sitting in his corner shop, always expressing a bit of interest in the carpet provider's hints at new stock, but never taking a clear decision until the break point.



[Edit II: I wish to highlight something noted in comments - the issues I raise here are general ones and not confined to a particular social class or economic category]

[Edit III: I probably should pursue this topic further, but I will wait to see what the audience is interested in]