The first Wharton Global Family Alliance Conference, held in March in Dubai, United Arab Emirates (UAE), drew business leaders from around the world to discuss new investment and business opportunities in the Middle East.

The event reflects Wharton’s growing interest in this region, as evidenced by, among other things, Wharton’s Arab Club — a non-political student group whose members last year took part in an internship program in Kuwait, says Todd Millay, executive director of the Wharton Global Family Alliance. The trip culminated in a one-day conference in Dubai. This year, the students came to Dubai in part to attend the three-day Wharton Global Family Alliance Conference which looked at issues ranging from regional economic models and capital markets to entrepreneurship and education.

The timing of the conference coincided with a number of economic trends. Rising oil prices, for example, which reached a peak level of $55 per barrel in 2004, have brought prosperity to all oil exporting economies, including UAE, and are encouraging regional governments to diversify their oil-based economies into non-oil areas, such as construction and tourism. Meanwhile, political, social and economic reforms, including privatization and liberalization, are being instituted slowly but surely in keeping with the changing times. Real estate and stock markets are booming, and IPOs are on the rise, with roughly 54 active issues so far. The Middle East’s share in world trade has increased from $369 billion in 1999 to approximately $500 billion in 2003.

Separating Management from Ownership

“On behalf of His Highness General Sheikh Mohammed Bin Rashid Al Maktoum, Crown Prince of Dubai and Minister of Defense, UAE, it gives me great pleasure to welcome you to Dubai,” said H. E. Sultan Bin Sulayem in his welcome address. “The growth that we are seeing here is continuous and demonstrates the ability to improve and expand.” One of the leading businessmen in Dubai, Bin Sulayem is the executive chairman of Istithmar, a major investment holding company set up by the Dubai government. The company, which is attempting to generate substantive new knowledge related to family business, was a major sponsor of the Dubai event.

Launched in 2003, Istithmar coordinates various entrepreneurial ventures in sectors like real estate, logistics, tourism, retail and financial services for corporations and private investors. Bin Sulayem is also the executive chairman of Dubai Ports, Customs and Free Zone Corp., chairman of, a B2B marketplace, and chairman of Nakheel, Dubai’s leading property development company. “Entrepreneurship is born from family business,” Bin Sulayem said. “And it is entrepreneurship that drives the creation of global social wealth. The family is the heart of our heritage and a bridge between the past and future to keep our culture alive. Yet difficult issues arise as we get older and grow in family businesses. Today we will discuss such issues.”

One such issue is corporate governance. “Whether in Dubai or Dusseldorf, good governance is a key ingredient for successful businesses,” Bin Sulayem noted. “To survive, family-owned businesses must resolve personal conflict with shareholders and look at consumer interests, integrate with financial markets in order to expand and be aware of social responsibilities, even as these businesses face the demands and pressures of the marketplace. Most important, they need the strength to separate management from ownership and business finances from personal finances because a business can keep families together or apart.”

He acknowledges such an attitude can be risky. Despite economic progress since the mid-1990s, many families have been reluctant to go public. At the same time, the imperatives brought about by globalization and the World Trade Organization (WTO) have been pressuring these family businesses into seriously considering the switch, say regional experts. A recent IMF report warned that Middle Eastern countries, including the Gulf states, lag behind other regions in such areas as foreign investment, the reduction of barriers to entry (such as minimum capital requirements), a reduction in complex procedures and regulations, and protection of property rights.

The first plenary discussion, titled “Regional Economic Models and Trends,” was moderated by Wharton finance professor N. Bulent Gultekin, who argued the case for change. “By 2050, China will be the largest economy, followed by the U.S., India, the European Union and Japan. I have been to these areas and it pains me to see that while the rest of the world is moving in leaps and bounds, you still have struggling regional economies,” Gultekin told the audience. “Is there a way we can replicate the economic growth that we see in Asia?”

Henry T. Azzam, CEO of Jordinvest, a regional investment bank based in Jordan, expressed enthusiasm for the current regional economic situation. Despite the turmoil in Iraq and the Palestinian territories, the Middle East recorded the second highest growth after China, he noted. A combination of high oil prices and production rates, low interest rates, expansionary fiscal policies and a very confident private sector with money to invest in this region suggest 7% GDP growth in real terms. “It is the confident private sector that is [becoming more active] and that is looking around because it is hard now to invest in the West,” he noted.

Indeed, private investors “like what they see locally and are putting more money in the domestic markets,” Azzam said. “All private sectors, whether banking, telecom, transportation, health care or education, did very well last year. Another factor is rising consumer expenditure” led by such factors as the rapid expansion of consumer credit, low interest rates and higher remittances in the case of non-oil Arab countries.

An article in Tuesday’s (May 3) Wall Street Journal echoed Azzam’s upbeat assessment as far as the banking industry is concerned. In the past decade, the Journal noted, “Islamic banking has matured from a tiny, sometimes controversial backwater into an important current of global finance, especially as Western bankers and borrowers compete for the new funds gushing into the Persian Gulf because of higher oil revenue.” The article goes on to point out that in 1999, “there were just a dozen Islamic-branded investment funds; now there are at least 150 around the world.”

Betting on Oil Prices

Oil, as everyone notes, is king. Buoyed by strong growth and demand, it is boom time for all oil-driven economies. Yet prices stay volatile due to tremendous impact from variables like limited excess capacity, fluctuating weather conditions and unsettling news from various oil-producing countries such as Iraq, Venezuela, Nigeria or even some of the Gulf Cooperation Council (GCC) countries. Bad news can range from strikes to a sudden rise in production quotas to pipeline attacks.

“By magnifying the uncertainty and betting on oil prices, we are now in fundamentally different markets,” Azzam noted. Gone is the $20 to $30 per barrel price band; the figure is now between $30 and $55. “Clearly, we have shifted into a higher price scenario. Since Gulf countries have started to produce more, they are enjoying not only higher oil prices but higher production and oil revenue. Last year, total oil revenues for the region were up by 35%. Take Saudi Arabia. Of its three main sectors, oil accounts for around 32% of the economy, the private sector is at 44%, and government at 24%. What happens in the oil sector translates into higher oil revenues for the government, which is embarking on very ambitious projects and thus adding to regional activities with its expansionary fiscal policies.”

Similarly, almost all Arab stock markets did well in the last two years, led by stellar performances in Egypt, followed by UAE, Saudi Arabia, Qatar, Jordan and Palestine. “This looks like the tech bubble in the U.S.,” Azzam said, adding, however, that the region is also demonstrating high liquidity.

Meanwhile, in terms of economies, the star economic performer has been Qatar, followed by UAE, especially Dubai. Saudi Arabia, Kuwait and others also did quite well. Regional tourism is another new phenomenon. “It is very difficult to get bookings in Amman, Beirut, Dubai or Damascus,” said Azzam. “People are traveling more within the region instead of in the West and this is transferring more revenue to the non-oil countries.” Another interesting trend is that neighboring countries are now investing money in the region. Saudis, for example, are the largest investors in Dubai and elsewhere, Iraqis and Syrians are relocating to, or investing in, Jordan and so on. Azzam noted that Lebanon and Syria might see a slowdown, while Palestine and Egypt will do well. “Most of the factors that affect capital markets are blinking green. With the regional changes, the family business outlook is changing. Private sector businesses are reassessing the risk-return profile of investing domestically and regionally vis-a-vis investing in the international markets.”

Ali Al Shihabi, CEO of Rasmala Investments in Dubai, responded to Azzam’s comments by asking the audience to step back from the short-term euphoria. “There is limited absorbent capacity within the Gulf and other Arab economies in terms of education and investment,” he argued. “There is a tremendous amount of liquid capital chasing a limited amount of investment. Also, with the capital being windfall capital, it affects the quality of long-term investment decisions.” The figures look good but the question remains as to how the Arab region, especially the Gulf, will generate jobs in the long run. “Governments will be able to subsidize economies, but that causes delays” in the enactment of underlying reforms.

“Today, India is spoken about a lot, but what allows India to compete internationally is its quality of education,” said Shihabi. “In the early 1950s, then Prime Minister Nehru made a decision to invest in technology education. It has paid off. But the Arab world is lagging. Should oil drop, we would find ourselves in a difficult situation. On the one hand, we have population growth. On the other hand, literacy has not necessarily been converted into education that businesses need and can deploy.”

Other issues that should be re-examined are legal reforms and further economic and political reforms. “We have to ask ourselves, how can we compete, not just globally but also regionally?” Oil revenues could set up a large trust fund to encourage scientific research, Shihabi suggested. Dynamic management, with the right leadership at the top — as is the case in Dubai — is needed. Yet all growth has to be managed keeping in mind demographic and social issues in the long term. “We need more depth, focus and openness to discuss these issues,” he said.

The session ended with discussion from the audience on the importance of the judiciary in financial markets, the need for transparency in family businesses, the impact of reforms in Arab economies and the current measures to attract FDI. Azzam cited the Dubai International Financial Exchange as an example of what other Arab countries should emulate in terms of creating sophisticated financial markets for regional and international players. “Capital always goes to where the rules of the game are clear, which is why Dubai attracts all this money. What is happening is that Arab money is now looking for a place to park and it is in this part of the world.” 

Shihabi, however, noted that this region is not yet a level playing field, with oil providing a cushion for delaying decisions pertaining to serious reforms. On a positive note, he cited the Saudi government’s decision to set up joint ventures with international banks in the 1970s, thereby paving the way for independent capital into the country. This, in turn, is helping to create a transparent banking sector. He also urged commitment to the regional universities. “We need to create a generation of ideas.”