Reform the key to investment

Dead Sea, Jordan // Arab economies are promising to move towards political reform, steps that may help to entice the return of foreign investment.

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Jordan, Libya and Qatar have indicated moves in the direction of democracy at the regional meeting of the World Economic Forum (WEF) in Jordan's Dead Sea resort.

While economics is usually at the forefront of WEF meetings, regional unrest this year has thrust political reform into the spotlight. Signals of more political openness are going down well with foreign investors.

Political reform was the top priority for US investors, said Elizabeth Littlefield, the president and chief executive of the Overseas Private Investment Corporation (Opic), a US government development finance institution. "Investors require certainty and also clarity and predictability in laws and regulation," she said on the sidelines of the forum.

Lebanon has the most democratic government in the Middle East and North Africa (Mena), with the Palestinian Territories and Iraq the next most liberal entities, according to the Economist Intelligence Unit's Democracy Index. The remainder are more authoritarian.

Filling political vacuums is urgent for Egypt, Tunisia and Libya after the ousting of their leaders. Foreign investors have fled in recent months, exacerbating a funding crunch. Partly as a result, Egypt and Tunisia have a funding gap this year of US$8 billion (Dh29.38bn) to $12bn, the Institute of International Finance estimates.

Mahmoud Jibril, Libya's prime minister, outlined on Saturday a reconciliation process intended to result in elections in eight months to form an interim government.

Demonstrating a link between the level of political reforms and foreign direct investment (FDI) is difficult. However, many economists believe governments that support rule of law and transparency enhance investor confidence.

Historically, Mena has lagged behind other emerging markets as a destination for international capital. In 2009, Mena countries received only 7 per cent of world FDI, compared with 10 per cent in Latin America and nearly twice as much in China, according to the UN Conference on Trade and Development.

Inadequate political systems can push up the cost of securing debt on international capital markets, said Marios Maratheftis, the head of Western Hemisphere research for Standard Chartered.

"Markets want stability," he said on the sidelines of the meeting. "Countries pay a penalty for not having the right institutions, for not having transparency or stability."

Countries that have experienced less unrest or none are also seeking to ease government controls.

In a speech to open the forum, Jordan's King Abdullah II predicted early legislative elections overseen by an independent election commission for Jordan.

"Let's be clear, political reform is economic reform," he said. "For businesses to invest and expand with confidence, they need a predictable, level playing field … transparency and accountability … the rule of law."

Sheikh Hamad bin Jassim bin Jabr Al Thani, Qatar's prime minister, also said the country was moving towards democracy.

UAE citizens last month voted for the second time in the country's history for members of the Federal National Council (FNC).

"Political reform is not a cookie-cutter approach. In the UAE, we are moving and doing it our way, as each country is unique. It's very tough to do reforms in one year," said Abdul Aziz Al Ghurair, the former Speaker of the FNC and the chief executive of Mashreq, in an interview on the sidelines of WEF.

The risk is stark if regional governments fail to move fast enough.

"If the momentum [of the Arab Spring] is not accompanied by real reform in economic and political policies this will turn into feelings of failure, depression which will result in more radicalism and violence," said Yasmin Galal, an Egyptian entrepreneurial activist.

tarnold@thenational.ae