Osama bin Laden required a dry tinderbox to ignite a world conflagration. The surest method to dampen things is to find better jobs for would-be terrorists.

A good way to find out what's wrong with the economies of the Middle East is to go to Jersey City, New Jersey, across the Hudson River from the World Trade Center. There you'll find plenty of Middle Easterners who planted their entrepreneurial seeds in a turf a lot more fertile than that found back home.

Their common concerns? Economies in the Middle East are only as good as the cost of doing business there. Those company costs are much higher than in the U.S. All it takes is $150 here to make a corporation, a couple of thousand to rent office space and a couple of thousand for bond. In the Middle East, it costs a few hundred thousand dollars for a license to begin the same business. Forget about renting an office. Fifty-year-old rent controls have dried up the market. "Nobody wants to rent an office to someone for $200 a year. So if you want to start a business, you have to buy a building, or an apartment.

The catalog of woes is much longer, but you get the picture: lots of red tape and corruption; plenty of dormant capital and not enough access to it. Take Syria as an example. Syrian business has hardly changed in 30 years: some additional fat cats and the rest state-owned enterprises.

Of course, entrepreneurs face similar obstacles in other parts of the world. But the problem is more urgent in the Middle East. Because of a baby boom in the 1970s and 1980s, the region has a demographic bulge, with lots of young and educated people entering the labor market--but finding no work. The region's labor force is growing by 3% to 4% a year, the fastest rate of increase in the world. Living standards have stagnated for the past 20 years, causing incomes in the region to fall further behind East Asia and the West.

This is the tinderbox that Osama bin Laden ignited and that other Arab dictators the likes of Saddam, Bashar, Husni, Muammar and Yasser control.

"When governments in the Middle East talk about nation-building, they should be talking about market-building. Markets are the main tool of economic empowerment for the disenfranchised whose numbers are growing at an extremely rapid rate.

In the past the region's governments would have "solved" the problem by employing the new entrants themselves. But they can no longer afford to do so. They can try to blame it on declines in the price of oil, but if they had adopted better policies this would not pose a problem. The fact is that their economies don't work, and the best way to fix them is to create a framework in which entrepreneurs can build businesses that will employ the millions who don't have jobs.

So the Arab young entrepreneur of today worries about getting financed, and the financier worries about the enforceability of contracts.

The banking system isn't much better. There's an almost total absence of competition among the banks, thus little incentive to lend to small businesses. To get a loan at all from a bank, you almost always have to pay a bribe.

It was not always this way. In the 16th century, when it was at its strongest, the Ottoman Empire came within spitting distance of Vienna, its power fueled by superior technology and a strong merchant class. Islam had a lot going for it, economically. The prophet Mohammed was himself a trader, plying between Jerusalem and Mecca. Collecting interest is forbidden by the Koran, but "the idea of being an entrepreneur and taking money and turning it around for profit is deeply rooted in the religion”.

So were the early Islamic businessmen and financiers of the 16^th century practicing some kind of venture capitalism; and how does the Islamic finance industry compare to today’s venture capital industry?

Islamic investment funds are a recent phenomenon that started with the founding of the Islamic Development Bank (IDB) in the early 1960s.   Since the 1970s, as the affluence of the Islamic world increased, the growth Islamic financial industry has greatly outpaced its secular counterparts.  Today it is estimated that assets under management at Islamic institutions has reached $230 billion, and is growing at the rate of 15% per year.  This growth accelerated after September 11^th, 2001, as Islamic investors withdrew their funds from Western banks, most notably American ones.

The rapid growth Islamic finance practices has led to the development of many innovative Shariah-compliant financial products, such as mortgages, instalment purchase plans, public company mutual funds, leasing programs, working capital financing, and insurance.  To date, however, Islamic private equity activity has primarily been limited to infrastructure development funds. Islamic investors wishing to participate in Western-style venture capital funds have few if any halal options. 

 The basic tenets of Shariah however, as they apply to finance, are entirely consistent with the practice of for-profit private equity investing in the developed world.  As a result, a private equity fund can be halal without deviating significantly from standard industry practice, and without harming its potential returns.  The most significant changes that have to be made are the elimination of financial interest and of non-socially-conscious businesses from the investment portfolio.

Which brings us to the point: Islamic investment funds of today have an opportunity of seismic proportion they could capitalize on if they played their cards right and allocated more capital to the “private equity” asset class.

This could not only reverse the “brain drain” that the Arab world has been witnessing over the last decades but could also empower Arab entrepreneurs to build their own businesses and create a true “democratization of capital” revolution throughout the region.

Powerful new financial technologies were developed in the 1960s, widely tested in the 1970s, and increasingly deployed throughout the '80s and '90s, allowing thousands of American companies access to the financial capital that helped fuel their growth. The multiplier effect of these financial techniques produced an unprecedented economic boom over the past 20 years.

Other parts of the world didn't adopt the new methods because their financial assets remained under the control of relatively few financial institutions — institutions that generally held large ownership positions in existing businesses. When you own major stakes in a country's largest businesses, you have little incentive to invest in new businesses that will compete with your established portfolio. Another factor inhibiting growth outside the United States was a relative lack of both financial transparency and consistent regulatory standards. The absence of these structures has tended to slow any move to the kind of market-based economy we've enjoyed in the United States. As a result, much of the world has failed to create jobs or broad-based prosperity.

Just as it has in the United States, the worldwide “democratization of capital” will democratize industrial assets and produce an explosion of job creation. But the capital revolution, which so changed America in the last third of the 20th century, is only the prelude to the other two major revolutions of the 21st century — the worldwide democratization of health care and of knowledge. These three revolutions, each aided by emerging technology, provide hope that the 21st century will be able to avoid the terrible conflicts of the past hundred years and become a new Age of Enlightenment.

At a time when dictatorships are on the retreat, we can hope for more than program reflecting short term traditional Arab business interests. Democracy is the ultimate issue at stake in the Middle East. Doing everything possible to bolster the Arab world's struggling civil society can be a low-cost, incremental strategy for the Arab and American financiers of today if handled by able, committed, and imaginative creativity.

© Copyright 1997-2004 United States Committee For A Free Lebanon. All rights reserved.

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