MENA Class 101: A guide for doing business in the MENA Region

By Fábio Amaral Figueira & Mostafa Elfar

I. Introduction

Being the third destination for Brazilian exports – after the United States and China – on a global level, the countries in the Middle East and North Africa region (“MENA Re-gion” or “Region”), deserve a reconsideration from Brazilian traders and investors. The links between Brazil and the MENA Region are deeper than just the heritage of Lebanese and Syrian immigrants reaching Brazil early in the 20th century. This article represents a useful preliminary guide on the cultural, social, political, and economic for Brazilians in-terested in trading and investing with the MENA Region or any of its countries. It sheds some light on the similarities, differences, and peculiarities of the MENA Region and its countries.

The article is split into three sections addressing the following: Section II. provides a high-level overview of the MENA Region’s geographical location. Section III. digs deeper to deal with the cultural and social homogeneity between countries and populations consti-tuting the MENA Region. Section IV. provides an overview on political distinctions be-tween countries of the MENA Region. Section V. is dedicated to addressing the economic features of the different economies in MENA. Noting that the business interest in draft-ing this article, Section V. might be considered the main section of this article.

II. Geographical location: What is the MENA Region?

On the geographical side, defining the MENA Region and creating a definitive list of its countries is not an easy task. Scholars in fields of geography and geopolitics refer to the Middle East and North Africa as the MENA Region. Although there is no list of countries composing the MENA Region, scholars use differing criteria to assess homogeneity and delineate (e.g., religion, language, heritage) those falling MENA Region. However, these criteria vary across scholars resulting in different conclusions and geographical (1) formulations of the Region. Some scholars argue the Region should encompass either Turkey or Iran, if not both.

In fact, the consensus of international institutions and geography and geopolitics scholars considers the MENA Region as spreading from Morocco in the north west of Africa to Iraq in the mid-west of Asia. It is possible to conclude that MENA Region largely coin-cides with the Arab World as it includes most of the 22 members of the League of Arab States (“LAS”). The ease of gathering the MENA Region in the LAS comes as a proof of the homogeneity between countries in the MENA. This facilitated establishing the LAS in March 1945, which is earlier than the United Nations itself.

(1) https://www.chathamhouse.org/sites/default/files/publica-tions/ia/INTA93_4_01_Del%20Sarto.pdf P. 769.

III. Cultural and social homogeneity between countries and popula-tions in MENA Region

When addressing homogeneity among countries constituting the MENA Region, the cul-tural and social factors directly come first to mind. The homogeneity can be assessed based on language, religion, and history. By benchmarking the same parameters on the MENA Region, it will be easy to identify the undeniable cultural and social homogeneity between the countries of the MENA Region. This homogeneity is justifiable for several reasons including:

1. a common language is crucial in creating any nation’s background and heritage, and with Arabic being the largely written and spoken language across the Region – though with varying dialects and accents – the cultural and social homogeneity is a definite outcome;
2. Islam started around 1500 years ago in the Arabian Peninsula. From then, it spread throughout MENA to have nowadays, its followers creating the largest religious group in the Region. It goes without saying that adopting Islam in MENA has influenced widely the cultural and social homogeneity among MENA’s popula-tions; and
3. prior to establishing modern nation states(2), MENA countries have been largely under the rule of the Islamic Caliphate followed by the Ottoman Empire with undefined borders.

(2) https://www.bbc.com/news/world-middle-east-15747941

IV. Political distinctions between countries in MENA Region

When drawing political distinctions between the countries in the MENA Region, several differences can be identified. However, for the purposes of this overview article, the plan is to group the political distinctions between countries in MENA under three categories: (a) monarchies vs. republics; (b) unstable vs. stable; and (c) those with civil wars or internal armed conflicts.

IV.A Monarchies vs. republics

The first factor creating a political distinction between countries in MENA region is the constitutional nature of the political system. These differences date back to the times of establishing the modern nation states in the MENA Region after World War II. Ending up as a monarchy or a republic was influenced by decolonization struggles. The tougher the resistance to colonial powers (e.g., France and the United Kingdom), the higher prob-ability to create a republic after declaring independence. This is verified for example in the cases of Algeria, Iraq, Syria, and Egypt.

On the monarchical side, MENA countries with monarchical system of power are mainly the members of the Gulf Cooperation Council (“GCC”) including Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Oman, and Bahrain. Additionally, Jordan and Morocco are the two additional monarchies in the MENA Region. A peculiar difference between the GCC monarchies and those of Jordan and Morocco is the empowerment of representa-tive democracy. While Jordan’s and Morocco’s monarchical systems qualify as constitu-tional monarchies with elected representatives (like Western monarchies), GCC’s mon-archies maintain their traditional nature in the presence of consultative councils.

IV.B Political turmoil vs. political stability

One of the most common characteristics of the MENA Region’s republics is the lack of political stability. Without going much in history from 2011 to date, it is simple to witness several waves of political turmoil and unrests within the same republic. To begin with the Arab Spring of 2011, Tunisia and Egypt were leading the scene of instability after wide-spread protests forcing the respective presidents to step down within weeks of unrest. A similar situation was featured again in Egypt in 2013 and in Algeria and Sudan in 2019.

On the other hand, there are republics with chronic political turmoil as in the case of Iraq and Lebanon. The ethnic-based and party-quota political systems of these countries are an obstacle to attaining politically stable regimes. The ongoing disputes between the local political factions often delays appointing and agreeing on the top public officials as for example the president in Lebanon or the prime minister in Iraq.

IV.C Civil wars or internal armed conflicts

The last category includes countries, which their political turmoil has developed to create ravaging civil wars and internal armed conflicts. The internationally prominent example is the nine-years ongoing civil war in Syria. In 2011, the peacefully starting protests were directly turned into an armed conflict and a civil war resulting in a mass destruction of Syria and its economy. Also, the absence of a permanent cease fire delays the reconstruc-tion of the economy.

Other examples of civil wars and internal armed conflicts are in Yemen and in Libya. In Yemen, since 2015, the internationally recognized government was evicted from power by a group of rebels and up until now no political settlement agreements have been con-cluded regardless of all diplomatic efforts and missions. Similarly, and after toppling the regime of Gaddafi, Libya has entered an era of political chaos that developed to a civil war between the eastern and western sides of the country.

V. Features of different economies in MENA Region

Not that the above sections are irrelevant, but for a Brazilian investor and/or trader the features of the different economies in the MENA Region can be of more important when considering for example, a change in their supply chains or a relocation of a productive facility to an economy in the MENA Region. Besides the above-mentioned political sta-bility, the economic characteristics that will be addressed in the next subsections are: (a) being a rentier economy; (b) integrated in global economy in terms of trade and invest-ments; (c) market size and financial capacities; and (d) abundance of labour force.

V.A Being a rentier economy and dependent on oil

A stereotypical feature of economies in MENA Region is to be oil-dependent in terms of economic activity (i.e., GDP) and government revenue-creation. This is true for the GCC economies, Algeria, and Iraq which all to an extent or another depend on oil ex-ploration, exploitation, and production being the leaders of national economic activity.

These economies and their financials came under severe pressures due to declines in oil prices since 2014. Thus, a set of them has engaged in extensive efforts to diversify their economic activity away from oil production. A successful live example is the United Arab Emirates, and specifically Dubai. Due to its lack of oil resources in comparison to Abu Dhabi, the policymakers in Dubai had no choice other than opening doors for investors in services. Dubai focused on liberalizing its financial, transportation, and logistics mar-kets turning the emirate to the main financial and trading hub in the MENA Region. Another example in the making is Saudi Arabia through its of 2030, which aims to diver-sify Saudi Arabia’s economy and to localize foreign industries in Saudi Arabia through entering in joint ventures with international groups. The pace of diversification differs between these economies, however, sooner or later, a full-speed diversification of the economy will be a must and will not be a matter of choice for policymakers.

Other economies in the MENA Region can have limited oil resources that suffice for the purposes of domestic consumption. In this category falls the Egyptian economy, which has a mix of economic activities including tourism, construction, agriculture, besides ex-porting and importing petroleum products. This mix excludes Egypt from the category of oil-dependent economies. Morocco’s economy seems in a position like Egypt.

V.B Integration in global economy in terms of trade and investment

The economies of the MENA Region are integrated in the global economy at varying extents. In the MENA Region, as mentioned under section V.A., the policymakers – of an on oil-dependent – are of a position against engaging in bilateral investment treaties (“BITs”) that encourage investment flows between economies. The basic justification is that the oil is a precious resource that foreign investors will seek to exploit regardless of the: (a) granted protections under BITs; or (b) investment climate in the host state (e.g., GCC economies). Considering this economic nature, the oil-dependent economies tend to less integrate in the global economy.

The United Arab Emirates, and Dubai come as an exception to the GCC economies. To become the financial and trading hub of the MENA Region required a deep integration of the UAE’s economy in the global economy. Evidences of integration are like the wide treaty networks concluded by the UAE including free trade agreements, double tax trea-ties (“DTTs”), and BITs. This includes for example the under negotiation DTT between Brazil and the UAE. Hence, Dubai is usually qualified as the main gateway to invest not only in the MENA Region but even generally in Africa.

With respect to non-oil dependent economies, and considering their interest in attracting foreign investments, these economies consider BITs and free trade agreements with their partners to facilitate trade and inflows of investments. To boost the chances of domestic economic development, these economies are pressured to: (a) integrate in global econ-omy by concluding BITs and free trade agreements; and (b) grant protections so to stim-ulate foreign investors. Apart from BITs and DTTs, on the domestic side, these econo-mies periodically introduce domestic investment laws prescribing guarantees and protec-tions to investors, as well as tax breaks and incentives. Due to these efforts on the inter-national and domestic levels, these economies tend to receive inflows of industrial and service-related investments. Examples of these MENA economies include Egypt, Jordan, and Morocco.

V.C Market size, financial capacities, and labour force

Considering the cultural and social homogeneity between the MENA Region’s popula-tion, and a total MENA Region population of around 400 million, the Region represents an opportunity for any Brazilian trader and investor. By excluding the economies expe-riencing political difficulties as in sections IV.B and IV.C, the market size of the politically stable MENA economies is massive especially with the Egyptian market that has a pop-ulation of more than 100 million.

Apart from the market size, another important factor in assessing MENA as a potential fruitful destination for engaging in trade is the financial capacity of the Region’s inhabit-ants. With specific reference to GCC economies, the limited poverty rates, and the prom-inent presence of high net worth individuals are motivations for traders to access these markets and exploit the willingness to spend of the GCC residents.

Finally, the abundance of a skilled labour force. With such population size, it comes with no surprise that the MENA Region has a skilled labour force. The levels of skills differ from an economy to another depending on the educational systems and the number of school and university graduates. In all cases, and considering the cultural and social ho-mogeneities, the MENA Region has high rates of cross-border migration between its economies. This allows economies in shortage to easily close any gaps in skilful labour. Accordingly, if a Brazilian investor has an interest in developing a project in a MENA jurisdiction, and provided that this jurisdiction does not have locally the necessary skills, it is an easy practice to sponsor the hiring of another MENA economy’s national. 

VI. Conclusion

To conclude, the article aims to take the reader by the hand in an overview of the MENA Region and its distinctive characteristics and similarities. The brief overview covers the geographical, cultural and social, political, and economic aspects of the MENA Region. After understanding the geographical framework of the MENA Region, the article ad-dresses the cultural and social homogeneities between the Region’s populations. The role played by the common language, the majority Muslim populations, and the Caliphate and Ottoman rule came as reasons for creating a homogenous bloc of populations inhabiting the Region.

On the political scene, there are significant differences between the MENA countries in terms of their constitutional systems, but more importantly in terms of political stability. To a large extent, each of the countries in the MENA Region (except for the GCC) has experienced a period of political turmoil – if not a civil war – in the last ten years. Some of these countries have succeeded in restoring stability, while others are still struggling. From an economic viewpoint, the MENA Region represents an economic opportunity for Brazilian traders and investors due to its integration to a large extent into the global economy, its market size and abundance of skilled labour, and considering its ongoing plans of diversifying the economic activities.

For more information you can contact :

Fábio Amaral Figueira

fabio.figueira@veirano.com.br

www.veirano.com.br

Mostafa Elfar

Mostafa.elfar@belex.com

https://www.belex.com/