The Game of Changes: The EU, China and the Middle East Investment Vortex

It is the Ramadan, the holy month of fasting, not exactly the best time of the year to engage oneself in analytical exercises. Nonetheless, I found myself doing exactly that on Sunday 12 May 2019 when I attended a lecture organised by the American University in Cairo Middle East Studies Center.

The talk was entitled “What Difference Has the EU-Arab League Summit Made to Relations Between the Europe and the MENA Region?” by ambassador James Moran, also an Associate Senior Fellow at the Centre for European Policy Studies, Brussels. (Dr. Moran was introduced by Robert Mason, Associate Professor and the head of the Middle East Studies Center). I almost didn’t go. A friend pestered me to risk it and I’m glad to say it was well worth the effort!

 The Mediterranean Reloaded

Ambassador Moran began by explaining that a prominent member of the European parliament was head over heels when the Arab Spring happened, thinking that they’d be waving EU flags in no time at all in Tahrir Square and that the Arab states would sign up to join the EU. This overly optimistic view was premised on the notion of the EU as a ‘beacon’ for democracy to the region.

I thought only Americans had such fanciful notions, the whole city-on-the-hill syndrome. Be that as it may, it helps explain the current defensive position taken by many Europeans against the Arab world, in the wake of what happened to the Arab Spring, with the influx of migrants escaping war-torn Syria and Libya, and the wave of terrorism usher in by ISIS and its affiliates. Still, explained the ambassador, not everyone in Europe took such a negative effort and there were concerted attempts to counter the rising tide of extreme right-wing populism that has taken advantage of this set of pensive post-Arab Spring  attitudes and try, one again, to resurrect the dream of a Mediterranean union between Europe and the Arab world.

These may seem like pipe dreams to us but, explained ambassador Moran, these are the only viable options on offer, if the Arab countries wanted to develop economically. The key to sustainable development is investment, in the form of foreign direct investment (FDI) (not portfolio investment) and finance, partnerships and technical aid targeted at small and medium-sized enterprises. Seventy per cent of FDI in Egypt, he said, was from Europe. There are other countries vying to invest in our part of the world but none are viable competitors – Turkey, Russia, even the United States – with the possible exception of China. Although he had the impression that China was concerned with Egypt and the Middle East as a consumer market,  that may be changing and long term productive investments might not be far off. Nonetheless, he insisted, Europe was better positioned for this kind of thing, specifically as regards small and medium enterprises (SMEs). The only banks concerned with helping these guys out, in Egypt at least, are European and Gulf Arab banks, and coordination between the two would spell success, he explained.

There is also the issue of humanitarian aid and cooperation with local civil society groups, something Europe is better predisposed towards doing. Not to forget scuttling the so-called deal of the century pushed by Trump and Kushner – or is that the other way around? He insisted that eight European capitals recognise Palestinian statehood, and the British parliament recognised it in 2014.

He finished off by arguing that the EU still had tremendous soft power appeal to the Arab world, as an excellent location for education and, interestingly, a place that can attract Arab scientists and researchers. (Is there a shortage in ‘thinking’ people in Europe in addition to wage-laborours?!)

 The Profession of Political Ping Pong

A good and successful lecture by all means. Then things got even better when the audience started leveling the questions. They almost brought the house down. Two Chinese students asked about Arab economic integration and if Europe was keen on promoting that along with its commitment to sustainable development. An Egyptian in the audience asked about China’s geopolitical ambitions behind its economic moves in the region. A Sudanese asked about the EU position on what’s going on in Algeria and, of course, Sudan.

For my part, I asked about Egypt’s 2030 sustainable development strategy, on account of ambassador’s remarks about the critical role of FDI. Ambassador Moran insisted that the EU supported economic integration, seeing it as the road to continuous prosperity, as the European experience amply demonstrated. He admitted that some of this economic fracturing was the result of the colonial heritage bequeathed from Europe to the Arabs but explained that the EU had endorsed economic integration in the region via the Agadir Agreement which ushered in the Arab-Mediterranean Free Trade Area, encompassing Jordan, Egypt, Tunisia, Morocco and the EU. Morocco specifically was a successful test case in free trade relations with the EU but without will power from the Arab member states and the Arab League at large, integration would not take root. All the Europeans could do was advise. Will power had to come from the signatory nations themselves.

As for China he said he was optimistic about Chinese economic intentions and didn’t suspect them of anything underhand. He sad this based on his own experience of negotiations with the Chinese while working in the EU. When it came to economic moves what worried him, however, was the Trump administration and its protectionism. It was the single greatest threat to the open international economy, whereas China was the greatest beneficiary of the WTO. On the topic of Arab economic integration he explained that the Arab world was the least economically integrated region in the world, something that has left Europeans bewildered. They all have the same language, religion, culture, history, so why aren’t they trading with each other?!

On Algeria, he explained that the French were the most optimistic and also, obviously, they were the main Europeans who had a stake in what was going on there. An optimistic view from the whole of Europe would certainly be a good thing. The problem was that it wasn’t clear how far the military was willing to make concessions and how persistent the protestors would be. Thankfully not a single drop of blood had been shed the whole time, but nobody knew how long this benign situation would last. The same went for Sudan, cautioning that the situation there was more delicately balanced and capable of erupting.

Concerning Egypt 2030 the ambassador explained that he was not the right person to speak on this topic because he was not directly involved in projects supporting it, such as the European Investment Bank and European Bank for Reconstruction and Development. They were actively involved in the solar power and energy efficiency projects that were part and parcel of Vision 2030.

The Hazy Horizon Ahead

While I would like to say that I am optimistic about the prospects for EU-Arab cooperation and that this would be a driver of sustainable development, the truth is that I am not. There are several reasons for this. One is the problem of economic integration, alluded to above. I will take ambassador Moran’s word for it that the EU wants economic integration and that individual European countries do not want to play off the Arab states against each other, but vested interest groups in Arabic countries are not keen on opening up their borders to rival Arab businessmen. I would add that state actors in many Arab countries are also keen on monopolising transactions with the outside world, and specifically with the former colonial powers.

Second, there was mind-boggling lecture by housing and urban development expert David Sims, also at the AUC. (“The Distorting Luxury of Infinite Space”, Alternative Policy Solutions, 31 March 2019). Sims explained that the dilemma facing investors in Egypt was a lack of deepening. That is, for FDI to take root and boost production and start employing larger numbers of people, you need local linkages in the form of – you guessed it – SMEs. There’s lots of land that’s being offered up for SMEs but no soft loans from the national banks and, more important still, no streamlining in the bureaucratic procedures for licensing. An equally daunting problem is the geographical distribution of the investment map. You have industrial cities and zones built far, far away from the population centres, and lousy means of transportation between the two. People end up spending what little money they make on transportation, which discourages them from taking up jobs in these far flung places to begin with, creating labour shortages (especially in skilled labour) and multiplying transportation costs for local manufacturers as well.

This feeds back into the investment process and, amazingly, small manufacturers decide to employ capital-intensive techniques instead of employ more people. So even if you get FDI, it doesn’t generate many jobs and has a minimal effect on genuine growth, let alone ameliorating the income gaps between rich and poor and rich and middle class.

The devil’s always in the details, and the same goes for solar power and energy efficiency, I’m sad to say. As I have argued elsewhere, renewables will not work economically unless you measure the amount of renewable energy generated and consumed on the national grid. And that means the government issuing ‘smart meters’. Energy efficiency is a safer bet, with LED lamps and solar water heaters, but even here there are problems; focusing too much on the consumer and not on the electricity provider. And without energy efficiency considerations and technology put in first, solar power and other renewable can’t make the impact that’s called for.

So, not an entirely rosy picture ahead, as you can see. Let’s hope Vision 2030 can fix these problems once and for all. If Europe is the only place that can provide technical help for Egyptian SMEs then I don’t think linking up with China’s Belt and Road Initiative (BRI) will help us out much in that regard. If the Chinese are keen on Arab economic integration, then that is another matter entirely. I would wager the Chinese are keen on that given that they want a uniform economic bloc both as consumers and producers of Chinese goods in a massive supply chain extending westwards from China to Iran to Saudi Arabia to Egypt and Sudan. (For a time it was argued that Turkey could pull the Arabs into a single trade area, an idea I’m still open to, but given the economic and political problems in Turkey today, China is a safer bet. I suspect the Chinese are following in the steps of the Japanese here, since Japan was able to shelter exports against protectionism and the overvalued Yen through manufacturing abroad. And it’s not like the Americans are going to buy any more Chinese goods since the 2008 financial crisis). You still need technical aid for Egyptian SMEs, though, if Chinese investments are to take root and have the desired effect which means involving the Europeans all over again.

One last thing to say before signingoff. The Chinese are keen on hooking Israel into this system but that may not be wise either politically or economically. The Arabs have to get their act together in that regard, but so do the Europeans.

Ambassador Moran himself recounted how a Palestinian student, in Jordan, asked when Europe would have its own single army and then correct all the wrongs that European powers had done in the region. I would wager the Chinese are keen to push their economic agenda whomever wins out in the end, the Israelis or the Palestinians, but we have to tilt the balance of economic and geopolitical interests in our favor as otherwise there will be hell to pay. And the first place to begin that process, diplomatically speaking, is in Europe.

But it will have to wait till after Ramadan!!

(The author is a Cairo-based political analyst, and a contributing editor with The Levant, where an edited version of this article appeared)

Aditi Bhaduri

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