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Wed 23 Mar 2011 12:00 AM

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Regime change

Risk aversion and the cost of doing business in risky markets

Regime change
Regime change

When the dust settles on the current political unrest, contractors and developers will be looking at a jumbled up playing field here in the MENA region. As always, those able to spot the best openings and opportunities will be likely to reap great rewards. But more importantly, it will be more about knowing when the time is right to enter and how to deal and operate in these markets.

In investment theory, diversification is a method for minimising risks. Applying it to business strategy, contractors and developers spread their risks by entering a number of different markets, despite some being risky, unstable and with costs of doing business being high.

They say fortune favours the bold. Yet there is a point when boldness becomes plain stupidity. The tricky part is to know where this point is! Put simply, for a company’s portfolio of projects to be profitable requires the ability to calculate the risk premium correctly. The cost-benefit analyses of projects in countries like Egypt, Tunisia and Libya will go through extensive reassessment as to what risks are acceptable when moving forward with new relationships.

Indisputably, corruption and lack of transparency are major stumbling blocks that have held back the economic growth in many of the states experiencing civil unrest. The hope is now that, with the entrenched leadership gone, that the bribery, cronyism and embezzlement which has been a staple of their business environments will be rooted out.

This belief in the power of democracy goes hand-in-hand with capitalism further ensuring transparency and free competition. However, the correlation between democracy and lesser degrees of corruption is neither obvious nor automatic. The impact of democracy could be argued, in some cases, to merely broaden the base for corruption from the concentration of individuals among the political elite.

I am not questioning democracy as an ideology; my point is merely to warn of idealised expectations about sudden and radical improvements in market efficiencies. Similar hyped expectations were placed on Iraq after its democratisation. Remember the former US Secretary of Defense Paul Wolfowitz saying of Iraq in 2003: “We are dealing with a country that can really finance its own reconstruction, and relatively soon.”

Solving the gargantuan challenges now facing much of the MENA region is not only a matter of reforming political and social structures. Solving the employment issue is about the attitude of people on an individual level. In this I can see clear similarities with the unemployment problem faced in the US. After decades of economic dominance, the American people have grown complacent with a sense of entitlement. This is giving them a hard time to adapt to the reality of its workforce having fallen behind in its competitiveness.

I can paradoxically see the same traits of a sense of entitlement and complacency among much of the people in North Africa and its relentless population growth. For instance, during the 30-year reign of Mubarak, the people of Egypt practically doubled itself to 88-million. This population growth has occurred despite the nation’s blatant lack of resources and lack of prospects in its economy. The result is, not surprisingly, a disproportionate number of uneducated young adults without work. Though for different reasons, the US and the MENA region now face a similar challenge in having to create jobs for their masses of unskilled labourers, who are growing increasingly restless.

To quote Thomas Edison, “Restlessness and discontent are the first necessities of progress.” In the meantime, it is probably wise to assume that restlessness and discontent are neither a foundation nor guarantee for progress.

Oscar Wendel is the conference manager for Construction Week.

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