Globalization Challenges in the Middle East: Religious Fundamentalism

By Khalil, Mohamad A.; Surendran, Sunil | Competition Forum, July 1, 2006 | Go to article overview

Globalization Challenges in the Middle East: Religious Fundamentalism


Khalil, Mohamad A., Surendran, Sunil, Competition Forum


EXECUTIVE SUMMARY

This paper examines the impact of terrorism on foreign direct investment (FDI) in the Middle East. While our survey of literature found weak support for the argument that terrorism reduces FDI, we argue that FDI can play an important role in reducing terrorism. We offer solutions to address terrorism and increase FDI in the region.

Keywords: Foreign Direct Investment, Terrorism, Middle East

INTRODUCTION

Globalization requires free movement of economic resources-human, capita), technological, and informational-between nations. Barriers to the free movement of resources such as tariff and non-tariff barriers, and terrorism will reduce global economic efficiency (Gerber, 1999). For example, high tariff on trade will not only reduce the benefits of trade to the exporting countries, but will also limit the benefits of trade to the importing countries (Root, 1999). Exporting countries lose export revenues while importing countries allow less efficient local producers to produce and sell their products at relatively higher prices, reducing the the consumer surplus. Terrorist activities inside a country will also have a similar harmful impact on the economies. While the economic impact of tariff and non-tariff barriers has received attention from researchers, economic impact of terrorism has received less attention until the 911 incident.

In this paper we focus on the Middle East, and the impact of terrorism on foreign direct investment (FDI) in the region. We suggest possible solutions so that the region can enjoy the fruits of economic development. A terrorist group in a country holding businesspersons, diplomats, or tourists hostage sends a signal to rest of the world that this country is dangerous to do business with and to even visit. For example, countries such as the United States and Japan frequently advise their citizens to not travel to countries affected by the threat of terrorism. Consequently, many economies of the Middle East have become victims of the terrorist activities as they frequently appear on restricted travel lists of many countries. One only needs to see the statistics on the tourism industry in Egypt, Jordan, West Bank, Syria, and Morocco during the late 1980s and the early 199Os, or on the direct foreign investment in the region. In spite of the data that the rates of return on investment in the Middle East is the among the highest in the world (MENA Development Report, 2003), the region receives the lowest amount of FDl inflows in the world (Figure 1).

LITERATURE REVIEW

For Thomas Friedman (1999) 'globalization' is inevitable, irreversible, and largely beneficial. It is endorsed by most well known economists, journalists, and politicians. The belief that globalization is good for everybody has powerful institutional support as well. Globalization has created millions of jobs from Malaysia to Mexico and a cornucopia of affordable goods to Western consumers. It has brought phone service to 300 million households in developing countries and a transfer of nearly a trillion dollars from rich countries to poor through equity, bond investments, and commercial loans. "It has helped topple dictators by making information freely available in once-sheltered societies," said Engardo of the Business Week (2000).

And the United Nations officials (1999) agree, "this era of globalization is opening many opportunities for millions of people around the world....We have more wealth and technology-and more commitment to a global community-than ever before." The view that globalization benefits everyone was also expressed by Peter Sutherland (Wichterich, 2000), the director of the General Agreement on Tariffs and Trade, the organization that preceded the WTO. He argued that, "globalization produced only winner, no losers."

Nevertheless, the globalization process is not free of problems. It can be slowed down by many factors such as terrorism, as well as from the groups who feel that the globalization processes hurt them culturally and economically. …

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