LONDON, 26 August — An informal Arab boycott of American goods ostensibly in protest against Washington’s obsessive pro-Israeli and anti-Palestinian policy, and primarily orchestrated by the housewives and mothers from Riyadh, Amman, to Bahrain and Cairo, has been under way for some months now. At the same time, there have been conflicting calls for repatriation of Arab private funds invested in the US, and those warning against any such impulsive and arguably ineffectual moves.
Some unsubstantiated reports even suggest that already $200 billion of Arab private capital (out of a supposedly $750 billion to $1 trillion) has taken flight out of the US either in protest or to pre-empt any freezing of such capital by an over-zealous and perceivedly anti-Arab Bush administration.
Some Saudi businessmen and analysts are even calling for a new export diversification strategy aimed by implication at reducing dependence on exports markets in the US, the UK and other European countries. How realistic are these developments?
Remember the Arab Boycott Office of Israel, Sanctions against Ian Smith’s Rhodesia; and against apartheid South Africa.
They all started off with great enthusiasm in particular by their strongest and usually economically most non-influential proponents. Within a year or two cracks started to appear — either the boycott or sanctions regimes were arbitrarily revised and confined to non-military and ‘non-repressive’ goods; or through the introduction of enabling legislation which made it illegal for companies to boycott trade with a particular country on the grounds of say the Arab Boycott of Israel as happened in the US and the UK; or for reasons of petty nationalisms; or sheer economic greed.
In the case of Israel, the Arab boycott, it can be argued, drove the US and the UK closer to the Jewish cause because it added a powerful new dimension to the activities of the Pro-Zionist lobbies and organizations such as AIPAC (America Israel Public Affairs Committee) in Washington.
It allowed them to campaign for and thereby influence specific acts of legislation more to do with American foreign policy and trade rather than the national interest or security.
Herein also lies the antecedents of the spate of legislation post-9/11 — those dealing with anti-money laundering measures, with compliance, with national security, with the fight against international terrorism — whose implementation is perceived to be weighted against Arabs and Muslims. The Arab boycott of Israel, some analysts argued, would have been far more effective had it been informal, rather than arbitrarily requiring all foreign companies dealing with the Arab countries to sever economic relations with Israel.
Arab relations in general with the US is essentially dichotomous. There is no homogenous Arab entity (although the romantics and nationalists would like to think so) and as such no unified American policy toward the Arab countries. The drivers of US-GCC relations, for example, are fundamentally different to those of US-Egyptian and US-Syrian relations. Even the Palestinian issue is no longer the binding force of a unified Arab foreign policy. Gulf states, for example, essentially are beholden to Washington for their security, yes as it turned out in the case of Kuwait, against aggression by a so-called brother Arab country, Iraq. In exchange, the US demands a stable flow of oil and that Arab countries underwrite their ‘security by proxy’ through the signing of multi-billion dollar defense contracts, tied in ostensibly to offset arrangements which gives the impression that many of the contracts are essentially high-tech but non-defense in nature.
Gulf-US interdependency, as such, is inextricably linked to the demands of US energy needs, Gulf security, the state of the US and European defense industries, and regional geopolitics. Another important component of this interdependency is the linkage of most Gulf currencies to the US dollar and the fact that the single most important commodity on which their economies are overwhelmingly dependent is quoted on the world markets in US dollars. Even in the case of economic diversification such as aluminum in the case of Bahrain and Dubai, these too are quoted in US dollars.
Post-9/11, this interdependency has manifested itself in other ways — that of capital and investment flows, and new compliance rules. While the Americans hold sway over the rubrics of defense strategies and operations, they do not control especially private Gulf capital flows. After all, controlling capital would be inimical to capitalism and the so-called American Dream.
No-one really knows how much Gulf capital is invested in the US. Gulf treasuries will have billions of dollars placed with the IMF (as part of their subscriptions) and have exposure to US government papers ranging from T-bills, bonds and certificates — most of which are locked into medium-to-long-term tenors. Gulf financial institutions also have billions of dollars placed with US counterparts, primarily because they do not have the capacity nor the instruments to absorb such huge amounts of liquidity. As such these banks park short-term funds with the likes of Citigroup, Merrill Lynch, Goldman Sachs, Bank of America, Morgan Stanley, and J.P. Morgan, which effectively become roll-over investments. By the way, most Islamic banks also do this. Private capital flows once again manifests themselves either through accounts in local banks or opening accounts with US banks. Gulf investors, like investors anywhere, would naturally look for the best possible returns according to their respective risk-reward investment strategies.
The US has been a popular venue for Gulf private capital not because Gulf investors overwhelmingly like Americans per se, but because of investment criteria, market performance, returns track record, investment security (although in the light of the Enron and WorldCom scandals this criteria is seriously jeopardized) and recourse.
As such, any repatriation of Gulf funds is most likely to be because of sound investment and economic reasons. The US economy has been hovering into a recession well before 9/11. The US equity markets have virtually been on a free fall for the last two years. US corporate accounting scandals and the ineffectual way the Bush administration has been handling the resultant issues; the bursting of the dotcom bubble; the collapse of various sectors such as technology and the airline sector, have also contributed to bear US market sentiments.
Bankers in London concur that there has been some Arab capital flight from the US, but nowhere near the figures bandied around by the media; and that most of this capital has gone back home rather than to Europe.
Assuming that $200 billion of Saudi private capital did come back, the Saudi banks are not capable of absorbing such huge capital flows. In a globalized world, these funds would merely filter out of the Kingdom and find their way back to the Western banks in the US and Europe.
The fact that there are no truly Arab global banks is a sad reflection of both the poor financial and regulatory planning policy of the region and the lack of vision of Arab banking itself. As one European banker recently stressed, "Arab banking has missed the boat and it is too late for the one or two contenders to go truly global. At best they should be looking at becoming strong regional banks or niche banks." Global banking, he added, requires more vision, skill and expertise, than merely capital. As with most emerging countries, the culture of Arab banking, with one or two notable exceptions, has been essentially devoid of world class and independent research and development; of market liberalization; of effective regulation and supervision; and of market education.
Boycott policies on a bilateral basis can be effective, but only if the whole machinery of the state and government with the support of the people is behind it. Then only if it is well thought out and for a specific duration, essentially to make a point as opposed to damaging the long-term interests of the country.
One such policy is the ‘Look East’ policy of the Mahathir government in Malaysia the 1970s. Malaysian had a dispute with the Thatcher government in the UK over a perceived anti-Malaysian campaign in the British media and over the introduction of full fees for foreign (including Malaysian) students studying at British universities, which sent the cost of studying in the UK soaring.
Dr. Mahathir Mohammed, a stalwart in the fight against British colonial rule in Malaya (as it was then known), ordered Malaysian companies to buy Japanese and South Korean products instead of British. He also introduced a revised education policy which stopped government funding for all first degrees abroad (except in certain cases where courses are not available in Malaysia). As a result the number of Malaysia students funded by the government at UK universities fell drastically. This gave a fillip to local Malaysian university education development.
It took almost a decade for Dr. Mahathir to declare the policy over. Today Malaysians funded by the government tend to do primarily post-graduate and doctoral studies at selected universities abroad. Dr. Mahathir’s policy was successful because of a unity of purpose.
In the Gulf, no sooner had Saudi Foreign Minister Prince Saud Al-Faisal announced that Saudi soil would not be used for the launching of any attack against Iraq, neighboring Qatar was already being prepared for a possible launching pad. No sooner had Dr. Abdul Rahman Al-Zamil, chairman of Al-Zamil Group, called for the repatriation of Saudi funds from the US, Prince Alwaleed ibn Talal was appearing on US TV network shows extolling the virtues of investing in the US and the illogicity of the repatriation calls. No sooner had Ihsan Buhulaiga reportedly stressed that the call for the boycott of US products should not be ignored, Osama Kurdi, secretary general of the Council of Saudi Chambers of Commerce & Industry, was reportedly warning that the boycott would harm Saudi and foreign investors.
While the grassroots of Gulf boycott of US goods will at best make a statement, it cannot possibly be effective on its own. US exports reportedly to the Kingdom for the half-year ending June 2002 dropped 30.5 percent to $2.2 billion — a 12-year low — and US imports from the Kingdom by 24.2 percent to $5.6 billion. But looking at the structure of US-Saudi trade, most of this is accounted for by oil and gas, machinery and equipment, and defense. Consumer goods pale into insignificance because the Kingdom in terms of market size is also minuscule, say compared with India, China, Indonesia, and Brazil. Individual Saudi purchasing power per capita has also fallen drastically over the last few years.
Those who call for export diversification should also consider the structure of the Kingdom’s and the Gulf’s export finance policy. The region is bereft of an export import bank and of an export credit insurance agency. The GCC did commission the Indian Eximbank a few years ago to look at the possibility of setting up a GCC Eximbank. As usual with many GCC initiatives, the vision, the urgency and the political will was absent. Gulf exporters face huge risks in exporting to untried and some established markets without the necessary export credit and insurance cover. These issues merely highlight the complexities of international trade and capital flows. While interdependencies can be specific, the forces of globalization continuously bring new ones to bear.