Five Key Factors

by Luca Rossi

Luca Rossi
Managing Partner
A.T. Kearney

With the collapse of barriers, the balance among the sides of the world changes as well the economic, political, social and cultural weight of each part. The Old Continent is getting old quickly; some say it is a dying continent. The emerging economies undermine the historical supremacy of the U.S.A. Cross-border investments follow new routes, such as that connecting China with Africa. Qualified human resources emigrate from the developing world, while the regions of the Fourth World, although suffering from a structural lag, begin to claim a role in the global scenario. The world is riding out with difficulty from one of the deepest recessions in modern economic history. Our analysis shows a consensus towards an improvement in the near future but also a nebulous and uneven medium term. The economic recovery is imminent; it cannot be otherwise given governments and central banks’ effort all over the world. However, we are not out of danger yet: a dull personal consumption, a not fully recovered banking system, inflation risks, the volatility of exchange rates, and the danger of a “Chinese bubble” in a country where banks have lent 25% of GDP. Over the hump, the long-term expectations almost unanimously point towards a positive development.
In this context, the development of Africa and the countries bordering the Mediterranean is a top priority. The progressive coming closer of different economies and cultures is a fundamental characteristic of the Mediterranean basin, which has always been closely related, although consisting of very different situations. No forecast of development in this region is possible without an outlook on the factors that influence the development of the global business environment.

The demographic trend.
A demographic turn-around is occurring in areas generally characterized by a high birth rate, first of all in Africa, where the number of children per woman fell from 6.72 to 4.97. Countries such as Tunisia, Turkey and some Gulf states have fallen below the threshold of stability (2.1), while Algeria and Morocco will reach the threshold soon. The least developed countries of the Mediterranean basing are also facing the gradual lengthening of life: in 2047 people over 60 will outnumber the under 15 worldwide. In 2050 there will be 9 billion people: the shortage of natural resources will become more pressing. In finding new solutions, the development of the Mediterranean area and Africa, as well their potential as producers and consumers, are crucial.

The basic resources: food, water and health.
Accustomed to depend on oil, the world finds it is difficult to consider the production of cereals or the access to water as essential variables. We are losing farmland at a rapid pace, and yet in 2030 we will consume 60% more of agricultural products. There will be a need to produce more food in less space by increasing the use of fertilizers and water. In this process, the development policies carried out by the countries bordering the Mediterranean and the partnerships with international investors will be of great importance. The scarcity of drinking water will increasingly affect business decisions and the location of production facilities. The conditions of the poorest areas in the world are closely related to the shortage of water, which is the most important factor in the development of a region: 64 countries are still below the minimum threshold of per capita health spending. Many of them are in the heart of Africa.

The development of sub-Saharan Africa.
However, the underdeveloped part of the African continent is little by little becoming a credible partner for the neighbours in the Maghreb and the Near East and the Western world in the second place. The figures show a boom decade; the growth rates stood at 5% until the recession and they are expected to go up in 2010; 29 billion dollars of foreign investment in 2008 (less than seven in 2000); the productivity in the textile industry is about 80-90% of the Chinese counterparts, a much lower cost; mobile telephony increased by 40%; growth in crude oil production, a sector in which Italy is one of the major partners of the continent; since 2000, schooling rate rose from 58% to 74% in eight years. Over the next decade, a better educated, numerous and more integrated labour force will emigrate from this area where 64% of workers earn 1.25 dollar per day and life expectancy is less than fifty years. Population growth, agricultural changes, as well as good governance will be fundamental in this process.

The influence of China.
With regard to the relations with the Mediterranean region, it should be stressed that China is intensifying investment and speculation. China has huge and widespread interests throughout Africa. In the Maghreb, China’s interests focus on trade, construction and import of oil, agricultural products and agreements on the supply of infrastructure, from construction to telecommunications. The country has recently opened five Exclusive Economic Zones (EEZ) in many African countries including Egypt, which is China’s first commercial partner with an investment of 2.5 billion dollars.

The explosion of the middle class.
Not only is it essential to forecast the GDP growth rate, but it is also important to analyze the income group distribution. The middle class, which can save and buy consumer goods, amounts to 1.8 billion people (6% of which is in the Middle East and North Africa) and it is rapidly increasing worldwide in the countries characterized by high rate of economic development, including many overlooking the Mediterranean. In the near future, millions of people will shape the patterns of consumption and increase its volume up to outweigh the West.
With regard to the Mediterranean countries (in Europe, Africa or the Near East), it is necessary to consider that consumption may be affected by religious affiliation. The Muslim population and its purchasing power are growing steadily: consisting of approximately 2 billion people, the market for Sharia-compliant products was worth 2 trillion dollars in 2006 and it is rapidly is going up. Although not uniformly and to the same extent, the Islam influences the diet, lifestyle as well as the rules of finance. The companies and banks that turn to Islam finance must learn how to know it and understand its delicate shades, without confusing its religious affiliation with the geographic position of the Arab world. The Sharia influences the entire value chain, from research and development to distribution, in particular: food and drink (in this sector, the sales of Nestle, world’s largest producer of halal food, are worth 5% of its total sales), finance, clothing, cosmetics and pharmaceuticals. Islam is the fastest growing religious community in the world and the business opportunities are huge. One example will suffice to explain this point. Satellite channels in Arabic are rapidly growing and advertising is possible at a very affordable price.
In the near future, many MENA countries (Middle East and North Africa) will contribute significantly to the recovery in consumption, which is essential to ride out the global economic stagnation: Gulf State such as Kuwait, Saudi Arabia and the UAE, as well as Tunisia, Egypt, Morocco, Algeria and Turkey (the latter is at the top of the ranking on future global economic driving force).
The European Union, in the effort to create an increasingly strong, cohesive and extensive cooperation beyond the national policies, is working under the pressure of a nationalist wave affecting its founders such as Germany. A further challenge for EU’s southern countries is playing the role of “hinge” between Europe, North Africa and the Mediterranean basin, of which they are an essential part. The role of Italy, in cooperation with other European countries, is essential in the search for further development and cooperation opportunities with other countries in the area. Despite the political problems of the Middle East and today’s global recession, the spirit of the Barcelona Process of 1995 is proceeding and strengthening. The objectives of the Union for the Mediterranean, which grew out of the Barcelona Process, are crystal clear and more relevant than ever. The European response to the problem of migration flows managing is a combination of far-sighted policies, political openness and partnership. Such policies can only be encouraged. Thanks to the positive prospects of energy (including Renewables), infrastructure and trade development, the Euro-Mediterranean cooperation is an important development opportunity for the industrial fabric of our country, for the benefit of large Italian companies long operating in the Mediterranean as well as our most innovative and proactive SMEs.