"How much is the Arab world investing in research and development? Much less than the rest of the world. We’re not thinking of our grandchildren or our neighbour’s grandchildren. Investing in the future is key." - Khalid Abdulla-Janahi Chairman of the Executive Committee, Shamil Bank of Bahrain, Switzerland; Vice-Chairman of the Arab Business Council

The unprecedented oil price windfall has led to a sharp rise in liquidity in the Middle East, as well as increased government revenues in oil-producing countries and some budget surpluses. The sharp increase in private equity funds from US$ 400 million in assets under management in 2000 to more than US$ 1 billion today - some reports claim the actual figure is five times that - indicates how much of the region is awash with cash. Unlike the petroleum boom of the 1970s, much of the capital is staying in the region, although some estimate that US$ 800 billion or more of Arab money is invested outside the region (see Box 3).

"In the Middle East," lamented Aladdin Saba, Chairman, Beltone Financial, Egypt, "we have a problem of too much money chasing too few deals."

This should not be the case, but the lack of deals that are attractive to private investors only highlights the shortcomings of a region where there is much that needs to be funded. Indeed, this embarrassment of riches could turn into a tragic shame if the region fails to take full advantage of the oil boom to speed up its global integration and support its transformation - in short, to pay for real structural reform and cushion its pain.

There are three concerns about investing - how to raise capital, where to put it and how to retrieve it along with earnings. The Middle East is deficient in all three aspects. For investors, the entry and exit paths are limited; there is no pan-regional stock exchange of a scale comparable to financial hubs in Europe, North America and Asia. Regional markets lack the disclosure standards and regulatory discipline afforded by world-class financial centres such as New York and London. Even public companies are unwilling or unable to provide adequate and reliable information to investors, giving rise to volatile performance on regional bourses (see Figure 2).

To attract more institutional investors and promote stability, markets in the region need tighter regulations, stricter enforcement and dependable rule of law. "Companies don't yet know what is required in terms of transparency," explained Mohamed A. Alabbar, Chairman, Emaar Properties, United Arab Emirates; Member of the Executive Committee of the Arab Business Council.

Everybody is in the learning process," added Shaikha Al Bahar, Group General Manager, National Bank of Kuwait SAK, Kuwait. "All of us here are against government intervention to influence prices, but the government should lay out the rules." Participants agreed that there are priorities for investing. Petroleum producers must abandon their overriding focus on oil and diversify, even if the US$ 70 per barrel price is an incentive to do otherwise. The danger is that the errors made during the 1970s boom will be repeated and the windfall wasted. At that time, extra revenues were parked outside the region, with little deployed for domestic development.

In one session, Egypt's Minister of Finance Youssuf Boutros-Ghali warned that, in times of transition and restructuring, the rich often get richer more quickly. The challenge is ensuring that the benefits of investments and public spending become equitable. That means concentrating on basic public goods that promote growth and benefit as many people as possible.

"The absolutely key items are institution building, education, infrastructure and health," said Forum Co-Chair William R. Rhodes, Chairman, Chief Executive Officer and President, Citicorp Holdings and Citibank, USA.