Two weeks ago I attended an international conference on foreign investment in the MENA (Middle East and North Africa) region held at a Dead Sea resort in Jordan, and it was an eye-opener. All the presentations and personal networking emphasized to this national security expert-cum-senior managing director just how minor a role our military will play in bringing lasting stability to the region.
Foreign direct investment (FDI) is the most important flow in the global economy because it's "sticky" money that invests in real things: companies, infrastructure, real estate, etc. When you invest directly in an economy, you plan to stay for a while, and that says to other potential investors, "I feel safe here. The rules are solid and clear. I can assess risk intelligently and hedge against it." In that sense, FDI is the gift that keeps on giving - a seal of approval attracting more of the same.
I've been tracking FDI for years, going back to a 2000-01 research project I led at the Naval War College involving the Wall Street firm Cantor Fitzgerald. Our focus back then was on FDI's role in fueling the rise of Asia, where about one-third of investment came from outside the region and two-thirds involved Asians investing in fellow Asians.
The lesson? Outside money, meaning inter-regional flows, tends to follow inside money, meaning intra-regional flows. No surprise there, as the locals know better. Financial panics start the same way: first the locals freak out, and then foreign investors get scared.
Back to MENA: FDI flows into the region have doubled since 2003, partly because of rising oil prices but also because foreign investors sensed new opportunities there: specifically, the need to generate new jobs for a demographic "youth bulge" working its way into local economies. If you're America waging a long war against radical extremism, then helping to create those estimated 100 million new jobs in MENA over the next two decades is of paramount importance. Otherwise, there are a lot of idle hands.
So, while I'm sitting through all the FDI panels at this Dead Sea conference, I can't help but be struck by what a huge difference America's 2001 free-trade agreement with Jordan has made in that country's future.
Jordan is the size of Indiana, where I currently reside, and it possesses approximately the same population. The big difference is that Indiana is full of arable land, so agriculture is big here. In Jordan, only 3 percent of the land can be farmed, so 85 percent of Jordan's GDP originates in the service sector. If you're a small, resource-poor and service-heavy economy, the only way you can really grow is to super-connect with the global economy - the Israeli model.
This is where America's free-trade agreement, along with King Abdullah II's ongoing trade liberalization and economic reforms, has dramatically brightened Jordan's prospects. That agreement, along with a similar one concluded with the European Union in 2002, allows Jordan to serve as regional gateway to more than three-quarters of a billion consumers with disposable income.
Jordanian exports to America have skyrocketed since the treaty went into effect, increasingly 14-fold since 2000. The kingdom, which attracted $50 million of FDI annually in the late 1990s, pulled in roughly 36 times that amount last year. Yes, Jordan still suffers a lot of unemployment, which unofficially stands near 30 percent, but there's no question that the country's already high global connectivity bodes well for future job creation.
Back to the bigger picture: Historically, MENA has been a nonentity in FDI flows, either inward or outward. When the oil boom happened in the 1970s, a lot of petrodollars flooded the world, but virtually none of it was "sticky." This time around, everything's changed. Not only are the oil-rich Gulf states raking it in, now they're taking that money and investing it directly, both regionally and abroad, triggering further interest from outside investors who, in turn, demand more transparency, which attracts more FDI, and so on.
Gen. John Abizaid, former head of U.S. Central Command, says the role of the military is largely to buy breathing space for better, nonmilitary solutions to emerge. That's something America needs to remember as we work the Middle East in this long war: The lasting solutions will arrive wearing business suits, not desert cammies.