Practical analysis for investment professionals
25 September 2012

After the Unrest: Five Key Trends Reshaping the Geopolitics of the Middle East

Protests in the Middle East have spilled into another week and reached as far as Hong Kong, focusing the world’s attention on the fallout from an anti-Islam video that surfaced earlier this month. But as Harvard University international affairs professor Meghan O’Sullivan reminded attendees in a keynote address at the CLSA Investor Forum in Hong Kong — just a day after four US embassy personnel in Libya, including the ambassador, were killed — the unrest should not distract from more fundamental geopolitical tensions in the region that hold important long-term implications for investors.

O’Sullivan, who directs the Geopolitics of Energy Project at Harvard’s Kennedy School of Government and writes a column for Bloomberg News, previously served as deputy national security advisor to US President George W. Bush, working on the ground in Iraq and helping to write the transitional law that became the basis for the Iraqi constitution. She is currently one of 24 special advisers for the campaign of Republican presidential nominee Mitt Romney. In her talk, O’Sullivan outlined five big trends that she says are reshaping the landscape of the Middle East today.

  1. Growing divergence in the wake of the Arab SpringThe Middle East used to be viewed as a stagnating though relatively stable region from a geopolitical perspective. Events of the last 18 months have changed that. Countries in the region have become more divergent: On the one hand, Libya, Tunisia, and Egypt are facing the challenges of building new institutions over the coming decade. On the other hand, status quo monarchies remain — and are preoccupied with maintaining stability and managing domestic discontent. In addition, new powers are rising — namely, Turkey and Qatar, with the latter, in particular, turning its extraordinary wealth into political action that is shaping the landscape of the region.
  2. Growing sectarianism. The sectarian divide between Sunni and Shia Muslims is growing stronger. This is manifested in the intensifying rivalry between Saudi Arabia and Iran. The Sunni uprising in Syria may look like a revolt against an oppressive Shia regime, but it is fast becoming a proxy war between its two larger neighbors, O’Sullivan contended.
  3. Massive demographic and economic pressures. The population in the Middle East has tripled since 1970, to 360 million people — and it is projected to top 600 million in 2050. One-third of the population is under the age of 15 and more than 50% are under 25. Millions are seeking to go to university, looking for jobs, and need health care. Average youth unemployment is around 25% and is the highest in the world. And, in the Gulf region, it’s even higher — up to roughly 40%. According to a recent Booz and Company study, the Arab world will need to create 75 million jobs over the next decade, a 40% increase from the current level. There is tremendous pressure on the labor market, infrastructure, and services.
  4. Rising tide of Islamism in politics. An unprecedented number of Islamist parties were voted into office in recent elections. Because many had no first-hand governing experience, voting for them was a way for citizens to vote against previous regimes and against corruption. Islamist governments are not necessarily anti-Western or anti-modern, O’Sullivan said, as political parties in Turkey and Iraq have shown. Although it is not yet clear what agenda these recently elected governments will pursue, they will look to build new institutions within the framework of Islam.
  5. US influence in the Middle East declining. Yes, domestic economic problems exacerbated by the global financial crisis and 10 years of an expensive, on-the-ground military presence in Iraq and Afghanistan have dampened American enthusiasm for its overall engagement in the region. The United States is finally pulling out of both Iraq and Afghanistan, and declining military engagement is matched by declining diplomatic engagement as the Obama administration has indicated that it is reorienting its attention toward Asia. This shift is making a deep impression on the people of the Middle East.

These big trends, according to O’Sullivan, have a number of important business and investment implications. The supply of oil and gas is at risk in the short, medium, and long term as the trend of declining energy security is becoming more evident. O’Sullivan also predicts that the United States or Israel will make military strikes against Iran in the months after the US election, and in retaliation, Iran may block Saudi oil tankers in the Strait of Hormuz.

In the longer term, the relatively youthful demographics of the Middle East can be a positive. But in the near term, there are many problems in the labor markets and serious reforms are needed, O’Sullivan said. The business climate will become more complicated, and it is getting more difficult to divorce politics from business, as China has tried to practice in the past. Finally, the disengagement from the Middle East and “pivot to Asia” proposed by the Obama administration will be a huge challenge to implement, as issues that demand US attention and resources will continue to come up.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Samuel Lum, CFA

Samuel Lum, CFA, was director of Private Wealth and Capital Markets at CFA Institute, where he focused on wealth management and capital markets, mainly in an Asia-Pacific context.

4 thoughts on “After the Unrest: Five Key Trends Reshaping the Geopolitics of the Middle East”

  1. Dmitrios says:

    O’Sullivan who “previously served as deputy national security advisor to US President George W. Bush, working on the ground in Iraq”

    What was she doing on the ground in Iraq? Looking for WMDs? We can all guess how credible is O’Sullivan’s analysis of the Muslim world!

  2. Brust says:

    Hey! I simply want to give a huge thumbs up for the good info you will have right here on this post. I can be coming back to your weblog for more soon.

  3. Democratic transition is long and messy everywhere, not just in the Arab world. There will be setbacks and reversions back to to authoritarian rule, especially in less affluent societies. (Samuel Huntington’s classical book The Third Wave is worth a look on this point.)

    The comments about demography and the jobs gap in the Middle East are very timely. As one example, Yemen’s current crisis is partly a manifestation of poor long-term planning in the context of depleted oil reserves.

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