Middle East meets Middle America

Emirati Vice President, Prime Minister, Defence Minister and ruler of the emirate of Dubai, Sheikh Mohammed bin Rashid al-Maktoum greets U.S. President George W. Bush upon arrival at the Dubai International Airport in Dubai.

TEXT OF INTERVIEW

Tess Vigeland: Hi. Tess Vigeland here at the Frank Stanton Studios in Los Angeles and joining me from Cairo, Egypt, is my colleague and Marketplace Morning Report host Scott Jagow. Hey Scott.

Scott Jagow: Hi Tess. Greetings from Cairo!

Vigeland: Excellent. Well, Greetings from good old Los Angeles.

You know, we talk a lot on this show about how our finances are connected more and more to the rest of the world -- the vaunted "Global Economy." Well, it turns out some of our basic personal financial concerns are similar as well.

Here in the U.S., the housing market has crashed, there's constant talk of recession, my grocery bill seems to climb every week and some analysts predict $4 a gallon gas by summertime. Scott, this is not a pretty picture here.

Jagow: No, it's not, but those financial worries are certainly not confined to the United States. I'm hearing the exact same thing over here. We talked with a few people at a cafe and this is what one Egyptian man said:

Man: Of course I worry about my children and my family -- maybe excessively because of what's happening in Egypt. The prices are changing at a very rapid speed. Before prices didn't change except from one year to another, but now the prices change from one week to the next.

Unemployment is a big problem here in Egypt. There's the official government statistic: about a 10 percent jobless rate. Then there's what people on the street say: you might want to triple that figure!

Vigeland: Ouch! But Scott, even with rampant unemployment, Egypt's economy is actually growing, right?

Jagow: Yeah. GDP grew by 7 percent last year and it's expected to keep going. Egyptians are trying to court U.S. investors, but they have some competition in Middle East. You have Dubai and Abu Dhabi and those have really become the go-to places for investment.

Vigeland: And I think that's actually where we'll start today's show: looking at the financial relationship between the Middle East and Middle America.

We've seen big headlines recently about sovereign wealth funds. These are governments, mostly in the Middle East right now, that are making substantial investments in U.S. companies, including financial powerhouses like Citibank and Morgan Stanley -- but the investments go beyond Wall Street. These state-owned funds have bought stakes in Main Street as well: Church's Chicken, Caribou Coffee and, believe it or not, the department store Barneys New York.

To talk about the Middle East-Middle America relationship, we turn to Professor Mahmoud El-Gamal. He chairs the Islamic finance department at Rice University.


Vigeland: Welcome to the program.

Mahmoud El-Gamal: Thank you Tess. Thank you for inviting me.

Vigeland: Why is the U.S. such an attractive place for Middle East investors right now?

El-Gamal: Well, it's the world's largest economy and certainly, the rule of law and the ability to diversify across different types of assets makes it a very attractive place. There was some exodus of Middle East funds in the aftermath of September 11, 2001 and some of what we're seeing are these funds coming back to be reinvested in the U.S., but certainly, what you hear from a number of the investors in the Middle East, including the so-called sovereign wealth funds, is that they view the financial sector in particular in the U.S. as being unfairly punished for some of the mistakes that were done in the middle of the credit bubble, and so they think that they're getting good value for their money by buying shares in our banks.

Vigeland: Knowing that Middle East investors are interested in Citibank certainly makes sense: it's a large multinational corporation with huge, huge amounts of money, but... Church's Chicken?

El-Gamal: Um... that's an interesting question -- or Caribou Coffee? One of the reasons for looking at these types of food retail outlets in particular is that there is a segment of the market in the Middle East that is marketed as Islamic investment and so you don't want to invest in Anheuser-Bush if you're going to market the instrument that eventually reaches the market as Islamic.

Vigeland: And that's because of Sharia laws outlawing alcohol and...?

El-Gamal: Correct, alcohol consumption, that's right, but the cleaner play, if you will, would be for companies that provide admissible products, so coffee is perfectly fine.

Vigeland: And Barneys?

El-Gamal: Barneys is clean!

Vigeland: I guess clothes don't really present any sort of problem, do they?

El-Gamal: That's right.

Vigeland: What does this foreign ownership mean to investors and consumers here in the U.S.? Should it matter to us whether Dubai or Qatar own chunks of, say, the NASDAQ stock exchange?

El-Gamal: I think the debate that's ongoing now is more political than economic. The worry is always whether or not, if a particular country were to acquire enough assets, they will start to exercise control and again, this is cyclical. We notice in the 1980s the mania about "Oh, the Japanese are buying real estate and eventually, they'll buy all of New York and we will all have to spend our money in yen" and so on and that never materialized. So this is cyclical, it just so happens that oil prices are high right now and therefore, these dollars have to go somewhere. To the extent that they buy American goods and American companies and American assets, they're allowing the dollar to stay relatively strong, which is helping to limit our inflation in the sense that our imports from other parts of the world are not getting that much more expensive.

Vigeland: What's the next trend in the Middle America-Middle East relationship?

El-Gamal: I suspect that if oil prices were to stay where they are and the amount of petrodollar flow to the Middle East remains in the trillions of dollars that we're forecasting over the next 10 years or so, then you would expect that more and more real estate, mortgage-backed securities, credit card receivables, all of these asset-backed securities that we've been hearing about a lot will be sought after by investors from the Middle East and from elsewhere. Over time, if people are relaxed about not caring whether the person who buys a big chunk of a company's stock comes from Asia or the Middle East or North America or South America or anywhere else -- money is money and it should seek the highest rate of return -- then things should continue smoothly and maybe we can whether this storm and have our economy back and running in no time.

Vigeland: Professor El-Gamal, thank you for joining us in this look at Middle America and the Middle East.

El-Gamal: You're most welcome.

Vigeland: Mahmoud El-Gamal is chair of Islamic economics, finance and management at Rice University.

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