02 Mar 2011

HBS Faculty on Revolution in the Middle East and North Africa


BOSTON—From Tunisia to Egypt, Bahrain to Yemen, as a number of nations in North Africa and the Middle East go through cataclysmic changes, the world watches and wonders what the future may hold as myriad protestors risk their lives for revolutionary change. Four Harvard Business School faculty members—Deepak Malhotra, an authority on negotiation strategy; Noel Maurer, an expert on the politics and economics of the energy business; Magnus Thor Torfason, an authority on how behavior is influenced by the social structures of individuals and organizations; and Tarun Khanna, an expert on emerging markets, examine these historic events through the lens of their research.

Deepak Malhotra, Associate Professor of Business Administration and author of Negotiation Genius (Bantam Books, 2007)

The U.S. response to events in the Middle East and North Africa needs to be guided by three key tenets of effective diplomacy.

First, diplomacy needs to consider our enemies tomorrow, not just our friends today. Events are unfolding, and the political landscape is changing at an astounding pace in this region. Although tempting, the U.S. response should be less focused on addressing the "current" state of affairs and more attuned to the various potential trajectories of change. For example, instead of trying to control the immediate aftermath of a dictator's fall from power (e.g., in Egypt), we should focus on building relationships with the country's many future leaders and constituents. This outreach should include all parties that will be relevant in the future, not just those whom we agree with and like. Even if the elected leaders of tomorrow are going to be of the unsavory variety, thirty years of experience dealing with Iran shows that neglect and isolation are ineffective strategies for managing conflict.

Second, diplomacy is about identifying what makes this situation different from others that look just like it. Despite apparent similarities in the uprisings that have gripped the region, every country is unique. The histories, perspectives, and needs of people across the region differ, and we need to tailor our approach country by country. For example, too strong a hand in the case of Egypt could backfire, whereas too light a hand in the face of Gadhafi's assault on his own people could be deemed unforgiveable and may be harmful to our legitimacy in the region. Some have voiced concerns that inconsistency—treating some countries and dictators differently from others—can undermine our legitimacy. I believe we can have consistency in our guiding principles, such as supporting human rights, without sacrificing much-needed nuance and variation in strategy (e.g., backing military intervention in one case but not another).

Third, diplomacy should be guided by values that can be clearly and consistently articulated. There has been much recent discussion about which objective the United States should pursue—democracy for them vs. security for us—in instances where the two seem at odds. The problem with this debate is that it stems from an imprecise articulation of American values. "Democracy" is not what Americans value; what we value, more accurately, is "liberal democracy." Thus, we would not support the right of 51% of a population to persecute or kill the other 49%, despite the fact that this is consistent with the notion of democracy as "majority rules." Instead, we value democracy of the kind that not only heeds majority opinion but also has a healthy respect for individual and minority rights. This is an important distinction, because liberal democracies tend not to impose a "democracy vs. security" dilemma on us; in dealing with liberal (or quasi-liberal) democracies, we typically can support both objectives simultaneously.

Accordingly, the guiding principle for our engagement in the Middle East and North Africa should be to support movement toward liberal democracy. This principle not only lays a foundation for clarity and consistency in our diplomacy but simultaneously promotes a nuanced foreign policy. For example, it does not obligate us to intervene or lend support simply because a country is heading toward majority rule. What we would need to assess in each case is whether the trajectory is toward liberal democracy. We should keep in mind, of course, that democracy is often the first step towards liberal democracy, and in any case, is a necessary condition for it.

Follow Deepak Malhotra on Twitter @Prof_Malhotra

Noel Maurer, Associate Professor of Business Administration and author of The Big Ditch: How America Took, Built, Ran, and Ultimately Gave Away the Panama Canal (Princeton University Press, 2010)

Revolutions, like Tolstoy's unhappy families, are all revolutionary in their own particular way. The current upheavals in the Arab world are no exception. What they have in common are good reasons for foreign businesses and Western governments to cheer the changes.

In Bahrain, the Khalifa family, members of Islam's Sunni sect, rules over a majority Shia population. This kingdom in the Persian Gulf earns $5 billion from oil, but production is declining. Banking and other financial services are now more important to the national economy. Security forces initially fired upon demonstrators, but withdrew after President Obama intervened with a phone call to the king. Some commentators worry about Iranian involvement, but according to Wikileaks, the U.S. State Department does not believe that the opposition has links to Tehran.

Protestors want the elected parliament to have real power. So far, the signs point toward compromise. The more the Bahraini opposition gets what it wants, the better for foreign business. Absolute monarchy can be a wonderful thing if the monarch is on your side, but there is little to prevent exploitation, opportunism, and corruption by the rulers. Bahrain has been steadily sliding down the Corruption Perception Index for years. Parliamentary democracy will only improve that standing, and democracies are subject to less radical political change than authoritarian regimes. The thing to fear is the monarchy's digging in, not the success of the opposition.

In Egypt, little has changed with Mubarak's ouster by the military, which plays a major role in the Egyptian economy. A third of the economy is under military control – military activities range from bakeries to appliance factories. With the armed forces' prestige at an all-time high, the chances of any serious economic reform in Egypt's future have plummeted, regardless of future political changes. If it was important to get a military partner on board as part of a business venture before the revolution, it's doubly important now.

Libya looks like a classic revolution, with barricades and battles. Gaddafi has lost control of the east. A prolonged civil war is a possibility, but so far the signs are that his regime is crumbling. The first goal for the international community is to keep the oil flowing. The United States and United Nations began to accomplish this by imposing selective sanctions that will allow oil to be exported but deny Gaddafi the resulting revenues. Otherwise, the rebels would have no incentive to let exports flow. Furthermore, now that the Obama Administration has offered "any type of assistance" to the rebels, there is even less incentive for them to damage the oilfields. Although production is down because the companies operating in the country have evacuated most of their personnel, exports continue from ports under rebel control.

Gaddafi might want to destroy the eastern oilfields, but the U.S. will likely soon protect this area by declaring it a no–fly zone – and Gaddafi's air force is defecting in any case. He might be able to destroy the western fields, but his forces have more important things to do at the moment ... such as defend Tripoli. Unless Libya dissolves into chaos, which so far does not appear to be happening, the new government is likely to be favorably disposed toward the West. The country will be no paragon of limited government, but it would be hard to match Gaddafi's capricious corruption. One question is whether the Italian oil company Eni will be tainted by its association with Gaddafi – but that would provide an opportunity for other energy companies. The inevitable uncertainty around the transition will be frustrating, but there are opportunities to be had.

All these revolutions should be welcomed for increasing freedom and dignity for millions — but there are also hard-headed reasons to support them. Although they bring uncertainty and higher oil prices in the short term, we should cheer for the possibility of enhanced representation that will bring the people in these nations more stability, public goods, and a better and more competitive business environment. This is certainly not true of all revolutions, but in these cases, at this time, supporting change is worth the risk.

Read Noel Maurer's blog at http://noelmaurer.typepad.com/

Magnus Thor Torfason, Assistant Professor of Business Administration

The waves of unrest that now sweep over the Middle East and North Africa have been referred to as "Revolution 2.0." The term admittedly ignores the vast history and evolution of governmental transitions over the ages, but these protests are nevertheless clearly influenced by network relationships and interaction in ways that would not have been possible even a few years ago. The most obvious factor, and the one that has given rise to the "2.0" moniker, is that of online social media.

Social media and, perhaps even more importantly, mobile phones have played a key role by solving the coordination problem faced by potential protestors. The costs and benefits to an individual thinking about getting involved depend in large part on how many other individuals are participating. In autocratic states where retribution against protestors is a real possibility, the potential costs of participating in a small protest can be very large.This results in a catch-22 situation: Large numbers of people are willing to rise up, but only if a large number of others do so at the same time. It seems clear that social media and mobile phones helped solve this dilemma by convincing people that the protests would be large, thus providing some reassurance that regimes would not find it easy to retaliate.

That said, other networks may ultimately be more important in determining whether such protests succeed. My research on international network structures suggests that in the past, democracy has diffused through a network of interstate relationships, formed through common membership in international organizations such as the United Nations, the World Bank, the International Atomic Energy Agency (IAEA), and many others. One of the ways in which such organizations facilitate democratic transitions is by constraining rulers who wish to forcefully quell local unrest. For example, the involvement of Mohammed ElBaradei, former Director General of the IAEA, brought immediate legitimacy to the uprising in Egypt and limited the options available to Hosni Mubarak.

Unfortunately, this network is likely to provide less support in many of the other states that are currently in the throes of rebellion. Data I have collected shows that Tunisia and Egypt – the states where the rulers relinquished power relatively peacefully – have considerable involvement in international relations of this sort. But Bahrain, Libya, Yemen, and others are less connected to the international network.

Even where regimes are toppled, it is far from obvious that democracy will follow. In fact, dictators tend to be replaced by other dictators. To prevent such an outcome, international relationships and influence are crucial. Even so, the sheer number of states now in flux limits the capacity to provide effective governance support. In the crucial months ahead, a commitment by a wide community of states can tilt the balance. The potential returns to the promotion and support of democracy in the Middle East have seldom, if ever, been higher.

Tarun Khanna, Jorge Paulo Lemann Professor, Director of Harvard University's South Asia Initiative, and co-author of Winning in Emerging Markets: A Roadmap for Strategy and Execution (Harvard Business Press, 2010).

This article, titled,"Rebuilding Egypt: How companies can fill the vacuum of trust", was originally published on Fortune.com on February 25, 2011.

Business leaders working in the Middle East should not stand by the sidelines or hop on the next flight out. They should act to rebuild trust, wherever and whenever it is possible.

The unfolding protest movements in Egypt and across the Middle East have generated a dizzying mix of joy, fear, and uncertainty throughout the world, leaving many in the business community involved in the region -- including many of my students -- confused and unsure over how to respond. How do they protect their employees as well as their bottom lines? And, in Egypt's case in particular, how can they contribute to the reconstruction process?

While the region has suffered from significant economic distress, it has been relatively contained compared to the fallout of some corporate crises in emerging markets in the not so distant past; consider the Asian financial crisis of the late 1990s and the Argentine meltdown of a decade or so ago.

The Korean stock exchange reached its nadir on the last day of December 1997, and was followed by Thailand in late August 1998, and Malaysia and Indonesia in late September 1998. These low points represented a good 70-90% drop from the preceding years. Argentina's low point was in mid 2002, and it represented a close to two-thirds drop.

So far, the Egyptian stock exchange has dropped about 15% since the turmoil began (the exchange's closure makes it difficult to provide a clean measure). Most of this drop took place over a two-day period and Egypt has experienced similar drops a handful of times in the past five years. Of course, we don't know where this will end.

Simon Cooper, CEO of Middle East operations at HSBC (HBC), says that there is a lot of waiting and watching going on, and, in a strange way, the unraveling of the Mubarak regime may hasten an end to the wait. After all, the end of Mubarak's reign was long anticipated; it was just unclear what that would mean for Egypt's future. Mubarak's exit has delivered a power vacuum, which has been partly filled by the armed forces, and by its promise to run elections in a few months.

What happens in such vacuums? In the collapse of the state that accompanied the Asian crises of the late 1990s, some have suggested that local tycoons effectively took the money and ran. In other words, some businesspeople may have determined that the tumult -- e.g. the passing of the strongman Indonesian president Suharto in Jakarta -- might undermine the basis of their past economic success, and that they were better off quitting if they could.

Yet, my experiences with businesses have not always, or even usually, been as dismal as suggested by these analyses. A more representative example, to me, came during the Argentine financial crisis. That meltdown was caused by a lack of political discipline that led to unsustainable borrowing to combat a recession in the late 1990s. This resulted in the largest sovereign default in modern history, double digit unemployment, street protests, and, as a symbolic indicator of the frayed political and social fabric, five Argentine presidents ushered in and out of office in just 15 days.

In Argentina, Tetra Pak, the Lausanne-headquartered, privately held packaging company (maker of the aseptic packages that seal ubiquitous juice boxes, among other things), behaved with admirable fortitude. Aldo Ferrer, CEO of Tetra Pak Argentina during that time, recalled that moment, "We were hit by a perfect storm, and we had to figure out how to get out of it safely."

Ultimately, Tetra Pak took the long view, trusting their local management and making the call that it was better to draw a line between the past and the future, invest in protecting the relationships they had built up over the past years, and, to some extent, help restructure what it was owed by its key customers, all in distress.

Tetra Pak's situation was especially dire since many of its costs were in dollars, but its receivables were in local pesos, unlikely to have much value going forward. It is also worth remembering that several other multinationals fled the country at the time.

Taking the long view, the high road, helped. By my reckoning, Tetra Pak's primary value in this situation was in restoring stability and trust, so that businesses could continue to operate with time horizons in excess of a few days. Tetra Pak contributed to the imagination of a different future than what was unfolding on the streets of Buenos Aires at the time. By the end of the decade, the company's dominance in the Argentine market had solidified. It helped that the company had a cadre of managers used to managing through crises.

This brings us back to Egypt and the Middle East tumult. What should my students, and their managerial and investor compatriots, do? They should not stand by the sidelines. They should act to rebuild trust, wherever and whenever it is possible. It still feels as though things are at a tipping point. Business can help reassure rather than (inadvertently) aggravate the situation.

This is not easy. Businesses may legitimately fear for the safety of their employees and leave the region altogether. They may, understandably, prioritize the immediate interests of their shareholders and decide to react to the current circumstances, which are not conductive to investment, rather than to what things might be like in the future.

Those that decide to stay the course, however, should engage in substantive and symbolic partnerships, with other corporations, and with the labor movement, and the frayed state, in whatever shape these groups present themselves. The workers are striking, demonstrating their angst and discontent. The state is struggling to reestablish its short and medium-term credibility. Absent a solution to their distress, they will continue inexorably down a worsening path.

The good news is that there is much less violence than there could have been. Egypt is home to a proud civilization, and perhaps this is a proud new beginning. Corporate Egypt and its cousins from around the region and the world need to realize that they are responsible for constructing their desired future. This is no easy task, but it is a lot easier than dealing with the aftermath of a continued vacuum of trust.

About Harvard Business School

Founded in 1908 as part of Harvard University, Harvard Business School is located on a 40-acre campus in Boston. Its faculty of more than 250 offers full-time programs leading to the MBA and PhD degrees, as well as more than 175 Executive Education programs, and Harvard Business School Online, the School’s digital learning platform. For more than a century, faculty have drawn on their research, their experience in working with organizations worldwide, and their passion for teaching, to educate leaders who make a difference in the world. The School and its curriculum attract the boldest thinkers and the most collaborative learners who will go on to shape the practice of business and entrepreneurship around the globe.