According to a report by the United Nations Development Programme (UNDP), presented at the Arab Financial Forum (AFF) in Bahrain this week, foreign direct investment in the oil-rich Middle East and North Africa region fell in 2003 to $4.6 billion from $5.8 billion in the previous year.
Experts say the political risk attached to the Middle East is a major factor in driving away investors, especially since the US invasion of Iraq and the continuing violence there.
Even Arab investors have left the region.
"Arab entrepreneurs investing in the region have been burned so many times that they are reluctant to take more risks," said Jason Peers, chief executive of London-based Jasper Capital Limited and a member of the Saudi British Business Council.
"What governments here need to do is to convince them that it is safe to put money back in their own region," he said.
Arab capital invested outside the
region is in excess of $500 billion
The UN report said Arab countries of the Middle East and North Africa drew less than 1% of the total direct investments in the world in the last two decades. Roger Tomkys, chairman of Arab British Chamber of Commerce, told the conference that in 2000 the figure had dropped to 0.4%.
UNDP said two-thirds of the region's population is under the age of 30, and of that 40% are unemployed. This is while $500 billion of Arab capital, mainly Gulf money, remains invested outside the region, it added.
Red tape, bureaucracies and a costly government welfare system, particularly in the oil-dependant Gulf countries, also create an unfavourable climate for investment, experts said.
Arab countries find it easy to get
investments in their oil industries
"We have real problem selling investment in this area. Investors are reluctant because it is much easier and cheaper to put their money somewhere else," said a Western consultant who advises the Saudi government on domestic investment.
"It is quite easy to get people to invest in oil, gas and petro-chemical sectors but much more difficult in ventures that would create jobs and help ease rising unemployment in the region," he added.
Some governments in the region have embarked on economic liberalisation but experts say the pace of reforms is too slow and such moves often face stiff resistance.
"Our governments tend to respond to popular sentiments rather than logic in economic planning," Abd Allah Bishara, former head of the Gulf Cooperation Council and current director of the Kuwait-based Diplomatic Centre for Strategic Studies, said.
"There are too many taboos, too many psychological barriers across the Gulf. But governments can no longer sustain the status quo. Foreign investment is an imperative if we want to meet future challenges," he said.
"Right now the regional market is very liquid because of the high oil prices but that will not last for too long"
ABC International Bank plc
Terry Stone, a director at ABC International Bank plc, a subsidiary of the Arab Banking Corp, said Gulf states, currently flush with oil money, needed to introduce long-term reform policies to encourage investment for healthy economies.
"Right now the regional market is very liquid because of the high oil prices but that will not last for too long," he said.
"What the region needs is solid financing from outside and to get that, governments need to show they are serious about opening up their markets," Stone said.