Eye on the Market I February 23. 2011 J.P.Morgan Topics: Events in the Middle East One of the most frequent questions I have been asked over the last decade goes something like this: "How do I manage around geopolitical risks in my portfolio?" Before 2001, this question was not asked very much. The 1990's were an oasis of geopolitical calm, following the collapse of the Berlin Wall and a decline in US military spending to its lowest level since the 1930's'. By the end of the 1990's, Francis Fukuyama's "End of History" was all the rage, proclaiming the triumph of liberal democracies, and with them, free markets, rule of law and separation of powers. Like the 1930's however, the calm of the 1990's was temporary, after which a variety of historical forces re-emerged with a vengeance. A couple of years ago, I spent time with Princeton's Bernard Lewis to discuss his views on the Middle East. One of the more revealing comments he made at the time: we should plan for a lot more instability in the region, since most of its countries are not sufficiently converting oil wealth into jobs, growth and progress. As one indication of this, he claimed that the energy exporting countries have made little progress in growing non-energy exports2, and were in aggregate lower than Finland, a country with 5% of the Middle East's population and which is located at the outer edges of the Arctic Circle. Broadly speaking, he's right. As shown below, per capita GDP in the Middle East/North Africa (MENA) only recently began to grow after 20 years of stagnation, while other parts of the world are making faster progress, particularly after the fall of Communism in Eastern Europe. Regarding the non-energy sector, much of the Middle East is still an Infertile Crescent; energy-exporting countries do in fact trail Finland. Both of these developments are part of the macroeconomic backdrop in which unemployment is high, economic dynamism and labor mobility are low, and intense subli