Unlocking the Power of the Little Guy: SMEs in the Middle East
By Nadeen Alawadh
Effectuating more inclusive development and diversified economies remains a crucial challenge in the Middle East. The COVID-19 pandemic, paired with the collapse of oil prices, has made it evident that the Mashreq region can no longer rely solely on the petroleum industry and the likes of OPEC to hold them over during a global crisis sustainably. Taking a broader view, governments lack the agility to adapt to drastic market changes, and long-standing state-led growth models have failed to tackle the burgeoning problem of youth unemployment, amongst other issues. However, the future seems optimistic with Arab nations rightfully focusing future diversification and job creation policies on the development of the private sector; more specifically, small and medium enterprises (SMEs).
SMEs are a linchpin in Arab economies, contributing anywhere up to fifty-two per cent of non-oil GDP while also accounting for a significant fraction of private-sector employment. Reform schemes, such as Kuwait’s Vision 2035 and Egypt’s Vision 2030, are in varying phases of progress; however, the ongoing COVID crisis has undoubtedly impeded on any advancements planned for the immediate future. Allocations made to alleviate various economic pressures and reduce the risk of losing the diversity of small and medium businesses during this time range from easing risk weightings to stimulus funds. Still, if there is any hope for the “visions” of diversification to come to fruition, stakeholders must act purposefully to liberate SMEs from the structural and institutional restraints that limit their potential economic impact.
One of the hurdles MENA entrepreneurs have to overcome is the gap in access to finance. Forty-two per cent of respondents of the 2018 Arab World Competitiveness Report named it as the most severe barrier to entry. By developing capital markets and broadening the FinTech landscape, governments could open up new financing channels and more extensive sources of funding. The region currently lags other areas in the accessibility of credit information to promote further pathways to finance. Creating a supported framework for enhanced credit information and encouraging transparency would mitigate information asymmetry, allow banks to assess the debtor’s credit risk accurately, and reduce the costs of borrowing.
It is not surprising that the immensely involved public sector is a burden on private sector development. MENA countries have ranked low by international comparison in global governance rankings on factors that include regulatory quality and corruption. Unfortunately, efforts to curb corruption by enhancing transparency and accountability within governing bodies have been piecemeal. The widespread (and often lacklustre) participation of state-owned firms alongside the multiple stages of unnecessary and defective bureaucratic business protocols continues to be a hindrance on private sector progress. Minimising governments’ positions as competitors in the market and streamlining business regulations would complement efforts to increase financial inclusion and thus establish a more conducive business environment where SMEs could thrive.
The inconsistency between the outcomes of the education system and the skills required for private sector employment is another impediment that needs to be addressed. Working towards improving the state of human capital in the region would give SMEs, and the private sector as a whole, access to higher quality factors of production. Strategies discussed to resolve the mismatch include targeted social spending and fostering partnerships with the private sector to develop training programmes that focus on strengthening skills such as financial literacy and critical thinking. On a larger scale, reforming the education system to one that emphasises the importance of non-technical skills and promotes an entrepreneurial mindset could create lasting change. Tackling this obstacle has the potential to be a multipronged solution to further issues faced in the MENA labour market. Equipping the local youth with sufficient skills to engage in the private sector allows for an increase in labour participation while also counterbalancing the transient nature of the expatriate labour force that most Arab countries rely heavily on.
Unlocking the potential of SMEs in the region will be no easy feat. Years of stunted employment growth, low private investment, and a wide financial inclusion gap has stifled chances of innovation and development. Nonetheless, the acknowledgement of these economic dilemmas and the intention to eradicate them; manifested through the creation of independent diversification projects, is an essential but small step in the right direction. Governments will need to commit to informed policy decisions and establish carefully outlined SME support schemes to take on the challenge of building a more diverse MENA economy that recognises the value of a vibrant private sector.
The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.