Giving small businesses the flexibility to thrive

This article appeared originally in Gulf News: link to original article

For decades, the traditional model of spurring growth in economies in the Middle East and North Africa (Mena) has been through the extraction and exporting of natural resources, with some manufacturing taking place here and there based on how far the country has moved from an agriculture-based economy to a manufacturing and industrial-based one. In most cases, however, this is merely the case.

One key result was an oversized role for governments in driving growth, either through running its own enterprises or by intervening in the workings of their economies. This is in no way an advocation of complete openness to international markets when industries are in their infancy stage … and Mena economies are not ready for them. It is rather a question of timing such openness to global markets based on long-term planning for their economies.

The oversized role of Mena governments also meant the need to extend subsidies to everything from fuel and electricity to multiple food commodities, further enshrining an unsustainable economic model for future growth. Furthermore, Mena governments became increasingly embroiled in an endless pursuit of job creation through direct hire or indirect hire by state-owned enterprises (SOEs), which further solidified their oversized role in their respective economies.

The above described economic model is responsible for today’s economic woes haunting Mena governments, especially since they have proven harder to sustain as years pass. If one is to summarise the status quo in Mena economies, there are two key issues that will continue to preoccupy their governments for years to come.

On several counts, ME economies are late to the game

One, there is lack of clarity on what Mena countries are good at, and quite frankly, it may be 50 years too late to figure out. Whether because of the discovery of natural resources or lack thereof, the incomplete transition from one economic base to the next produced a peculiar hybrid economic base that is incapable of driving economic growth and job creation for a growing populous. That is, the Mena is going through a youth demographic bulge, which is not only feeding growing youth unemployment, but one that will be problematic for pension funds and future pension payouts.

Thus, Mena governments continue to subsidise government jobs, turning job creation into a self-fuelling vicious economic cycle.

Two, governments are still competing with the private sector through their SOEs, which most of the time is not on an equal footing. With unwarranted mergers and acquisitions to further consolidate their supply value-chains and expand their consumer base, those SOEs evolve into monopolies and oligopolies that end up setting prices in controlled markets.

Moreover, and in a few cases where there is a sizeable domestic consumer base, those SOEs choose to limit their operations to their home markets.

In other words, they end up adding to the very same economic issues troubling Mena governments. Alarmingly too, this also means that individuals are discouraged from coming up with viable business ideas that could grow into bigger players in the private sector, hindering the rise of small and medium enterprises (SMEs) when those very same SMEs could be the key to resolve Mena’s economic issues.

Business ideas are notionally born out of a need in the market or the community, one that ensures its success and financial feasibility. Those business ideas, with the right regulatory framework, access to financing, and zero government start-up fees could grow into successful SMEs that would be better accustomed to domestic market needs. Doing without fees in early years would serve as a grace period for those SMEs by lowering their establishment costs.

The replication of such a process will add to job creation that is not government-driven and will help with youth unemployment. Additionally, establishing hundreds if not thousands of SMEs will eventually result in survival of the best business ideas rather than that of the fittest, which is the case with SOEs.

SMEs that spurted to serve domestic markets and have survived domestic competition can be then nurtured and supported towards internationalisation, making sure that those SMEs outgrow their domestic bases for long-term survival. This is as well to continue driving job creation and favourable trade accounts for their countries.

Another side benefit will be allowing Mena governments to slowly withdraw from their economies and to limit their interventions to if and when needed, like during a downturn or an economic crisis.

The last thought that I want to leave you with: What if start-up and renewal fees were done without altogether, and different levels of corporate taxes introduced instead?