The real hurdle to economic participation is a business environment that leaves everyone behind.
The Arab uprisings have unleashed a new entrepreneurial spirit in the region, particularly among younger entrepreneurs who feel emboldened to launch new small- and medium-sized enterprises (SMEs). The international donor community has long supported SMEs as they create jobs, greater domestic income (especially among lower-income groups), economic growth, and social stability in emerging markets. Yet, donor activities have sometimes been misguided—however well-intentioned—and the current environment provides an opportunity to reevaluate the best ways to encourage entrepreneurship.
First and foremost, laws governing bankruptcy make the price of failure prohibitively high and thus promote a culture of risk aversion. Lack of information and transparency regarding business legislation is another problem. A third hurdle to entrepreneurship is the absence of formalized networks.
Many multilateral programs and international NGOs in the region focus disproportionately on female participation in SMEs. For example, the Development Assistance Committee within the OECD designated over 4.6 billion US dollars towards women’s economic and productive sectors between 2007 and 2008.
The limited involvement of women in SMEs in the region cannot be doubted; the SME sector is characterized by low rates of female ownership and few female workers—in stark contrast to the participation of women in the informal sector. In the Middle East and North Africa, SMEs comprise the most substantive part the economy: there are 12 million SMEs, which make up 95 percent of the private sector. Even so, only about 300,000 of those are women-owned “formal” SMEs. In Egypt, these enterprises account for about 75 percent of total employment and 80 percent of the gross domestic product—yet women own less than two percent. Even with that disparity, it is important to remember that this trend is not unique to the Middle East; globally, women own only one-third of SMEs in emerging market economies (between eight and ten million).
To address this disparity, many programs try to level the playing field through microcredit loans to women. Although well intentioned, this focus on unequal access to credit ignores the real difficulties of doing business in the Middle East. Women’s rights activists in the region often stress this and argue that the core obstacle to doing business in the Middle East is the failure of governments to create regulatory environments that facilitate access to institutional capital and knowledge and that are conducive to entrepreneurship for everyone, regardless of gender.
Restrictive legislation is one of the key obstacles to the emergence of a culture of entrepreneurship in many Arab countries. According to the World Bank’s 2012 “ease of doing business” ranking, the regional average is 93 out of 183 countries. Egypt and Jordan are ranked 110 and 96 respectively. “Although Egypt came in 21st for “starting a business” which includes things like registering with the government and signing up to pay taxes, it scored very low on essential needs for conducting business: 101st for obtaining electricity, 147th for enforcing contracts and 154th for handling construction permits. Jordan was 96th overall and 95th for “ease in starting a business.”
Both governments have introduced positive reforms in recent years; Jordan reduced the minimum capital requirements from 1,000 dinars to 1 Jordanian dinar whereas Egypt eliminated its minimum altogether in 2008. Jordan also moved to allow sales and income taxes to be filed electronically, while Egypt reduced fees for construction permits and licenses; and while both have established “one-stop shops” for registering businesses (easing the time considerations of start-ups considerably), much more still must be done.
As donors continue to review SME development in the Middle East and North Africa, they should move beyond access to credit and instead explore ways to connect entrepreneurs while pushing for more favorable legislation and greater government transparency.
First and foremost, laws governing bankruptcy make the price of failure prohibitively high and thus promote a culture of risk aversion. Egypt’s current bankruptcy laws are very unfavorable to SMEs: not only are procedures extremely slow and costly, they even criminalize bankruptcy by mandating jail time. In such a business environment, scaling up is not a pragmatic option, much less investing in technology or capital-intense industries. In addition, by not clearing debtors for three years, they deny entrepreneurs the opportunity to restructure or start up new ventures; Jordan does not fair much better. Out of 183 countries, Jordan ranked 150 in “ease of getting credit” since entrepreneurs have weaker legal rights regarding repayment to creditors.
Lack of information and transparency regarding business legislation is another problem. According to Iman Bibars (chair of the Association for the Development and Enhancement of Women) about “about 80 percent of the Egyptian population is unaware of the lending processes” in addition to the government programs relevant to establishing a business. Many Egyptians are also not aware that new reforms, like the establishment of the General Authority for Investment and Free Zones (GAFI) allow simultaneous registration and licensing in a single location. Publishing procedures for the process online would go a long way at increasing both information awareness and transparency.
A third hurdle to entrepreneurship is the absence of formalized networks. Business success requires access to institutional knowledge to tackle challenges common to the group–and in this area, the most positive changes are taking place. Many private initiatives have established online networks in a variety of industries. Jordan’s non-profit Young Entrepreneurs Association aims to serve as a focal point for educating and training entrepreneurs as well as encouraging collaborative work. Individuals like Lara Ayoub (who established Jordan’s first independent daily news site, al-Ghad) have created networks to share advice and mentor new generations in skills not provided in the formal educational system, and similarly in Egypt, Egypreneur has provided a support system for new enterprises and identified topics for the sharing of institutional knowledge.
As donors continue to review SME development in the Middle East and North Africa, they should move beyond access to credit and instead explore ways to connect entrepreneurs while pushing for more favorable legislation and greater government transparency. The real hurdle to economic participation is a business environment that leaves everyone behind.
"This article is reprinted with permission from Sada. It can be accessed online at: www.carnegieendowment.org/sada, © 2012, Carnegie Endowment for International Peace.”