Last week I attended a high-level conference in Marrakesh on jobs and growth in the MENA region. What became clear is that, like the mythical Roman god Janus, there are two faces to most of the region’s economies. We can call them the young and the old. And that the choice for MENA governments to make is not which face of Janus to support, but rather how to ensure that both can co-exist and prosper.
One face is the dynamism of the thousands of young entrepreneurs turning their innovative ideas into flourishing start-ups, often with the help of new technologies.
The most visible successes in this genre are companies like e-commerce site Souq.com (bought last year by Amazon) and online transport-booking firm Careem, which are both now worth hundreds of millions of dollars and provide employment opportunities not just for IT professionals but drivers, accountants, marketing experts, lawyers, and blue collar workers alike. While it's noteworthy that Careem now employs 2,000 people and 500,000 drivers, what is more important is that it has empowered women to take up a profession that was hitherto male dominated.
And beyond these household names there are thousands of other new ventures that are spurring innovation and dynamism in the region, sometimes in the most unlikely circumstances. From a service matching job seekers with opportunities in Yemen to the Tunisian company that has designed and produced an amphibious car that it is successfully exporting to Europe and elsewhere, there are many examples of innovation in the region that are a match for any other part of the world.
One particular focus for innovation is Fintech. Around the world, the exponential growth in digital financial innovation is already disrupting how we transact: providing new ways of saving money, taking loans, making payments, sending remittances, and raising capital. In the MENA region where most people still do not have a bank account, the potential for using Fintech is even greater and some exciting new ventures have taken off in this field in recent years. Startups like Verify, which launched in 2017, are using blockchain technology to facilitate transactions and new ventures taking advantage of new technologies are emerging every week. So, one side of economic activity in the region is very positive, with examples of innovation and entrepreneurship and the promise of exponential growth and financial reward.
But the flip-side of Janus—the second face of middle east economies—reveals the large traditional companies which are struggling to compete in an ever more challenging market environment.
These are often companies that depend on the region’s high import barriers for protection from more competitive international rivals, or depend on favorable access to finance from public banks and a preferred position in selling their products to the government. Some of them are public enterprises that have lagged behind in modernizing their plant and equipment, management techniques, and business models, which need not just protection but regular handouts from the public purse to make ends meet.
The very technology driving growth and innovation in one part of MENA economies is seen as a threat by other companies whose business model and employment prospects will be disrupted unless they adapt and change much more quickly than in the past. To be sure, not all large enterprises are a drag on the economy. Some of the best known names are also the most effectively managed—from flag carrier airlines in the Gulf to fertilizer producers in the Maghreb. But still too many of the region’s traditional companies are lagging in a world where the pace of change is accelerating and only the agile will survive.
There is much to be done on both fronts to reconcile these clashing realities into strong, future-facing, diversified economies. And with a quarter of young people in the region out of work, 20 million more joining the labor force in the next five years, and tens of millions of women who want to take their rightful place in the economy, time is running short to take action.
Thus, I propose the following set of steps:
First, fix the business environment.
One of the biggest challenges for any entrepreneur in MENA is dealing with the government bureaucracy. Everything from getting a building permit to a start-up license to paying taxes or dealing with labor regulations can be much more onerous and time consuming than in most other parts of the world. Corruption—petty and grand—can make life even more complicated. In a recent survey, 55 percent of businesses in the region cited corruption as a major constraint. This is higher than the 39 percent in Latin America and the Caribbean or 36 percent in sub-Saharan Africa. Another big concern for MENA businesses is not being able to enforce contracts or to get fair and timely decisions from the courts when they have a commercial dispute. In today’s world when capital is mobile, it is more important than ever for countries to make a concerted effort to attract international firms, and retain the resources and talents of national investors. MENA’s countries must step up their efforts.
Second, scale back and re-think the role of the public sector.
As economies become more complex, the state needs to update its role as a regulator. Too many regulations in MENA countries were designed for the state dominated economies of the last century. They need simplifying and modernizing. At the same time, the public sector needs to shed much of its role as a producer. Why are government-owned factories in the region still producing cement or running hotels, businesses that are neither strategic nor natural monopolies? And the public sector can no longer be the employer of last resort—a model that has resulted in bloated bureaucracies, made it harder for private businesses to recruit competitively, and led to a public-sector wage bill that is no longer sustainable given the fiscal constraints that most countries now face. The technology revolution can also be used by governments to simplify how they work and how they interact with their citizens.
Third, focus on the special needs of both the new and traditional economies.
Digital economy startups in some MENA countries are hampered by the high cost of internet access—not just for themselves but for their potential clients. Access to finance is harder for firms who work with ideas and algorithms instead of factories and equipment that were part of traditional businesses. Fintech firms generally need a regulatory environment that is more flexible for their startup phase than is the case for established firms in the financial service industry. However, only a handful of MENA countries have specialized Fintech regulations in place today. A key to developing a supportive environment for digital economy firms is for governments to engage with them in a regular dialogue—to understand better what drives them and what is holding them back. This will require developing new channels of communication since the traditional private sector interlocutors for governments are generally representative of the established and older firms.
At the same time, there is a need to modernize the "old" economy. While the digital economy will generate many new successes and attract substantial media attention, the bulk of private sector activity and jobs in the MENA region will continue to come from the kinds of businesses that have been around for a generation. Helping these businesses to grow, modernize, and adapt to a more competitive global marketplace remains a key priority for growth and prosperity. This is where actions to improve the business environment will be most impactful. This is also where gradually opening MENA economies to international trade and investment will help to bring the technology, management skills, and market access that will raise value added and product quality. Finally, this is where a mindset change is necessary to move to promoting private business rather than protecting well connected private businesses.
Finally, strengthen links between the education system and the job market.
Education systems worldwide are struggling to adapt to the new skills that will be needed by tomorrow’s workers. In MENA, too many graduates don’t even have the right skills for today’s private sector jobs. There are some good examples of vocational and job related training in countries across the region but these need to be scaled up and mainstreamed. A special challenge is to ensure that the 28 million children in the MENA region in need of humanitarian assistance due to continuing violence, displacement, natural disasters, and economic inequality do not end up as a lost generation robbed of their education and of their prospects. And it is important that women and girls receive the same education and training so they too have the right skills for private sector jobs. Increasing women’s participation in the job market is not just important for them but could generate a trillion dollars of economic growth over the next decade.
In order to implement these four changes, the MENA governments must have a more proactive approach to learning from the successes of their peers. Within the region there are good examples in every area. The United Arab Emirates, Jordan, and Egypt have made fast progress in enabling Fintech startups. Morocco has been able to strategically target and catalyze the establishment of new industries (automobiles and aeronautic parts) which today generate more export revenues than its traditional sectors. Qatar and the UAE have made rapid progress in improving their business environment. Iran and Jordan have valuable experience to share in phasing out generalized and wasteful energy subsidies and replacing them with targeted cash transfers to needy households. Drawing upon the repository of knowledge in regional and international organizations can be an added source.
The task ahead is to learn from each other’s experiences and to adapt them to each country’s own circumstances. This is not glamorous work but it’s what’s needed to move forward. The priority, as Christine Lagarde concluded at the conference, is to act now.