Small is beautiful in the Middle East’s plans for economic growth

Growing numbers of middle class college graduates in Cairo have come up with a novel solution to the challenge of making ends meet in a high unemployment, low income economy. They are setting up fast food stalls on the city’s streets.

For these young Egyptians, it is a back-to-basics approach to making a living.

The traditional Middle Eastern economy was built on such small-scale enterprise, whether it was the family craft businesses that survive in the souqs of Marrakesh, Cairo or Damascus or the dusty metal-bashing workshops employing a handful of workers still found across the region.

In much of the Middle East and North Africa, however, subsequent economic development was based on centralisation, political control and the dominance of the oil sector, a scenario that favoured big corporations over small and medium sized enterprises (SMEs).

Although SMEs represent between 80 and 90 per cent of enterprises in the Middle East and North Africa, according to World Bank estimates, the small business sector has been constrained by factors such as limited access to banking services and a conservative view of credit and debt that has tended to favour large enterprises in the bidding for government contracts. Loans to regional SMEs average just 2 per cent of GDP, the lowest level worldwide.

Despite the large percentage of small firms, their contribution to gross national products in the more prosperous parts of the region remains relatively modest: 22 per cent in Saudi Arabia, 20 per cent in Kuwait and just 14 per cent in Oman, according to a recent survey.

Now, however, there has been an increasing focus on the role of SMEs in the context of economic reforms geared to meeting the needs of rising populations in a post-oil era.

A recent report by the UAE investment firm Allied Investment Partners PJSC said national strategies to accelerate economic growth in the region had switched to SMEs. “This comes on the back of declining oil reserves and revenues, which served as a wake-up call to…governments on over-reliance on their energy reserves to fuel their respective economies,” the report said.

A rapidly rising number of entrepreneurs, helped by greater ease of doing business, economic reforms and growing markets, had increased the value of SMEs in the Middle East and North Africa to $1 trillion, according to the report.

A range of regional initiatives, with backing from international institutions such as the World Bank and the Organisation for Economic Cooperation and Development, have been launched to invigorate the neglected SME sector.

The targets range from one-person businesses like the Egyptian street food vendors to middle-sized construction and services businesses employing a few dozen to a few hundred people.

Multiple programmes are also aimed at supporting small-scale start-ups in the tech sector. Educated young people who might previously have aspired to a career in government service or the state sector are now being encouraged to launch their own digitally based firms. Reforms to favour the growth of the sector range from easing or modernising regulation to improving financial infrastructure and training.

In the Egyptian example, at the most modest end of the SME scale, the government has reacted to the phenomenon of newcomers entering the country’s vibrant but often chaotic street food scene by introducing legislation to facilitate licensing, cut red tape and provide dedicated spaces for sellers.

“The law is very important for youth because it reduces the crisis of unemployment…by helping youth start their own project with a budget that corresponds with their financial capacities,” Soad el-Masry of parliament’s small and medium-sized enterprises committee told Egypt Today.

Elsewhere support has focused on internationally backed financing. Under a 2017 agreement, the European Bank for Reconstruction and Development (EBRD) provided Morocco with loans worth €20 million for SMEs, describing them as the backbone of the national economy.

In a region in which a minority of people have bank accounts – among the lowest levels worldwide – international institutions have also been funding micro-financing to encourage the formation of one-person or small family businesses among some of its poorest inhabitants.

It’s a start, but there are calls for more. Minoush Abdel-Meguid, co-founder of Cairo-based Union Capital, told a Middle East regional session of the World Economic Forum that the enthusiasm for the SME sector had not entirely lived up to the hype. “The region must move past the rhetoric … Instead, it must address the various challenges, eliminate obstacles, encourage entrepreneurship, and provide policy frameworks that move beyond talk and more into action.”