The Arab World Must Think Big About its Smallest Businesses

(Bloomberg Opinion) -- After the Arab revolutions of 2011, multilateral institutions in the Middle East and North Africa began to show greater interest in the promotion of small and medium-sized enterprises as a means to inclusive development — the scarcity of which had contributed greatly to the uprisings. Donors, development institutions and banks started or expanded already existing programs for SMEs, usually in the form of credit extension and technical assistance.

This appeared logical. After all, SMEs in the region have long struggled to access capital in its various forms: financial, physical and human. Many studies and reports have shown their weak growth, and their dismal share in exports and foreign investment. The promotion of SMEs seemed a good place to start for the creation of an inclusive model of development that could combine job creation with high growth, both of which are desperately needed in MENA. And since SMEs were so pivotal to economic success stories elsewhere — in East Asia, for instance — it stood to reason that their promotion would have the same effect in the Arab world.

Alas, this logic does not fit well into the economic reality in some of the most-populated countries in the region, like Egypt, Tunisia and Morocco (and Syria before the civil war). Here, the vast majority of privately-owned enterprises are neither small nor medium, but rather of a micro size, usually employing less than five or six people and often operating informally. These economies have a very few SMEs, and they account for minute shares in output, employment and investment.

Before the region can develop the SME sector to its full potential, it needs to be enable its micro-enterprises to grow. Instead of promoting the very few SMEs that already exist, creating more of them should be the focus of donor and development interventions.

In a 2017 study by the Euro-Mediterranean Network for Economic Studies, micro-enterprises with fewer than four or 10 employees, depending on the definition adopted in each country, constitute approximately 91% of all privately-owned firms in Egypt, 89% in Jordan, 98% in Tunisia and Morocco. These establishments almost always operate informally, without obtaining any permits, licenses or being registered with the state. They also conduct most of their transactions in cash, making them virtually untraceable.

There is a heavy concentration of these establishments in menial trade and service jobs in urban and rural areas, which underlines their very limited access to all types of capital. All four countries are densely populated, and their economies don’t depend on hydrocarbons. They have all undergone considerable rounds of economic liberalization and privatization under the auspices of International Financial Institutions, the European Commission and USAID since the 1980s and 1990s. They have also all ended up with economies that are dominated by privately-owned activities that provide most of GDP and employment.

But these private sectors generally suffer from the “missing middle syndrome” — they have a very few extremely large and concentrated private enterprises at the top (usually in capital-, technology- and skill-intensive sectors) floating over a huge number of very tiny establishments, in labor-intensive and low-productivity activities. Their transformation experiences since the 1990s have largely failed in creating a middle stratum of small and medium-sized enterprises.

Egypt, the most populated Arab country with around 100 million people, is a case in point. SMEs made up around 4% of all enterprises in Egypt in 2006, compared with 51.7% in Malaysia. (As elsewhere in East Asia, Malaysia’s success in developing SMEs is the product of concerted efforts by the state in areas like access to finance and land, technology transfer and technical assistance.)

One of the key hurdles to developing micro-enterprises is the fact that most of them are informal. Most MENA state bureaucracies know next to nothing about the populations of micro-enterprises that operate within them. Moreover, there is considerable mistrust between the two, especially from the side of the micro-enterprises, which suspect that any information-giving on their part will lead to taxation, or might expose them to more corruption and extortion from state officials. This makes such establishments hard to target with development interventions.

To fix this problem, governments and international donors should prioritize the creation of institutional links between micro-enterprises and state bodies, banks and special funds. This requires that state agencies build on the existing socio-economic practices of micro-enterprises. These enterprises have developed social capital based on family and neighborhood networks, through which they mobilize financial and human resources, as well as access markets for their goods and services. If these could be recognized by state representatives and formalized into local and socially-embedded development associations, it would help in gathering and processing information. These associations could function as intermediates that enjoy the trust of local members while acting as interlocutors with government agencies and donors in areas like credit provision, technical assistance and technology transfer.

Building such institutional linkages between state institutions and the vast base of microenterprises is not easy. It will require great political and administrative effort. But such an effort is crucial for building a robust SME sector, and achieving the goal of more inclusive development.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Amr Adly is an assistant professor at the American University in Cairo. He is the author of "State Reform and Development in the Middle East."

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