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World Bank SME program right thing for Middle East

This new World Bank program aimed at financing small- and medium-sized enterprises (SMEs) is the kind of policy this blog is all about. Democracy and entrepreneurship should work in lockstep. By giving people choice in who they vote for, you give people choice in how they want to live their lives. Entrepreneurship is all about choice — the choice between staying in a stable job (or remaining unemployed) and striking out on your own, risk and all, to do something different.

From the MEMRI Economic Blog:

MSME Sector: Engine Of Growth

“It is indeed the huge MSME sector across the Middle East and North Africa that can and must be the engine for accelerating growth and in so doing drive that all-important factor: job creation.” So says Shamshad Akhtar, vice president for the region at the World Bank. The facility has been a gleam in her eye from the outset, based in a firm conviction that enterprise access to finance and knowhow has proven globally to be a critical path to inclusive economic growth for millions of people. As the challenges of openness and opportunity recast history across the region in its streets and squares, the emphasis on creating employment and entrepreneurship opportunities has never been more urgent.

Lack Of Funding

As elsewhere in the world, the MSME sector in the Middle East and North Africa (MENA) is where significant numbers of people make (or could make) their livelihoods. For example businesses employing up to 100 people make up well over 90% of all enterprises in economies such as Tunisia, Egypt, Jordan and Morocco. But the constraints are sharply felt. Bank lending to MSMEs is lowest in the world along with Sub Saharan Africa, and only 10% of MENA enterprises finance their investment expenditures with bank loans. Smaller players are starved for capital and growth in output, and job creation hits a ceiling.

With a large, educated amount of unemployed youth being one of the driving factors behind the Arab Spring, this program could not have come at a better time. If there are no jobs, people need to create them. Arab youth are right to hold their governments accountable for failing them — that is deserved. But plenty of smart, driven youth could also channel their revolutionary energy into innovative productivity.

Some of the greatest entrepreneurs have failed time and time again before finding the one innovation that changed the course of their lives. But in the top-down, authoritative Arab society, few dreamers receive the leeway to pursue such innovations. Responsibilities remain with putting food on the table for large families. Arab families also push their children into becoming engineers or doctors — recently, lawyers have become somewhat acceptable — simply because those professions represented stability and status. Entrepreneurship is just now rinsing off a dirty label in the United States, and the Arab world lags far behind cleaning up the term.

This influx of capital will only help push Arab innovators to go at it alone. Ultimately, it will merely pull people who already have the entrepreneurial spirit into the fold — this program won’t immediately attract the 22-year-old busboy with five siblings. But this program could very well set the groundwork for the entrepreneurial spirit in the Arab world. Eventually, busboys could innovate in their spare time, thinking of the next big business idea or technology.

Sidenote: Apologies for my self-imposed, week-long hiatus. It’s somewhat taxing to write 1,000 words daily for the job that pays my bills and then do another 600-1,000 on top of it each day for this blog. I’m sure you all had no idea what to do with yourselves this past week. Hopefully you read a book, or something.

Jordan workforce training initiative disappoints World Bank

Jordan must improve its joint public and private sector workforce development initiative, according to a sub-par World Bank report.

Since adopting a national plan to improve workforce training and preparedness in an increasingly globalized Jordanian economy, “the past two years have not seen effective coordinated implementation” of outlined initiatives, the World Bank said.

The review evaluates a 2002 plan to better integrate the private sector into the public sector’s efforts in preparing Jordanian workers for the competitive globalized market. That plan said, chiefly:

The absence of employers in the participation and decision making of most aspects of workforce development is the current dominating characteristic of the system. For example, none of the 5 private sector representatives of the 11 Board members of the VTC’s Board of Directors hold leadership positions or represent priority sectors. Over the last 30 years of VTC’s history, the attitude of the private sector toward VTC has been symbolic at best.

The quality of private sector training providers varies in both cost and quality and will have to be improved over time by developing certification and accreditation activities.

Jordan’s government has failed to set policies encouraging this partnership, the World Bank report released this week said. Ultimately, workforce training has to start with heavy government lifting. It must set the agenda and have a direction before it instructs the private sector on how to train and develop its workforce. Until the government knows what it wants, the private sector will remain distant.

The truly innovative and society-benefiting businesses follow talented minds and skilled labor, which Jordan certainly could have if it coordinated its efforts. The average Jordanian goes to school for 13 years, which means there are plenty who go to college. Workforce training starts with the government because it must set the agenda.

Private sector was not engaged in workforce training because, historically, Jordan generated most of its revenues from high tariffs, effectively closing off the economy and reducing its need for productive efficiency and a trained workforce. But the financial crisis that hit the nation in 1988 provoked serious trade liberalization discussion. In essence, government can take the blame for the private sector’s unwillingness or inability to train workers — the government had never given the private sector a reason to prioritize this.

Jordan had been maligned by unemployment and poverty, relying on at least five International Monetary Fund programs between 1992 and 2002. As a result, the Hashemite Kingdom had to follow the standard IMF prescription of lowering trade barriers, cutting public benefits and privatizing business, among other things. During the time of those IMF programs, Jordan joined the World Trade Organization, the EU partnership agreement, the Arab Free Trade Area and a free trade pact with the US. That all meant Jordan needed a better trained workforce to compete with its new, freer economic borders, which has lead to rapidly increasing exports and GDP.

But increasing exports is easy when you change from a drastically protectionist trade policy and have low wages — Jordan’s GDP per capita is $5,400, ranking 144th in the world according to the CIA World Factbook. The key now for Jordan is value creation. More than 77 percent of its workforce is in services, which are low-paying and do little to generate societal benefit.

The median age in Jordan is 22, which means there’s an overwhelming amount of young people in the country. It will not survive based on an almost entirely service-based economy. The government needs the private sector to help train workers in order to attract capital and investment. Until the government gets its act together, that won’t happen.

Oil-rich nations spend more at home, but it’s not sustainable

July 19, 2011 1 comment

Oil-rich Arab nations spent more at home this year as autocrats dished out one-time benefits to quell civil unrest. While it’s a good sign that such rulers responded to protesters, it falls short of a real policy change in how oil-rich states disburse revenue.

The fact protesters pushed autocrats to realize they needed to spend more domestically shows the effect the threat of losing power has on those rulers. So what then would create long lasting reforms in government spending on domestic programs and businesses? Democracy. Human rights. Better institutions. Anything that allows citizens to hold officials accountable, and one way of doing that is through an enforced electoral process.

In essence, this spending merely aimed to pacify those with only a lukewarm revolutionary fever and increase support among regime backers. These are not long term, sustainable spending programs.

From ArabianBusiness.com:

Following popular revolts in the Middle East and North Africa, countries like Bahrain, Libya and Kuwait increased domestic spending or handed cash outright to their citizens in packages totalling as much as four percent of gross domestic product. Saudi Arabia alone is spending $130bn, or a staggering 30 percent of its GDP.

These countries can more than afford to do so, if Goldman Sachs’ estimate for petrodollar savings flows are anything to go by: the bank forecasts imply $840bn over the coming year, based on Brent oil at $126.50 a barrel by mid-2012.

Saudi Arabia, for example, doled $130 billion to its citizens this spring. But much of this came in the form of housing credits and other cosmetic fixes to superficially enhance quality of life without actually changing anything.

Institutions are rarely built from the top-down in such societies. Protesters coaxed benefits from tight-fisted rulers through their voices and actions. Imagine what would happen if they could do that every two or four years at the polls.

 

Yemeni banks cease some operation

July 14, 2011 1 comment

Growing tribal violence has pushed Yemenis to withdraw large amounts from banks that have crippled their ability to perform basic activities.

The withdrawals represent a bigger problem — tribal conflict is getting so dire that Yemenis are either fleeing the country with cash in hand or there is a real fear that whatever government comes to power could exert force over banks. With President Ali Abdullah Saleh in Saudi Arabia receiving medical treatment, there’s a sizable power vacuum that needs filling.  Saleh’s tribal allies already had turned against him. Yemen’s tribes are more than willing to vie for his former position atop the government.

This banking problem is more acute for the long term future than short term. Without any reserves, it cannot offer loans to businesses — and if it does, it risks default in an incredibly unstable economy. That means it cannot promote business in its own borders.

Additionally, it likely will not attract foreign investment (not that it was particularly successful in that regard before the Arab Spring) with financially tapped banks. The volatile political landscape will probably continue in Yemen much longer than any other Arab Spring nation, even after a new government comes to power. It appears some militant tribal faction will assume the presidency if Saleh steps down or is forcibly removed. Saleh has vowed to return to Yemen, which has made the country even more uneasy as Saleh will undoubtedly try to regain power from the tribes that now run the country. All of this sends bad signals to foreign investors.

Taiz is the city to watch. It’s considered the intellectu­al capital of Yemen, but it is growing increasing­ly militarize­d. People there never would have dreamed of seeing citizens carrying guns through the street, but it is now a daily occurrence­.

The longer Saleh stays in Saudi Arabia, the greater chance tribal violence breaks out in effort to establish control and supremacy over Yemen. I’m beginning to doubt that any change in government would lead to a peaceful, democratic one. Saleh certainly has not been a good leader — hardly anyone entrenched in power for 30+ years is — but there doesn’t appear to be a civil group ready to wrest power from the well establishe­d tribes.

From Al Bawaba:

Aeriqi confirms that banks suffering from large withdrawals may collapse and notes that liquidity is scarce. Dozens of banks are carrying out measures to ease monetary withdrawals such as reducing official working hours and initiating electricity interruptions.

Economic experts note the current crisis in Yemen has greatly impacted the Yemeni economy, especially the banking organizations which provide loans and credit to organizations and individual borrowers in order to meet their financial needs.

Lebanon gets 3G, elevates its business attraction

Lebanon probably hasn’t paid too much attention to 4G iPhones, as the country just got 3G capability nationwide this week.

The new network should make Lebanon a more attractive destination for investment. It still has to get over the whole being a puppet of Syria and constant tension with Israel things, but this can only help — especially since Iraq and Syria are the only other 3G networks in the region.

The Middle East and Africa as a region had just 7 percent 3G cellphone penetration in 2009, one of the worst regions in the world for cellphone service. That number is expected to grow to 35 percent in 2014.

The Middle East has been a little slower than many regions on communications technology, but it is trending toward modernization. More Middle Eastern residents have cellphones than ever before, and it is one of the fastest growing regions for cellphone adoption.

Lack of economic diversity certainly has played a role in the Middle East’s slow adjustment to 3G. With so much of the Middle East dependent on the oil industry, there was little incentive for governments to make that investment because the oil industry could get along fine without it. Everyone needs oil, and production efficiency isn’t a big concern for buyers.

The 3G technology also could help protest movements, if Lebanese feel so inclined to join other Arab nations. Faster and more reliable communications technology would make Twitter even more viable.

From the Lebanon Daily Star:

The state-owned GSM operator is set to launch one of the latest versions of the 3G technologies, 3.9G, granting users Internet speeds of up to 170 MB per second, more than a 100 times maximum bandwidths of current 2G networks.

This is like bringing Lebanon out of the cellphone stone age. That alone should make it a more attractive place for business. It has the aforementioned shaky governance and political atmosphere issues to overcome, which will definitely inhibit investment. Still, businesses couldn’t have liked the idea of operating in a rapid-paced global world on a 2G network. This will certainly pay off.

“Middle East Marshall Plan” should include human rights promotion

U.S. Sens. John Kerry (D-Mass.) and John McCain (R-Ariz.) are planning a sort of Middle East Marshall Plan by tying U.S. intervention with business and economic interests. IF (and I say IF) this is what the U.S. decides to do to break its relative isolation during the Arab Spring, the senators should work to promote human rights at the same time.

This extremely nauseating puff piece about the war veterans/politicians/BFFLs seemed to care less about the news and  more about their on-again, off-again Beltway lovefest. I hope WaPo plans on a follow with some analysis, but in case they don’t, I’ll go ahead and do it anyway.

From The Washington Post:

The elder statesmen are also hoping to forge something resembling a Marshall Plan for the Middle East, aiming to spur massive private-sector investment across a region remade by revolution. The pair traveled to Egypt last weekend with eight Fortune 500 executives in an attempt to ignite investment in a country that has struggled since the February fall of longtime leader Hosni Mubarak.

Human and basic democratic rights such as freedom of speech and free and open elections, ideally, would come before economic development. Without human rights, society is at greater risk of corruption and abuse.

The U.S. has had its rear end pinned to the pine when it comes to supporting revolutionary forces in the Arab Spring. So the first proactive approach the U.S. makes is to support investment and U.S. economic interests, which is not going to set off a ticker tape parade in most Arab countries.

By promoting human rights in tandem with economic interests, the U.S. will appear more benevolent and also secure more stable investments. Fortifying institutions such as free and open elections will make politicians more accountable and curb corruption, which will mean a more honest and even approach to things from government contracts to welfare. Human rights reform will reduce workplace abuses, alleviate gender wage and employment differentials and therefore lead to a more productive and stable economy.

There’s also the dangers posed by opening up economies to the global market when those nations do not have sound human rights protections. “Race to the bottom” scenarios could develop in which nations depress wages to earn a competitive advantage for foreign investment. It also makes exports cheaper and therefore more attractive in the international market, but at the expense of a nation’s own people because it decreases purchasing power. That, in turn, diminishes the opportunity to innovate and be entrepreneurial because citizens have less disposable income and have to provide for families on sub-standard wages.

This is obviously asking for a lot. Promoting business will address youth unemployment, one of the largest causes of the Arab Spring. That alone would go a long way. But the U.S. should aim to have equal involvement in helping craft institutions and human rights reform as it does in boosting the Middle East economy.

Ultimately, the U.S. is currying favor with future Arab leaders, and one way to do that is by bolstering those nations’ economies. The U.S. doesn’t negotiate trade or peace agreements with the Arab street, so I understand the tactic.

But the U.S. has often worried about its image in the Arab world, and its hesitance to support revolutionary forces has not been viewed positively by most Arabs. The perceived inconsistency of the State Department — intervening in Libya but not Syria, for example — only amplifies that negative image.

I truly believe a more active approach to human rights promotion is possible. There is a power vacuum in the Arab world, unlike China, where the U.S. has also used rhetoric rather than might to encourage human rights reforms. The Arab street genuinely wants the freedoms U.S. and other nations have, so I believe it would be more receptive to U.S. help.

Diplomatically, America’s hands are tied. Intervening on the side of revolutionary forces will send a signal to allies that the U.S. is fickle. But the Arab street sees a contradiction between U.S. actions and its purported values of freedom and liberty. Arabs see that as hypocrisy, which amounts to an image problem of the worst kind.

 

US should reevaluate Iraq exit after oil attacks

June 28, 2011 1 comment

Recent reports that Iraqi insurgents are attacking the oil industry should give the US pause about its planned exit considering the impact these incidents could have on long term economic development.

Joel Wing at Musings on Iraq has a good summary (with links) to the reports. In all, there were five mishaps related to oil in June.

Wing explained that oil accounts for 90 percent of the nation’s revenue. He said insurgents plan such attacks to grab headlines, which leads to recruits, which leads to money, which leads to continued operations.

The constant threat of those attacks lead to unpredictability, and Wing hypothesized that insurgent timing was planned to coincide with the beginning of several foreign oil contracts.

This dynamic will have a tremendously negative effect on Iraq’s economic development potential. In his essay “International Investment and Colonial Control: A New Interpretation,” Jeffrey Frieden explained that site-specific foreign investment during a host country conflict is easier to defend with force — for example, oil fields. But there are some major security concerns ahead of the planned US exit from Iraq. The Iraqi police and army do not appear trustworthy or legitimate to many citizens, which means they cannot be counted on to provide vital security for the nation’s precious oil resources.

Whether this causes investor flight remains to be seen — although that’s doubtful considering every country has oil needs. But it could significantly alter the contracts Iraq receives. Maybe not monetarily, but something may have to give. What that is remains unclear, but one thing is certain — investors won’t like the prospect of their millions of dollars going ablaze.

The attacks on oil have another effect — by crippling the nation’s main breadwinner, the insurgents render the government ineffective. Depleted jobs numbers and oil revenue sends a bad signal to the Iraqi people that their government cannot provide for them. That in turn feeds into insurgent recruiting, as those groups are bankrolled by wealthy people and can offer essential services such as education, food and shelter.

In essence, the attacks on oil encourage civilian dependence on insurgent groups for general welfare. It’s a scenario the U.S. has tried to avoid for years, but one that may still be a factor when it leaves.

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