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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.

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New IMF chief good news for Arab world

New International Monetary Fund chief Christine Lagarde has promised to give emerging markets a greater role in the macroeconomic monitoring and emergency lending organization, a move that should be a positive for Arab countries.

The IMF lends money to ailing nations — mostly poor — based on a “Washington Consensus” of structural adjustment policies. The idea is that these SAPs will integrate nations into the global economy, which will boost employment, make goods cheaper and provide stability for those nations.

For nations with a poor regard for human rights, IMF’s conditions could possibly increase the income gap between the wealthy and poor. IMF conditions such as spending cuts in social services, massive public sector layoffs, wage freezes to attract foreign investment, weaken public sector rights, devaluing local currencies, abolish price controls on basic foodstuffs and promotion of export-oriented production all put pressure on nations’ poor.

In nations where human rights and democracy are not respected — like many in the Arab world — IMF loans have been widely abused. For example, since dictators ran many borrowing countries between 1972 and 1981, IMF loans were used to boost military spending from $2.5 billion to $29 billion. Developing nations turned to rapid industrialization, building airports and dams, rather than small-scale development projects to assist local economies.

The IMF, headquartered in Washington, D.C., has a “Western” economic philosophy of open trade, but open trade does not suit every nation. And given the recent financial troubles of interconnected, open economies in Europe and the United States, the timing could not be better for emerging market input.

The IMF applies its Washington Consensus because it believes that cocktail of macroeconomic reform will allow debtor nations to repay IMF loans faster. But I would argue this is a quick fix that provides a cosmetic spurt to GDP without actually creating a sustainable improvement of quality of life.

Many Arab nations — even a majority of those still engaged in the Arab Spring revolutions — are largely run by authoritarian figures that spend little on social services because there’s no political pressure, such as elections, to do so; rely on public sector employment because those figures build loyalty through those jobs; rely on military employment for loyalty; have undiversified economies; and institutionally-created income gaps through shoddy welfare systems and lack of homegrown business.

At the root of this problem is the lack of accountability for Arab leaders as a result of weak or nonexistent human rights. Without the threat of being voted out of office and with the military, business elite and public sector dependent on those rulers staying in power, there are few ways to force leaders to cycle the money they earn and keep for themselves back into the economy. As a result, most people remain poor, education becomes less attainable, those nations become less attractive for foreign investment to mine the talent living there and people do not have enough money to do things like become an entrepreneur.

India and China still have rampant income inequality and the latter has a suspect human rights record, but their economies are growing faster than anyone. They will undoubtedly have an increased influence in the Lagarde-led IMF. India built its economy through harnessing the loads of young talent it had at home, making it an attractive place for investment. China closed its economy, has manipulated currency and relied on its 2 billion residents to be its market.

Neither India or China should be a model for macroeconomic policies. Their input, however, could help craft a better model than what we have today.

 

 

 

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