Why it’s time for the Arab world to unshackle its start-ups

by Philippe Le Houérou*

When I toured the Greek Campus technology park a few months ago, the optimism was palpable.

It made sense. In a region that has struggled to find its economic footing since the Arab Spring – and where conflicts still rage in Syria, Yemen and parts of Iraq – the entrepreneurial ideas being refined in innovation spaces like the Greek Campus, once part of the American University of Egypt, aren’t just symbolic. They are one of the keys to the Middle East and North Africa’s future, playing a role in helping to build inclusive growth, end poverty, fight climate change and create jobs.

That’s because start-ups contribute significantly to employment, economic growth, competitiveness and productivity. These companies introduce new products, adopt cutting-edge technology and open new markets. The result can be a major contribution to a sustainable and inclusive private-sector development.

A cash-less revolution in Egypt

Several successful start-ups are already finding vast audiences for their products and services in the Middle East and North Africa. One example is Souq, an online retailer based in the United Arab Emirates that was purchased in March by Amazon. Souq led a revolution in e-commerce in the region that has powered cross-border trade and improved consumer choice.

In Egypt, another company, Fawry, has developed a game-changing electronic payment system that has freed consumers and businesses from using cumbersome cash. More than 20 million Egyptians, including many small business owners, now use the service, which processes 1.5 million payments a day.

Public-sector imbalance

Entrepreneurs also can help the region address a number of stiff – but not insurmountable – challenges.

Joblessness is one of the most critical. Nearly one out of three young people in the region is unemployed. Those who do have jobs often work for the public sector, the Arab world’s biggest employer. In the Gulf states, Egypt, Iraq, Jordan, and Tunisia, governments account for 60-80% of all formal employment, an unsustainable situation.

But small businesses aren’t positioned now to create jobs desperately needed by the region. These businesses can’t access the credit needed to expand and hire new workers. The region has 23 million small and medium-sized enterprises, accounting for up to 90% of all formal private-sector enterprises. Yet they receive only 8% of bank lending.

Capital-starved entrepreneurs have few options outside banks. Despite a growing number of accelerators and seed funds in the region, the venture capital market is still nascent, forcing most start-ups to fund their ideas on their own.

Even well-financed entrepreneurs still face other obstacles, some of them due to their own lack of experience. There is little formal education for entrepreneurs and only a handful of networks that support start-ups. Gender bias, too, plays a restricting factor. Nearly every economy in the Middle East and North Africa has at least one restriction that hinders women’s ability to get work.

Making every dollar count

So how can we help more companies like Souq and Fawry overcome these hurdles?

First, countries need to reform their bankruptcy laws. Start-ups take risks. Yet existing regulations make it difficult to liquidate companies, which decreases the chances of creditors recovering their loans. This increases the cost of debt. An important part of the reform is to abolish jail sanctions for non-fraudulent bankruptcies.

Second, many countries have labor laws that make it hard for businesses to both recruit and let go staff, and for ambitious workers to move across markets in the region. That needs to change because start-ups already operating on tight budgets need to make every dollar count.

Third, countries should revisit restrictions on foreign ownership and strengthen intellectual property laws to protect these entrepreneurs’ hard-won innovations. Doing so would allow more investment to flow into the region.

In many places, the private sector still plays second fiddle to state-run companies. Governments need to reassess that balance and adopt reforms that unlock the potential of private businesses. Global development finance institutions like World Bank Group – which includes my institution, the International Finance Corporation (IFC), the private-sector arm of the World Bank Group – have a key role to play. We can be a bridge between governments and the private sector.

This bridge will help develop new markets for entrepreneurs and increase private participation in state-dominated markets. That is at the heart of IFC’s new strategy of creating new markets and opportunities in low- and middle-income countries. I see a great opportunity in MENA. By addressing the bottlenecks that stifle entrepreneurship, the region can deliver sustainable economic growth and create opportunities for millions of people. This is the kind of future that is possible.

*Executive Vice-President and CEO, International Finance Corporation
**This article is part of the World Economic Forum on the Middle East and North Africa 2017. First published in www.weforum.org