Enabling entrepreneurs, start-ups and small and medium entreprises is crucial to economic growth, innovation and tackling high rates of youth unemployment in the Middle East and North Africa region. How can national governments, civil society organisations and the European Union and its Member States collaborate on improving the framework for entrepreneurship?
In 2015 the European Neighbourhood Policy (ENP), the EU’s framework for its relations with countries to its south and its east, received a major rethink. For the southern neighbourhood partners, namely Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestine, Syria and Tunisia, the focus has shifted to stabilisation through economic development and developing more individualised approaches and relationships with each country.
“The ownership for the strategies, for the vision, for the reforms, needs to be with the partner countries as well as with EU member states,” explains an EU official. “It’s about finding where interests coincide, and finding common ground between the the EU, partner countries and even the Mediterranean region as a whole in the different areas of engagement.”
In the sphere of business and entrepreneurship, the focus has been on working with governments to improve the enabling environments for the private sector in each partner country. Without reforms by authorities, the impact of the EU, donors and development entities will always be limited. “[Projects and funding] will have no multiplication effects, they will just be one-offs,” said the official.
That means support is often tied to broader changes. For example, an EU support package worth €150 million to support the revitalisation of the Lebanese economy, which could generate up to €1.5 billion in loans, was announced in April 2018 on condition that the country’s financial institutions identify and propose projects that are bankable, and adopt relevant reforms.
Promoting resilience has meant focusing on reducing the impacts of war and migration of refugees in some countries, including Lebanon, where more than €1bn in direct aid has been given. Meanwhile, the coordinated support extended to Jordan – which has been grappling with the impact of the conflict in its northern neighbour, Syria – such as providing refugees with food, medical aid and education, has been one of the biggest successes of the ENP in recent years, says Professor Dr. Tobias Schumacher, holder of the Chair in European Neighbourhood Policy at the College of Europe.
One significant socio-economic issue is youth unemployment in the Middle East and North Africa (MENA) region, which is the highest in the world according to the World Bank, with an average at around 27%. In Egypt it is around 35%, in Tunisia 36%, in Jordan 39%.
But while these statistics may be comparable to European countries such as Spain or Italy that also have high youth unemployment rates, the crucial issue in MENA is the growing proportion of youth in the overall demographics as populations grow, and thus the absolute number of unemployed young people, says Salvatore Nigro, Global Vice President at EFE-Global, which provides skills training to youth across the region. For the entire EU, the median age of the population is 42.6 years1; in the Arab countries of the MENA region, the median age is just 22 years2.
“With 65% of the population under 30 years old, we are confronting a massive, massive ‘youth quake’, a major emergency,” says Nigro. He notes that the right to work is part of the Universal Declaration of Human Rights. “When you are young, you are productive, you want to contribute to your life, to your society, you want to have a career.”
Still, the picture is not clear-cut. Many MENA countries have growing private sectors, but companies still face problems hiring qualified workers, says Nigro.“Sometimes companies have easier access to credit, access to capital, than access to the human capital and human resources they need, because the public education system is not really preparing young people for jobs.”
There is no doubt that enthusiasm around start-ups and the potential to rapidly scale up technology-based businesses has been one of the positive stories to emerge from the MENA region over the past decade, with the number of successful company ‘exits’ – successful sales – increasing over the past 24 months.
But critical challenges remain, especially a lack of funding and the small size of local markets in many countries, making it challenging to grow, says Sebastian Rubatscher, co-founder of enpact, a Berlin-based start-up mentorship organisation. The company has a Startup Meter tool which analyses urban start-up ecosystems: in the southern partnership countries it covers, Tunis, Amman and Beirut rank highest.
There are also important questions to be asked about start-ups when it comes to inclusivity. For example, a recent survey of Egyptian start-ups by EMNES showed a clear skew towards male co-founders and male workers. Meanwhile, around 70% of the start-ups were in Greater Cairo (home to less than 25% of Egypt’s total population), suggesting there needs to be more focus on ensuring there are opportunities outside of the main cities in each country, and on promoting inclusion of women.
Rubatscher says that many start-up founders also tend to come from more privileged backgrounds, and are able to rely on personal savings or family wealth to fund a company. He advocates more focus on activity that can support a person from any socioeconomic background. “In Egypt, we have started with founder scholarships – we pay them €500 a month – and they can just focus on developing their business idea. With this we can be inclusive [of] people who are not able to afford to start their own business because they don’t have family backing.”
That’s seen as a regional problem that needs to be addressed: the Majalat Civil Society Forum in 2018 concluded that EU youth programmes should be more inclusive and benefit primarily young people with fewer opportunities.
Start-ups or SMEs as engines of job creation?
“Entrepreneur is becoming a magic word, with the idea that everyone can become an entrepreneur. But that’s not the truth – not everyone can become an entrepreneur,” says EFE’s Nigro.
And when it comes to job creation, he believes that start-ups will not be able to generate the critical mass of jobs needed to cope with youth unemployment that is growing each year – MENA needs 100 million jobs, he says. The only way to create this many jobs is to work with SMEs and help them to grow, he believes. “If we are able to support SMEs to grow from having 10-15 employees to having 50 employees, we will create this critical mass, because they represent the majority of jobs in the region.”
SMEs are estimated to be responsible on average for more than 30 percent of all private sector employment in MENA, according to the World Bank. This is lower than in most of the rest of the world, leaving a significant margin for improvement.
Yet both SMEs and start-ups can face similar problems, with a need for more mentoring and training, and huge legal and bureaucratic challenges for small businesses in most MENA countries, says Nigro. In the World Bank’s ‘Ease of Doing Business’ report, many southern partner countries lag behind developed countries in areas such as ease of starting a business, registering property, trading across borders and enforcing contracts.
Smaller businesses in particular also face myriad practical obstacles that can slow growth, including lack of access to foreign currency or foreign bank accounts, the departure of skilled staff – often to join large multinationals or seek jobs in developed economies – and a lack of transparency when dealing with government agencies such as customs, says Christian Hanelt, Senior Expert – Europe and the Middle East at the Bertelsmann Stiftung.
Still, progress is being made in many areas. The MENA region is one of the three regions globally that has improved the most since 2004 when it comes to ease of business, according to the World Bank, along with Europe and Central Asia, and Sub-Saharan Africa.
The funding gap for SMEs in the region, which has been calculated to be as high as $260bn, is seen to be one factor holding back growth of SMEs and in turn employment. Most banks are accustomed to lending to governments or large private sector companies – typically less risky – meaning they have little appetite to support small companies by providing loans.
But in recent years, many EU-related organisations, including the European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), KfW and the Agence Française de Developpement (AFD), have been active in providing funding for SME lending. Many of these funds have been provided to local banks to establish or expand SME lending facilities.
There have also been examples of enhanced coordination. For example, in July 2018, the EU led a delegation of eight development financial institutions to Tunisia, to “reaffirm their support to Tunisia, particularly for the country's socio-economic reform programme aimed at stimulating growth and employment generation”.
Civil society organisations can also play a role in working to improve the enabling environment, to address issues including good governance, rule of law, justice and human rights. One issue that touches most of the MENA economies is the role of women, who are typically under-represented in the workforces of many of these countries, and can also face restrictive or unfair laws that reduce rights and equality.
Wadih Al-Asmar, President of EuroMed, a rights organisation, says that civil society groups in the region have produced some positive results in the area of gender mainstreaming. “In general, laws to protect women are improving in the region – slowly, but they are moving in the right direction.” But when it comes to equal participation, such as women active in politics and business, including representation on company boards, he says women are still far behind in much of the region.
There is also growing awareness that solutions are needed to address the economic and social impact of climate change. Its negative effects are already being felt in the MENA region, including hotter and drier summers that put increased pressure on scarce water resources, vital for agriculture. This comes at a time when populations are growing, notes Hanelt of the Bertelsmann Stiftung. “Agriculture production in our partner countries in the Mediterranean region is being challenged by increases in temperature associated with climate change. There needs to be more focus on how to save water, how to create more sources of income for food creation,” he says.
Launched in 2004, the European Neighbourhood Policy (ENP) has been a cornerstone of the relationship between the EU and the so-called southern neighbourhood partners, namely Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestine, Syria and Tunisia. The policy also governs relations with several eastern neighbourhood countries.
In 2008 the Union for the Mediterranean was launched: its aim is to promote stability and integration across the Mediterranean region, as embodied in the 1995 Barcelona Agreement.
In 2010-11 the ENP was recalibrated in response to the Arab uprisings, to promote “deep and sustainable democracy” as well as inclusive economic development.
Then in 2015 there was a major review of the neighbourhood policy, following the period of turbulence in the southern partnership countries. “Stabilisation of our neighbourhood” was described as the most pressing challenge by Johannes Hahn, the Commissioner for European Neighbourhood Policy and Enlargement Negotiations. “Conflicts, terrorism and radicalisation threaten us all,” he said. “But poverty, corruption and poor governance are also sources of insecurity. That is why we will refocus relations with our partners where necessary on our genuinely shared common interests. In particular economic development, with a major focus on youth employment and skills, will be key.”
Practical changes following the 2015 review included more flexible deployment of financial resources and moving away from a ‘one size fits all’ approach, “[to] develop partnerships that are tailor made with each of our neighbourhood partners to reflect different ambitions and interests”, according to the EU.