May 14, 2014

- CMED’s annual conference on Middle East economic development stressed the urgency of creating jobs and opening up the private sector to employ young people.
by Peggy McInerny, Director of Communications

 

UCLA International Institute, May 30, 2014  
- There is no shortage of capital, said one speaker, the problem is creating the enabling environment for investment.
The economic future of the Middle East lies in opening up the private sector, facilitating small- and medium-sized enterprises (SMEs) and employing the exploding number of young people in the region. That was the general conclusion of the ninth “Enriching the Middle East’s Economic Future” conference organized in Doha, Qatar earlier this month by the UCLA Center for Middle East Development (CMED), directed by UCLA Professor of Political Science Steven Spiegel.

 

 

The CMED conference ran May 12–14; it is held jointly with the annual Doha Forum, with the support of the Permanent Committee for Organizing Conferences of the Ministry of Foreign Affairs of Qatar. The event brought together academic experts, businessmen, political representatives, journalists, development specialists and diplomats from across the region and the world to discuss the challenges of job creation, youth employment and private sector development in the Middle East.
This year’s conference also initiated a new tradition: the award of the Doha Prize for Economic Innovation. In conjunction with the Doha Forum and the Middle East Investment Initiative, CMED solicited young entrepreneurs from the Middle East and North Africa region to submit projects that sought to stimulate the SME sector, either by improving education and training to increase skills and employment, or by promoting public sector innovation in the region. (See CMED article for a description of the respective winners and their projects).
The conference revealed a region highly aware of the reforms needed to build a thriving private sector. Perhaps most impressive were the array of young people — men and women alike — who are already creating and running small businesses, developing volunteer networks and forging ahead with training and financing their peers in the region.

Entrepreneurs lack investors and the conditions to thrive
As Leslie Janka (president, Quincy International LLC, Saudi Arabia) put it, the “youth tsunami” in the Middle East poses an enormous challenge to all states in the region, which need to create some 50 to 100 million jobs by 2025. That’s a tall order for governments that have, in the words of local experts, failed miserably to implement similar reforms in the past.
The economic and political stakes of expanding employment are extremely high. As one participant bluntly observed, stability in the area is unlikely to hold for 10 more years if radical changes are not taken to build new types of economies.
Again and again, conference panels made clear that young entrepreneurial talent is alive and well in the states of the Middle East. What is needed is to create the conditions to unleash it.
Entrepreneurs working on the ground in the region (including women entrepreneurs from Saudi Arabia and Yemen), social entrepreneurs, investment groups and representatives of governmental and donor training programs identified a number of daunting challenges faced by young entrepreneurs.
These challenges include limited access to funding (especially by women); aversion to risk on the part of institutional and individual investors; the absence of laws on equity investment, bankruptcy and social enterprises; stifling government bureaucracies; and educational systems geared toward professional rather than applied skills.
“Don’t wait for the government!” said successful Turkish-Saudi businesswoman Tuba Ozlem Terekli (co-founder and CEO, Qotu Al Riyadah Co., a venture capital firm), who implored investors to begin working with young entrepreneurs without delay. This course carries considerable risk, however, as funding new businesses without bankruptcy laws in place could leave investors liable for the debts of failed start-up companies.

A multidimensional shift to a new economic paradigm
At the macro level, in order to create jobs on the scale needed, the region’s current top-down state economies based on oil and gas must be replaced by strong private sectors based on goods and services. Many speakers noted that an immediate market for services exists in the Gulf countries, particularly for SMEs that could forge upstream and downstream linkages with large energy enterprises.
Perhaps most urgent, long-term economic alternatives to oil and gas must be found. As one panelist noted, the entire Middle East region today —an area with 400 million inhabitants — exports about the same volume of goods as does Switzerland.
Participants specifically and repeatedly advocated for curricular reforms in education that would emphasize business skills development, expanded training programs, incentives for lending to start-up companies and new legislation on small businesses. In particular, said Sheik Masid El-Masiri (director, Center for Research and Consultancy, Modern College of Business and Science, Oman) the region must create two institutions: SMEs and self-employment.
Many speakers emphasized that governments need to lead by getting out of the way: becoming a facilitator — and not the builder — of an innovative private sector. Yet often it is support at the highest level that encourages change.
King Abdullah II of Jordan, for example, specifically discouraged the use of state money in developing entrepreneurial financing and training programs, investing his own personal money as an example to convince others to do so the same. As Jamal Fakro (first vice president, Shoura Council, Bahrain) noted, the magnitude of required reforms in the region will require strong political leadership.
Governments need not just promote a clear vision, but a wise vision, said Aflah Al Rawahi (chairman, Binsalim Group, Oman) — one based on observation of the market. They also need clear, detailed implementation plans and ongoing accountability for the execution of reforms, he added, describing reform as a process in which problems should be quickly recognized and corrected.
Al Rawahi’s comments on accountability were reiterated by many participants from the region, with Anwar Eshki (chairman, Middle East Center for Strategic and Legal Studies, Saudi Arabia), identifying corruption as one of the most important internal problems of the Gulf countries.
Before governments can take action, however, they first need to decide what kind of private sector they want. Most participants favored a diversified private sector based on small and medium enterprises, but a few people argued that countries in the region cannot skip stages of development and should first build manufacturing sectors.
Although the high-tech sector appears to offer prospects for economic development in the region, conference participants disagreed on its potential for generating employment. Guy Pross (partner, 31 Degrees North, Australia) argued that the “industrial Internet” (in which smart machines talk to one another) and big data were providing space for SMEs worldwide to provide services and research and development to larger corporations. R &D, he pointed out, is now a nimble and global economic sector, allowing SMEs to compete directly with corporations.
Ray LaHood (former U.S. Secretary of Transportation) reminded the conference that building infrastructure was the key to development and to attracting jobs anywhere in the world, but that implementation required strong political leadership. Kazuyuki Hamada (member, House of Councillors, National Diet, Japan) encouraged countries in the region to diversify their energy resources and begin to innovate in the energy field by creating new energy methods and new forms of transportation.
Participants disagreed on the utility and wisdom of government programs to support entrepreneurship, although they concurred that different funding mechanisms were needed for microenterprises, SMEs and large firms. Several donor programs, including one that helps women in the Palestinian Territories create new businesses, reported great success with programs that guarantee bank loans to start-up businesses.
People from the region, however, vigorously objected to creating programs that would put financing for new businesses in the hands of government officials who have never been entrepreneurs.
Guy Pross in particular recommended private-sponsored programs that would support SMEs from training through launch through their introduction and integration into the corporate sector. “The structure of venture capital is wrong for SMEs,” he remarked, “we need a lower risk and higher rate of success and the element we have found is integration into the corporate world".
One constant refrain of the conference was the urgent need for mentoring programs in which senior, experienced entrepreneurs give budding businessmen and businesswomen advice over a significant period of time, drawing on their own networks to help the young entrepreneurs find investors and, in many cases, employees.

 

Economic change also involves cultural shifts
The preference for high-paying government jobs has created high unemployment among well-educated Arab youth in the Middle East, many of whom hold degrees for which there is little demand on local markets. The resulting “rentier” economy, said Sheik Masid El-Masiri of Oman, has made citizens in the region dependent on their governments for a livelihood, awaiting state jobs with salaries that cannot be matched in the private sector.
To build innovative economies led by strong private sectors, he said, the “culture of shame” associated with working in the private sector must change.
As one speaker pointed out, many young people in the region feel excluded from the existing private sector, seeing only large businesses dominated by “big families” who win large state contracts. Young people, he argued, must be encouraged to join the private sector not simply to generate employment and spur economic growth, but to give them a stake in their countries’ futures.
No reforms will succeed, however, if societies in the region do not cultivate both acceptance of failure and risk, said Jimmy Levy (managing partner, Al Bawader Investment Fund). Despite young people’s lack of experience, participants were confident that entrepreneurial boot camps, together with and business incubators and accelerators, could teach young people the skills they need to become entrepreneurs, take risks and fail - provided that prevailing conditions permit them to start again without either crippling debt or social stigma.
And in this regard, cash flow is quite poor for a cash-rich region. That is, money is simply not reaching venture capital funds at the levels needed. There is no shortage of capital, said one speaker, the problem is creating the enabling environment for investment. The lack of tolerance for failure remains a critical obstacle to expanding opportunities and innovation.
One foreign investor bemoaned the paltry financing and awards available to young entrepreneurs in the region, saying, “We need to think bigger, aim bigger, and be able to draw on the financial resources to do so.” Both local and western investors active in the start-up sector said that creating investor associations can help generate a culture of venture capitalism, while enabling investors to reduce individual exposure.
Other crucial cultural shifts discussed at the conference included greater education and employment of women (who face far higher unemployment rates than men in the region), the need for accountability systems, and educating the public and governments alike on the utility of volunteerism and social entrepreneurship.

The political setting
Although fewer panels addressed security issues than in past years, the conference did not overlook the topic. A lively panel on Obama’s foreign policy was, for example, highly critical of Obama’s lack of leadership in world affairs, particularly his failure to act in Syria, the collapse of Israeli-Palestinian peace negotiations and the administration’s handling of the Ukraine crisis.
Of note, Abdullah Alshammari (former diplomat, Saudi Arabia Ministry of Foreign Relations), argued that the U.S.-Saudi relationship remained strong, but that recent U.S. actions in the region had been highly disappointing from the point of view of a friend. Not only does the U.S. have no alternative to Saudi oil, he argued, but the world needs continued U.S. leadership. “You cannot be weak,” he emphasized.
Obama’s foreign policy fared better, however, in a heated discussion involving a large audience from many countries around the world, many of whom believed the panelists had been too dismissive of the American president’s achievements, especially his move away from the use of military power.
For example, one Canadian mused, "Would you rather have the neocons in charge with Russia or would you rather have Obama? We are looking back at the zombie-cold war. In reality, we are seeing a foreign policy of which most of the world would approve".
In another session, Bijan Khajehpour (managing partner, Atieh International, Iran) identified a Talibanized Pakistan as the top strategic threat for Iran. In particular, he argued that tensions in the Middle East were primarily political, not sectarian, and that framing these tensions in sectarian terms only strengthened hardliners.
A discussion of the American shale gas revolution concluded that increasing gas production in the United States would have little effect on the global market. As former Colorado governor August William Ritter, Jr., observed, people lobbying to sell U.S. gas to Ukraine have an “inflated notion” of the United States’ influence as an exporter in this market.
Palestinians and Israelis on one panel agreed that peace would bring immediate and large economic benefits to both. As Bashar Masri (chairman, Massar International, Palestine) pointed out, the vast majority of the private sector in the Palestinian territories works with Israeli companies, with more than 50 percent of Palestinian products sold in Israeli shops.
The civil war in Syria was repeatedly identified as a major danger to regional stability, yet even there, businessmen are attempting to find creative ways to employ people. Ayman Tabbaa (chairman, Syrian Economic Forum) described a novel initiative in which he is involved: the possible creation of an economic zone in Turkey to which factories in northern Syria would move. Such enterprises would provide Syrian refugees in Turkey work and preserve Syria’s industrial base until such time as the factories could return to Syria.

Great change ahead
The countries of the Gulf, vastly transformed by oil and gas wealth over the last 50 years, find themselves at the threshold of another great transformation: building diversified economies that can employ ever greater numbers of young people.
Steven Spiegel of UCLA closed the CMED conference by quoting a comment by Anwar Eshki of Saudi Arabia:"I came to Qatar 20 years ago, and none of this was here. What if gas and petrol stop existing? What will happen to the region? We need alternatives and we need to start looking for [these] alternatives today".
Upon his return to UCLA, Spiegel reflected, “In the nine years since the ‘Enriching the Middle East’s Economic Future’ series began, the meetings have evolved into a more focused program with fewer speeches and more discussions of how to broaden and expand the economies of the region.” He noted that at times, these issues require political and diplomatic discussion, but that these topics are also addressed.
"Since we joined with the Doha Forum as partners several years ago, we have been afforded the added dimension of a large meeting with participants from around the world", he continued, "adding to our representatives from 60-odd countries".
Combined, he explained, the two programs afford participants an unusual opportunity for exchanges with some of the leading experts and analysts worldwide.
"The uniqueness of these two conferences working together is not only in the panels and workshops that we both provide, but in the connections and private discussions that occur,” said Spiegel. “When we talk about creating a region with more jobs and fewer controversies, we’re not only listening to presentations and reacting to them. In the corridors and the side meetings, we are creating that enriched Middle East".

Published: Friday, May 30, 2014