90146 March 2014 – Number 119 X1` Arab Development Symposium II: Invigorating SMEs in the Arab World Mustapha Rouis and Imed Limam1 Introduction: In March 2010, the Arab Fund for Economic and Social Development and the World Bank (Middle East and North Africa Region) agreed to hold joint high-level development seminars around issues pertaining to the Arab World. These would be held on a regular basis, every 18 months or so, at the Arab Fund premises in Kuwait. The first symposium focused on “Food and Water Security in the Arab World” and took place in March 2011. The second, the topic of this MENA K&L Quick Note, analyzed “Micro, Small and Medium-Scale Enterprises (MSMEs) in the Arab World” and was held in June 2012. Employment and Poverty Challenges in the MENA Region: Over the next decade, the MENA region, which has the highest youth unemployment rate in the world, needs to generate 40 to 50 million jobs just to absorb the new entrants into the labor market. This is four to five times the current rate of job creation. Meanwhile, 12% of the 350 million people living in the Arab World are below the poverty level of USD 2 per day. The rural-urban dichotomy has MSMEs in the MENA Region: Currently, there are also widened measurably due to the steady around 19 to 23 million MSMEs in the MENA migration of rural populations to urban centers in region, 10% of which are in the formal sector with search of employment. the remaining 90% in the informal sector. SMEs employ 4 to 35% of total employment, and account for 20-35% of private sector employment compared 1 to 49% in the OECD set of countries. The finance gap Mustapha Rouis, Consultant, Office of the Chief Economist, facing medium size enterprises is estimated at $200- Middle East and North Africa Region, The World Bank; and Imed Limam, Sr. Economist, Arab Fund for Economic and Social 250 billion with $50-70 billion for small size Development. This MENA K&L Quick Note was cleared by enterprises. Shantayanan Deverajan, Chief Economist, Middle East and North Arica Region, The World Bank; and Ahmed Osman, Operations Global Lessons on SMEs, Growth and Director, Arab Fund for Economic and Social Development. The authors are grateful to Simon C. Bell from the World Bank for Employment: There are major definitional problems their comments. regarding SMEs across countries in the world and, in some cases, within the same countries (depending modest contribution of SMEs to growth and on the nature of the institutions dealing with SMEs). employment in the MENA region: weak institutions, Such disparities tend to distort the role and impact poor regulatory environment, scarcity of skilled of SMEs. Notwithstanding this issue, the empirical labor, and access to finance. At the same time, the evidence is mixed about the role of small and literature and empirical analysis are mixed about the medium size enterprises in growth, job creation and merits of direct government support for SMEs. innovation. In OECD countries, studies show that small enterprises create more jobs (60-70%), This notwithstanding, there is a clear appreciation of contribute more to growth (approximately 50%) and the role of SMEs in economic development, introduce more process and product/service particularly at a time when the region is going innovations than large firms. through unprecedented turmoil precipitated by poor governance and dire unemployment. The In 2005, the European Commission reported that reinvigoration of SMEs would therefore provide approximately 23 million SMEs provide about 75 some response to the crisis. A regional approach to million jobs and represented 99% of all enterprises promoting SMEs would have the added benefit of in the enlarged EU. The Boltin Committee in the UK enhancing regional integration among MENA claimed that small enterprises are the ‘seabed’ and countries—a region which is one of the least ‘incubators’ for innovation, entrepreneurship, and integrated in the world. Finally, micro enterprises worker learning. The Small Business Administration have an important development role as they in the US attributes most of the growth and stimulate economic inclusion, particularly among employment generation to small enterprises. With women and youth. modest growth prospects and exceedingly high unemployment rates, especially among young males Recommendations: The main recommendations are and females in the Arab countries, how can SMEs be divided into two areas: policies and institutions. The energized to help generate job opportunities, bolster following represent the critical set of institutional shared growth, improve competition, and reduce business enablers that are necessary for the growth poverty? of MSMEs: i) a credit risk guarantee entity, ii) a credit bureau and registries, iii) a central micro- Other studies show that large size enterprises are the finance coordinating entity, iv) private venture real engine of growth and job creation (net). A 2012 capital firms, v) a specialized micro financing bank, study by Bob Rijkers on MSMEs in Tunisia2 and vi) a professional association to represent concludes that the firms most responsible for job MSMEs. On the policy side, there are two sets of creation during the period between 1996 and 2010 policy recommendations: financial and non- have been small startups (11-100 employees) and financial. large firms (over 100 employees). This conclusion is corroborated in other empirical studies on Morocco, Contact MNA K&L: Ethiopia and Indonesia. Caroline Freund (2012)3 Gerard A. Byam, Director, Strategy and Operations. indicates that SMEs are less productive and account MENA Region, The World Bank. Preeti Ahuja, Manager, MNADE for a smaller share of productivity growth, and that mature SMEs have a low survivability rate. On the Regional Quick Notes Team: other hand, large firms have the capacity to attract Omer Karasapan, and Mark Volk more resources, adopt newer technologies, increase Tel #: (202) 473 8177 levels of resource productivities, penetrate new The MNA Quick Notes are intended to summarize markets and grow faster than SMEs. lessons learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily Challenges and Opportunities for SME reflect the views of the World Bank, its board or its Development: There are several reasons behind the member countries. 2 ”Job Creation: A Big Job for Big Firms,” World Bank, www.menablog.worldbank.org 3 http://blogs.worldbank.org/arabvoices/small-medium-sized- enterprises-not-silver-bullet-growth-and-job-creation March 2014 · Number 119 2