HELPING MIDEAST COMPANIES: WHO’S WINNING?

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By William Fisher and Ludwig Rudel

Over the past decade, international donors have pumped billions into programs to make Middle East industry, agriculture and services more competitive in the global economy. Funds have come from such organizations as the US Agency for International Development, the European Union, the World Bank and many others. These donors believe that the private sector is the engine of economic growth and job-creation, that economic growth is the key to the development of a middle class, and that it is the middle class that fosters stability and political and economic reforms.

Egypt has long been well atop the list for donor largesse in the Middle East – second only to Israel as a recipient of US aid. But substantial funds are now flowing to other countries such as Jordan, and lesser amounts to others such as Lebanon, Gaza/West Bank, and to several countries in North Africa.

What have Middle East donors done? Their toolkit includes everything from microfinance to privatization. Donors have given policy advice to privatize inefficient State-run companies, get governments out of this operational role, and train them to perform regulatory functions. They have collaborated with host government ministries and agencies to develop policies and implement regulations to remove obstacles to private sector growth. They have sponsored programs, often with special lending packages funded with governmental resources, to reform banking practices to make credit accessible to smaller companies. They have provided firm-level technical and managerial assistance to thousands of individual companies. They have introduced low cost training programs to help entrepreneurs access global information sources on available technology and foreign markets. They have helped to create technology research and development facilities and encouraged these institutions to develop links to local companies or industries. They have introduced programs to help groups of local business people to organize themselves into Business Support Organizations – BSOs – to provide market and technology information and services to their members, and lobby their governments to remove constraints to private sector development.

What has been achieved? In the economic development arena, it is difficult – and unfair -- to try to find a quick ‘cause and effect’ relationship between donor help and corporate performance. By definition, economic development is a slow process, and more equitable distribution of income is even slower. While there are many anecdotal success stories, the view of most development experts is summed up by Dr. Wallace E. Tyner of the Department of Agricultural Economics at Purdue University, a veteran of dozens of overseas development projects for USAID and other donor agencies in the Middle East and elsewhere. Says Dr. Tyner: “The reality is that when a donor project comes along, it is usually the established or well connected that have access to the donor(s). Smaller businesses largely get left out of the process. Thus, small businesses remain small and unable to create jobs, and the relatively rich get richer.” Donors find this phenomenon particularly discouraging because small businesses have the potential to create far more jobs than all the relatively large private companies combined.

What can be done? There is no one-size-fits-all solution for the Middle East. But there are steps that could be taken. For example:

1. Conditionality: As ‘in-your-face’ as it may be diplomatically, donors need to insist that aid to the private sector be accompanied by pro-business policy and regulatory changes. They also have a right to encourage transparency and accountability from host governments for the funds they receive, and appropriate actions to ensure that mafias or corrupt officials don’t profit from aid dollars. Once a program and its goals and benchmarks are accepted by recipient governments, these hosts should understand that the size of next year’s aid budget will depend on how well this year’s benchmarks have been met.

2. Donor Know-How: Those who work for governmental aid agencies have little or no private sector experience. This has led to errors in judgment and to a general lack of interest in private sector development. Donors need to recruit more staff from the private sector.

3. Access to Capital: Sales, profits and employment cannot be created without capital. But in the Middle East and elsewhere, commercial banks are most comfortable lending to prominent figures and to friends and relatives, and distinctly uncomfortable lending to others – especially smaller companies. Reform of commercial banking systems throughout the Middle East needs to be a much higher priority among donors.

4. Inside-out, bottom-up Change: In a few Middle East countries, indigenous business support groups have learned how to make their case to government and keep the pressure on until reasonable policy changes are made. Donors need to devote more resources to the development of such trade associations, chambers of commerce, and cooperatives.

5. Use of Volunteers: While NGOs have been used abroad in the past, they have usually been placed in subservient roles to contracting firms. Yet host governments and host country business people may well respond more positively to volunteers than to paid consultants. Volunteers can bring a wealth of practical business experience to the Middle East. Their role is worth expanding.

6. Donor Coordination and Cooperation: Multilateral and bilateral donors need to leverage their resources to optimize their positive impacts. This requires more collegial planning and implementation of programs to strengthen private sectors throughout the Middle East and North Africa. There is a need for greater cooperation among donors from different countries, as well as between bilateral and multilateral donors.

7. Access to Information Systems: Middle East business people need more access to the Internet, which unprecedented opportunities for individual entrepreneurs to obtain information about the latest technologies and market information from around the world. It can also be used to help MENA business people to identify prospective joint venture partners or subcontracting customers.

8. Corruption: Corruption exists in every developing country (and many developed ones as well). The Middle East is certainly no exception. Corruption comes in many forms. It is often blatant: your goods will rot on the dockside unless the Customs Officer and his colleagues get their baksheesh. Sometimes it is subtler; many companies in the Middle East hire Customs Officers to do their paperwork in their ‘spare time’, thus ensuring expedited shipments. In whatever form, corruption is pervasive and costly. The American Chamber of Commerce in Egypt estimates that corruption adds 25-30 per cent to every commercial transaction, often with the result that Egyptian products and services become uncompetitive. Moreover, corruption hurts smaller companies most. Finally, a reputation for corruption poisons the environment for major transnational investors. It is true that Middle Eastern civil servants (who, in many countries, once made up much of the respected middle class) are painfully underpaid. They need more money, and those who deserve it on a merit basis should receive it. But money alone will not fix this deeply ingrained problem. Donors can help, but at the end of the day, it is a matter of political will: host governments throughout the region need to be prepared to take swift and serious criminal action against corrupt officials, from the top down, and against the business people who keep this sordid tradition alive.

The Middle East lives in a globalized world, whether it likes the idea or not. It can rise to the challenges of globalization -- producing good products and services competitively -- or it can allow globalization to reduce it to buying expensive imports only the few can pay for. Changing old ways will not be easy. But failure is not an option.