Why jobless? Privilege not competition in the Private Sector
This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs.
Several years ago, when I first came into the region, my department produced a Private Sector Flagship report titled, “From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa”. This report gradually became known simply as “From Privilege to Competition” and more recently truncated even further to “P2C”.
When this report was first launched in Egypt, in the year before the Arab Spring first began to take hold, the region planned a large event in Cairo with Ministers and press. Interestingly, no ministers turned up to the launch event. The main thesis of the report had apparently become clearer as they digested the title! Similar dissemination events in Rabat and Beirut also fizzled somewhat, as this highly charged message was not well appreciated by those in power. Indeed, it was not until the advent of the Arab Spring that the message of the report really began to resonate in truly spectacular ways.
And what was that message?
The basic premise was that opportunities in the private sectors of the MENA region – and how well a private business man or (less likely) a private business woman performed – depended upon WHO they knew rather than WHAT they knew. Getting into business in Tunisia involved working with the extended Ben Ali family, while similar connections in Egypt, Libya, and other countries in the region were the only real route to success in the private sector worlds of these MENA countries. Naturally, these cabals of crony capitalists were all too keen to keep out all and any competition that may come in and threaten their cozy little nest egg of well protected companies. Never were the words of Adam Smith more true than in pre-revolutionary MENA – “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” However, in the case of MENA it was not just “the same trade” – it had sadly become virtually the entire private sectors of many countries in the region.
Basically, the nexus of political and economic power had come to skew development towards benefiting and protecting a few well-placed players who controlled the flow of opportunities and resources. This not only narrowed the benefits of market-based growth, but also resulted in less investment, less export diversification, and less technological sophistication.
Competition is a fundamental driver of innovation and efficiency-oriented improvements in operations, yet with constraints on entry and competition, and with financial markets, land markets and industrial strategies all oriented more towards the few rather than to the many, economic dynamism was muted along with employment growth.
My favorite graph from that report plots countries by their level of per capita national income (i.e. at presumed similar levels of economic development) and the number of products that they produced and exported. What is startling about this graph (below) is that virtually all MENA countries fall below – and some well below – the trend line. The implication is that MENA produces less products compared to other countries at a similar level of development – something that we intuitively all recognize (i.e. that MENA is pretty much an undiversified region in terms of its production base). But what is also very interesting is that the technological content of the goods that are produced is relatively low compared to similar comparator countries in other regions.
(Click to Enlarge)
The up-shot of this is that MENA countries tend to have an undiversified economic base and that the technological content of that productive base is also fairly low. Both attributes belie the status of MENA as a middle income region – and they have been perpetuated by a closed approach to trade and foreign direct investment and a system of crony capitalism that precisely tried to lock out competitive pressures.
However, as we have increasingly become aware, a dynamic and vibrant, constantly evolving economy – which creates the required number and quality of jobs for its employment seekers – requires competition, and the innovation and dynamism that it produces. The very strength of the American economy is a direct result of the emphasis on competition as a stimulus to innovation and dynamism. As Charles Darwin said “It is not the strongest of the species that survives, nor the most intelligent, but rather the one most adaptable to change”. As with living species – the same appears to be true of national economies. Without competition and without innovation, economies calcify and shrink – reducing job opportunities for new job seekers – while a privileged few monopolize the limited benefits.
The exciting aspect of the Arab Spring is that this dynamic has now suddenly changed. A door has creaked open, a window of opportunity has appeared – there is now the potential to change the existing P2C dynamic of the past 20, 30, 40, 50 years of crony capitalism. It will, however, require a substantial change in the existing status quo. As Adam Smith hints, new crony capitalists are likely to rise up and take the place of their fallen forebears. Nor have all the former crony capitalists disappeared. Many will seek to go back to the old predictable ways of the past.
This, however, is MENA’s moment. The window will not stay open for ever. Unless the rhetoric and the job creation mantra that is now being chanted by most of the governments of the region is accompanied by a real openness, a greater acceptance of foreign investment, substantially enhanced competitive pressures, and a fully supportive and comprehensive business Eco-System – then the opportunities for real innovation that can create the many middle income level job opportunities which are in such demand throughout the region, will be lost.
This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs. The common thread and objective of these blogs are to spur a conversation on “what to tell your Finance Minister.” This is in preparation for the World Bank Annual Meetings in October 2012, where the report's main messages and the results of the live chat will be presented to MENA policy makers. We want to know what YOU think is holding people back, and what can be done to create more and better jobs in MENA. Please send us your thoughts and join us for a live web chat on jobs on September 17.
Read the previous weeks' blogs in the series: