Saudi Construction workers, SUSTG

Not Just Tech: Entrepreneurship in the Middle East

05/19/2016 . By Nathan Field

This article has been translated into Arabic by the Center for International Private Enterprise, and the Arabic version is available on their website.

هذا المقال نشره معهد التحرير لسياسات الشرق الأوسط باللغة الإنجليزية، وقام مركز المشروعات الدولية الخاصة بترجمته إلى اللغة العربية. يمكن الإطلاع على النسخة العربية هنا.

The conventional wisdom in the Middle East policy and media communities is that the promotion of entrepreneurship in the region is both wise and strategic. After all, the creation of new jobs and additional economic stakeholders creates better prospects for healthy democracy in the Arab world over the long run. Rags-to-riches stories of young Tunisians and Egyptians undermine the Islamic State and other extremist groups whose appeal is based on the idea that young people cannot achieve purpose and meaning by adhering to social conventions. However, the widespread focus on tech startups as the sole manifestation of entrepreneurship in the region is producing lackluster results. Nearly every conference held in Washington since 2011 has been dominated by tech veterans or promoters of “innovation” and “changing the world.” While noble, this is not producing tangible gains in terms of new jobs and status for those in the Middle East who do not already have it.

For greater impact from a U.S. policy perspective, the primary focus of entrepreneurship policies should be in promoting traditional small and medium-sized enterprises (SMEs), not necessarily high-tech ones. While these firms will not change the world or be “the next big thing,” they are more likely to generate new opportunities for those in the region who need it the most.

The Limitations of Tech Startups in the Middle East

The bias toward the dominant tech narrative is illustrated in a recent report produced by the Atlantic Council, “Economic Recovery and Revitalization.” Chaired by two tech entrepreneurs, it advocated a nearly exclusive focus on tech startups:

It is important to offer clarity on terms that are often used in discussing the impact of tech-enabled entrepreneurship.  “Start-ups” focus on companies that start from scratch, require small amounts of capital, and emphasize technology to either reduce costs or reach customers.  In contrast, “small and medium sized enterprises” (SMEs) are small businesses – usually with below $10 million in revenue – that are significantly slower growing than startups.  Both significantly impact the economy in the region and both – as well as most large enterprises – are compelled to change rapidly in the new era.  We believe this impact this change is best illustrated with a focus on startups.” 

There are three core problems with an exclusive focus on tech startups from the perspective of U.S. political objectives in the Middle East. First, if the goal is job creation, tech startups are not likely to generate such results. As the Atlantic Council report notes, tech startups “emphasize technology” to “reduce costs.” There is no way of getting around the fact that this largely means replacing human workers with technology. From a business perspective, this means more profits for the company and a better product.  As an entrepreneur, there is nothing wrong with this, but tech startups are not inherently focused on attempting to create new jobs. Flat 6 Labs, perhaps the most well-known incubator in the Middle East, advertises on their website that they have created “400+ jobs.” While this is a step in the right direction, the number is hardly a drop in the bucket of the massive unemployment problem in the region. 

Second, anyone in the Middle East with the programming or management skills needed in the tech industry is almost certainly close to the top of the socio-economic ladder or talent hierarchy. Therefore, when outside funds focus on tech startups, they tend to reinforce rather than break socio-economic barriers that negatively affect Arab politics and society. This is not to say that tech startups cannot help the working classes, as some do. Shaghalni (“Hire Me”), an online job platform that caters to blue collar workers, recently received funding from Egyptian billionaire Naguib Sawaris. Shaghalni founder Omar Khalifa’s description of his winning pitch reiterates the nature of the problem. Khalifa noted that what caught Sawaris’ attention was the company’s focus on helping those outside of the economic elite, which is where he says “the real [unemployment] problem exists.”

Third, the Atlantic Council narrative is based on assumptions about technology and economic costs that are accurate in an American context, but not necessarily in the Middle East. Too many of the tech startup advocates in the U.S. lose track of important cultural perspectives. Just 24 percent of Egyptians and 34 percent of Tunisians are regular internet users, with just five and 13 percent respectively having access to smartphones. Moreover, the report also argues that SMEs produce slower growth—as though a company with less than $10 million of annual revenue is somehow insignificant. In countries like Egypt, the median monthly salary is about $560 with the average being closer to $300.  An SME that produces even $1 million per year in revenue is one thing in San Francisco, but in a country like Egypt it would be able to employ 40 to 50 people. 

The Value of Lower Tech SMEs

From a U.S. policy perspective, SMEs provide the advantage of more tangible and necessary impact on the Arab world. The economic demand and jobs appropriate for SMEs in many cases already exist. Middle Eastern entrepreneurs don’t necessarily need to be “innovative” or “create something new” in order to succeed. In Saudi Arabia, for example, there is a glut of skilled and semi-skilled labor ready to be put to work, though that labor force’s availability is entwined with other issues of migration, labor policy, and social change.  As I wrote several years ago, even in non-oil countries such as Egypt there is no shortage of available manual opportunities for a new SME. Unskilled sectors (e.g., trash collection), semiskilled (like construction and maintenance), and businesses requiring skilled labor (like education) are all ripe for expansion.

Three recent articles on Tunisia and Egypt succinctly illustrate these points. One from the New Yorker by George Packer on “Exporting Jihad” tries to get to the heart of why 7,000 Tunisians have joined ISIS. Nearly all hail from economically depressed sections of the country that have not benefited from the “Jasmine Revolution.”  As a Tunisian put it:   

You feel no interest from the post-revolutionary governments in us here. People feel that the coastal areas, with twenty per cent of the people, are still getting eighty per cent of the wealth. That brings a lot of psychological pressure, to feel that you’re left alone, that there’s no horizon, no hope.

The second article describes “How five Tunisians startups have become profitable:”

All sectors are represented; meal delivery with MonResto.tn, media with stock exchange specialist ilBoursa, connected devices with Chifco, B2B services with e-reputation platform Webradar, online deals with Bigdeal.tn, classifieds with Tunisie-Annonce.com, travel with Cyberesa, ticketing with Tiklik, and gaming with Digital Mania.

As a fellow entrepreneur, I wish these firms the best of luck.  But these stories illustrate how success as a tech startup does not automatically equate to socio-economic gains for the majority of the population of Tunisia. In fact, none of these companies appear to be significant employers.  Moreover, their core services appeals to an upper socio-economic echelon.  These firms provide few jobs or opportunities for new economic status to the people profiled in Packer’s article. 

By contrast, two SMEs worth considering have recently been profiled in Wamda. Egyptian firm Tiba Solar has established a solar panel manufacturing facility. FilKhedma (“At Your Service”) connects tradesmen and technicians in Cairo with people in need of household repairs. Both of these companies provide job opportunities for working-class Egyptians and are precisely the type of firm that should be the focus of entrepreneurship policies. 

Whether tech startups or SMEs, any new company faces a wide variety of obstacles, due to the bureaucratic climate, legal issues, and other challenges endemic in the region. Tech startups are often able to sidestep the most challenging of the regulations and challenges, but local governments, foreign donors, and investors ought to be willing to support traditional businesses seeking to grow and expand in the Arab world. Though massive profits may not accrue to investors through these companies, traditional SMEs are best placed to bring prosperity and security to the most people.