Stifling Entrepreneurship in The Middle East

Here's an excellent economic and  political analysis of the situation in the Middle East, by James Surowiecki writing in the The New Yorker:

"Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies. It’s hard for entrepreneurs to start and run a business. Minimum capital requirements tend to be high, so you can’t get started without lots of cash, and getting business licenses and registering property are frequently arduous. Political favoritism is rampant, and byzantine regulations are difficult for outsiders to navigate. It’s instructive that the young man whose self-immolation helped set off the protests in Tunisia had had his fruit cart confiscated for violating some government rule.

The stifling of entrepreneurship shrinks opportunity for the young. The state’s intrusive presence forces much economic activity off the books—in Egypt, eighty-five per cent of small businesses are in the “informal” sector—and this reduces growth, since informal businesses have a hard time getting credit or expanding beyond a certain size. Thus the region’s economies are growing more slowly than they should, and the benefits of economic growth tend to be concentrated in the hands of those lucky enough to work for, or own, companies favored by the state.

Since weak economies eventually give rise to discontent, one might have thought that self-interest would impel autocrats to embrace reform. But, while clinging to the status quo can be dangerous for autocrats, real reform comes with its own risks. After all, in a system of state-controlled capitalism without a large, independent private sector, huge numbers of citizens are dependent on the state for their livelihood in one way or another. In the Arab world, an estimated thirty per cent of the workforce is employed by the state. Strict regulations enable the government to protect its friends in the private sector from competition, and bureaucrats line their own pockets, becoming further indebted to the system. The reliance in most of these countries on food and fuel subsidies likewise increases people’s dependence on the state. The big risk of reforming the system is that it weakens the state’s economic hold over its citizens."

HT: Stuart Anderson