Economics 101: GCC states need to do more to encourage SME-led innovation
How to make GCC SMEs as dynamic as non-GCC SMEs?
The high wages and secure jobs that GCC public sectors offer to their citizens undermine the incentive to work in a SME, either as a dynamic entrepreneur or as a regular employee. Given how important SME-led innovation is to the performance of conventional economies, what can the GCC countries do to improve the contribution of their SMEs?
Before I propose specific policies, a key overarching theme is that governments in general, GCC or otherwise, should avoid the business of picking “winners”. Throughout history, governments have demonstrated that their best role is to enable the private sector and to create an environment where competition in a level playing field determines the success of commercial projects.
Government bureaucrats exchanging memoranda about what they think is commercially valuable based on non-market criteria is a recipe for an ineffective private sector, because bureaucrats lack the financial incentives necessary for making wise commercial decisions.
In contrast, competitive markets motivate entrepreneurs to address their clients’ needs, as it is the most straightforward path to commercial success. Swapping market forces for government decisions encourages entrepreneurs to shift resources away from satisfying clients toward building a rapport with the government bureaucrats picking the winning projects. GCC governments should especially heed this warning as they seek to increase the private sector’s role in employing nationals, as too often in the past, their zeal for assisting nascent private-sector projects encourages white elephants dependent upon government support.
Thus, even when the government does provide direct assistance to SMEs, where possible, it should build upon a competitive market decision over which projects merit support. An example is loan guarantees, whereby creditors provide loans to SMEs under the standard terms but the government secures the loan on behalf of the borrowing SME, eliminating the downside risk faced by creditors. This way, private, for-profit creditors are still competing to offer loans to private, for-profit SMEs and civil servants are kept far away from commercial decisions. Another common example is tax breaks for SMEs.
In both cases, GCC governments can amplify the benefits accruing to SMEs by shifting funds away from public-sector employment to SME support. Thus, rather than replacing retiring government workers with new hires, those funds can be redirected toward lightening the tax burden being imposed upon SMEs, such as the selection of fees recently imposed upon companies operating in the Saudi private sector. Much to the chagrin of many GCC citizens, making public-sector employment less attractive is critical to empowering SMEs.
GCC entrepreneurs often suffer from a lack of training in accounting and other business essentials. Along similar lines to the above, rather than running their own workshops, governments should consider giving SME owners vouchers which they can use to attend privately run workshops in a competitive educational market.
Government regulations also constitute a significant hurdle for SMEs, which cannot afford the lawyers and industry specialists necessary to navigate a byzantine legal environment. In many cases, regulations become unsuitable with the passage of time, due to technological improvements, but they remain in place because governments focus more on the act of promulgating new legislation than on eliminating defunct old legislation.
How can GCC governments tackle this problem?
The Netherlands offers the sunsetting of legislation as a potential solution, whereby regulations automatically expire and have to be actively reenacted by the government; that helps to limit the persistence of obsolete regulations. The UK government’s approach has been to establish deregulation units dedicated to weeding out laws that have become inappropriate. SMEs in the GCC would surely benefit from such initiatives.
Finally, GCC governments should consider giving SMEs a larger role in official trade missions, especially as they seek to expand trade relations with huge markets such as China and India.
Vincent van Gogh once remarked: “Great things are done by a series of small things brought together.” The GCC’s oil means that its economy has the potential to be great; realising that potential requires SMEs to play a larger role.
Omar Al Ubaydli is the programme director for international and geopolitical studies at the Bahrain Center for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University in the US. He welcomes economics questions from readers via email (firstname.lastname@example.org) or tweet (@omareconomics).
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Updated: February 25, 2017 04:00 AM