By Kristen Carpenter and Giovanna da Silva
Entrepreneurship often serves as a means to achieve social change. In the Middle East, social enterprises such as Glowork foster advancement by providing the disenfranchised with empowerment and professional development opportunities.
Many entrepreneurs and employment seekers in the area, however, face regulatory hurdles to starting their own business. Excessive regulations stifle job growth and increase unemployment rates. Reducing the amount of bureaucracy in the employment sector is crucial to promoting a healthy environment of entrepreneurship and increased rates of employment, thus facilitating increased economic growth.
Prospective entrepreneurs can face arduous regulations before they receive approval to create an enterprise. In Saudi Arabia and the United Arab Emirates, registering a business with their respective national governments can cost around $15,000. The cost of starting a business is highest in Yemen, however, where expenses amount to 73.5 percent of income per capita. In the West Bank and Gaza strip, registration expenses can reach 45 percent of income. In contrast, startup costs in Europe and Central Asia are just above four percent of income per capita. These exorbitant fees restrict those with entrepreneurial aspirations but little financial capital from starting their own businesses.
The World Bank’s “Doing Business” project collects data from local businesses in 190 countries and analyzes the regulations they face overtime. The project uses this information to compare regulatory environments of nations and regions worldwide. According to the report, Middle Eastern and North African (MENA) nations ranked in 115th place on average for “ease of doing business.” In the same category, Latin American and Caribbean states averaged in 110th place while the European Union ranked in 34th place. In Lebanon, securing a license to construct a warehouse averages 249 days, with the MENA regional average at 132 days. A business will need 90 days to receive electricity in Qatar and 68 days in Saudi Arabia.
Businesses in the Middle East are also constrained by stringent labor restrictions which contribute to a high unemployment rate in the region. Middle Eastern youth aged 15 to 24 experience a rate of unemployment at 21 percent. This contrasts with the global average rate of youth unemployment of 13 percent. While certain regulations are justified in order to protect the rights and safety of workers, an excessive amount of government involvement in the labor market decreases the rate at which companies employ workers. This especially hinders vulnerable groups such as women and young, inexperienced people from acquiring employment.
Several Middle Eastern countries require businesses to pay fines for each person they fire regardless of the cause. In some cases, the business owner must re-train employees instead of firing them. This policy decreases the quality of customer service and disincentivizes workers’ productivity. It may also encourage employees to see their employment as a fixed source of income, unrelated to their job performance. Under this labor regulation, businesses are discouraged from hiring new workers. Additionally, this regulation encourages corruption and rule-breaking. Employment laws are often evaded in both the public and private sector.
Companies avoid firing fees by signing a fixed-term contract with employment. Those working on fixed-term contracts, however, earn lower wages, experience higher turnover rates, and are trained less on average. Fixed term contracts also provide little opportunity to move up in the company.
Not surprisingly, 38 percent of firms in Lebanon report that labor regulations are a “major constraint to doing business,” followed by Oman at 35 percent, Syria at 34 percent, and Jordan at 14 percent.
The public sector is responsible for a large portion of employment in the Middle East due to government intervention in the economy and the nationalization of industries such as oil production notes the Brookings Institution in Washington, D.C. Incentivizing the growth of entrepreneurship in the private sector is integral to combating high unemployment rates. Lifting employment restrictions, streamlining the licensing and permitting processes, and decreasing the cost to register a business with the government are all important measures that must take place in order to advance the growth of entrepreneurship in the private sector and improve the standard of living of those who are unemployed.