strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
(originally published by Booz & Company)


Staying on the Road to Growth

Governments can emulate this example by instituting more public–private partnerships to attract investors, and by promoting the transfer of skills from foreign firms to the local private sector.

Nationalization vs. Privatization

Privatization was one prominent area in which the Middle East was joining the global mainstream before the Arab Spring. Since 1990, some countries, including Egypt, Jordan, Morocco, and Tunisia, have sold off state enterprises and liberalized such sectors as telecommunications and transportation, hoping to eventually hand the reins of growth to private companies. In the GCC, privatization has helped the economy remain robust, and has promoted diversification away from hydrocarbons. Saudi Arabia transferred operation and maintenance of ports to the private sector in 1997; the Saudi Ports Authority owns the assets and retains a supervisory role.

This swing of the policy pendulum away from nationalization was bold. Nationalization had assisted state economic development. It had given a lift to newly independent economies, and often boosted national pride. But over time, state-dominated enterprises and economic institutions became sclerotic and hard to manage.

In the wake of the Arab Spring, governments may be tempted to swing the pendulum back toward nationalization. This trend may be encouraged by the popularity of state-owned enterprises, which fared relatively well during the economic downturn. The recent funneling of budget resources into the public sector is a warning that privatization could falter. One example is the Gulf housing market, where shortages are becoming acute for parts of the population. The best approach is for a mixture of public- and private-sector firms to build more dwellings for people of all incomes. Instead, state-owned firms, with easy access to funding, have pursued mammoth projects for affluent customers; these large-scale ventures have allowed them to overawe their private-sector competitors. Governments can avoid such public-sector dominance by using their existing national economic capabilities to nurture entrepreneurship, promote small-business creation, and foster the kind of privatization that works well.

Morocco, for example, has used its long-term commitment and openness to foreign direct investment to generate sustained economic momentum. In 1989, with the passage of a national privatization law, major state enterprises began to manage themselves along private-sector lines. Morocco is now a venue for large and innovative investment. In February 2012, Renault-Nissan opened a $1.3 billion automobile manufacturing plant in the Tangier Free Zone (a low-tariff port area dedicated to industrial development). The plant will be able to produce 400,000 cars per year and create 3,000 jobs. The facility has a carbon footprint of zero, a global first in the automotive sector.

Admittedly, the track record of privatization so far — the rate at which private enterprises participate in major economic activities — has varied by sector. The telecom industry generally performs well, and in the process enables citizens of the region to participate in the world economy. Jordan, which started bringing in private firms in 2001 and used an advanced regulatory regime, now has more mobile telephone subscribers than people. Its 2011 penetration rate of 120 percent compares to 2.5 percent in 1999, when the government had a monopoly. By contrast, the record in banking and finance is mixed. The GCC ratio of banking-sector assets in private hands ranges from 87 percent in Kuwait to 47.8 percent in the UAE (at the end of 2007).

Encouraging entrepreneurship among small companies is particularly important. The MENA region has a low level of enterprise creation (just 0.63 firms per 1,000 working-age people, according to the World Bank, less than half the rate of Latin America and the Caribbean), and many new companies are very small. Yet small firms have tremendous potential. In Morocco, microenterprises account for 65 percent of all private-sector employment; in Saudi Arabia, they account for 40 percent. In a region blighted by unemployment, governments should recognize that nurturing local businesses is a very powerful form of privatization. Counterintuitive though it may seem, one way to accomplish this is to use the buying power of large, state-owned companies. This technique, in which corporate giants deliberately foster smaller businesses along the value chain, has worked in South Korea, Singapore, and Taiwan. Large companies can also cut their import costs if they have more and better-quality local suppliers. Companies such as Saudi Aramco, the Saudi Basic Industries Corporation, and the Abu Dhabi Basic Industries Corporation are already taking this approach. They also provide training programs to groom skilled workers whom they then place with their suppliers. The same pattern is occurring in the telecommunications sector with regional operators such as Saudi Telecom, Etisalat, and Qtel.

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.