August 27, 2007
Economic Development, Risk Taking & Culture (or excessive attention to culture)
Taking cue from from my own Lounsbury comment, a slightly modified and updated set of thoughts on this IHT article: Egypt searches for a balance that rewards risk-takers while valuing the past, although as I said on The Lounsbury, to be fair it is an AP article.
While it has aspects of breathless gullibility, it's not without a discussion of evolving business culture...or aspirations of evolving business culture. But in advance of my comments, a few thoughts.
First, in reading this article I was struck by the degree to which both local and foreign observers can rather easily fall into broad cultural generalizations as prime reasons for a phenomena, ignoring rather plainer, perhaps less sexy real incentives. This is not to say, by the way, that I am taking a view that culture is not in play in the issue of risk taking breezily discussed in the article. Quite the contrary, I've discussed many times in the past (in various forms, such as re World Bank Reports of various foci, my supposedly practical comments, USAID or similarly sponsored reports on Arab Investment, practical problems (well not really but I had forgotten about this), as well as personal rambling on structuring investments, biz cultural observations or mumbling about economic freedom.
Were I to disentangle this incoherent mass of observations, there would be two core observations: yes risk taking is culturally constrained in MENA - although I am not sure that the cultural aspect is worse than a good number of countries on the North fringe of the Med basin - and; rather more immediate, the overall economic system due especially to the interference of the Vampire States in the service of the oligarchies, makes domestic risk taking rather more risky than merely starting up a business....
Making then many of the comparisons in this fine IHT arty rather suspect from the get go. That being said, there is some utility in reflexion and comment:
Khaled Awad is a risk-taker.
A doctor by training, he decided at the age of 26 to give up a secure position in one of Egypt's state-run hospitals and do something considered crazy by most of his countrymen: start his own business.
Awad, who started a company that transmits stock market data directly to mobile phones, is so unusual in Egypt that business people and academics are still trying to agree on a common Arabic word for "entrepreneur."
Eh, well, there's also a lack of a common single agreed on word for other things as well. I'd place the problem on the faqih attitude of Arab academics, combined with a rather typical academic disdain and distance from the dirty world of commerce.
That and Arab literature and language departments are filled with nitpicking cretins, but then so are English departments.
Yet as unemployment remains high across the Middle East, efforts to promote such risk-taking are considered significant to increasing the economic vitality in the region, with its corruption-ridden economies and chronic lack of opportunity for those without political connections. And there is often a link between economic stagnation and political extremism.
Egypt does have a few well-known entrepreneurial success stories, like Cilantro, a chain of trendy coffee shops, and Otlob.com, a popular home delivery Web site.
Otlob? A success story?
Someone bring me up to date, I thought it was a failure being kept alive to prevent realisation of losses.
Regardless, a good turn of phrase, often a link between economic stagnation and political extremism, puts things in the right light, of not just poverty but opportunity and frustration, which is the real driver.
But such examples are hard to find. Instead, would-be entrepreneurs continue to face barriers that complicate efforts to turn the germ of an idea into a large and profitable company.
Despite a spate of economic reforms in recent years, many entrepreneurs feel their needs have been neglected, and regulations still bar the way.
Bankruptcy, for example, is still considered criminal in Egypt.
Yes, quite bracing that. Criminal sanctions for the simplest of commercial errors.
Not uncommon really.
One core problem is the cultural reluctance to cast aside stability for the unknown.
Quite pragmatic reluctance really. If you're without a real safety net, casting aside stability and plunging into the unknown is perhaps not wise.... and above all if the odds are rather stacked against you.
One should note - not as much in the circumstance of Egypt, but more so in the Maghreb - the risk-reward calculation and risk taking is not absent: look at the dangerous routes taken by the economic migrants to Europe, and years of hard labour, etc. Their calculation - the economic migrants of various sorts - is not irrational really.
So, casting aside stability, promoting risk taking, easy to place the weight on the shoulders of the culture, but one can often blind oneself to a better diagnosis by looking only at culture.
"They assume I am crazy," Awad said of his friends. That is despite his winning a business plan competition sponsored by the Egyptian Entrepreneurs Business Forum. The award netted him a $9,000 prize and an office in Smart Village, a new-technology office park where giants like Microsoft and Vodafone are located.
Likewise, Nagla Akl, who started a successful marketing agency in Alexandria at the age of 21, encountered serious resistance from friends and family.
"I come from a very conservative family," she said, "so they basically hid from the rest of the family" that she was working on her own business "for two or three years."
Akl said her family, regarding her enterprise as too "wild," made out that she worked for a magazine.
The risk aversion comes, in part, from Egypt's socialist roots.
And the fact the system has a tendency to crush you if you stick out.
Until recently, every Egyptian who graduated from a university was guaranteed a government job - swelling the country's bureaucracy and setting limits on many peoples' goals.
In many countries, business failure is accepted as an inevitable byproduct of innovation. But in Egypt, stories of businessmen who go bankrupt run alongside tales of common criminals in newspapers.
A debtor also is deprived of his right to vote and prohibited from working in any commercial profession until he pays back his loans. He may also be banned from leaving the country.
The negative reputation of bankruptcy stems from 1990s scandals involving businessmen who got loans from local banks, then fled the country once their plans fizzled.
Because of the past scandals, banks in Egypt also remain reluctant to lend to small or medium-sized firms - and often require large amounts of collateral that are out of reach to most.
Eh. Well actually huge amounts of collateral are required because recovery of debt is a bloody nightmare, and it takes years to take possession. Ergo one has to price in recovery time, etc. etc. Not just the scandals, the legal system as it is structured.
Oh, plus the accounts of most businesses are worth fuck all. So again, one has to have a nice gun up side the head of the borrower to ensure payment, because one knows the accounts are complete shit as a standard operating procedure.
Ehab George, who owns a software development and distribution business in Alexandria with 24 employees, was turned down by several banks last year when he needed a loan to expand. "My business is too risky for them," he said.
That kind of business is often too risky for Western banks as well.
Two international research groups said in a report published in 2004 that small and medium-sized firms in Egypt had received only 10 percent of the financing that they needed to expand.
Ah the development people and their bleeding heart "SMEs need more financing" fantasms.
The government has implemented reforms in recent years to improve the banking system, but it is unclear if that will increase small lending. As of May 2006, the private sector share of bank credit was only 3.5 percent, and the overall loan growth rate was declining.
In 2005, two World Bank economists reported that the lack of available financing was the No. 1 factor limiting economic growth here.
And banks are about the only option, besides family money: Venture capital is virtually nonexistent and other nonbank financial instruments, like leasing equipment instead of buying it, are poorly developed.
VC got taken for a bath in the 90s.
Of course the corruption of the entire system and the fact the whole country is a basket case helps.
I frankly have fuck all confidence in the reforms, but who knows...
There have been changes that have fueled business growth.
The Egyptian government set up a Social Fund for Development in 1991 to help new and existing small- and medium-sized businesses obtain financing and administrative support.
But many doubt that an additional level of government bureaucracy is the answer. The country and region seem torn between the need to adapt to a world that rewards risk taking and the traditional thinking that values a conservative approach.
The last line is bollocks. The problem is not simply mentality - I see risk taking all the fucking time. It's rather that the entire fucking system is built to punish risk taking. The culture has its risk taking aspects - although a bit on the short termist side - the problem is the overall governmental systems penalize.
Of course another goddamned government fund is going to do fuck all
Amr Rezk, an Egyptian who recently graduated from Harvard Business School, is tackling the problem head-on, launching his own group to incubate and finance start-ups.
"My goal is to create competitive businesses that create a lot of wealth for Egypt - and serve as models for others to follow," he said.
Kha, I should introduce him to a friend of mine who did the same thing in Cairo a decade ago.
I should add it failed badly, and not for lack of talent.
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What an erudite and learned blog, I will be bookmarking it.I hope some of your readers will visit my blog 'An Unrepentant Communist'..
Greetings to you all from County Kerry in Ireland
Posted by: Gabriel at August 27, 2007 08:33 AM
One word: repent!
It is a thoughtful site worth a look, though.
Up An Phoblacht!
Posted by: matthew hogan at August 27, 2007 09:40 AM
Erudite and learned?
Bloody hell mate, you're hitting some strong stuff there, being both a Bolshy bastard and calling us erudite and learned.
Posted by: The Lounsbury at August 27, 2007 11:12 AM
Gabriel: I find, as a lefty, that's it's better to just stick to the topic at hand and not spill over too much around here, unless doing it in a "learned and erudite" way. Unless you like wasting you day away trading insults with the easily offended/amused denizens of this blog.
Also, shameless plugs? come on. Make smart comments, and people will check out the site that your name is linked to...
Posted by: Frandroid Atreides at August 27, 2007 01:54 PM
I liked the plug and the implicit offer to trade reading opportunities.
When a Communist is on his way to understanding the concept "mutual gains through trade" he's halfway out the door already.
Posted by: matthew hogan at August 27, 2007 02:53 PM
Erudite...of course you are, and as for my unrepentance,well it is in quotation marks, it was an epithet applied to Brecht before the US kicked him out...Never had anything against 'mutual gains through trade'...Good Luck !
Posted by: gabriel at August 27, 2007 04:09 PM
and when market fundies understand that the 1929 crash was more than just a "market correction", they enter the realm of sanity...
"1929 crash was more than just a "market correction",
Of course it wasn't a mere market correction, it was the pentup puncture of a ridiculous speculative bubble enabled by government fabricated liquid currency fed by the relatively new Federal Reserve; and panic over a protectionist tariff imposed by the government.
Posted by: matthew hogan at August 27, 2007 05:39 PM
A real living commy...
This paper - http://www.imf.org/external/pubs/cat/longres.cfm?sk=20523.0 - argues that, in general, access to funding in Egypt is not a binding constraint on growth.
The main problem is the 'appropriability of returns': "Private returns are reduced through the high cost imposed by complex regulations and inefficient government services, but perhaps also
through the high cost of experimenting and exploring new production ideas."
Posted by: Simon at August 28, 2007 09:15 AM
Cilantro and Otlob are the big success stories? Sounds like this journo is new to Cairo and those are the only two businesses he's aware of because they cater to English speakers.
Also, rather ironic that he uses the old cliche about there "being no word for x in this language" when the word entrepreneur entered English from the French, and this hardly signifies that France is a great creative source of entrepreneurship.
And the French use the English words "leader" and "outsider" and "look" (as in a fashionable look - "ce look est un must") all the time.
Posted by: sp at August 29, 2007 06:12 AM
Aww be nice to the Kerry man, Killarney is my favourite place in the world...
Posted by: Meph at August 29, 2007 01:06 PM