The Middle East's post-pandemic future
A new reality is beginning to emerge as lockdown measures begin to ease amid the Covid-19 outbreak, imposing a dramatic restructure to the future economic and social landscapes as we traditionally know them. In the Middle East and North Africa (Mena) region, governments intially responded to the pandemic with stimulus packages and are now planning for their countries’ post-pandemic future as borders open back up and curfews are lifted.
The significant pullback in economic activity, necessary to protect public health, has jeopardised the economic well-being of individuals and institutions and resulted in slowdown in business operations. In addition to activating crisis-response efforts in full motion, governments across the world are considering and adapting a range of longer-term trends that have been accelerated by the crisis as they shape their recovery plans post-Covid-19.
“The reality of work will change and the way of work must change. The world after coronavirus needs different preparations," said Sheikh Mohammed bin Rashid, Prime Minister and Ruler of Dubai, during a virtual UAE Cabinet meeting to discuss post-Covid-19 strategy. "Preparing for a post-coronavirus world is to prepare for a new future that no one expected just a few months ago."
A Digital Future
Digital innovation will play a defining role during the recovery period, as Covid-19 has accelerated the migration to digital technologies at staggering scale and speed, across every sector. The use of internet during the pandemic is up 50 per cent in some parts of the world, according to World Economic Forum, as more aspects of our daily lives have moved online.
In specific, automation, digital and artificial intelligence (AI) technologies are expected to have a substantial economic and social impact. These technologies will likely account for about 60 per cent of potential productivity growth globally by 2030.
It is of no surprise that many governments have created, or started to activate, national AI strategies, as they will need to more than double their productivity growth to sustain economic growth rates.
The global economic trends for the post-Covid-19 era will give rise to a new global supply chain and new business patterns. It will also lead to allocating substantial investments for digital infrastructure, 5G networks, smart cities, smart services, health, education and trade.
Creating digitally enabled ecosystems therefore becomes critical because they catalyse growth and enable rapid adaptation.
“Being digital is the new design principle for any organisation moving forward post-pandemic, we need to be digital by default, because this will be the new infrastructure to enable businesses in the future. The blend between physical and digital world will be much more accentuated. The best performing companies and organisations during this crisis are the ones who were better prepared in terms of IT infrastructure,” says Adil ElYacoubi, chief strategy officer at Dubai Future Foundation (DFF).
Most companies were already digitising their operations before the coronavirus hit. By accelerating these efforts, they will likely see greater benefits in productivity, flexibility, quality and end-customer connectivity post-Covid-19. However, the adoption of digital and AI technologies will also require most workers to upskill or reskill.
Some sectors have been hard hit by the crisis including tourism, aviation, retail and real estate, while other sectors have grown such as technology, internet services, digital entertainment, e-commerce and e-groceries. Many are dealing with severe slowdowns in their operations while others seek to accelerate to meet demand in critical areas spanning food, household supplies and pharmaceuticals.
“Sectors like construction may take longer to recover as businesses and governments reduce investment while sectors like healthcare, digital, and online retail might be able to capitalise on new growth opportunities. Throughout all of this, we will likely see an economy where businesses become more focused on identifying efficiencies, reducing costs and implementing new technologies,” says Stephen Anderson, Middle East strategy and markets leader at PwC.
In order to come back stronger, companies across sectors will reimagine their business model as they return to full speed. During the current crisis, businesses have worked faster and better than they thought possible just a few months ago. Maintaining that sense of possibility will be an important source of competitive advantage.
New Ways of Business
The pandemic is accelerating new ways of working. According to PwC’s CFOs Pulse survey, more than half of Middle East’s chief financial officers indicate they will take steps to improve the experience of remote working and will look to make remote work a permanent option, while 50 per cent report they plan to accelerate automation and new ways of working.
“Organisations will look to preserve some of the benefits from remote working (better engagement, communications, efficiencies) and look to reduce their office footprint going forward. That said, interestingly, in one of our recent surveys only 1 in 4 companies in the UAE felt they would move to remote working as a more permanent option. So there is still lots of work to do in this regard,” says Anderson.
Company leaders will need to consider the tools, behaviours and incentives that will enable employees to be productive, collaborative and creative.
“The aftermath of the pandemic will provide an opportunity to learn from a plethora of social innovations and experiments, ranging from working from home to large-scale surveillance. With this will come an understanding of which innovations, if adopted permanently, might provide substantial uplift to economic and social welfare—and which would ultimately inhibit the broader betterment of society, even if helpful in halting or limiting the spread of the virus,” according to Kevin Sneader, global managing partner at McKinsey & Company.
Role of Startups
Globally, government economic-stimulus responses to the coronavirus crisis outsized those established after the financial crisis of 2008.
“We have learned from previous crises that quick action from government and substantial packages to be deployed form the main recipe to stabilise the economy, we have seen now the dichotomy between the stock market in the US and the reality that it is not falling, this is explained by the quick action from the government to deploy funds and inject enough liquidity in the system, in addition to the technology sector that thankfully saved the market,” says ElYacoubi.
Economic recovery will rely on long-term growth, innovation and adaptability to the new economic and social landscape, in order to create an economic framework that is more resilient to future crises. It is within this long-term vision that the role of small and medium-size enterprises (SMEs) and entrepreneurs becomes crucial to economic recovery from the pandemic.
But startups and SMEs are in an especially difficult position.
A report by Wamda and ArabNet found that lockdown measures to curb the spread of the virus and the economic uncertainty have resulted in a negative impact on 71 per cent of the startups, of which 22 per cent have suspended operations, and 21 per cent are witnessing a high decrease in demand resulting in significant losses.
Reported venture funding deals took a hit in the first quarter in the UAE, declining 33 per cent year-on-year, according to Magnitt. Plunging demand has forced startups to lay off workers, and many don not have the financial resources to survive in this climate. Although these companies have the potential to be an economic and employment engine after the crisis, an effective government response now is critical.
“This is a really tough time for SMEs and one of the dangers for the GCC is that years of gradual diversification of the economy can be quickly eroded by the impact of Covid-19. SMEs are the lifeblood of this diversification contributing to employment, job creation and growth of the economy in various sectors, for example, wholesale, retail trade, hotels and restaurants are dominated by SMEs,” says Anderson.
The startup and SME sectors combined contribute up to 40 per cent to gross domestic product (GDP) and up to 50 per cent to private sector employment in Mena, according to the International Monetary Fund.
SMEs and entrepreneurs are capable of creating a large, diverse job market and adapting to the new digital environment generated by the pandemic. For example, booming SME sectors in Saudi Arabia, such as financial technology, real estate and e-commerce companies, would thrive by catering to a digital society post-pandemic, while drawing on a huge talent pool for job opportunities.
“The dynamic of the economy is a knowledge-based one, at the core of it is the tech startups and innovation-driven enterprises. This is critical for the future growth for cities and economies,” says ElYacoubi.
Now more than ever, startups and SMEs need comprehensive support based on a coherent strategy. Governments recognise that they will be a vital engine for the post-crisis economic recovery, and many have already implemented programmes in response to the pandemic. But ensuring that aid reaches SMEs and startups, and makes the desired impact need a more tailored approach.
“A bunch of things need to fall in place for startups to make it. This can include the macro environment of the economy and the city where the startups exist, all the way down to the micro side of how the startup is designed and building its product offering,” says Nader Museitif, head of business development and partnerships at Hub71.
To address immediate disruptions, governments have announced unprecedented stimulus packages, yet not enough packages tailored to entrepreneurs have been put in place. The effectiveness of government support to date has been limited.
“The problem is even if the amount of the stimulus packages is very big at the macro level, we do not have certainty that this stimulus will reach the startups. Therefore, we need to think of stimulus packages directly designed to this specific segment of the economy. That could take a wider spectrum of incentives, from cash injections to matching schemes with VCs and freezing some government fees, even factoring in the balance sheet of startups that have certain receivables over risk factoring solutions to speed up their financial cycle. Government procurement also need to favour SMEs where relevant to give them some business,” says ElYacoubi.
A report by DFF titled ‘Life After COVID-19: Innovation and Entrepreneurship’ offers recommendations to support the innovation ecosystem in the UAE and the region, which include reducing or delaying office costs, utility bills and licence fees as well as offering open grants, providing loans and flexible financing. The report also suggests and promotes the concept of funding salaries for a short period of time, reducing living costs, increasing mobility across visas and free zones for highly skilled talents and supporting temporary employment as means to support the startup sector.
Government response in the region has so far focused on supporting the survival of larger companies and SMEs, however, these efforts should be complemented with promoting and supporting entrepreneurship to enhance business creation in priority industries post-Covid-19, increase the number of high-quality jobs, and improve the socioeconomic resilience and competitiveness of the regional economy.