MSMEs, Startups and the Future of the Palestinian Economy

Entrepreneurship is taking the world by storm. And it makes sense. Entrepreneurship fosters innovation, and ultimately when it works, spurs economic growth, creates jobs via startups, and contributes to social change. Yet, as entrepreneurship is on the rise, the impact and importance of micro, small and medium enterprises (MSMEs) get become overlooked. In fact, MSMEs are responsible for nearly 90 percent of businesses and over 50 percent of all employment on a global scale. And in emerging markets, the World Bank reports that seven out of ten jobs are generated by MSMEs. However, in Palestine, the focus on entrepreneurship is at the cost of MSMEs. 

MSMEs and Startups

Suffice to say, MSMEs do not have a single definition. Rather, they are predominantly defined by their size, and the precepts laid out by their respective governments. The OECD categorizes SMEs depending on the size of their enterprises. For example, one to nine refers to micro, 10 to 40 refers to small, and finally, enterprises with 50 to 249 employees are medium. Reflecting upon the reality on the definition provided by the Palestinian National Authority, one to four employees refers to micro, five to nine refers to small, and 10 to 19 refers to medium.

MSMEs are your typical local business. Although they might not necessarily bring anything new to the market, MSMEs are essential for the sustainability and growth of local economies. They maintain their internal structure, revenues and assets, without adopting rapid growth strategies, or acquisition from larger companies. They are also attributed to their flexibility and ability to respond to emerging market needs.  

Startups, on the other hand, bring something new to the market. As their name implies, startups are enterprises at the earliest stage of development, and are built to capitalize on emerging needs of markets, either on a local or global scale.

MSMEs Dominate the MENA Region

MSMEs are the backbone of economies around the world. According to the IFC, in high-income countries, MSMEs are responsible for generating 64 percent of their respective GDPs, and 62 percent of all employment.  

And in the MENA region, MSMEs account for up to 40 percent of employment, and this is in the formal sector alone. To further illustrate the impact of MSMEs, 90 percent of all businesses in the region are MSMEs. This translates to nearly 23 million enterprises in both the formal and informal sectors.

MSMEs dominate the employment landscape in the region, which is why efforts to enhance these enterprises staying power and impact are becoming more essential. This is especially important for the region’s youth, who at 30 percent suffers from some of the highest rates of unemployment in the world.

Tapping into the potential of MSMEs in Palestine

For Palestinians, the emergence of an entrepreneurial ecosystem has come at a crucial junction. One in which Palestinians are choosing now more than ever to step up and become leaders in their own right, by innovating the future of the country. However, as essential as entrepreneurship has become, it takes years to foster a healthy entrepreneurial ecosystem that contributes to the overall GDP of a country. This is especially true for Palestine, as startups are only just emerging, struggling to gain a footing in their local economies, let alone sustainably compete in regional or international ones.

Furthermore, the lack of structural capacity, as well as coordination between ecosystem stakeholders within both the public and private sectors, has resulted in a scattered entrepreneurial environment and the loss of countless opportunities. And amidst this, investors lack confidence in startups based in Palestine, because of the existing limitations in terms of political and economic uncertainties.

MSMEs, Entrepreneurship and a Resilient Economy

To illustrate, the Palestine Monetary Authority (PMA) reports that MSMEs made up nearly 99 percent of the Palestinian economy, while employing 80 percent of the country’s private sector labor force. The same report indicates that 80 percent of MSMEs are dependent on the personal saving of their owners to maintain operations. MSMEs are the backbone of the Palestinian economy and have displayed their resilience even in the most difficult times, during political upheaval, imposed closures, and outright external aggression.

For Palestinian MSMEs, the struggle is embedded within a landscape of resource scarcity and lack of access to essential funding. The World Bank reports that MSMEs owners around the world struggle to access finance and secure bank loans needed to sustain their businesses. The same report indicates that 40 percent of formal MSMEs “have an unmet financing need of USD 5.2 trillion every year.” And in Palestine, approximately 90 percent of MSMEs are unable to acquire loans. The main cause, scarcity of resources inherent within Palestine, and high rates of MSMEs within the informal sector without the legal registration needed to secure finance.

For Palestine, a country dependent on foreign aid, MSMEs are struggling that much more to access the resources needed to survive. The economy in simple terms is not healthy, with no change in sight in the short or medium term. So, what is the future of Palestine's economy with regards to entrepreneurship and MSMEs? While entrepreneurship is, without a doubt, needed to spur innovation and economic growth, Palestine is years away from having a healthy entrepreneurial ecosystem capable of contributing to the growth of a resilient economy.

However, to support entrepreneurship at the cost of local MSMEs which continue to sustain the economy and provide thousands of employment opportunities is impractical and insufficient. As such, a more nuanced approach needs to be adopted. One that fosters entrepreneurship by building the infrastructure needed for a more cohesive and collaborative ecosystem, leading cities across the country towards a more resilient economy.

Supporting MSME founders with the financial loans and credit needed to kick off their businesses is the first step. Further government legislation and private sector support that helps potential MSMEs owners learn how to navigate their local economies, and acquire the skills needed to establish competitive business plans, are also desperately needed. This can be achieved with the support of committed stakeholders from the public and private sector, and most importantly, harnessing the know-how and investment capabilities of the Palestinian diaspora.

What is needed is a comprehensive development plan that helps MSMEs access not only the funding they need but develop competitive strategies to compete in markets throughout the MENA region. Another component is the outdated infrastructure and technology, which adds a glaring obstacle for MSMEs to operate in local markets.

To truly capitalize on the power of entrepreneurship, promoting tech-centric startups that provide innovative solutions for local businesses can help improve the efficiency of their day-to-day operations, and in the long-term improve their viability. This will help MSMEs expand their use of technology products and services to reach new markets, both regional and international. These measures require awareness and capacity building, to help MSMEs founders and staff embrace new technologies and move away from traditional manufacturing, marketing and management, which are outdated and ineffective. 

Overall, a more cohesive economic environment that combines the collective capabilities of MSMEs while tapping into the power of innovation of entrepreneurship can help Palestinians build a more resilient economy, with strengthened internal markets and export worthy potential.