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Article: "Loyalty over performance: Italian lessons for Gulf firms" (الأداء قبل الولاء: دروس إيطالية لشركات خليجية)

12/7/2017

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نُشر في الحياة
English version below

غزا المسلمون صقلية عام 827، وعلى رغم انتهاء النفوذ الإسلامي في القرن الحادي عشر بعد احتلال النورمان الجزيرة، رسخت تقاليد مشتركة لكل من جنوب إيطاليا والجزيرة العربية، وما زالت مستمرة. وفي الوقت الراهن، حيث تسعى الدول الخليجية لتعزيز أدائها الاقتصادي، يجب درس «المرض الإيطالي» الذي برز عام 1995، تفادياً لارتكاب الخطأ ذاته، وهو تفضيل الولاء على الأداء في مكان العمل.ـ

المزيد

Muslims conquered Sicily in 827. Despite their expulsion in the 11th century, after the Norman conquest of the island, cultural traits common to southern Italy and the Arabian peninsula emerged, and they persist today. As the Gulf countries seek to improve their economic performance, it is worth studying the “Italian disease” that afflicted the country in 1995, so as to avoid repeating the same mistake: favoring loyalty over ability in the workplace.
Italy underwent an economic miracle after the second world war, which transformed it into one of the seven strongest economies in the world. Its performance declined in the 1980s, and it started to stagnate after 1995, which resulted in several financial crises and large budget deficits during the new millennium. What caused this negative turnaround, and how can the Gulf countries make use of this experience?

In a new paper titled: “Diagnosing the Italian disease,” researchers Bruno Pellegrino (University of California at Los Angeles) and Luigi Zingales (University of Chicago) analyzed the Italian economy, discovering that the main reason for its declining growth was poor management and leadership in the private sector, which was in turn caused by a familiar problem in the Gulf: prioritizing loyalty over ability when appointing top management in firms.

In particular, a fundamental transformation started in the mid-90s, which because the most important source of growth in the global economy for the subsequent 20 years: the computer and internet revolution. The internet is a special technology in that exploiting it requires managerial nous; it isn’t enough to just purchase computers and link them to the world wide web.

For example, there are many household producers in Saudi Arabia who sell their wares via social media, and they differ greatly in their success, despite a large degree of homogeneity in their output. The performance disparities can be attributed to their varying competence levels in using social media, and their intelligence in interacting via the internet. Using Instagram as a successful commercial tool requires much more than simply signing up for an account and uploading pictures.

Using detailed data on firm activities, the study’s authors deduced that Italian companies did invest in computers and the internet in a manner comparable to their counterparts in other, advanced economies. However, they failed to exploit those investments as effectively. In particular, Italian firms suffered from poor management, attributable to appointing senior executives nepotistically rather than on the basis of ability. This is one of the aforementioned traits in common with modern Arab culture, as family companies play a key role in the Gulf economy, including the tradition of appointing family members to key posts in the organization.

However one should note that depending upon children, siblings, and cousins in managing a company can be a rational policy in commercial environments that suffer from weak legal enforcement. When depending upon courts to protect rights becomes more difficult, those who control resources will look to existing trust networks as a replacement, especially the family network. The same mentality exists in marriage, as courts do not always guarantee the rights of women in wedlock. Italian businesspeople have long complained of slowness and corruption in the legal system, and the same flaws exist in the Middle East, along with the same commercial repercussions.

Accordingly, the Italian disease can be attributed primarily to the weakness of the legal system. Therefore, the primary policy lesson for the Gulf countries is that they should strive to guarantee the transparency, swiftness, and objectivity of legal proceedings over commercial affairs, such as suits relating to contract violations, unsettled balances, protecting capital owners, and so on.

However, the culture of relying on family members in Italy and the Middle East is partially the result of a lack of professionalism, too, and it isn’t merely an optimal response to less-than-ideal legal setups. Some owners treat their businesses as their own private fiefdoms, and they prefer controlling others by employing family members over improving the company’s performance by employing high ability workers. The oil boom has allowed many Gulf companies to persist with such ineffective commercial practices, because rising oil prices have offset the ensuing economic losses.

At the start of 2018, two new trends have emerged in the Gulf economy that push businesspeople toward reassessing their historical hiring practices.

First, falling oil prices, which have forced private sector companies to improve their performances as they stave off bankruptcy. What the economy was previously able to stomach in terms of managerial slackness has now become unsustainable.

Second, Saudi Arabia’s anti-corruption drive, which is one link in a long chain of policies seeking to improve performance in government organizations. Previously, some Saudi companies would appoint family members to high positions, either because they did not have faith in the legal system, or because they were looking to exploit weaknesses in the legal system. However the clear message sent out by the government is that the economic pie is going to be redistributed away from corrupt opportunists, toward compliant producers.

Finally, the Italian experience points to the fact that it is time to turn the page on certain managerial practices, as they have become impediments to building a strong economy. The Gulf peoples should appreciate this lesson as quickly as possible, and treat Italy’s economic crises as a useful source of knowledge, rather than as academic problems happening a long way away.

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Omar Al-Ubaydli
Bahrain Center for Strategic, International and Energy Studies
PO Box 496, Manama
Kingdom of Bahrain
Email: [email protected]
Tel: +973-17-752-742
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