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Report No. 48566-MR Report No.Mauritania Sector Development Options to Enhance Private 48566-MR Policy Mauritania Policy Options to Enhance Private Sector Development Public Disclosure Authorized Country Economic Memorandum April 2010 PREM 4 Africa Region Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized SMH Hydrocarbon Company of Mauritania SNIM National Company of Mining Industries SOMELEC Mauritanian Electricity Company SONELEC Division of SOMELEC UNDP United Nations Development Programme VAT Value-Added Tax WAEMU West African Economic and Monetary Union (WAEMU) WDI Worldwide Development Indicators WDR Worldwide Development Report WHO World Health Organization WTO World Trade Organization Vice President: Obiageli K. Ezekwesili (AFRVP) Country Director: Madani M. Tall (AFCF2) Sector Director: Sudhir Shetty (AFTPM) Country Manager: Francois Rantrua (AFMMR) Sector Manager: Antonella Bassani (AFTP4) Task Team Leader: Manuela Francisco (AFTP4) iii TABLE OF CONTENTS ACKNOWLEDGMENTS ........................................................................................................................ vii EXECUTIVE SUMMARY ..................................................................................................................... viii 1. MAURITANIA’S ECONOMIC GROWTH HISTORY ................................................................... 1 A. Brief History of Mauritania’s Growth ............................................................................................. 1 B. Political and Cultural Aspects .......................................................................................................... 8 C. Social Aspects and Poverty Trends .................................................................................................. 9 D. Current Investment Climate: Implications and Costs for Growth ................................................. 10 E. Four Key Constraints on Private Sector Development .................................................................. 14 2. THE INFORMAL ECONOMY: DRIVERS AND IMPLICATIONS FOR ENTERPRISE DEVELOPMENT ............................................................................................................................... 22 A. Drivers of Informality from the Fiscal Policy Perspective ............................................................ 22 B. Small Business Taxation ................................................................................................................ 35 C. Conclusions and Policy Recommendations ................................................................................... 40 3. LABOR MARKET IN MAURITANIA: AN ANALYSIS OF LABOR INFORMALITY AND SKILLS MISMATCHES ................................................................................................................... 43 A. Overview of the Labor Market ...................................................................................................... 43 B. Understanding the Informal Sector ................................................................................................ 48 C. Skills Mismatches .......................................................................................................................... 53 D. Conclusions and Policy Recommendations ................................................................................... 58 4. COMPETITION POLICY AS A TOOL TO INCREASE COMPETITIVENESS AND ECONOMIC DIVERSIFICATION .................................................................................................. 60 A. Current Competitive Setup in Mauritania ...................................................................................... 60 B. Framework on Fighting Anti-competitive Market Conduct .......................................................... 64 C. Cost and Benefits of Implementing Competition Law and Policy ................................................ 75 D. Conclusions and Policy Recommendations ................................................................................... 77 5. COMPETITIVE SPECIAL ECONOMIC ZONES ......................................................................... 82 A. Rationale for and Typology of Special Economic Zones and Associated Regimes ...................... 82 B. Identifying a Special Economic Zone Regime Adapted to the Mauritanian Context .................... 88 C. Conclusions and Policy Recommendations ................................................................................... 95 REFERENCES ........................................................................................................................................ 101 iv List of Annexes: Annex 1: Economic Indicators .................................................................................................................. 108 Annex 2: Main Provisions and Incentives Included in the Proposed Investment Code` .......................... 112 Annex 3: Economic Growth and Effective Enforcement of Competition Policy and Law ...................... 113 Annex 4: Drivers of Tax Evasion ............................................................................................................. 116 Annex 5: Labor Chapter - Descriptive and Empirical Results .................................................................. 119 Annex 6: Evolution of the Special Economic Zones ................................................................................ 126 List of Boxes: Box 1.1: Mauritania’s Industrial Sector Structure ..................................................................................... 5 Box 1.2: Morocco’s Experience with Developing Agriculture and Tourism ............................................ 7 Box 1.3: The Costs of Informality ........................................................................................................... 16 Box 2.1: What is “Informality”? .............................................................................................................. 23 Box 2.2: Factors Fueling Informality: Burdensome Regulations and Weak Enforcement ...................... 24 Box 2.3: METR Economic Concept ........................................................................................................ 28 Box 2.4: Example of the METR Calculation for the Small Business Regime (Turnover Tax between 4-10 percent) in the Manufacturing Sector in Mauritania .......................................... 29 Box 2.5: Key Areas for Taxpayer Education and Assistance .................................................................. 38 Box 2.6: Improving Local Business Environments by Streamlining Regulatory Fees and Parafiscal Instruments at the Local Level ................................................................................. 39 Box 4.1: Fostering Competition: The East Asian Miracle Revisited ....................................................... 66 Box 4.2: Highlights for Competition Law Design ................................................................................... 68 Box 4.3: The Attributes of the Kenyan and the Zambian Competition Bodies ....................................... 70 Box 4.4: Steps in the Administration and Enforcement of Competition Law ......................................... 71 Box 4.5: The South African Experience with Competition Law Implementation ................................... 72 Box 4.6: The Role of Competition Policy Advocacy .............................................................................. 74 Box 4.7: Government Aid Control Programs Helps Channel Public Resources towards Development . 75 Box 5.1: Successful Special Economic Zones around the World ............................................................ 84 Box 5.2: Examples of Less Successful Special Economic Zones ............................................................ 87 Box 5.3: Rules Regarding the Incentive Regime, WTO Agreements and Recommended Practices ...... 90 Box 5.4: The Economic Contribution of Tuna Fishing Industry in Mauritius ........................................ 94 Box 5.5: Checklist for the SEZ Dialogue ................................................................................................ 99 List of Figures: Figure 1.1: GPRSP-II Strategic Objectives and Identified Interventions ................................................. 14 Figure 2.1: Time Spent to Pay Taxes in Mauritania and in Some Other African Countries .................... 25 Figure 2.2: Comparison of the METRs for Various Tax Regimes for Small Businesses ........................ 33 Figure 2.3: Informal Payments to Facilitate Compliance with Various Administrative Requirements in Mauritania (% of Firms) ............................................................................. 37 Figure 3.1: Unemployment Rates across Age Groups ............................................................................. 45 Figure 3.2: The Unemployment Rate among Groups with Various Levels of Education ........................ 46 Figure 3.3: Employment by Sector in Rural Areas .................................................................................. 47 Figure 3.4: Employment by Sector in Urban Areas ................................................................................. 47 Figure 3.5: Level and Composition of Informal Employment ................................................................. 48 Figure 3.6: Informality over the Lifecycle ..............................................................................................