MENA DEVELOPMENT REPORT From Privilege to Competition Unlocking Private-Led Growth in the Middle East and North Africa From Privilege to Competition MENA DEVELOPMENT REPORT From Privilege to Competition Unlocking Private-Led Growth in the Middle East and North Africa THE WORLD BANK Washington, D.C. © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 123412111009 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN-13: 978-0-8213-7877-9 eISBN: 978-0-8213-7889-2 DOI: 10.1596/978-0-8213-7877-9 Library of Congress Cataloging-in-Publication Data Benhassine, Najy. From privilege to competition : unlocking private-led growth in the Middle East and North Africa / [Najy Benhassine, principal author]. p. cm. -- (Mena development report) ISBN 978-0-8213-7877-9 -- ISBN 978-0-8213-7889-2 1. Economic development--Middle East. 2. Economic development--Africa, North. 3. Public- private sector cooperation--Midde East. 4. Public-private sector cooperation--Africa, North. I. World Bank. II. Title. HC415.15.B465 2009 338.956'05--dc22 2009030180 Cover photo: Zoubida Allaoua and Catherine H. Burtonboy Cover design: Naylor Design Contents Foreword xiii Preface xvii Acknowledgments xxiii Glossary of Terms xxvii Abbreviations xxix Overview 1 What Is This Report About? 1 Is the Private Sector Able to Play the Role of a Growth Engine? 2 How Has the Private Sector Performed So Far? 3 Is It about Missing Reforms? 6 Is It about the Way Rules Are Implemented? 9 Why Is It Difficult to Improve the Business Environment in the Region? 12 Weak Demand for Reform: A Private Sector That Has Yet to Become an Agent of Change 13 Weak “Supply” of Reforms: Policy-Making Institutions That Lack Credibility 14 What Should Be Done Differently? Where Should Each Country Start? 15 Getting Specific: A Roadmap for Credible Private-Led Growth Strategies in MENA 16 Looking Forward 22 1. Voices of Entrepreneurs—Stories of Success, Hope, and Challenge 25 Listening to Entrepreneurs 27 Government Successes and Pitfalls in Supporting the Private Sector 30 v vi Contents Challenges Facing Entrepreneurs—From Regulatory Barriers to Conflict and War 31 Privileges, Unlevel Playing Fields, and the Credibility of the Reforms 35 Hope and Enthusiasm for the Future 38 Part I Private Sector Performance in the MENA Region: Explaining the Untapped Potential 43 2. Searching for Signs of Sustained Private-Led Growth in MENA 45 The Growth of MENA Economies 46 An Economy-Wide Perspective 50 Firm-Level Productivity 63 Summing Up 65 3. Explaining the Private Sector’s Weak Performance—An Organizing Framework 69 The Need for Humility in Prescribing the Keys to Private-Led Growth 69 Policies, Institutions That Implement Them, and Expectations about the Future 71 Measuring Rules, How They Are Applied, and Expectations about the Future 75 4. Policy Reforms in MENA,Their Credibility, and Their Implementation 79 Is the Problem with Missing Reforms? 80 The Problem Is the Insufficient Private Sector Response to Reforms 84 Is It about the Way Rules and Policies Are Implemented? 86 Symptoms of a Business Environment That Is Not the Same for All 97 Summing Up 104 Part II Policies and How They Are Applied: State Intervention and Discretion in Credit, Land, and Industrial Policy 107 5. Access to Credit in MENA: Toward Better Supervision and Less Interference 109 Credit Markets and Banking Systems in MENA 111 Business Manager Perceptions of Credit Constraints 113 Beyond Perceptions and Complaints: How Many Firms Are Really Credit Constrained? 114 What Can Governments Do to Increase Access to Credit? 117 Contents vii 6. Reassessing the State’s Role in Industrial Land Markets 129 The Low Access to Land in MENA Countries 130 Sources of Inefficiencies in Land Markets 132 Getting the Incentives Right in Enclaves 142 Power and Rent Seeking in Public Land Allocation and Regulation 143 The Way Forward 145 7. New Industrial Policies: Opportunities and Perils of Selective Interventions 151 A Tradition of Subsidies and Selective State Interventions 152 A Framework to Clarify a Controversial Debate 153 Private Sector Policies in MENA—A Legacy of Disproportionate Interventionism 159 Assessing Risks of Industrial Policy Interventions 162 Should Oil-Rich Countries Intervene? Yes, but the Risks of Failure Are Higher 166 A Final Cautionary Note: Industrial Policies Could Succeed if the Right Conditions and Processes Are in Place 167 Part III Designing Credible Private Sector Reforms Informed by Political Economy Realities 169 8. Institutions and State-Business Alliances Constraining Reforms and Credibility 171 Weak Supply of Reforms: Policy-Making Institutions That Lack Commitment and Credibility 173 Weak Demand for Reform: A Private Sector That Has Yet to Become an Agent of Change 182 What Can Reformers Do to Change the Political Economy Status Quo? 191 9. Rethinking Private Sector Policy Making in MENA 195 What Should Be Done Differently to Realign Investor Expectations? 196 Looking Forward: Unlocking the Region’s Private Sector Potential 207 References 209 Index 219 viii Contents Tables 4.1 Private Sector Priority Constraints from Enterprise Surveys, 2003 and 2005–08 88 5.1 Efficiency of Credit Markets 110 6.1 Registering Property (2009) 130 6.2 Industrial Land Prices in Selected MENA Countries 137 8.1 The Public Sector Wage Bill in MENA and Comparator Countries, 2001–05 179 8.2 Advocacy Priorities of Business Associations Do Not Match the Top Constraints of Enterprises 189 Figures 0.1 Stagnating Private Investment Rates 4 0.2 Lower Diversification of Exports 5 0.3 The Number of Regulatory Reforms Has Increased Recently in MENA Countries 7 0.4 Reform Episodes and Private Investment Response 7 0.5 Overall, the Business Environment in MENA Countries Looks “Average,” as It Does in Many Fast-Growing Economies 8 0.6 Policy Uncertainty and the Unequal Implementation of Rules Are Leading Constraints to Businesses 10 0.7 Perceptions about the Consistency and Predictability of Rules and Regulations as They Are Applied in MENA Countries 10 0.8 The Lasting Influence of the Business Elite and the Lack of Dynamism and Competition in the Private Sector 11 1.1 Most MENA Economies Are Private Sector Based, 2005 and Previous Decades 26 2.1 Middle East and North Africa’s Weak Growth in International Perspective 48 2.2 Middle East and North Africa’s Growth over the Long Term 49 2.3 Contributions to the Growth of GDP in 2007—Insufficient Role for Exports 51 2.4 Private Investment as a Share of Total Investment 52 2.5 Private Investment as a Share of GDP, 1995–2006 53 2.6 Gross Private Investment, 1980–2006 54 2.7 Net FDI Flows as a Share of GDP, 1970–2005 54 2.8 Structure of Foreign Direct Investment, Cumulative 2000–07 55 2.9 Manufactured Exports to GDP, 1965–2006 59 2.10 Recent Export Growth among MENA’s Resource-Poor, Labor-Abundant Countries 60 Contents ix 2.11 Technology Content of Exports: Medium- and High-Technology Exports 61 2.12 Number of Products Exported 62 2.13 Lower Diversification of Exports 63 2.14 Proportion of New Products in 2006 Export Basket 64 2.15 Total Factor Productivity: MENA Countries and Comparators 65 2.16 Labor Productivity: MENA Countries and Comparators 66 3.1 The Firm and Its Investment Climate 71 3.2 The Firm and Its Investment Climate: Rules and Policies and the Institutions That Implement Them 74 4.1 Overall, the Business Environment in MENA Countries Looks “Average,” as It Does in Many Fast-Growing Economies 81 4.2 The Number of Regulatory Reforms Has Increased Recently in MENA Countries 82 4.3 MENA Tariff Reductions Top Those of All Other Regions, 2000–07 82 4.4 Private Investment Has Been Rising 84 4.5 MENA Business Creation between 2002 and 2005 Leads the Developing World 85 4.6 Reform Episodes and Private Investment Response 85 4.7 Private Investment’s Response to More than a Decade of Reforms Has Been Relatively Weak, 1990 and 2006 86 4.8 Large Proportions of Investors Complain That the Regulations