From privilege to competition
Unlocking Private-led Growth in the Middle East and North Africa
Launch event - Cairo, November 9, 2009
Keynote Address by Dr. Shamshad Akhtar
Regional Vice-President of the World Bank Middle East and North Africa region
Ladies and gentlemen, distinguished guests,
1. Let me warmly welcome you today for the launch of the World Bank’s flagship report From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa (MENA). This report is part of a series designed to help policy makers and stakeholders better understand the interrelated development issues facing the region. As such, this report complements the Bank’s flagship reports on education, employment, trade and investment and water scarcity.
2. The global economic and financial crisis has raised questions regarding the appropriate roles of the public and private sector in promoting sustainable economic growth and stable financial systems. Although there is continued faith in the private sector’s potential to serve as an engine of growth, the lessons learnt from the unfolding crisis have underscored the need for:
(i) Developing the right blend of incentive frameworks to allow the private sector to unleash its economic potential, while supporting diversification and employment; and
(ii) Putting in place effective regulatory and oversight frameworks to promote competition and fair practices, manage system risks and uphold public welfare.
3. Unlocking Private-Led Growth highlights the significance of the role of the private sector in MENA. It offers policy makers, private sector participants and other stakeholders the opportunity for a timely debate on the private sector and reform in the context of the present global economic crisis. The report brings out the importance of properly managing:
(i) The role of the private sector in complex environments where age old policies, practices, and traditions nurture and reward privilege and vested interest rather than competitiveness – which is a prerequisite for efficient and sustainable growth.
(ii) The role of the state in promoting a conducive business environment -- setting in place the right incentive and regulatory regime to ensure that the private sector functions well.
(iii) Development of institutions that impartially and effectively enforce policies, rules and regulations to ensure the evolution of well functioning, efficient and fair markets.
4. The MENA region’s economic growth averaged 5.8% between 2005-2008. This lags behind an average growth rate in developing countries of 7.2%. MENA’s economic growth rate is expected to decline to 2.2% in FY10, under the impact of an economic crisis which has brought into stark relief the risks of the region’s lack of economic diversification. A well-functioning private sector plays a critical role in diversifying economies, and is critical to achieve high and sustainable growth. This has to be MENA’s overarching goal, as the region needs to generate 40 million jobs to employ its growing work force. Experience has brought home the reality that governments will not be able to create these jobs in the state owned enterprises or public sector at large -- at least not in sufficient numbers or in a sustainable manner.
5. Increased openness and liberalization over the past two to three decades has already transformed the economies of MENA from public sector-driven economies to one where more than 80 percent of non-hydrocarbon value-added is produced by private enterprises. This private sector growth has been fostered by investment climate reform. Progress has been particularly remarkable in Egypt since 2004, with dramatic changes in taxes, tariffs, selected regulations and several other key areas of Government interaction with investors. In four of the past seven years, Egypt ranked among the top ten regulation reformers measured by the Doing Business report published by the World Bank Group.
6. Nonetheless, the Report finds that despite private sector reforms and a growing role, the private sector has fallen short of transforming countries of the Middle East and North Africa into diversified, high- performing economies. Based on a survey of 10,000 firms, rounds of interviews across the region, and a review of rich evidence both at the international and regional level, the report finds that:
MENA’s private investment rates have stagnated at around 15 percent of GDP, while dynamic regions like East Asia managed to raise private investment rates close to 30 percent – or double the prevailing MENA rates;
MENA’s average number of registered businesses per 1,000 people is about a sixth of that in the OECD, and less than a third of that in Eastern Europe and Central Asia;
Productivity in MENA’s average manufacturing firm is about half that of Turkey’s manufacturers. Limited productivity is reflected in a weak export base.
The most diversified countries in MENA export around 1500 goods--most of them in low-value added sectors, compared to close to 4000 goods in countries like Poland, Malaysia or Turkey. Diversification is even weaker in oil-rich countries, many of which export less than 500 goods.
MENA has a higher average age of both manufacturing firms and their key managers. Firms are close to ten years older than the average in Eastern Europe and East Asia and managers on average are 7 years older than in these two regions. This is despite MENA harboring one of the youngest populations in the world. In some cases, this reflects dominant and connected firms using a privileged position to limit competition.
The average MENA manufacturing firm faces close to 6 times fewer competitors in its domestic market compared to the average firm in Eastern Europe and Central Asia.
7. Private sector performance has been subdued because of a variety of factors, critical among which are issues surrounding the quality of reforms in the region. This is captured by the low private sector investment response to past reform in the region. Private investment across the Middle East and North Africa increased by a modest 2 percentage points in response to the reforms enacted to date. Compare this to a private investment response to similar reforms in other regions of more than 10 points in East Asia, 7 percent in South Asia, and 5 percent in Latin American economies. Investment response has been dampened by weak and uneven implementation of reforms and lack of enforcement by institutions whose transformation lags behind policy change. Too many would-be entrepreneurs across the region still believe that the key to success is how connected or how privileged you are—instead of how creative, persistent and competitive.
8. World Bank enterprise surveys conducted throughout the region over recent years show that close to 60 percent of business managers do not think that the rules and regulations, as they appear “on paper,” are applied consistently and predictably in MENA. The same surveys also show that regulatory policy uncertainty, unfair competition practices and corruption often appear as top constraints to businesses.
9. The report advocates enabling a new generation of entrepreneurs to emerge, to create dynamic firms that can compete based on productivity and that are efficient enough to export even advanced products to the rest of the World. In that regard, it is important that this new generation sees evidence that business-friendly policy reforms will benefit them as well—and not just a minority of privileged or connected individuals.
10. The report recommends the strengthening of institutions to implement private sector policies equitably and consistently. Discretion and interference in applying the rules should be reduced, and, when it occurs, it should be made more transparent.
11. This proposed new agenda is in essence a “good governance” agenda. To really improve the business environment in the region, transparency, accountability and quality of service in public agencies should be at the core of reform. The report cites the experience of high-growth countries that were able to rely on strong, rule-bound institutions to reduce discretion and create dependable incentives for rapid private-led economic growth.
12. The Report offers some regional examples where this has begun to occur –for instance customs reform in Morocco and Tunisia, or GAFI’s one-stop-shop for investors in Cairo. More transparent, streamlined and computerized processes, strong incentives for agency staff to improve the quality of service to investors, and limiting the points of interactions—thus limiting opportunities for discretion—with public servants have allowed GAFI to reduce delays for business registration at its Cairo offices from 34 days to 3. Streamlining also eliminated some 40 procedures. Business registration increased dramatically after that. Such deep institutional reforms should expand to other agencies, and to other countries in the region.
13. Improving the business environment for all also requires reducing conflicts of interest between public servants and private interests—too many of these still plague competition in MENA countries. Regulations that either restrict such competition or erect informal barriers to entry protect a few privileged firms – and dull the competitiveness of the private sector in regional and international markets.
14. To gain the full benefit of reform requires visible action by governments to signal that there will be a level playing field for all participants. The credibility of these signals can be an important driver of private investors’ response to reforms.
15. Finally, it is important to recognize that the private sector also has a responsibility – and an important role to play -- within this agenda. Too often, its voice has been dominated by proponents of the status quo in order to maintain their privileges. But the world is changing. Already, a new generation of entrepreneurs is emerging in MENA. Their ability to influence the future direction of reform will be crucial. For this, the private sector needs to be better organized and be more inclusive. It needs to be a stronger partner with governments in developing, implementing and evaluating reforms.
16. In conclusion, MENA is a region endowed with considerable human capital, creativity and resources, and its growth potential is high. Meeting that potential will require a credible commitment to reduce discretion and ensure a more equal enforcement of the rules, so that more entrepreneurs can invest and create jobs.
17. Skeptics voicing doubt that the private sector will succeed in generating needed jobs and growth are legion in the region and elsewhere, and the global financial crisis may have added to this skepticism. However, the lessons of past crises support this core message: sustained job creation can only come from a competitive private sector, which in turn requires governments to build efficient regulatory capacity and a supportive, non-discriminatory environment.
18. The current global economic slowdown could be a historic opportunity for the MENA to embark on such an ambitious agenda. Slowdowns present opportunities to regroup, addressing key constraints and preparing to respond to the pull of accelerated global growth presented by the recovery. This could open the door for fundamental reforms that will prepare the countries of this region to rebound, embrace the global recovery, strengthen their long-term growth prospects and create much needed jobs.
19. As my colleagues will show you shortly, this report offers innovative ideas and recommendations for policymakers, the private sector, and civil society to make this happen. I hope that the report will generate debate and constructive discussion. And the World Bank stands ready to be a partner in support of our client countries in implementing further reforms.