From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa

FROM PRIVILEGE TO COMPETITION: UNLOCKING PRIVATE-LED GROWTH IN THE MIDDLE EAST AND NORTH AFRICA

BY ANDREW H. W. STONE AND NAJY BENHASSINE

The route to sustained private-led growth and job creation in MENA requires improving the credibility of reforms, the effectiveness of policies and their equitable enforcement.   This is the central message of the forthcoming World Bank Flagship Report for MENA, From Privilege to Competition:  Unlocking Private-Led Growth in the Middle East and North Africa.

Barriers to firm entry and to sound competition—some due to government policies, and others to the discriminatory way in which rules are implemented and enforced—have restrained the emergence of a dynamic private sector in the region.  The flagship shows that the recent increase in growth and private sector activity has not been accompanied with a commensurate improvement in indicators of sustainable high levels of growth.  Gauged by the diversification of exports, their technological sophistication, the level and sectoral composition of private investment, or the productivity and innovation of firms, no MENA country exhibits the kind of dynamism and economic transformation witnessed in Malaysia, China, the Republic of Korea, Poland, Turkey, and other fast-growing economies.

While progress with reforming the rules varies between countries, the region as a whole suffers from discretionary and arbitrary implementation of policies, and from lack of government credibility to really change a deeply rooted status quo of privileges and unequal treatment of investors.  For many countries, the problem is not with insufficient or missing reforms, but rather with their quality and the widespread belief that the business environment as it appears “on the books” is not applied equally to all. Consequently, the region enjoys less competition than elsewhere. The dynamism of entry of new firms and exit of inefficient businesses is weaker than in Asia, Latin America, or Eastern Europe; and firms are on average older than elsewhere—as are formal business owners. The response of private investment to past reforms has been weaker than in other regions (figure 1)—a sign that investors do not fully trust that seemingly pro-business policies will be applied to them equally.

Governments’ commitment to address key barriers to entry and competition and to level the playing field for all investors will be essential to convince more entrepreneurs to take the risk to enter markets, innovate and create jobs. Credibility with bureaucrats is needed to assure implementation of policy reforms after they are enacted.  Credibility with investors, bureaucrats and the broader public will be earned only if political leaders commit to dismantling the rent allocation channels that weaken the regulatory and administrative functions of the State in all areas of the business environment.

Engaging in a reform agenda that signals a credible commitment to reduce discretion will require a change in the way policymaking is conducted. It will also require institutional reforms. Already, a new generation of entrepreneurs is emerging in MENA in response to past reforms, and their ability to influence the future direction of reform towards competitiveness and growth will be crucial.  The private sector reform agenda has increasingly focused on better governance of market institutions, and focused less on mere retrenchment of the State from asset ownership.  In that context, the political economy legacy that is prevailing throughout the region constitutes a handicap to the transformation of MENA States.

The flagship report does not offer a standard recipe of reforms that would generate diversification and sustained growth in every country of the region; such a recipe does not exist. Lessons from past successes and disappointments with standard reform packages call for some humility in a search for the keys to strong, sustained growth. Today this search is even more challenging as short-term global economic prospects are grim.  Instead, the report focuses on three aspects of policy making that combine to affect investors’ expectations: the rules, how they’re applied, and the credibility of government commitment to reforms. 

A three part strategy is proposed.

First, reduce the opportunities for rent-seeking and foster competition. With the proper regulatory environment, governments can encourage entry in all sectors of the economy by removing formal and informal barriers to competition. This is a prerequisite for reducing rent-seeking and fostering the emergence of a more diversified private sector that will, in turn, create pressure for more pro-growth reforms.  Beyond this, the mix of policies that will carry the greatest credibility in the eyes of investors depends on each country—but where to start is often known by local stakeholders. In some countries of the region, a necessary starting point to signal that change is real will be to dismantle the conflicts of interest between political leaders and private business. In others, it will be to open the banking sector to more competition and reduce the dominance of State-owned banks. In almost all countries, it will mean reducing opportunities for rent-seeking in public land markets, or opening sectors that remain closed to (foreign or domestic) competition.  

Second, reform institutions. Private sector development policies will need to be systematically anchored in elements of public sector and institutional reforms to reduce discretion and opacity, and improve the quality of services provided to firms—hence reducing transaction costs. This agenda entails:

1. Building strong rule-bound market institutions to which substantial decision making power over economic outcomes is delegated. The objective is to credibly shield the public officials of all market institutions from political and personal interference.  Improving the investment climate in MENA comes down in great part to putting in place such institutions.
2. Increasing transparency and accountability of all public bodies that interact with the private sector and regulate markets.  This should be done by creating systems of independent measurement of the quality of service to the private sector and instilling a culture of accountability.
3. Ensuring equity in market governance and therefore reducing de jure and de facto barriers to competition.  This entails easing entry, exit and transaction costs for firms in all sectors, and thus reducing the opportunities for discretionary behavior in public institutions – something that contributes to the “unlevel playing field” in MENA.

Third, mobilize key stakeholders around a dedicated long term growth strategy. A new form of partnership is needed between the government and the main stakeholders. These partnerships can underpin stronger reform alliances and broader participation in designing, implementing, and evaluating policies. Mobilizing and uniting forces inside and outside governments around a credible long- term growth strategy, supported by strong political leadership, has been a characteristic of all countries that have sustained high growth rates over long periods of time. Concretely, this requires four pre-requisites:

1. Freedom for the private sector to organize in independent organizations, to raise funding from members, to obtain economic and policy information, to voice criticisms of public policies to the public at large, and to inform open policy debates.  Such freedoms are not granted by law or in practice in much of MENA.
2. Capable and inclusive business associations. Most independent business associations in MENA countries are either small - lacking advocacy or organizational capacity, or are captured by a few prominent members. 
3. An institutionalized, transparent and inclusive process for private sector consultation in the identification of policy issues, the design of reforms and the monitoring and evaluation of their implementation.
4. Greater availability of and freedom of information relevant to economic policy, administrative performance and markets, to allow stakeholders to hold government accountable, to participate in dialogue, and to reduce uncertainty.

Short of such a fundamental shift in the way private sector policies are formulated and implemented, investor expectations that governments are committed to reform will be limited.  It will take political will—and time—to support sustained reforms that credibly address the real issues holding back the region, and convince investors and the public that changes are real, deep, and set to last. While a longer-term growth challenge, this fundamental policy change will also affect the short-term ability of policy makers to respond to the economic downturn and seize on the opportunities that the global economic recovery will offer. MENA countries are endowed with strong human capital, good infrastructure, immense resources for some, and a lot of creativity and entrepreneurship everywhere. The economic and social payoff of embarking on a more ambitious private-led growth agenda could thus be immense—for all.