Unlocking Sustainable Private Sector Growth in the Middle East and North Africa E-Book

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2022

Seitenzahl: 116

Beschreibung

More than a decade after the Arab Spring, the Middle East and North Africa region finds itself facing momentous challenges. The COVID-19 pandemic has disrupted economies, and the Russian invasion of Ukraine sent shockwaves through the region, with higher hydrocarbon prices, risks to food security and a drop in tourism. Beyond looms the threat of climate change. But challenging times provide opportunities for change. The region's private sector can seize the moment. It remains the hope for many young people and has the potential to drive a sustainable model of growth. The Enterprise Surveys, conducted by the EIB, EBRD and the World Bank, provide insight into what lies beneath the region's relatively slow growth, with a focus on the reasons for stagnating productivity and inadequate accumulation of human and physical capital in the private sector.

Leseprobe

UNLOCKING SUSTAINABLE PRIVATE SECTOR GROWTH IN THE MIDDLE EAST AND NORTH AFRICA

Evidence from the Enterprise Survey

About the European Investment Bank

The European Investment Bank Group is the EU bank and the world’s biggest multilateral lender. We finance sustainable investment in small and medium-sized enterprises, innovation, infrastructure, and climate and environment. We have financed Europe’s economic growth for six decades and are at the forefront of EU crisis response, leading the world in climate investment and backing development of the first COVID-19 vaccine. We are committed to triggering €1 trillion in investment in climate and environmental sustainability to combat climate change by the end of this decade. About 10% of all our investment is outside the European Union, where our EIB Global branch supports Europe’s neighbours and global development.

Contents

Foreword

Executive summary

Section 1Introduction: Economic performance and the business environment

Section 2Quality of governance and productivity

Section 3Management practices and partial government ownership

Section 4Trade and innovation in MENA

Section 5Adoption of digital technology and productivity growth

Section 6Businesses’ human capital and formal training of workers

Section 7Access to finance and investment

Section 8The green economy in the Middle East and North Africa

Section 9Conclusions and policy implications

References

Bibliography of background papers

Glossary

Foreword

More than a decade after the Arab Spring, the Middle East and North Africa (MENA) region finds itself facing momentous challenges. Waves of the coronavirus pandemic are disrupting economies, affecting every aspect of life. More recently, the Russian invasion of Ukraine sent shockwaves through the region in the form of higher hydrocarbon prices, risks to food security, and lower tourist arrivals. Beyond lies the looming threat of climate change. And the longstanding structural conditions of the past manifest themselves as continuing difficulties in the present.

Mounting debt and limited fiscal capacity have challenged the role of the state in the region. But challenging times provide opportunities for positive change. There is a chance for the MENA private sector to seize this moment. It remains the hope for many young people for their future and, while its role as the engine of growth has yet to be realised, the private sector has the potential to drive a greener region with a sustainable model of growth.

This report sheds light on the state of the MENA private sector through surveys of over 5 800 formal businesses across six MENA economies — Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza — conducted between late 2018 and 2020, largely before the pandemic.

The surveys are nationally representative — following the methodology of the World Bank Enterprise Surveys — and are of great value for a region that is significantly short on data. They are comparable to a previous round of surveys conducted in 2013, providing a measure of change across two points in time — a first for the Enterprise Surveys in MENA. They also contain new information on the green economy and the political connections of businesses.

Nine research papers have been produced from analysis of the data capturing different aspects of the private sector. This report is a cohesive analytical work based on the findings of these scholarly studies.

The findings give some cause for concern. They reveal that cronyism is prevalent in the private sector, while informality continues to limit firms’ growth ambitions. Many businesses are financially autarkic. Management practices across firms are generally poor, and the shadow of the state distorts incentives. Few businesses formally train their workers.

Furthermore, barriers to international trade remain, while adoption of digital technologies is limited. Green investments are low in the region, with most businesses having poor management practices on environment, energy and climate change. Corporate responsibility on environmental, social and governance (ESG) issues lags behind that in benchmark countries at a similar level of development.

But there is considerable heterogeneity within the region, providing hope that there are opportunities for both businesses and governments to learn from better performers within the region.

The enormous undertaking of conducting the Enterprise Surveys was made possible by extensive cooperation between three international institutions: the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank Group. The staff of these institutions remain committed to expanding knowledge about the Middle East and North Africa by shedding light on a private sector that has the potential to chart a promising path for the region. We hope you enjoy reading the report.

Debora RevoltellaDirector, Economics Department European Investment Bank

Ralph De HaasDirector of Research, European Bank for Reconstruction and Development

Roberta GattiChief Economist Middle East and North Africa, The World Bank

Sergei GurievProfessor of Economics, Sciences Po

Executive summary

Economic growth in the Middle East and North Africa has been weak since the global financial crisis of 2007-09 and the Arab Spring of the early 2010s. On average, gross domestic product (GDP) per capita has grown by only 0.3% a year in six representative economies of the region: Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza. That compares unfavourably with rates of 1.7% on average in middle-income countries and 2.4% in the developing economies of Europe and Central Asia (ECA).

Achieving higher and sustainable growth is particularly important in view of other economic challenges facing the region: Public debt in MENA countries has increased considerably over the last decade, accompanied by declining investment. More recently, the coronavirus pandemic has battered the region, further straining public finances. In addition, the Russian invasion of Ukraine affects the economies covered in this report through higher hydrocarbon prices, risks to food security and declining tourism.

This report seeks to understand what lies beneath that relatively slow growth, with a particular focus on the reasons for stagnating productivity and inadequate accumulation of human capital and physical capital in the region’s private sector. To this end, the report summarises the main findings from nine background papers based on Enterprise Survey data. It also draws conclusions for policy, not only for promoting stronger firm performance, but also for addressing the challenge of climate change by pursuing sustainable growth.

The background studies draw on data from Enterprise Surveys of over 5 800 formal businesses across the abovementioned six MENA economies conducted between late 2018 and 2020, largely before the coronavirus pandemic. Data from the same survey conducted in 28 ECA countries provide points of comparison with economies at similar stages of development, while data from a previous survey conducted in MENA in 2013 provide a measure of change over time. Although the Enterprise Survey data largely predate the pandemic, they remain extremely relevant as they offer a precise snapshot of the more structural features and weaknesses of the business environment. Resilience to the new shocks — and capacity to react — are likely to be affected by those structural features.

The Enterprise Surveys entail face-to-face interviews with the owners or main managers of registered firms with at least five employees, classified by sector (manufacturing, retail and other services), size (5-19, 20-99 and 100+ employees) and regions within a country. They collect basic information on the firms, including their age, size and their views on the quality of the local business environment in terms of, for example, infrastructure, labour, and business-government relations.

The latest surveys have also gathered information on the political connections of firms and their behaviour related to the environment, energy and climate change, including green management practices and green investments.

What is holding back the region’s private sector?

The business environment is perceived to be challenging. Survey respondents list political instability, corruption, competition from the informal sector and a lack of access to finance as the top obstacles to operations in MENA. Product market regulatory barriers are also prohibitive.

Political connections and informality undermine fair competition. Firms with political connections extract relative gains from their privileged positions. But the leveraging of influence also has the indirect effect of forcing competing firms to compensate with other means of political access. Political connections undermine a level playing field. The region’s large informal sector also weighs heavily on established firms. Competition from informal economic activity results in lower growth expectations and consequently lower probability of accessing finance, as evidenced by fewer loan applications.

Management practices in the business sector lag behind best practices in benchmark countries. Businesses have comparatively poor management practices, with average management practice scores declining for all MENA countries since 2013. This can be attributed partly to government ownership, as even partial government ownership slows the introduction of best management practices. In addition, protection of well-connected incumbents from competition reduces incentives to adopt modern management practices. This is costly, as managerial practices are crucial for profitability, trade and innovation.

Firms in the region are less capable of exploiting the benefits of trade, innovation and digitalisation. Many productive firms in the region fail to reap the scale and efficiency benefits from trade because of the weak business environment and state dominance in the economy. Innovation is one of those benefits, often associated with trade participation and integration in global value chains. Firms in MENA instead record very low innovation rates. Companies also lag behind their counterparts in other developing countries in terms of adoption of digital technologies.

Few firms in the region invest in their workers. MENA economies are making inadequate use of their human capital. Manufacturers provide formal training only to a small share of workers. Only a few companies invest in training their workers, and these tend to be larger, younger, foreign-owned and digitally connected exporting firms.

Accessing finance remains difficult and investment rates are low. Stringent collateral requirements, complex application procedures and high interest rates discourage firms from applying for loans. A significant share of companies are financially autarkic (not engaging in borrowing or lending activity with other economic players), most opting to self-finance voluntarily. Financial autarky appears to be a response to a difficult operating environment. MENA economies have exceptionally low investment rates. Although high interest rates resulting from the build-up in public debt may be one cause of the decline in investment, an unfavourable business environment may drive both high interest and low investment rates.

The green transition is not yet a priority. Incentives for companies to decarbonise are weak as all of the region’s economies continue to subsidise fossil fuels and electricity generated from fossil fuels. Listed companies now have stronger incentives to take account of ESG issues, but average corporate ESG responsibility in the region remains low. MENA firms are less likely than their ECA counterparts to adopt measures that reduce their environmental footprint. Some economies in the region do significantly better than others, however, indicating that opportunities exist for reforms to increase growth and make it more sustainable.

What can be done to unlock sustainable growth in the region’s private sector?

The report calls for countries in the region to lower regulatory barriers for businesses, promote competition and reduce disincentives emerging from political influence and informal business practices. Reforms that facilitate innovation, the adoption of digital technologies and investments in human capital are crucial. Companies should also be incentivised to exploit the benefits of participating in cross-border trade and global value chains more broadly. Better management practices can be instrumental in this regard.

Reforms to support these objectives will also need to take account of sustainability and the global agenda to limit climate change and protect the natural environment more generally. Greening MENA countries’ growth models will require sound public policy, strong state institutions, and determined political leadership that provides incentives for companies and consumers to think green, promote clean investment and remove barriers preventing a smooth transition to the green economy.

At the same time, the state has a duty to ensure that this transition process is just — through measures that help workers take advantage of opportunities to obtain new, higher-quality jobs linked to the green economy, while also protecting those at risk of losing their jobs. Such measures include labour market policies, skills training, social safety nets and action to support regional economic development.

Governments in the region should focus their support on industries and firms that have a zero-carbon future, while refraining from propping up so-called zombie firms that will struggle in the green economy. This includes addressing the market and policy failures that are impeding the transition to a green economy. The key here is to get prices right. That means putting a higher price on carbon and applying that higher price to a broader set of emission sources, as well as removing fossil fuel subsidies.

Section 1

Introduction: Economic performance and the business environment

MENA countries face a challenging macroeconomic context, characterised by persistently low GDP per capita growth.Figure 1.1 presents evidence on GDP per capita growth since the global financial crisis of 2007-09. On average, GDP per capita grew by only 0.3% a year in the six economies that are the focus of this report: Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza. That compares with 1.7% in the average middle-income country and 2.4% in the developing economies of Europe and Central Asia. In the 13 years since the crisis, the accumulated growth in GDP per capita in benchmark countries is 20 percentage points higher than in the average MENA economy. But this observation is subject to several caveats. Firstly, the average masks significant heterogeneity across countries. At 2.1% a year, GDP per capita growth in Egypt is high and the performance of Morocco compares favourably to the benchmarks. Secondly, negative per capita growth in Jordan and Lebanon is at least partly related to high population growth, which reflects the large number of refugees from Syria that both countries host. To the extent that the refugee populations are supported by the international community, the GDP figures may not fully reflect the experience of the native populations.

Figure 1.1