Economic Research Forum (ERF)

What’s holding back the private sector in MENA?

1929
The development of a vibrant private sector is essential for delivering the sustainable employment and inclusive growth that are so urgently needed in the countries of the Middle East and North Africa. This column summarises findings on the key constraints on doing business from Enterprise Surveys conducted in eight economies in the region during the period 2013-15.

In a nutshell

As might be expected, political instability is widely viewed as a constraint on firms’ productivity and competitiveness.

But there are many other issues that must be addressed to promote faster private sector growth and job creation.

These include tackling corruption and unreliable electricity supplies, facilitating firms’ access to finance, improving systems of education and training, supporting work opportunities for women and young people, and creating greater openness to international trade.

What are the main constraints on firms’ day-to-day business activities across the Middle East and North Africa (MENA)? To help answer this question, the European Bank for Reconstruction and Development (EBRD), the World Bank (WB) Group and the (EIB) conducted a joint enterprise survey in 2013-15.

The survey covered more than 6,000 firms across Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, West Bank and Gaza, and Yemen. Six key themes emerge from an in-depth analysis of these unique survey data (EBRD, EIB and WB, 2016).

Productivity

While labour productivity is somewhat higher than in similar emerging markets, total factor productivity (TFP), which measures the efficiency of use of other factors besides labour, lags. In all countries but Jordan, Morocco and Yemen, above-median labour productivity goes hand in hand with below-median TFP.

This indicates that while labour is used somewhat efficiently, when all factors are taken into consideration, firms are less productive. In other words, higher levels of labour productivity are achieved at the expense of an over-reliance on capital and intermediates. Larger firms in particular spend more on capital than labour inputs.

Yemen stands out in a negative way: firms are characterised by low labour productivity and low TFP. In contrast, in Morocco, relatively high labour productivity is also associated with relatively high TFP, indicating a comparatively efficient firm population.

Engagement in international trade

Many firms engage in international trade, but they are mostly small and medium-sized enterprises (SMEs) and do not reap the benefits in terms of size and productivity premia. One in four manufacturers in the MENA region directly exports goods abroad, but almost 80% of them employ fewer than 100 people.

‘Superstar’ exporters have similar productivity margins as elsewhere, but the bulk of other exporters lag behind. In fact, small player exporters are even less productive than non-exporters, yet they persist in the market.

Those with consistently higher premia are importers, consistent with gains from better access to foreign technology and participation in supply chains (see Figure 1). The latter is also associated with higher likelihood of introducing new products and processes.

Tunisia is a case in point: it has the highest proportion of firms that both export and import in MENA and it is well integrated in global value chains. Moreover, a higher percentage of Tunisian firms are engaged in innovation than in the MENA region on average; this may be related to knowledge transfer from the country’s partners in global value chains.

Business constraints

Many firms are severely affected by political instability, corruption, unreliable electricity supply and inadequate access to finance (see Figure 2). Firm innovation and growth are also constrained by barriers to trade and a scarcity of appropriately trained workers.

In many places, there is a striking disconnect between firms and formal financing channels, with the result that firms are simply discouraged from seeking external finance, inevitably reducing their growth potential. Inefficiencies in the business environment are felt disproportionately by SMEs.

Credit constraints

An unusually high share of firms at first sight appears not to be credit-constrained. But this is not driven by successful loan applications; instead, many firms report that they have enough capital and thus do not need a loan. Indeed, a significant share of firms that are not credit-constrained has disconnected from the banking sector altogether (see Figure 3).

This share is particularly high in Djibouti, Egypt and West Bank and Gaza. In Egypt, 40% of formal private sector firms do not even have a checking or savings account and therefore do not use the financial system even for payment services, suggesting that the disconnect is structural.

Disconnected firms resemble credit-constrained firms: they are small, less likely to plan for expansion and have a low propensity to invest. Further analysis suggests that firms are less likely to disconnect from the banking sector if nearby banks accept movable assets as collateral.

Employment

Manufacturing and exporting firms play a comparatively large role in providing employment, with the retail sector lagging behind. With the exception of West Bank and Gaza, the largest share of private sector jobs is in large firms.

The relatively small share of employment in SMEs is not explained by a relative lack of SMEs. Rather, firms in the MENA economies tend to be small and stagnant: few firms expand or downsize over time. Of the firms that were small in 2009, 93% were still small in 2012. Only 7% grew beyond 19 employees in 2012. Similarly, 82% of medium-sized firms and 91% of large firms remained in the same size category.

Exporters account for a higher proportion of formal jobs in the region than elsewhere in the world, more so in the relatively rich economies of Jordan, Lebanon and Tunisia than elsewhere (see Figure 4).

Skills

Skill shortages are a concern for those firms that have the highest growth potential. Even though education systems have failed to provide the necessary skills required by the private sector, the intensity of training provided by firms is low compared with similar countries (see Figure 5).

For example, only 5% of Egyptian firms offer formal training, far lower than the MENA average of 17%. The difference is driven primarily by the low percentage of SMEs providing formal training for their employees – only 2% and 6% of them do so, compared with 12% and 23% in the MENA region on average respectively.

Further reading

EBRD, EIB and WB (2016) What’s Holding Back the Private Sector in MENA? Lessons from the Enterprise Survey.

All MENA Enterprise Survey data are freely available for researchers to use: http://ebrd-beeps.com/

Tags: , , , , , , , , ,

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.