In a nutshell
Productivity gains in MENA countries could result from structural change through a reallocation of production factors from low productivity sectors to higher productivity sectors.
Structural transformation in Egypt, Morocco and Tunisia slowed down between 1990 and 2010 – too early, at a low level of income and development, and before catching up with the emerging economies.
Manufacturing dynamism remains an important driver of structural transformation towards products with higher value added and more sophisticated exports.
Higher and steadier productivity gains are necessary to set MENA countries on a faster growth trajectory to meet their big socio-economic challenges. These productivity gains could result from capital accumulation, technical change and innovation as well as from structural change through a reallocation of production factors from low productivity sectors to higher productivity sectors.
Structural change implies a transformation of the economy towards heavy and sophisticated industries, as well as modern and technology- intensive services (El Haddad, 2013; FEMISE, 2013). The FEMISE (2013) report concludes that: ‘structural transformation is essential for economic development, a process which may involve benefits from movements of factors of production across sectors, product upgrading, penetration of new markets and/or acquiring new know-how’.
Many studies have addressed the issue of structural change by exploring its intensity, path and determinants in OECD countries as well as in Latin America, Asia and Africa (McMillan and Rodrik, 2011; McMillan and al, 2014). But few studies have focused on the MENA region, which is partly due to the unavailability of comparable long-term data series on sector-level value added and employment.
To fill this gap, we have examined the patterns of structural transformation in Egypt, Morocco and Tunisia over a very long time span – since the 1960s. Our main objectives are to identify the main determinants of and obstacles to factor reallocation, and to understand how to stimulate structural transformation that will unleash the productive potential of MENA countries.
Premature deindustrialisation and unfinished structural transformation
Our results suggest that the most significant contribution of structural change occurred during the period 1975-90 in Egypt, Morocco and Tunisia. The strongest transformations were made before 1990 during the first stage of industrialisation.
The pace of structural transformation has slowed down between 1990 and 2010 – too early, at a low level of income and development, and before catching up with the emerging economies of East Asia and elsewhere.
The period 1975-90 was characterised by a first stage of industrialisation, contributing positively to structural change. The three countries experienced some industrial diversification, though, in ‘light industries’, such as textiles, agro-food, and resource-based industries (including the chemicals and petroleum sectors in Egypt) under relatively protectionist policies.
But the manufacturing sectors were basically characterised by a lack of sophistication (FEMISE, 2013). The three countries confined their industries to low technological, assembly and outsourcing activities despite some efforts made to develop the machinery and electrical sector in Morocco and Tunisia. For decades, production has been mainly intensive in the use of unskilled labour (Tunisia and Morocco) and resource-based (Egypt).
Furthermore, the three countries have not achieved transition to the next stage of industrialisation – that is, to more sophisticated products and high-technology exports, as happened in the emerging economies. The share of high-technology exports in the three countries was very low in 2010: 0.9% in Egypt; 4.9% in Tunisia; and 7.7% in Morocco. This is very low in comparison with East Asian countries, which reached and average share of 26.6% of high-technology exports in manufactured exports.
After 1990, the three countries could not compete within the context of trade openness and intensive exposure to international competition. The dismantling of the Multi Fibre Agreement has hampered the traditional textile sector in three countries.
There has been a process of deindustrialisation since the 2000s. The manufacturing sector has been growing more and more slowly in the three countries, and the employment and value added shares of manufacturing decreased, leading to what Rodrik (2016) calls ‘premature deindustrialisation’. The period following 2010, which is not covered by our study, has been more promising for the manufacturing sector in Morocco through the development of the automotive sector.
Despite the industrial policies carried out through export promotion, upgrading programmes, as well as many financial and fiscal incentives, the transformation process has stagnated and remained unfinished, especially in Egypt and Tunisia.
Several common reasons might explain such outcome, including: low capacity of policy implementation; ineffectiveness of incentives due to mismanagement; multiple and dispersed programmes and actors; absence of a vision and targeting of sectors; bad governance; lack of transparency; favouritism; bureaucracy; lack of human capital due to the bad quality of the education system; bad quality of infrastructure; and limits on financing innovation (El Haddad, 2013; Ghali and Rezgui, 2013).
Furthermore, institutional and regulatory barriers (such as rigid regulation, high entry and exit costs, and labour market rigidity) hamper the transformation process.
Transition to the modern services of the tertiary sector has been slow, especially in Egypt and Tunisia, which is mainly due to institutional and non-institutional barriers in a context of autocratic regimes and bad governance. Both countries experienced a revolution in 2011, further delaying their economic transition.
But it is worth noting that Morocco compensated for its manufacturing decline by a relatively rapid transition to modern services during the 2000s. This enabled the country to boost its services exports and pursue structural transformation.
How to unleash the productive potential of the MENA countries
What can be done to unleash the MENA countries’ productive potential, to boost the reallocation of resources towards the most productive sectors and to stimulate productivity and economic growth? Our research suggests a number of recommendations.
Manufacturing dynamism remains an important driver of structural transformation towards products with higher value added and more sophisticated exports. As Rodrik (2016) reports, ‘Sustained, rapid convergence on the part of developing economies has historically required industrialisation’. Therefore, industry upgrading is a priority in the three countries; the transition from assembly activities to more sophisticated production process should be more effective.
Government intervention is necessary to ensure that changes are made in the right direction – that is, towards the most productive and competitive sectors (such as digital economy, renewable energy and bio-agriculture). Governments should support, facilitate and accompany the expansion of the private sector, entrepreneurs and start-ups, which are the main actors creating innovative and knowledge-intensive activities leading to structural change (Altenburg et al, 2016).
This requires a more competitive business environment with less bureaucracy, easier access to finance, greater respect of intellectual property rights, hard and soft infrastructure investment, as well as investments in industrial and technological parks.
Barriers to entry of new and efficient businesses as well as exit barriers for inefficient ones should be removed in order to have smoother factor reallocation. More flexibility in the labour market is also needed, which makes an economy more attractive to local and foreign investors.
Governments should support the improvement of technology capabilities of firms and R&D investment. The adoption of new technologies and processes allows the emergence of high value added products with new markets. Therefore, the implementation of efficient and well-governed systems of innovation should be a priority in the MENA region. Governments should play a more active role to facilitate the financing of innovation particularly in smaller enterprises (Ghazali and Mouelhi, 2018).
At the same time, reforms of the educational and professional training systems need to be implemented effectively in order to increase the quality of labour resources, to improve their technological capabilities and to adapt to the needs of new activities. In the same vein, the anticipation of technological trends, new opportunities as well as the increasing demand for specific skill-types are necessary.
In sum, an effective industrial policy is needed. As reported by Herrendorf et al (2013), ‘policy may provide the “big push”, promoting and targeting competitive sectors, with high productivity and growth potential that lets the economy escape from its poverty trap and leads to industrialization and self-sustaining economic growth’.
A participatory approach, strengthened implementation capacity and effective policy monitoring are all needed to achieve these objectives (Altenburg et al, 2016).
Altenburg, T, M Kleinz and W Lutkenhorst (2016) ‘Directing Structural Change: From Tools to Policy’, German Development Institute Discussion Paper No. 24/2016.
El Haddad, A (2013) ‘The Structural Challenge of Growth and Transformation for Egypt’s Industrial Sector’, in FEMISE, 2013.
FEMISE (2013) ‘Structural Transformation and Industrial Policy: A Comparative Analysis of Egypt, Morocco, Tunisia and Turkey and Case Studies’.
Ghali, S, and S Rezgui (2013) ‘Structural Transformation and Industrial Policy: Tunisia’, in FEMISE, 2013.
Ghazali, M, and R Mouelhi (2018) ‘Growth of Micro, Small and Medium Enterprises (MSMEs) in the MENA Region: Constraints and Success Factors’, EMNES Working Paper.
Herrendorf, B, R Rogerson and A Valentinyi (2013) ‘Growth and Structural Transformation’, NBER Working Paper No. 18996.
McMillan, M, and D Rodrik (2011) ‘Globalization, Structural Change and Productivity Growth’, in ‘Making Globalization Socially Sustainable’ edited by M Bacchetta and M Jense, International Labour Organization and World Trade Organization.
McMillan, M, D Rodrik and I Verduzco-Gallo (2014) ‘Globalization, Structural Change, and Productivity Growth: With an Update for Africa’, World Development 63: 11-32.
Rodrik, D (2016) ’Premature Deindustrialization’, Kennedy School of Government Working Paper, Harvard University.