Tackling Barriers to Private Sector Progress: International Economic Analyst Moin Siddiqi Looks at Some of the Ways in Which Obstacles to the Development of Small to Medium Business Enterprises (SMEs) in the Middle East and North Africa (MENA) Might Be Overcome, Backed by Information from the World Bank, the OECD and the IMF
Siddiqi, Moin, The Middle East
Companies around the developing world face a host of institutional and physical barriers when engaging in business enterprise, from lengthy delays in obtaining permits and licences in some countries to dealing with heavy red tape--or worse, corrupt government officials--in others. The opportunity cost in terms of economic growth and job creation can be enormous, with small and medium-sized enterprises (SMEs)--the engines of wealth creation--frequently suffering the worst of the impact.
The Arab region is not immune from these constraints as evident in a recent World Bank report, From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa, which pinpoints the underlying reasons for the relatively low level of private sector investment--chiefly: excess state intervention in banking and land management; overreliance on an oil/gas industry, leading to a lack of diversification; deficiencies in the credit market; higher taxes; an inadequate skills base, partly caused by brain drain and lower spending on higher education and technical training; corruption (i.e. bribes to 'get things done'); cronyism; and unreliable basic infrastructure outside the Gulf states for supporting output facilities and handling exports.
The overall level of private investment in the MENA region has remained stagnant over the past two decades at just 15% of gross domestic product (GDP)--less than one third of the average in most other developing areas (except sub-Saharan Africa). Moreover, regional economies lag behind in crucial areas of diversity and technological sophistication of exports, and the productivity and innovation of firms (indicating poor managerial and technical skills and higher operating costs). In fact, new investment leads to productivity gains only when domestic markets are highly competitive and firms possess the right skills and good corporate strategies.
The sectoral composition of investment tends to be skewed towards services (mainly telecoms), real estate and the exploration of natural resources (hydrocarbons and mining), rather than the labour-intensive manufacturing sector. The overall assessment is that MENA's private sector, in its present form, cannot possibly support robust sustained regional growth like that in for example, China, South Korea or Malaysia: "With a few--arguably nonreplicable--exceptions from the Gulf, no country of this region has witnessed in recent years a growth led by structural transformation of the economy."
Average economic growth between 2004 and 2008 achieved 6%, fuelled largely by pubic spending and government-sponsored projects in the oil-exporting nations, thanks to swelling oil windfalls. Still, unemployment remains and output growth falls well below Emerging Asia (led by China). With rapidly growing populations and therefore a dire need for job creation, the MENA region must aspire to grow at 8% per annum and achieve greater levels of diversification in the new decade. But the productivity of private firms in Yemen, Jordan, Lebanon, Iraq and the Maghreb countries will not increase until infrastructure, notably transport and power generation, are fully developed, hence the importance of private capital.
The World Bank argues that MENA's problems in attracting private investment are "linked to the lack of rule-based institutions that are insulated against discretionary interference by political leaders". It contrasts the labyrinthine bureaucracies prevalent in MENA with "economically successful non-democracies in East Asia", where the ruling party and the civil service are institutionalised. Thus, the political hierarchy is accountable for policy actions.
The Bank believes difficulties cannot be attributed to "missing reforms" or poor regulations, except in a few lagging countries or sectors, since the business climate is relatively similar to that of better-performing developing nations. …