The region stacks up poorly on world competitiveness and governance indexes
Global indexes of countries’ competitive-ness, ease of doing busicompetitive-ness, and governance indicate that the Middle East and North Africa as a region offers a less competitive and more constrained market environment than comparator regions. The latest scores in the World Economic Forum’s (WEF) 2017–18 Global Competitiveness Index (GCI), the WEF Executive Opinion Survey on doing business, and the World Bank’s Worldwide Governance Indicators (WGI) reveal some consistent patterns.
Global Competitiveness Index
According to the 2017–18 GCI, most Middle East and North Africa countries
underperform relative to their develop-ment levels (figure 4.1). The region’s coun-tries have an average score of 4.28 out of 7 (Schwab 2017).2 Half of the world’s coun-tries (out of 137 included in the GCI) score higher, including countries at earlier stages of development.3 The Middle East and North Africa countries’ rankings range from last (the Republic of Yemen) to 17th (the United Arab Emirates). Further, they face a challenging duo of the most signifi-cant barriers to doing business as per-ceived by execut ives i n t he reg ion:
inefficient government interventions and corruption.
The WEF attributes the region’s weak performance on the GCI to several factors.
First is the extent of the state’s presence in several sectors, including manufacturing, construction, finance, transport, and infra-structure. Over 2010–12, the central gov-ernment wage bill as a percentage of gross domestic product (GDP) for Middle East and North Africa countries averaged
Sources: World Development Indicators Database; Schwab 2017.
Note: The World Economic Forum’s 2017–18 Global Competitive Index (GCI) ranked 137 countries, including 15 in the Middle East and North Africa (Schwab 2017). GDP per capita uses latest available data from 2016 or 2017.
120
LUX
CHE NOR
USA
SWE AUS
GBR ARE
CHN
KWT
OMN IORIRNMAR
GCI rank
DZA TUN LBN
YEM EGY
QAT 100
GDP per capita (US$, thousands)
80
60
40
20
0 20 40 60 80 100 120 140
BHR
FiGURE 4 .1 Middle East and North Africa countries are less competitive than most countries of comparable income
approximately 8.1 percent versus about 5.9 percent for Organisation for Economic Co-operation and Development (OECD) countries and 7.1 percent for Europe and Central Asia (WEF and World Bank 2018).
The region’s GCC countries average a 2-to-1 ratio of public to private sector employment, one of the highest in the world.
Second are several investment climate factors that constrain private investment:
political instability, a complex regula-tory environment, skills mismatches, and barriers to competition in critical factor markets. One of the only areas in which the region’s countries have made signifi-cant progress relative to OECD countries over the past few decades is infrastruc-ture, but the WEF report notes that this has not been associated with gains in competitiveness.
Doing Business Index
The Middle East and North Africa has also underperformed with respect to its
business environment in the World Bank’s Doing Business Index. In 2017, the region’s countries ranked above South Asia in how the private sector functions but below Latin America and the Caribbean, Europe and Central Asia, and the OECD countries. For instance, to start a business in the Middle East and North Africa takes 7.8 procedures over 20.1 days, and costs 26.3 percent of income per capita, compared with South Asia at 8.1 procedures over 15.4 days and 13.4 percent of income per capita. The region’s businesses also pay high and fre-quent taxes to operate—17.8 payments a year on average—whereas Europe and Central Asian countries incur 17.6 ments, and OECD countries, 10.9 pay-ments. Again, South Asia ranks lower, at 31.8 payments a year on average (World Bank 2017a). Business regulations in the Middle East and North Africa are rated distant from good practice with respect to efficiency and quality, relative to other regions (figure 4.2).
80 70 60 50 40 30 20 10 0
OECD high income
Average distance to frontier score, 2017
Europe and Central Asia
East Asia and Pacific
Regulatory efficiencya Regulatory qualityb Middle East and
North Africa
Latin America and Caribbean
South Asia Sub-Saharan Africa
Source: World Bank 2017b.
Note: OECD = Organisation for Economic Co-operation and Development. The distance to frontier score in the World Bank’s Doing Business Index measures the gap between an economy’s performance and the “frontier,” representing good practice across the entire sample of indicators (excluding labor market regulation indicators) across all economies since 2005 (World Bank 2017b).
a. The distance to frontier score for “regulatory efficiency” is the aggregate score for the procedures (where applicable) and time and cost indicators from the following indicator sets: starting a business (also including the minimum capital requirement indicator), dealing with construction permits, getting electricity, registering property, paying taxes (also including the postfiling index), trading across borders, enforcing contracts, and resolving insolvency.
b. The distance to frontier score for “regulatory quality” is the aggregate score for getting credit and protecting minority investors as well as the regulatory quality indexes from the indicator sets on dealing with construction permits, getting electricity, registering property, enforcing contracts, and resolving insolvency.
FiGURE 4 .2 Business regulations in the Middle East and North Africa are rated distant from good practice with respect to efficiency and quality
Worldwide Governance Indicators
Concerning five governance indicators that affect the local business environment, the Middle East and North Africa scores lower across the board than other middle- to high-income regions of the world: East Asia and Pacific, Europe and Central A s i a , a n d L at i n A m e r i c a a n d t h e Caribbean. The region’s scores in the World Bank’s Worldwide Governance Indicators (WGI) have been declining con-sistently since 2007, with the exception of brief positive upticks regarding regulatory quality and rule of law in 2012. In the WGI 2017,
• On gove r nme nt ef fective ness, the Middle East and North Africa scores approximately 10–25 percentage points lower than the other regions (figure 4.3, panel a);
• On regulatory quality, the region scores about 10 –15 percentage points lower ( figure 4.3, panel b);
• On rule of law, the region scores about 10–20 percentage points lower (figure 4.3, panel c);
• On political stability, the region consis-tently scores about half the score of the other regions, and this score declined markedly from 2007 to 2017 (figure 4.3, panel d); and
• On control of corruption, the region scores about 10–20 percentage points lower (figure 4.3, panel e).
Adding to the evidence of governance-related effects on competitiveness, several recent studies have found that industrial policy and regulatory environments in Middle East and North Africa countries are highly correlated with firm connected-ness (Rijkers, Freund, and Nucifora 2014;
Schiffbauer et al. 2015). In the Arab Republic of Egypt, for example, a small number of politically connected firms have been permitted to operate in energy- intensive industries (Schiffbauer et al.
2015). Any firm seeking to operate in energ y-i ntensive i ndust r ies needs a
government license, and access to these licenses has been restricted to insider firms.
Firms with licenses to operate in this field benefit from large energy subsidies. This state of affairs limits both competition in energy-intensive industries and the growth of labor-intensive industries.
In Tunisia, there is evidence that industrial policy was oriented toward rent creation for former President Ben Ali and his family (Rijkers, Freund, and Nucifora 2014).
Differences in performance between firms connected to the former president and com-petitors are much larger in sectors with higher regulation. Further, the sectors in which connected firms are active are dispro-portionately more regulated than other sectors.
In both Egypt and Tunisia, there is evi-dence that barriers to entry in trade protect connected firms from foreign competition and orient them toward domestic markets (Schiffbauer et al. 2015). These barriers include privileged access to factors of produc-tion, inconsistent implementation of rules and regulations within a given sector, and exclusive operating licenses in profitable ser-vice sectors.
Competitive constraints stem from the region’s political economy
The Middle East and North Africa’s underperformance in creating an environ-ment that promotes competition and ease of doing business does not seem driven by an absence of efforts to reform the legal and regulatory environment. The region’s governments have introduced about as many market-enhancing reforms as com-parator regions, but the private sector development response has been lower—a contrast attributed partly to the distinc-tion between legal reform and practical implementation (Benhassine et al. 2009).
That contrast (illustrated in figure 4.4) offers insight into a finding that is devel-oped further below—that adding layers of reforms appears to be insufficient in
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
2017 2012 2007 2017 2012 2007 2017 2012 2007 2017 2012 2007
0 10 20 30 40 50 60 70 80 90 100
Percentile rank (0 to 100) a. Government effectiveness
Percentile rank (0 to 100) 2017
2012 2007 2017 2012 2007 2017 2012 2007 2017 2012 2007
0 10 20 30 40 50 60 70 80 90 100
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
b. Regulatory quality
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
2017 2012 2007 2017 2012 2007 2017 2012 2007 2017 2012 2007
0 10 20 30 40 50 60 70 80 90 100
Percentile rank (0 to 100) c. Rule of law
Percentile rank (0 to 100)
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
2017 2012 2007 2017 2012 2007 2017 2012 2007 2017 2012 2007
0 10 20 30 40 50 60 70 80 90 100
d. Political stability and absence of violence or terrorism
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
2017 2012 2007 2017 2012 2007 2017 2012 2007 2017 2012 2007
0 10 20 30 40 50 60 70 80 90 100
Percentile rank (0 to 100) e. Control of corruption
Source: World Governance Indicators Database, https://info.worldbank.org/governance/wgi/.
FiGURE 4 .3 The Middle East and North Africa has consistently ranked lower than other middle- to high-income regions on the Worldwide Governance indicators, 2007–17
the Middle East and North Africa con-text, where some fundamental distortions remain unaddressed.
History of the postcolonial development model
The development model most Middle East and North Africa countries pursued in the 20th century after independence from the British and French was both a reaction to, and in some ways a perpetuation of, the model pursued by colonial governments.
Governments established social contracts that were framed as correcting for spatial disparities and widespread poverty main-tained under colonial rule (Nabli et al.
2006). They were designed to depart from the colonial model, in which foreign private firms had lucrative deals to extract natural resources.
As such, core attributes of the new social contract across the region comprised (a) a shift from markets to states as key shapers of national economies; (b) a shift toward states to determine economic priorities; (c) a focus on redistribution through economic and social policy (and an assignment to the state of the provision of welfare and social ser-vices); and (d) the establishment of the politi-cal arena as an expression of national unity instead of as a platform for political contesta-tion or a means for managing conflicting preferences (Nabli et al. 2006).
The implementation of this social contract was similar across the region, especially in Algeria, Egypt, Iraq, and the Syrian Arab Republic, and to a lesser extent in Jordan, Morocco, Tunisia, and the Republic of Yemen. It included single-party or ruling party governments, constitutions that established interventionist and redistributive principles, agrarian reform programs, centralization of professional associations and trade unions, and state provision of social services and subsidies.
To execute this new social contract, gov-ernments across the region took control of their natural resources from foreign firms (which had negotiated long concessions dur-ing World War II) (Mills and Alhashemi 2018).
The new governments worked mostly through state-owned enterprises controlling oil, gas, phosphates, and other natural resources.
With revenues assured for the medium term from control of natural resources and a commitment to redistribution and social wel-fare, the region’s governments pursued public sector job creation as a centerpiece of their development models. Natural resource and foreign aid rents limited the governments’
needs for tax collection and therefore for active citizen participation in governance (Mills and Alhashemi 2018). Further, public sector employment limited the likelihood of citizen contestation against the government.
Legacy of spatially biased policies and development
Although their stated objectives were to change the colonial development model and redistribute to the needy, the legacy of spa-tially biased systems inherited from colonial rule persisted in most countries of the Middle East and North Africa (Mills and Alhashemi 2018). National administrations and fiscal systems were spatially biased toward capital cities and coastal metropolises. Colonial rul-ers had focused on resource extraction in less
Source: Benhassine et al. 2009.
Note: Private investment rates are from the World Development Indicators Database, national accounts, and the International Monetary Fund and have been averaged over the five-year periods.
Episodes of reforms are based on the Economic Freedom Index of the Fraser Institute (http://www.freetheworld.com), and a reform episode is defined as a five-year episode during which the 0–10 index permanently improved by at least one unit.
20
15 10
5 0
t–15 t–10 t–5 Reform t+5 t+10
Five-year time intervals
Private investment as a share of GDP (%)
Middle East and North Africa East Asia and Pacific
Latin America and the Caribbean South Asia
FiGURE 4 .4 Private investment has responded less to reforms in the Middle East and North Africa than in other regions
Private investment (as % of GDP) in relation to reform episodes
connected areas and focused the investments on the coast with little to no representation of local interests. That system was maintained or mirrored after independence.
Regions that felt taken advantage of have increasingly risen in protest in a form of resource regionalism that mirrors resource nationalism (Mills and Alhashemi 2018).
These lagging regions where resource extraction has been heavy include southern Algeria, southern and interior Tunisia, east-ern and northeasteast-ern Syria, and the interior of Oman. And although some company towns in these regions represent enclaves of development, even urban centers in resource-rich areas often lag behind their national peers. Such cities include Basra and Kirkuk in Iraq, Assaluyeh in the Islamic Republic of Iran, Gafsa in Tunisia, and Khourigba in Morocco.
Instead of correcting the biases in their fis-cal and administrative structures that rein-forced spatial disparities, the region’s governments sought to overcompensate for them with spatially targeted industrial poli-cies. The industrial policies were largely ver-tical, focusing both on specific industries or sectors and on regions. Policies cultivated industries in specific sectors, while spatially targeted industrial policies were oriented toward distributing jobs and services to lag-ging regions. More than in comparator regions, the Middle East and North Africa governments pursued vertical (sector and spatially targeted) industrial policy instead of horizontal industrial policy (Nabli et al.
2006).
More generally, most of the region’s gov-ernments seemed to perceive industrial poli-cies, including subsidies, as a necessary part of industrial development because of the externalities of their instruments of redistri-bution and because of their heavy reliance on natural resource revenues and foreign aid.
Price controls in the Middle East and North Africa divorced prices from production costs, and the region’s governments pursued com-pensatory measures accordingly. Given the focus from the 1950s onward on food subsi-dization, the agriculture sector received large
subsidies, trade protection, and other incen-tives for production.
Historically, while a stated pillar of gov-ernment development models in the Middle East and North Africa has been to redistrib-ute development gains to needier popula-tions, their choice of vertical instead of horizontal industrial policies is consistent with pursuit of control. Vertical policies have concentrated winners and diffused losers and therefore help secure government power bases. In contrast, horizontal policies that are not industry- or territory-specific have diffuse benefits, concentrated losses, and often lon-ger time frames for impact. So, they can be perceived as less politically rewarding. Given the initial orientation to reward a limited few at the expense of many, shifts from vertical to horizontal instruments have become increas-ingly difficult to make because insider eco-nomic actors are resilient to reforms. Reforms often reorganize opportunities for rent seek-ing rather than eliminatseek-ing them (Nabli et al.
2006).