Once driven by the public sector, the economies of the Middle East and North Africa (MENA) now look to the private sector for growth. Private enterprises account for more than 80 percent of the region’s non-hydrocarbon value added. Increased openness and liberalization, as well as investment climate reforms, have enabled this transformation over the past two decades. Despite the private sector’s growing role, however, the low quality and weak implementation of reforms has limited their effect and the MENA countries have failed to transform into diversified, high-performing economies. To strengthen the private sector, the government should enact more consistent and equitable regulations, while entrepreneurs must play a larger role in developing and evaluating reforms. 

Investment Climate Reforms but Limited Response

Countries across the region have made considerable progress in reforming their investment climates in recent years. Egypt, for example, dramatically changed taxes, tariffs, and other key areas of government interaction with private investors and ranked among the top ten reformers in the World Bank’s Ease of Doing Business Index four times in the last five years as a result. Jordan carried out reforms in 6 of the 10 areas measured by the Index, and Saudi Arabia ascended to thirteenth out of the 183 economies evaluated. Morocco established a private credit bureau to facilitate access to finance; Tunisia strengthened investor protection and reduced customs processing delays by two days on average; and the UAE sped up its building permit process by putting it online.

Despite these reforms, MENA’s private sector is still lagging behind that of other high-performing regions in several important respects:

  • Private Investment: MENA’s private investment rates have stagnated at around 15 percent of GDP—half the 30 percent rate reached in East Asia. Reforms only managed to increase MENA’s private investment by a modest 2 percentage points, while similar reforms led to increases of more than 10 percentage points in East Asia, 7 in South Asia, and 5 in Latin America.

  • Business Density and Competition: The average number of registered businesses per 1,000 people in MENA is about a sixth of that in the OECD countries and less than a third of that in Eastern Europe and Central Asia. MENA’s average manufacturing firm faces close to six times fewer competitors in its domestic market than does an Eastern European one.

  • Productivity: The productivity of MENA’s average manufacturing firm is about half that of Turkey’s—a country with a lower income per capita than the MENA average.

  • Export Diversification: The region’s limited productivity is reflected in its weak export base. The most diversified economies in MENA export around 1,500 goods—mostly in low-value-added sectors—compared to nearly 4,000 goods in countries like Malaysia, Poland, and Turkey. Diversification is even weaker in oil-rich countries, many of which export less than 500 goods.

  • Firm and Manager Age: Recent World Bank enterprise surveys show that MENA’s average firm is almost ten years older than that of Eastern Europe and East Asia, while its average manager is seven years older. This is despite MENA having one of the youngest populations in the world. In some cases, this high age reflects dominant and connected firms using a privileged position to limit competition.

Improving Reforms

World Bank enterprise surveys show that 60 percent of business managers do not think that the rules and regulations, as they appear “on paper,” are applied consistently and predictably in MENA. The same surveys show that uncertainty about regulatory policy, unfair competition practices, and corruption significantly constrain business. Too many would-be entrepreneurs across the region still believe that the keys to success are connections or privilege—rather than creativity, persistence, and competitiveness—reducing the incentive to comply with regulation and the desire to invest.

Government Role

MENA needs a new generation of entrepreneurs to emerge and create dynamic firms that are efficient enough to export even advanced products. In order to achieve this, policy makers must show the new generation that business-friendly reforms benefit them as well—and not just the minority of privileged or connected individuals. Transparency, accountability, and quality of service in public agencies that interact with firms must be at the core of these reforms.

There are several instances of such successful reforms, including customs reform in Morocco and Tunisia, as well as Egypt’s General Authority for Investment (GAFI)—a  one-stop-shop for investors. As a result of more transparent and computerized processes, strong incentives for staff to improve the quality of service, and limited points of interaction with public servants (and therefore limited opportunities for indiscretion), GAFI has reduced business registration delays in its Cairo office from 34 days to three days; streamlining also eliminated some 40 procedures. As a result, business registration has increased dramatically. To be sure, such institutional reforms will need to expand to other agencies for the full impact to be felt.

Private Sector Role

The private sector also has a responsibility—and an important role to play—within this agenda. Too often, its voice has been dominated by proponents of the status quo, who hope to maintain their privileges. But the world is changing. Already, a new generation of entrepreneurs is emerging in MENA, including a—so far—small number of educated women. The ability of this new generation to influence the future of reform will be crucial. To ensure that their voices are heard, the private sector needs to be better organized and more inclusive. It needs to be a stronger partner for governments in developing, implementing, and evaluating reforms.

Ritva Reinikka is the director of the World Bank’s Economic Development Group for the Middle East and North Africa Region.