91702 World Bank MENA Regional Issues Brief: Jobs or Privileges Number 1 of 5 Jobs or Privileges Unleashing the Employment Potential of the Middle East and North Africa Problem What do privileges look like in the Middle East and North Africa? The Middle East and North Africa • 71% of connected firms in Egypt, but only 4% of all firms, sell products that are region faces high unemployment or protected by at least three technical import barriers. jobs in low-productivity activities • 64% of politically connected firms in Tunisia are operating in sectors subject to often in the informal economy. restrictions on Foreign Direct Investment relative to only 36% of non-connected firms. Analysis • 45% of all connected firms in Egypt operate in highly subsidized energy-intensive industries such as cement or steal, compared to only 8% of all firms. The private sector has not generated • 64% of politically connected firms in Tunisia are in sectors requiring an exclusive license enough jobs as polices that restrict to operate relative to only 45% of non-connected firms. competition have limited the entry of • Firms in politically connected industries (i.e., with at least one connected firm) are 11- new firms and prevented more 14% more likely to have acquired land from the government. productive firms from growing – the type of firms that create most jobs. • An additional firm with a politically connected CEO reduces the average waiting time for a construction permit in an industry by 51 days. These policies are often captured by few politically connected firms and • Firms in industries with at least one politically connected CEO are inspected by tax result in privileges instead of an officials 4.6 times a year relative to 5.7 times a year for firms in industries without a Summary connected CEO. In addition, the frequency of inspections by the municipality is about environment that enables all 20% higher for firms in non-connected industries. entrepreneurs to grow and prosper. • The variation of reported inspections across firms is significantly higher within Solution connected sectors. This suggests that politically connected firms receive very few Encourage competition and reform inspections while non-connected firms are inspected frequently. policies that allow a few connected • The entry of new firms into politically connected sectors is about 28% lower. firms to dominate the most lucrative • Employment growth declines by about 1.4 percentage points annually when connected sectors of the economy. Sustaining firms enter new, previously unconnected sectors in Egypt. the reforms requires institutions that Politically connected firms are identified in Egypt as firms managed or owned by businessmen promote equal opportunities for all controlling senior posts in the government or National Democratic Party and in Tunisia as firms entrepreneurs and transparent and open policy making whose assets got confiscated after the revolution as they were owned by the Ben Ali family. PROBLEM firms with less than five employees  Real GDP per capita growth hovered dominates the private sector, ranging around 2% over the last 20 years; 2- The lack of private-sector jobs in the from about 40% in Tunisia and Jordan 4% lower than in South or East Asia. Middle East and North Africa (MENA) has to almost 60% in West Bank & Gaza led to high unemployment, especially and Egypt.  Growth was driven by an increase in among young people and women, and to the share of the working-age a large informal economy, concentrated in  The probability that micro firms grow population rather than labor unproductive, subsistence activities. As a beyond 10 employees 5 years later is productivity. result, the region has a vast pool of only 2% in the West Bank & Gaza, 3% untapped human resources. in Tunisia, and 12% in Lebanon. Are the fundamentals of job creation different from other regions?  Only 19% of the working-age ANALYSIS population has formal sector jobs in They are not: startups and more MENA relative to 27% in Latin Growth could have been much higher had productive firms create more jobs in America and the Caribbean and 40% MENA countries been able to absorb their MENA as elsewhere. in Eastern Europe and Central Asia. fast-growing labor force into the higher- productivity activities.  Micro-startups – firms less than 5  The share of employment in micro years old and with less than 5 World Bank MENA Regional Issues Brief: Jobs or Privileges Number 1 of 5 employees – accounted for 92% of relative to 886,000 in Turkey. land, and so forth). These policies net job creation in Tunisia from 1996- undermine competition, equal 2010 and 177% in Lebanon from  Ending large variation in rule opportunity for all entrepreneurs and 2005-2010. enforcement would raise competition result in lower efficiency, innovation, and and innovation: over 50% of surveyed job creation. The quantitative impact of Few firms either entering or exiting the firms regard regulatory policy privileges during the Mubarak and Ben Ali market coupled with slow productivity uncertainty as an obstacle to firm regimes in Egypt and Tunisia are growth has limited MENA’s pool of growth in MENA. summarized above. Many of these startups and more productive firms that policies are still in place. are the engines of job creation. Avoiding the Pitfalls of Industrial Policy The available qualitative evidence points  For every 10,000 working-age Efforts to stimulate private sector growth to similar mechanisms of policy privileges persons, on average, only 6 limited and jobs in MENA have often taken the in other MENA countries. liability companies were created form of active industrial policies. But annually in MENA; the average there is limited evidence of success and SOLUTION among all worldwide was 26. several instances of policy capture by a few, connected firms. A comparison with The road to more jobs in MENA countries  After 35 years in operation, firms in East Asian countries highlights several is paved not only with better supply-side Tunisia and Egypt barely increase critical differences in policy design: policies (e.g., education) but, crucially, their productivity while firms in does also require significant reforms to Mexico, India and Turkey increase 1. Broader consensus on a common stimulate labor demand by moving from a their productivity 2-3 fold. strategic growth vision. system of privileges to one where all firms and new entrepreneurs compete on an Distorted Dynamics 2. Evaluation systems to assess the equal basis. Therefore, governments performance of policies and should reform all policies that unduly These factors holding back job creation public officials. constrain competition. are rooted in a policy environment that favors a few dominant market players and 3. Support was linked to verifiable One critical aspect of this reform agenda insulates them from competition. For performance guaranteeing equal is to create institutions that safeguard example, access for all firms. competition. Such institutions include, but are not limited to, an independent  Removing restrictions on foreign 4. Industrial policy provided competition authority; appropriate direct investment (FDI) into service incentives for firms to compete procurement laws, or an accountable and sectors in Jordan would increase the in international markets. highly competent public administration. entry of foreign firms which, in turn, Another component, just as important, is would create jobs in domestic firms. 5. Far-reaching public sector to ensure policy making is transparent reforms creating a merit-based and open, with a mechanism that  In Morocco, more competition, equal public administration. encourages citizen participation. Finally, and predictable treatment by tax this report provides a decision-making administrations, less corruption and Privileges instead of Jobs guide which governments can use as a obstacles in the judicial system, and framework when designing and lower cost of finance would raise job Policies in MENA have often been captured by a few politically connected implementing policies. growth among young firms. firms. This has led to a policy environment  Eliminating energy subsidies to that created privileges rather than a level industry in Egypt (which amount to playing field, and undermined private sector growth and job creation. These For references and detailed analysis and US$7.4 billion or 3% of GDP in 2010) privileges insulated firms from domestic policy recommendations, refer to the would increase competition and job and international competition and complete 2014 World Bank Regional creation: despite lower wages in subsidized their operations via Report: “Jobs or Privilege: Unleashing the Egypt only 562,000 people work in preferential and sometimes exclusive Employment Potential of the Middle East labor-intensive manufacturing firms access to cheap inputs (credit, electricity, and North Africa”. 2