91704 World Bank MENA Regional Issues Brief: Jobs or Privileges Number 3 of 5 Distorted Dynamics The Impact of Policies on Firm Dynamics and Job Creation In MENA, 50% of surveyed firms regard regulatory policy uncertainty as an obstacle and Problem 35% as a “severe” or “major” obstacle to their firms’ growth. Regulatory uncertainty is A limited pool of startups and perceived as one of the biggest obstacles to growth in MENA, along with competition productive firms reduce formal from the informal sector, access to finance, and macroeconomic uncertainty. This sector job creation in MENA. report presents evidence that MENA firms’ aversion to regulatory uncertainty is predominantly about discriminatory policy implementation benefiting a few insider Analysis firms and creating an uneven playing field among firms. Policies in MENA countries Share of Firms considering Regulatory Policy Implementation Uncertainty as an Obstacle to Growth often constrain firm startup and productivity growth, and Yemen2010 thus job creation, by limiting Syria2009 competition. These policies Libya2009 take different forms across Egypt2008 countries but share a common Egypt2007 feature: they create and Morocco2007 uneven playing field and Summary Tunisia2013 privilege a few specific firms. lebanon2006 Lebanon2009 Solution Jordan2011 Reform the policies undermining Jordan2006 equality of opportunity for all Algeria2007 entrepreneurs. Reduce the Iraq2011 space for discretionary policy 0 20 40 60 80 100 design and ensure that laws and regulations are enforced equally Major/Severe Obstacle Moderate Minor across firms. Source: Authors’ calculations using Enterprise Surveys in 2006-2013. PROBLEM countries and sectors but share several protection from foreign competition in Low firm turnover, productivity growth, common features: they limit free-entry in domestic service sectors has led to lower and resource misallocation, which hold the domestic market, exclude certain productivity growth of services. back job growth in MENA, point to a lack firms from government programs, Foreign Direct Investment (FDI) inflow in of competition. The firm dynamics in the increase regulatory burden and Jordan leads to a partial crowding-out of region reveal market structures in which a uncertainty on non-privileged firms, old and small domestic firms operating in few leading firms have large, unearned insulate certain firms and sectors from the same sector, but has positive advantages, while (potentially) large foreign competition, and create incentives employment spillovers among domestic numbers of informal micro-firms use that discourage domestic firms from service providers and young firms. unproductive vintage technologies to competing in international markets. Domestic manufacturing firms (suppliers) serve local market niches. ANALYSIS did not benefit from FDI spillovers, In MENA, policies limiting competition and possibly reflecting a combination of weak • Legal barriers to FDI creating uneven playing field abound and competition in the sector and the absence constrain private sector job creation. Restrictions on foreign firms entering of well-designed and effective technical service sectors in MENA countries are supplier support programs. Removing These policies take different forms across among the highest in the world. Partial restrictions to FDI into services in Jordan World Bank MENA Regional Issues Brief: Jobs or Privileges Number 3 of 5 70 Service Trade Restriction Index (STRI) in MENA countries are GCC among the highest in the world. 60 The graph shows the STRI which reflects simple country SAR averages. The higher the index, the more restrictions are 50 imposed on foreign firm entry: zero implies no restrictions on MENA foreign owners, 100 implies foreigners are not allowed to 40 operate in the sector at all. Entry restrictions on foreign firms EAP are highest for professional services, transport, or finance but 30 also exist in retail trade and telecommunications. These AFR backbone services are important inputs for all other sectors; 20 hence weak performance due to restrictions on foreign entry LAC might lead to weak links in the economy dragging down 10 productivity (in using sectors.) what is ‘using sector’ ECA Source: Authors calculation based on World Bank Service Trade 0 Financial Professional Retail Telecom Transport Restriction Database (Mattoo et al., 2011). is expected to create jobs among industries thereby discouraging more competition by tilting the playing field for domestic firms. labor-intensive activities and driving the the advantage of a few privileged firms. economy away from its core areas of • Red tape in the regulatory These policies that need reforming comparative advantage. In addition, environment distorts manufacturing include administrative barriers to firm smaller firms in Egypt are capital job growth in Morocco entry, cumbersome bankruptcy laws, constrained suggesting that capital in the energy subsidies to industry, exclusive High administrative burden is frequently industrial sector is misallocated towards a license requirements to operate in raised as a major constraint to firm few large old firms. specific sectors, legal barriers to FDI in growth by entrepreneurs in MENA • Discriminatory policy implementation services, trade barriers - including non- Several dimensions of Morocco’s business creates an uneven playing field tariff measures, or barriers to access to environment impact employment growth the judiciary, land, or industrial zones. The frequency and number of reported and disproportionately affect young firms. inspections across firms is significantly The findings suggest that more Policymakers should reduce the space for lower within connected sectors. This competition, equivalent treatment by tax suggests that a few privileged firms discretionary policy implementation and administrations, less corruption and receive very few inspections while the ensure that laws and regulations are obstacles in the judicial system, and lower majority of firms are inspected frequently. enforced equally across firms and that cost of finance would raise employment policy is designed and implemented by a Many firms in MENA identify “policy growth among young firms. strong, capable, and accountable uncertainty” as a “severe” or “major” administration. The latter can be • Energy subsidies in Egypt discourage obstacle to growth. This reflects firms’ supported by linking entry into and growth in labor-intensive industries perception of “policy implementation promotions within the administration to uncertainty” resulting from discriminatory Forty-five percent of all connected firms in merit, judged on the basis of potential or practices. The variations in policy Egypt operate in energy-intensive actual contributions to the legitimate implementation observed in the data are industries such as cement or steel, goals of public policy. substantial, and firms spend a significant compared to only 8 percent of all firms. amount of time and effort to influence One critical aspect of this reform agenda Large energy subsidies targeted to heavy policy implementation. Uncertainty in rule is to create institutions that promote and industry in Egypt (equivalent to 2.9 enforcement reduces competition and safeguard competition and equal percent of GDP or US$7.4 billion in 2010) innovation in a number of MENA opportunities for all entrepreneurs. affect competition and job creation. A countries, suggesting its potential government license is required to legally negative impact on productivity growth For references and detailed analysis and operate in energy-intensive industries and private sector dynamism, especially policy recommendations, refer to (such as steel and cement) limiting free- the entry and growth of new firms Chapter II in the complete 2014 World entry, and equal access for all Bank Regional Report: “Jobs or Privilege: SOLUTION Unleashing the Employment Potential of entrepreneurs. Moreover energy subsidies benefit energy-intensive Remove policies that undermine the Middle East and North Africa”. 2