MENA DEVELOPMENT REPORT
From Privilege to
Competition
Unlocking Private-Led Growth in
the Middle East and North Africa
F rom Privilege to
Competition

F rom Privilege to
Competition
Unlocking Private-Led
Growth in the Middle East
and North Africa
MENA DEVELOPMENT REPORT
THE WORLD BANK
Washington, D.C.
© 2009 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
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All rights reserved
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This volume is a product of the staff of the International Bank for Reconstruction and
Development / The World Bank. The findings, interpretations, and conclusions expressed in
this volume do not necessarily reflect the views of the Executive Directors of The World Bank
or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The
boundaries, colors, denominations, and other information shown on any map in this work do
not imply any judgement on the part of The World Bank concerning the legal status of any

Preface xvii
Acknowledgments xxiii
Glossary of Terms xxvii
Abbreviations xxix
Overview 1
What Is This Report About? 1
Is the Private Sector Able to Play the Role of a
Growth Engine? 2
How Has the Private Sector Performed So Far? 3
Is It about Missing Reforms? 6
Is It about the Way Rules Are Implemented? 9
Why Is It Difficult to Improve the Business Environment
in the Region? 12
Weak Demand for Reform: A Private Sector That Has Yet to
Become an Agent of Change 13
Weak “Supply” of Reforms: Policy-Making Institutions
That Lack Credibility 14
What Should Be Done Differently? Where Should Each
Country Start? 15
Getting Specific: A Roadmap for Credible Private-Led
Growth Strategies in MENA 16
Looking Forward 22
1. Voices of Entrepreneurs—Stories of Success,
Hope, and Challenge 25
Listening to Entrepreneurs 27
Government Successes and Pitfalls in Supporting
the Private Sector 30
Contents
v
Challenges Facing Entrepreneurs—From Regulatory

State Intervention and Discretion in Credit,
Land, and Industrial Policy 107
5. Access to Credit in MENA: Toward Better
Supervision and Less Interference 109
Credit Markets and Banking Systems in MENA 111
Business Manager Perceptions of Credit Constraints 113
Beyond Perceptions and Complaints: How Many
Firms Are Really Credit Constrained? 114
What Can Governments Do to Increase Access to Credit? 117
vi Contents
Contents vii
6. Reassessing the State’s Role in Industrial
Land Markets 129
The Low Access to Land in MENA Countries 130
Sources of Inefficiencies in Land Markets 132
Getting the Incentives Right in Enclaves 142
Power and Rent Seeking in Public Land Allocation
and Regulation 143
The Way Forward 145
7. New Industrial Policies: Opportunities and
Perils of Selective Interventions 151
A Tradition of Subsidies and Selective State Interventions 152
A Framework to Clarify a Controversial Debate 153
Private Sector Policies in MENA—A Legacy of
Disproportionate Interventionism 159
Assessing Risks of Industrial Policy Interventions 162
Should Oil-Rich Countries Intervene? Yes, but the
Risks of Failure Are Higher 166
A Final Cautionary Note: Industrial Policies Could Succeed
if the Right Conditions and Processes Are in Place 167

0.2 Lower Diversification of Exports 5
0.3 The Number of Regulatory Reforms Has
Increased Recently in MENA Countries 7
0.4 Reform Episodes and Private Investment Response 7
0.5 Overall, the Business Environment in MENA
Countries Looks “Average,” as It Does in Many
Fast-Growing Economies 8
0.6 Policy Uncertainty and the Unequal Implementation
of Rules Are Leading Constraints to Businesses 10
0.7 Perceptions about the Consistency and Predictability
of Rules and Regulations as They Are Applied in
MENA Countries 10
0.8 The Lasting Influence of the Business Elite and the
Lack of Dynamism and Competition in the Private
Sector 11
1.1 Most MENA Economies Are Private Sector Based,
2005 and Previous Decades 26
2.1 Middle East and North Africa’s Weak Growth
in International Perspective 48
2.2 Middle East and North Africa’s Growth over the
Long Term 49
2.3 Contributions to the Growth of GDP in
2007—Insufficient Role for Exports 51
2.4 Private Investment as a Share of Total Investment 52
2.5 Private Investment as a Share of GDP, 1995–2006 53
2.6 Gross Private Investment, 1980–2006 54
2.7 Net FDI Flows as a Share of GDP, 1970–2005 54
2.8 Structure of Foreign Direct Investment,
Cumulative 2000–07 55
2.9 Manufactured Exports to GDP, 1965–2006 59

and Unpredictably 87
4.9 Policy and Regulatory Uncertainty Are Leading
Constraints to Businesses 89
4.10 Days Spent in Inspections or Required Meetings
with Officials 91
4.11 Senior Management’s Time Spent Dealing with
Regulations 92
4.12 Inspections Where an Informal Payment Is
Requested or Expected 92
4.13 Perception of the Corruption Constraint
among MENA Firms 93
4.14 Most MENA Countries Lag behind International
Norms in Their Corruption Ranking 94
4.15 Anticompetitive/Informal Practices 95
4.16 Entrepreneurs from Lebanon Complain
about Competitors’ Practices 96
4.17 Revenue Reported by Typical Establishment for
Tax Purposes 96
x Contents
4.18 The Lasting Influence of the Old Business Elite
in MENA: Older Firms 98
4.19 The Lasting Influence of the Old Business
Elite in MENA: Older Entrepreneurs among
Younger Populations 99
4.20 Less Educated Business Owners 100
4.21 Business Creation and Entry into Export Markets 100
4.22 Entrepreneurship in MENA and Other Regions 101
4.23 Dispersion in Value-Added per Worker 103
4.24 Competition in Manufacturing 103
5.1 Total Credit to the Private Sector Compares

Private Investment 174
8.2 Party Institutionalization in MENA and Comparator
Countries, 2004 176
Contents xi
Boxes
2.1 An Emerging Consensus on the Link between
Export Diversification and Growth 57
5.1 Bank Bailouts and the Financial Crisis—A Return
to Nationalizations or a Temporary Cure? 120
5.2 Credit Rationing and the Availability of Credit
Information 123
8.1 The Gulf Cooperation Council: Exception to the
Resource Curse? 181
8.2 Oil Rents, Foreign Aid Rents, and the
(Dis)Incentives to Institutionalize 183
8.3 The Genesis of Business Elites in Morocco 185
9.1 Cairo’s One-Stop Shop 199
9.2 The Federal Institute of Access to Public
Information in Mexico 203
x Contents
4.18 The Lasting Influence of the Old Business Elite
in MENA: Older Firms 98
4.19 The Lasting Influence of the Old Business
Elite in MENA: Older Entrepreneurs among
Younger Populations 99
4.20 Less Educated Business Owners 100
4.21 Business Creation and Entry into Export Markets 100
4.22 Entrepreneurship in MENA and Other Regions 101
4.23 Dispersion in Value-Added per Worker 103
4.24 Competition in Manufacturing 103

8.1 The Effects of Ruling Party Institutionalization on
Private Investment 174
8.2 Party Institutionalization in MENA and Comparator
Countries, 2004 176
Contents xi
Boxes
2.1 An Emerging Consensus on the Link between
Export Diversification and Growth 57
5.1 Bank Bailouts and the Financial Crisis—A Return
to Nationalizations or a Temporary Cure? 120
5.2 Credit Rationing and the Availability of Credit
Information 123
1 Banking Reform Can Reduce the Financing Gap 123
8.1 The Gulf Cooperation Council: Exception to the
Resource Curse? 181
8.2 Oil Rents, Foreign Aid Rents, and the
(Dis)Incentives to Institutionalize 183
8.3 The Genesis of Business Elites in Morocco 185
9.1 Cairo’s One-Stop Shop 199
9.2 The Federal Institute of Access to Public
Information in Mexico 203

Foreword
Times of economic turmoil often overshadow long-term challenges.
However, the current global economic crisis could be a historic oppor-
tunity for the Middle East and North Africa region. It could open the
door for fundamental reforms that will prepare the countries of this re-
gion to rebound, embrace the future global recovery, and strengthen
their long-term growth prospects.
From Privilege to Competition: Unlocking Private-Led Growth in the

past crises support the main message of this report: sustained job creation
can only come from a competitive private sector, which in turn requires
governments to build efficient regulatory capacity. Where regulatory in-
stitutions are weak or where regulators are captured, the state cannot
play its supportive role effectively.
A more vibrant private sector in MENA countries will also contribute
to increased economic integration of the region. With a conducive busi-
ness environment, new entrepreneurs will emerge to reap the benefits of
greater intraregional trade and investment—driven more by business
considerations than by political concerns.
While There Have Been Policy Reforms, Their
Implementation Needs to Improve to Foster a Stronger
Response From the Business Community.
In many MENA countries the institutions that implement private sec-
tor policies, need strengthening to make reforms more credible, and to
ensure that they are implemented equitably and consistently to the ben-
efit of all entrepreneurs.
This region has made great strides over the last few years in improv-
ing its investment climate—even if some countries still lag. Yet the re-
sponse of the private sector has been muted. Arbitrary implementation
of reforms and discretion in enforcing rules explain why too many
would-be entrepreneurs believe that the key to success is how con-
nected, or how privileged, they are, which diminshes the importance of
competition, creativity, and persistence. Focusing on the credibility of
reforms and the consistency of their implementation is what this report
recommends. This new agenda for private sector development applies
to all countries in the region, even if it translates into different strategies
depending on each country’s specifics, its progress with business envi-
ronment reforms, its resource endowment, and its political economy.
This new agenda emphasizes the role of institutional reform as the

sector to grow and create the jobs that are badly needed. The World
Bank stands ready to support our MENA client countries in this
endeavor.
S
HAMSHAD AKHTAR
REGIONAL VICE-PRESIDENT
MENA REGION
Foreword xv

Preface
The objectives and intended impacts of this report are threefold: in-
forming policy makers and other stakeholders, proposing a new angle on
private sector policies, and provoking a debate.
First, informing. The report brings together new evidence on private
sector development across the Middle East and North Africa (MENA),
as well as the findings from the literature on this topic, particularly
country-specific analysis. Its aim is to present current knowledge on busi-
ness environment challenges in MENA—at least on selected issues pre-
sumed to be most pertinent to the region. It also aims to inform policy
makers and other stakeholders of successful policy reforms in the region
or elsewhere.
Second, proposing a new perspective on public policies shaping the
investment climate. This report is prescriptive, offering new routes for
policy reforms. Rather than reiterate the list of standard reforms that
might be ongoing in the region, this report will offer different angles to
the business environment reform agenda. For example, in the legal and
regulatory environment, the report emphasizes the institutional under-
pinnings of the reform process and its public sector governance aspects.
Similarly, for industrial strategies the report will distance itself from dog-
matic views on whether they are good or bad. Instead, it will focus on the

policy recommendations. It tries to fill a gap by offering a specific
content to the public sector reform agenda as it applies to private sector
development. It not only emphasizes that the success of private sector
development policies rests in great part on more effective, predictable
and equitable implementation of these policies by the relevant public
agencies. It also offers a menu of measures of public sector reform that
would allow this.
The second audience is the private sector. All too often the pitfalls in
the business environment are attributed exclusively to governments. As
this report argues, the private sector should also play a role in identify-
ing, designing, monitoring, and evaluating reforms. It needs to be
enabled to do that, and it needs to build its own capacity to organize and
contribute constructively to the policy debate—when it is invited to do
so. The private sector in MENA is very diverse, and often its most pow-
erful advocates are not the most reformist. In all countries some in the
private sector are active defenders of the status quo—a fundamental
problem. The central message of this report—good governance of the
public sector—applies to the private sector as well. As much as the report
targets reformists in the government, it also targets reformists in the
private sector.
The report is also designed for specialists, particularly academics in
the region, and nonspecialists—the press, policy commentators, and
citizens. Because the quality of public governance is central to private
sector development and job creation, this report concerns all citizens.
1
Zogby International, “Attitude of Arabs: 2005” (www.zogby.com). The countries covered
and the respective sample sizes are the Arab Republic of Egypt (800), Jordan (500), Lebanon
(500), Morocco (800), Saudi Arabia (800), and the United Arab Emirates (500).
Preface xix
In its broadest definition, private sector development would include

ture issue facing businesses of the region. Private participation as a means
to improve the efficacy of public infrastructure is not analyzed, however;
that would require specific analysis for different infrastructure sectors,
which is not the objective of this report.
Finally, this report will not treat the specific challenges of private sec-
tor development in conflict-affected areas. Although building govern-
ment credibility after conflict is central to private sector reconstruction
and recovery, the specifics of economic policy making in politically
unstable or conflict situations is so complex that it demands a focus that
is outside this report. Instead, the report is about the long-term process
of building public institutions to govern markets in the entire region.
xx Preface
A cautionary note on data sources: The private sector’s scope is
large—informal merchants, microenterprises, restaurants, dentists and
hotels, rural firms, manufacturing firms, multinational corporations, and
all economic activities owned and managed by private entities constitute
the private sector. Naturally, much of the analysis in this report draws
on a subset of what constitutes the private sector in each country. For
example, World Bank enterprise surveys cover mostly industrial small
and medium-sized enterprises. The Doing Business data generally refer to
a formal manufacturing firm in the capital city.
The report draws on a variety of data sources, including international
databases, country-specific databases and reports, World Bank enterprise
surveys, original data collection conducted during its preparation, and
the published economic literature. Most of the microeconomic evidence
rests on a database of about 10,000 firms surveyed in the region using a
standard questionnaire. International comparisons of firm-level evidence
was done using the same source of survey data collected by the World
Bank in more than 80 countries, totaling more than 80,000 firms (see
www.enterprisesurveys.org).

Part II then illustrates how this issue of poor implementation of the
policies translates in three key policy areas in the business environment
of the region: access to finance (chapter 5), access to land (chapter 6), and
the conduct of industrial policies (chapter 7). The aim is to show how the
role of the state and its institutions, when diverted from their regulatory
and administrative missions by special interests and when subject to
discretionary influence, can distort policies that may otherwise be well
designed and well intended.
Part III analyzes the political economy of reforms in MENA (chapter 8)
and uses this analysis to offer a set of strategic recommendations and
concrete policy actions that take into account the region’s diversity and
political economy (chapter 9).