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What’s holding back the private sector in MENA?

Lessons from the Enterprise Survey

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EBRD-EIB-WBG MENA Enterprise Survey and Report

MENA ES: Around 6,000 firms in the formal private sector

Topics covered: • Firm productivity

& business environment

• Access to finance • Jobs and skills • Competitiveness

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Firm productivity and the business environment

The formal private sector as a seed for more inclusive growth

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Firms in MENA have relatively high labor productivity, but not higher TFP…

Labor productivity and total factor productivity (TFP)

0

10

20

30

40

50

60

70

80

Egypt,Arab Rep.

Tunisia Lebanon WestBank and

Gaza

Morocco Jordan Yemen,Rep.

Perc

ent o

f firm

s with

pro

duct

ivity

abo

ve th

e m

edia

n of

resp

ectiv

e in

com

e pe

ers

Labor productivity TFP

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…mostly due to inefficiently high capital shares, particularly in medium and large firms

Median capital share, by size of the firm

0

10

20

30

40

Smal

l

Med

ium

Larg

e

Smal

l

Med

ium

Larg

e

Smal

l

Med

ium

Larg

e

Smal

l

Med

ium

Larg

e

Lower-middle-income

MENA ES

Lower-middle-income

Upper-middle-income

MENA ES

Upper-middle-income

Perc

ent

Political instability, electricity, corruption, access to finance are the main perceived obstacles to operations

0

10

20

30

40

50

60

70

Polit

ical

inst

abili

tyAc

cess

to fi

nanc

eEl

ectr

icity

Polit

ical

inst

abili

tyIn

form

ality

Acce

ss to

fina

nce

Polit

ical

inst

abili

tyEl

ectr

icity

Corr

uptio

n

Polit

ical

inst

abili

tyEl

ectr

icity

Corr

uptio

n

Polit

ical

inst

abili

tyEl

ectr

icity

Info

rmal

ity

Acce

ss to

fina

nce

Tax

rate

sPo

litic

al in

stab

ility

Elec

tric

ityCo

rrup

tion

Tax

rate

s

Corr

uptio

nIn

adeq

uate

ly e

duca

ted…

Info

rmal

ity

Egypt, ArabRep.

Tunisia Yemen, Rep. Lebanon West Bankand Gaza

Jordan Djibouti Morocco

Perc

ent o

f firm

s ind

icat

ing

top

obst

acle

In addition, SMEs are: • More likely to experience a power outage and less likely to

use a generator • More likely to be credit constrained

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Small firms suffer more from political instability and issues related to electricity and access to finance

0

10

20

30

40

50

60

70

Electricity Finance Political Instability

Perc

ent o

f firm

indi

catin

g a

maj

or o

r ve

ry se

vere

obs

tacl

e

SMEs Large firms

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Firm dynamics is weak, but productive firms grow faster and pay higher salaries

• During 2009-2012 labor productivity declined, as sales growth lagged behind employment growth

• Medium-sized firms faced particular difficulties, reflecting poor firm dynamics

• Evidence from market forces at work: – Productive firms grow faster – More productive firms pay

higher salaries

0.0

0.2

0.4

0.6

0.8

1.0

Small (5-19) in2009

Medium (20-99) in 2009

Large (100+) in2009

Firm

size

in 2

012,

%

Firm size in 2009

Small (5-19) in 2012 Medium (20-99) in 2012

Large (100+) in 2012

Firm size transition between 2009 and 2012

1. The formal private sector can be a seed for more inclusive growth in MENA

2. Dealing with political instability, corruption, electricity and access to finance is key to support the growth of the formal private sector

– This is particularly relevant for smaller firms, as they report that they are more constrained by the existing operating environment

3. Distortions matter

– Need to carefully assess distortions, such as privileges, subsidies, transfers and, more generally, competition policies

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Policy implications

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Access to finance

Banks and firms happily apart

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• 73% of firms are not credit constrained: they had loans approved in full or did not apply for a loan as they have enough capital

• 58% of firms are disconnected: did not apply for a loan because of sufficient funds

Banking sectors are large, but lending is concentrated and firms tend to disconnect from the financial sector

0102030405060708090

Deposits Credits togovernment

Credits toprivate sector

MENA ESLower middle incomeUpper middle income

Perc

enta

ge o

f GDP

Loan concentration (share of top 20 exposures in

bank equity), is the highest in the world

Disconnected firms lose growth opportunities

• Disconnected firms resemble credit constrained firms – Low propensity to invest – Low likelihood of having expansion plans – even when capacity

utilization is high – However, they are not complaining about this situation, while credit

constrained firms are

12

01020304050607080

Djibouti West Bankand Gaza

Egypt, ArabRep.

Morocco Jordan Yemen, Rep. Lebanon Tunisia

Perc

ent o

f firm

s

Disconnected Discouraged Connected

• Collateral requirements are particularly stringent in MENA, in terms of incidence of collateral requirement and assets accepted as collateral

• Firms are more likely to disconnect when collateral demands are stringent, particularly when they are young

• Firms grow faster when collateral requirements are less demanding

Banks’ collateral policies can induce firms to disconnect and prevent growth

Policy implications

1. It is necessary to construct the bridge: – Reduce the net costs of formalization and increase firms transparency – Better risk assessment capabilities for banks

2. Credit guarantee schemes can facilitate lending to borrowers that otherwise would be too risky

3. Reform of the secured transactions framework can alleviate collateral constraints

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Jobs and skills in the formal private sector A call for higher and more inclusive growth

• Females account for 18% of the jobs in firms, vs 34% in other regions, own only 3% and are top managers in only 5% of firms – Firm performance (labor productivity, sales growth or employment

growth) and the business environment are not related to the gender of top managers, owners or employees -> this could reflect a very strong survivorship bias

– Firms managed by women have a higher proportion of female employees

• Younger or larger firms employ more young workers – Firms with a higher share of young workers report more skills

mismatches and provide more training

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Jobs for female and young

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Skills shortages are particularly in fast growing firms; possible educational mismatches

• Inadequately educated workforce mostly an issue in Yemen, Morocco and Tunisia (above income peers)

• Skill shortages are a greater concern for firms that grow rapidly

• Firms that complain of skills shortages rely more on university educated employees

• Only 17% of firms train their workers: very low by international standards (around 38% in their peers)

0

2

4

6

8

Empl

oym

ent g

row

th (%

)

0

15

30

45

No Minor Moderate Major Verysevere

Perc

ent o

f uni

vers

ity

educ

ated

em

ploy

ees

Inadequately educated workforce as an obstacle to the enterprise

1. Remove distortions preventing entry into the labor market

– Impediments preventing women participation

– More focused and targeted education for the young

2. Reduce the mismatch between the skills learned in formal education and those required by the business community

3. Provide incentives to increase the training intensity in firms

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Policy implications

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Competitiveness in MENA Trade, innovation and management practices as drivers for productivity growth

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MENA ES firms are more likely to export, but those exporting firms are small and show low productivity premia

• MENA ES exporters are numerous (25% of firms are exporters in MENA ES vs 14% in lower- and 18% in upper-middle-income economies)

-1000

100200300400500600700800900

1000

MENA ES Lower-middle-income

Upper-middle-income

Perc

ent

Superstar Big player Small player

Labor productivity premium, exporting groups vs non-exporters

Most exporters in MENA ES are SMEs

01020304050607080

MENA ES Lower-middle-income

Upper-middle-income

Perc

ent o

f exp

orte

rs th

at a

re

SME

s

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Manufacturers in the MENA ES are particularly import reliant, and importers have higher productivity premia than exporters

Import reliance of manufacturers

Source: Enterprise Surveys.

0

20

40

60

80

100

120

140

160

MENA ES Lower-middle-income

Upper- middle-income

Perc

ent

Two-way trader Export only Import only

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10

20

30

40

50

60

70

MENA ES Lower-middle-income

Upper-middle-income

Perc

ent

Manufacturers importing inputs

Inputs of foreign origin

Labor productivity premium of traders vs. non-traders

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Firms innovate, mostly adopting existing technologies, but labor productivity gains

from innovation are small

0

5

10

15

20

25

MENA ESManufacturing sector

20+ employees

Perc

enta

ge in

crea

se in

labo

r pr

oduc

tivity

Product Process

Technological Non-technological

0

5

10

15

20

25

MENA ES, manufacturing andservices

Perc

ent o

f firm

s

Product Process

Technological Non-technological

38 percent of firms in MENA ES introduced at least one type of innovation

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Firm-specific human capital, access to knowledge and access to finance have a positive impact on innovation

Firm-specific human capital

• Providing formal training to employees

• Giving employees time to develop new ideas

Access to knowledge

• Foreign ownership

• Importing and exporting

• Licensing of foreign technology

• ICT use

Access to finance

• Line of credit or loan

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Poorly managed firms would benefit more from improving their management practices than from innovating

0

5

10

15

20

25

Engage in innovation Improve management quality from25th to 75th percentile

Perc

ent i

ncre

ase

in la

bor p

rodu

ctiv

ity

Product Process Technological Non-technological

• … while well managed firms benefit more from innovation than from further improvement of management practices

1. Remove restrictions to firm entry and exit as well as restrictions that give incumbent firms undue advantage

2. Greater openness to international trade; more effective customs and trade regulations for importers and exporters

3. Importing should not be viewed solely through the (negative) lens of trade deficit and foreign exchange reserves; it can be a means to encourage more high-value added production

4. More open approach to FDI, as foreign ownership is also a means for acquiring knowledge and introduce innovation in the market

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Policy implications