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May 09, 2005
World Bank Middle East and North Africa Economic Developments and Prospects 2005 Initial Comment
For those of you interested in such things, I thought I might take a moment to draw your attention to the relatively recently released World Bank report entitled “Middle East and North Africa Region 2005 Economic Developments and Prospects: Oil Booms and Revenue Management.”
A fairly longish report with all the various benchmarking indicators one could want – or at least most of them if one is a policy maker. Rather less useful from a private investment perspective, but nevertheless interesting reading. I shall try to find some time to actually comment on this in extensor, but frankly given I need to get cracking on the private equity in MENA note for this fall, this may not be soon. Or ever.
Some quick observations, from a lazy weekend spent digesting this and other items. First, this contains some of the most poorly labeled and obtuse graphs I have seen in a while. I flatter myself in thinking I know how to read these things, but some of them require a good few minutes of study, and one (unemployment) is so poorly labeled that I defy anyone to make sense of it. WB should know better, a graph should not require a minute of reflection to puzzle out, it needs to be right there and understandable in 5 seconds.
However, this is mere whinging. Decent report overall, the aggregated indicators are interesting (although again, the manner in which they chart them out, requiring a full paragraph footnote to explain suggests that they could have spent some time in rendering the presentation). The overall message – economic reforms have improved conditions, but much slower than the rest of the world. No surprise, but they do present an analysis of different factors. I would note that their breakout of MENA countries (or a sub-set, some are excluded for data reasons) into ‘resource-poor – labor abundant’ (RPLA); ‘resource-rich – labor-abundant’ (RRLA); and ‘resource-rich – labor-importing’ (RRLI) breaks out the economic structures better than the usual regional groupings do. Reflecting on the discussion, which I will have to get back to, on private sector development, I came away not agreeing with the Bank’s habitual focus on trade barriers. While free trade is important, my experience suggests that in order for the poor but labor abundant countries to successfully improve their export performance, reforming internal business environment – ease of business creation, related regulation – needs to be at the forefront. Obviously both are important, but my sense is that at present, the focus should be on internal reforms such as more reasonable labor laws (flexibility, flexibility; hiring and firing has to be easy) and ease of business creation.
On this last item the minimum capital required to register a business is particularly evocative (as well as truly puzzling). As the report notes, the minimum capital for starting (or better, legally registering – obviously one can be an unregistered ‘grey / black’ market business where rules don’t apply) is “exceedingly high in the MENA region, almost five times as high as the world average and well above any region of the world.” By was of explanation, they note the requirement is “a measure of the amount an entrepreneur needs to deposit in a bank account to obtain a company registration number.” Expressed in percentage of per capita income (based if appears off of Gross National Income – GNI, not GDP) is extraordinary, even stunning. Eyeballing the chart, Egypt requires minimum capital (c. 2004) equal to 800 percent of per capita income, Jordan somewhat over 1000 percent of per capita income, Morocco somewhere around 750 percent, Syria around 5000 percent. More “reasonable” figures in Tunisia, for example, 350 odd percent, UAE, 400 odd percent, Kuwait, somewhat under 180 percent. By way of comparison, the chart reflects an average for Latin America in the 50 percent rage, Asia-Pacific in the 180 percent range.
That implies an enormous of amount of capital, relative to disposable resources in country, to open a business – legally of course. Now, certainly one can do so ‘illegally’ but being ‘illegal’ or unregistered – above all in a Code Civil country – carries no small disadvantages in terms of access to resources, financial or otherwise. As the report blandly notes, such “high minimum capital requirements all but block entry into the business sector.” They certainly make a step-wise, evolutionary development for entrepreneurs rather more difficult and immediately open up rent-seeking activities for rentier capital holders.
Now, I have all kinds of observations in this connexion but let me share rather a conversation I had, about this very point with my afternoon coffee companion. A banker for one of the largest (fully private, international) banks in the region.
I shared my outrage and incomprehension over these figures with her (Yes, sadly in taking coffee with attractive young women on the weekend, I remain unable to have light conversation. I am afraid she only puts up with it because she wants to bed me and my handsome passport. I remain coy. Ha. Besides, otherwise we have to talk about her hair or some boring nonsense – or I end up talking to her fetching white but too tight and full shirt, better to get wound up on macro-economic data and entrepreneurship. Save me from making my life more complex.), and I believe rather got something of a window on the thinking – perverse, conservative and risk-averse – behind these otherwise completely incomprehensible numbers.
First, she argued that high minimum capital requirements are very positive because that ensures that undercapitalized companies are not created. This left me aghast and I pointed out that her confreres are always complaining that local companies of all sizes are severally undercapitalized with too little capital retention for investment, and local entrepreneurs tend to slip out the capital regardless. Rather clearly the high minimum capital requirements are not doing anything effective there. She granted that this might be the case, but then argued that things would be even worse if it was permitted to start up even more thinly capitalized firms – where upon ignoring her leaning back most improperly – I noted that if one is strangling off enterprise creation to start with and the result of a policy is under-capitalization, it hardly seems that the regulation is making things better. After bickering about the mentality of “Arabs” and enterprise creation, we declared a truce on the issue of whether comportment would be better or worse without the regulation, per se.
However, she most interestingly asserted that the ‘wrong kind of people’ would create firms if just anyone with a little capital was allowed to do so. I found that an amazing assertion, above all as coming from someone coming from a modest family. It was an amazingly clear statement of unconscious rigidity. She also argued that there would be “too much” firm creation by doubtful types and that this would lead to explosion of failures, of bankruptcies. Again, her ideal – as a banker mind you – seemed to be firm creation by the “right” people with the “right” resources, and to forgo possible growth for more sureness. Not “too many” bankruptcies by “the wrong kind of people.”
As one might suspect, this absolutely horrified me and provoked a perhaps too excited anti-regulation rant (and anti-French, there being some French people nearby to gratuitously insult for having foisted the idiocy of a particularly rigid version of Civil Code thinking off on the Med. Basin. Afraid they merely ignored me, but I do believe I got under their skin.) on my part, where I believe my best point was quite simply that all this creation and failure is going on anyway, but only in the black or grey market where for lack of proper legal protections, financing, etc. really renders the economy less stable – although it does render the formal economy more ‘stable’ in a rather conservative, rent seeking fashion. Forgone growth for a false sense of stability and continuity. The sense of continuity I think is important. Rather a similar situation to the situation in labor market regulation where they are always copying the most ‘protective’ regulations to “protect” the workers – and manage by doing this to squeeze a significant percentage of employment out into the grey / black markets where no protection at all exists. The moronic mistake of the anti-globos, pushing for more “protection” for workers in terms of useless laws that will only present opportunities for rent seeking corruption and blithering on a “fair trade” as a polite way of saying “protection.”
In the end we only partly agreed – I think largely because she wants to pretend to agree with me, I doubt I convinced her of the evils of government regulation in such areas.
[edited]
I note that contra certain rumours, this was not in fact a date. Just wanted to clear that up. On dates I talk about concrete business.
Posted by The Lounsbury at May 9, 2005 11:00 AM
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Jan-July 2005
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