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June 05, 2005
Practical Comments on World Bank MENA Development, Part II
Continuing on, due to the bloody annoying limits livejournal placed (and hopefully purged of the fucked coding):
Jumping ahead to the subject near and dear to my heart, “Improving the Investment Climate for Private Sector Development”
Let me quote the key observation that makes me prefer a focus on cleaning up regulation and reducing the vampire state’s grasp in the region (behind the reduction of tariffs):
“While a number of countries in the region have low tariffs, recent research suggests that openness to trade tends to have little impact on growth in economies that are excessively regulated. The impact of tariff liberalization will be constrained if the regulatory environment dissuades investment.”
Well, all I can see is that it is about bloody time the point was made. Assumptions, my dears, assumptions. In short, reactivity. Not, however, just a matter of regulation (i.e. governmental action), but also entrenched habits – the non-tariffs barriers are created
Now further:
“The formal private sector remains underdeveloped in MENA, still emerging from the culture of decades of state-led growth and industrialization. On average, the private sector accounts for less than 50 percent of GDP in the region. Private sector activity is concentrated in a small number of large firms that have benefited from protective policies, along with a number of microenterprises that account for much of employment but have little access to formal finance, markets, or government support programs.”
Emphasis added
The underlined section is particularly important to understand. Even in the private sector, the effect of the Great Families with the competition strangling cross holdings is particularly pernicious. Further, I note that in my experience, the US and European efforts to reach the small players are almost invariably co-opted by the clever families that set up fake “small-medium sized enterprises” to capture aid, and succeed because the development agencies have a penchant for dealing with “entrepreneurs” that speak English or French well, automatically excluding of course the real ‘new players.’
Here again, this is tied to regulation that while ostensibly aimed at “protection” does nothing really of the sort. Well, does nothing of the sort in the sense meant, it usually does a fine job of protecting a clique of those who capture the rents – the old club and the occasional entrant. It then operates to exclude new entrants, entrepreneurs.
Let me jump forward to page 56:
“While there are large differences in the levels of national regulation, the region as a whole suffers from overly complex, time consuming, and costly business regulations and licensing requirements, impeding the entry of more private sector businesses. These costs to businesses especially deter the development of the small business sector, which cannot afford to hire intermediaries to deal with the complexity of administrative procedures.”
Precisely what I was getting at above – regulation that serves no purpose but to protect established interests, all covered up in nice rhetoric about “social partners” and other typically French formulations of brilliant dishonesty sure to suck in the gullible illiterate anti-Globo left.
“Several areas of government regulation stand out as particularly burdensome for the region. The minimum capital required to start a business is exceedingly high in the MENA region, almost five times as high as the world average and well above any other region of the world (Figure 3.5). The minimum capital requirement is a measure of the amount that an entrepreneur needs to deposit in a bank account to obtain a company registration number. In Jordan , Saudi Arabia , Syria , and Yemen , this amount averages more than ten times the country’s average income per capita (with Syria requiring 50 times the average income per capita). Such high minimum capital requirements all but block entry into the business sector.”
I covered this in my earlier note on this document, but let me return to how completely insane and utterly useless (except of course to keep the club doors closed).
“These high costs are all the more burdensome considering the underdeveloped state of the banking and financial sectors. While the economies in the GCC, Jordan , and Lebanon have fairly sophisticated financial sectors, with high bank and non-bank financial sector development and generally good regulation and banking supervision, much of the region’s private sector still has limited access to market finance. Banks dominate the financial system, but in general they play a limited role in financial intermediation. Much of the banking sector remains primarily in government hands and is inextricably linked to state-owned enterprises (SOEs), subject to government intervention in its lending and credit allocation policies to SOEs. This intervention has led to a crowding out of the private sector where it is permitted to operate, especially in Algeria , Libya , Syria and Yemen . Lending remains predominantly short-term and trade-related, with relatively little being directed to either long-term investments or to households.”
I note that the state domination of the banking sector is not really true for Tunisia and the Maghreb, however while the private sector operates the banking sector, there is crowding out as both countries shift governmental debt issuance to the domestic market. Not the banks fault, however, good business to take deposits at zero interest and buy government paper at 5-11 percent. Beautiful spread.
I have ranted on here before about the issue of understanding of short and long term credits in the market – the issue of lending being primarily short term is in my opinion not simply a “development” or regulatory issue, but an issue of local risk tastes.
I also note household lending is expanding in Jordan and Morocco at a fairly rapid pace. Whether that is a ‘good’ thing I am not sure. Certainly I have the sense that it is largely consumptive and not productive (although allowance has to be made for small real estate acquisition and first time major white goods which certainly can be thought of as productive in the sense of boosting household efficiency).
Moving ahead to Section 3.4.2 “Developments in structural reform for private sector development” a few observations on their observations:
“Outside of the Gulf, two countries that have been especially successful in implementing business regulation reform are Morocco and Tunisia . As part of continuing industrial modernization efforts under the Mise à niveau program, new measures to create a more favorable investment climate and encourage private sector growth have yielded some strong results in both countries. By cutting the number of procedures for starting a business from 11 to 5, Morocco moved from the bottom half of economies worldwide to the top 10 percent between 2003 and 2004. Its privatization progress has been strong, with more than 40 companies wholly or partially privatized in the oil refining, road transport, telecommunications, and banking sectors. The largest of these is the privatization of Maroc Telecom. Morocco has made efficient use of public private contracts in several sectors, and it is continuing to liberalize, most recently in the audiovisual communications sector and air transport sectors. Liberalization in the former sector may reinforce the process of democratization, while the latter may stimulate tourism activities and help secure the target of attracting 10 million tourists by 2010. Other achievements include strengthening of property rights and the passage of a new Labor Code by the Moroccan Parliament in 2003, after years of discussion. Serious improvements in the business environment were also made in Tunisia , and recent developments include important reform in the legal framework for asset recovery and bankruptcy.”
Some precisions, on the improvements in Morocco , sadly too many are headline improvements whose execution is lacking. Above all in terms of process. In theory, e.g. there are 5 processes, in reality more due to “add ons” – certain operations in theory suppressed but Administration manages to reimpose. I also note the new Labor code is a complete mess and desperately needs revisions – too much copy paste from France with no realistic chance of working in Morocco (let alone in France where their labor code is strangling).
Regardless, the improvements are real enough, and if they could improve their factor costs – labor and energy – the economy might really see some opportunities to take off. Clearly expanded private power production and a more flexible labor code with provisions realistically applicable in country would both help immensely.
Moving to this:
“Elsewhere, however, progress in improving the business environment has been more uneven. Although Jordan has maintained steady progress with its privatization program (completing some 60 privatization transactions by mid-2004 and netting proceeds of $1,214 million), its overall progress in various areas of business regulatory reform has been mixed. It has managed to significantly reduce the time and procedures associated with starting a business, and it has reduced the regulation for firing workers, in both areas ranking above the 50th percentile in terms of improving its worldwide standing. But it has failed to move forward in other areas of the business environment, including improving access to credit and contract enforcement, relative to worldwide progress.”
Here again I find the analysis too headline focused and too development idiocy. Access to credit? There is plenty of liquidity in Jordan , it’s less regulatory (although the interminable credit bureau tender letting process if ever finished will help) issues than private sector practices.
“Egypt’s structural reform program stalled between 2000 and 2003, and it has made little progress in improving the business environment to date. Recently, the reform momentum has regained strength, beginning in 2003 with the decision to float the pound. The announcement of deeper and more comprehensive reforms in 2004, including the long-waited reforms in the banking sector, is a welcome development.”
Well, I suppose it almost redundant for me to mention how deeply sceptical I remain in regards to Egyptian reforms reality. Potemkin village posturing in my opinion.
I note, for example in re the “float” of the pound the comedy of a step forward - two steps back that the Egyptians effected when they “floated” the pound and then imposed a series of non-transparent administrative controls to ration access to hard currency.
Typical Egyptian government scheming, rather similar to their operations at present in contesting the political opposition.
Moving on to page 60 I found myself annoyed with their discussion of access to finance by the private sector. Firstly because the strong regional variations make it hard to generalize, but largely because I am simply generally annoyed when I read development people’s writing about access to finance as I usually feel (perhaps incorrectly) they’re thinking in very non-market terms, and not about access to finance in business driven terms.
The following section focused on relative world progress versus MENA progress I found fundamentally uninteresting. A policy person’s discussion, I suppose interesting to those types but I saw little practical here.
Another item regarding measurement, playing off of an item on page 64:
“It is worth noting that in two-thirds of the MENA countries with labor force growth rates exceeding 3 percent a year (not including the GCC), the overall business environment is ranked below average, relative to the world (Algeria, Syria, Yemen, and Egypt
A few countries may offer some guidance to others in the region. Regarding procedures to start a business and contract enforcement, Morocco and Tunisia appear to have substantially more favorable conditions than the average for developing countries as a whole. This suggests that there is much that other countries in the region could learn from these two countries when reforming their own business rules and regulations.”
The first paragraph is a very, very important observation. Leave aside Yemen , who the fuck cares about shitty little Yemen . Problem is Algeria , Syria and Egypt . Big, important and potential disasters (well Egypt is a slow motion disaster already).
Now, in regards to the issue of measurement and characterization, I have to say that in my experience Morocco feels tougher than Jordan in terms of actually doing business. That might be because of the ‘wasta’ or connexions rather than general standards, but hard to know.
Indeed that raises an interesting issue regarding business culture. Gut feel on how easy it is to work may be more important than abstract measures that don’t capture experienced business.
I have no idea how to write about such, however there an intangible which World Bank reports can not capture: “East of Doing Business” in cultural terms or cultural practice.
I don’t mean some namby pamby sense, but how well real practices jell. Why do I ‘feel’ it is easier to strike a deal in the Sham rather than the Maghreb ? Although (i) by the data the environment is easier than the Machreq, (ii) culturally I personally like the Maghreb more than the Machreq and specifically more than the Sham. I note were it merely my personal idiosyncrasy in expressing this, I would merely put this down to my personal tastes and keep my mouth shut. However, I have heard similar opinions from both Arabs (Maghrebine and Machreqi) and Westerners.
Clearly then it is not merely my personal failing or tastes, even as I note the Maghreb is more welcoming on a social level than the Machreq. Frankly, this is a question for which I have no particular answer nor clearly thought through analysis. I have heard various explanations, some tying business practices to English influence in the East, or in the inverse French influence in the Maghreb (French practices being so notoriously rigid).
While I see some merit in that, I rather remain unconvinced the colonial influence is the determinant. Perhaps I shall one day figure out a way to writ something intelligent about this. For the moment I merely note this impressionistic observation and suggest that when economic policy papers are written they routinely miss something that the businessman on the scene senses.
The box on the next page, 65, is interesting, but I would suggest they would do better with research on actual execution. Nevertheless, the overview on Tunisia and Morocco (and I draw attention back to the media liberalization ongoing in Morocco where papers are actually – excluding the party papers – interesting to read and risk giving you actual information, all because of the fairly strong private presence) identify important issues with real importance for the private sector.
Finally, the final section, Enhancing Governance, some short observations. Certainly it is no surprise that by the index on administration quality MENA falls short even of its own income level peer group standards. “MENA countries have, individually and on average, lower levels of quality of administration in the public sector than would be expected for their incomes.”
Public accountability even by developing world standards is shit.
I however do not see this as something that will change by pushing political reform first. I’d rather see liberalization and a follow-up type of political development, as Morocco has been doing (and Jordan might if it were differently placed) and Tunisia certainly should start doing insofar as it is clear that the Ben Ali regime needs some sunlight thrown on it to head off certain developments.
Posted by The Lounsbury at June 5, 2005 04:05 PM
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Jan-July 2005
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