Private sector key to development in Middle East, North Africa

Arab governments need to give room and encourage private sector growth if they’re serious about developing their economies.

al-monitor With governments across MENA facing fiscal constraints, the private sector should see this as an opportunity to play a key role in development. Photo by REUTERS/Yuriko Nakao.

Topics covered

renewable energy, world bank, mena region, foreign investment, energy, electricity shortages, electrical outages

Dec 13, 2013

There is no other region in the world where supporting the private sector is as important as it is in the Middle East and North Africa (MENA). Three years on from the Arab Spring, many countries in the region continue to struggle with their political and economic fallout: prolonged political transitions, slow growth, high fiscal and current account deficits, staggering unemployment and tepid private investment (both domestic and foreign). The Arab Spring has also brought renewed attention to already existing problems, such as:

  • High unemployment levels, especially among the youth.
  • Insufficient accountability and transparency.
  • An unwieldy public sector dominated by state-owned enterprises.
  • A low level of private-sector participation in the economy.

The private sector, with its financial clout and knack for innovation, has the potential to help reverse these trends. But first, governments need to give it some room to operate. The private sector in MENA needs to be “crowded in” and not crowded out, as has been the case for decades.

Historically, the public sector has been the main driver of economic growth throughout MENA. However, this cannot continue as many governments are facing budget crunches and have their hands full with political and security issues.

With governments across MENA facing fiscal constraints, the private sector should see this as an opportunity to play a key role in developing vital infrastructure projects.

It's important that governments in the region do not crowd out the private sector as they have done in the past, and some continue to do now. Instead, they should focus on creating a transparent regulatory and institutional framework in which all private-sector players can operate. 

While the state is imperative for policy formulation and setting transparent regulatory frameworks, the private sector in MENA needs to be given the space to contribute to sustained economic growth and job creation. A competitive and innovative private sector is essential to preventing MENA from lagging behind other emerging regions.

So what can governments do? Many states in the region have already begun to improve their business environments by simplifying regulations, opening up the financial sector and reducing restrictions on trade and investment. But there is much more to be done.

Investors and small business owners still lament shifting policies and the uncertainty they create. They also worry about an uneven playing field that favors established firms at the expense of new competitors. Governments need to embrace a long-term vision for the economy, and give innovative companies a chance to flourish by encouraging competition.

Unreliable electricity supplies are a major constraint to private-sector development, according World Bank data, with over 50% of firms in MENA identifying such shortfalls as a significant problem. A reliable power supply is important for economic growth. It is also critical for ensuring further private-sector investments in MENA. World Bank Enterprise Surveys reveal that MENA experiences more power outages, and with longer durations, than any other region in the world.

States need to make better use of the resources they have, and there is no better example of that than renewable energy. According to estimates, renewables could potentially produce 200,000 megawatts of power annually in MENA. That makes them a perfect solution for the blackouts plaguing many countries and a potential boon for investors.

Many governments have identified aggressive targets in this sector. But for the industry to take off, it needs a lot more support. States need to enact transparent regulations for the power sector that encourage private investment. We have already seen several examples of what can happen when they do. Just last week, the World Bank's International Finance Corporation and several other international finance institutions finalized a $221 million loan package to support the first privately-owned wind farm in Jordan.

Governments also need to foster entrepreneurship. Recent studies show that there was an eight-fold increase in the number of startups in MENA between 2005 and 2011. Around 120 venture-capital transactions were completed in MENA in 2009 and 2010, compared with 62 between 2006 and 2008. This constitutes a clear surge in startups and demonstrates that an entrepreneurial spirit is alive in the region. But there are not yet enough of these companies to drive economic growth. This is because startups are struggling to find financing. According to World Bank data, only about 6% of firms have a loan or line of credit with a bank, in comparison to 30% in South Asia and 48% in Latin America.

MENA has the highest jobless rates in the world, with youth and female unemployment at staggering levels. This does not have to be the case. Sectors like tourism, information technology and construction are booming in many countries, but employers struggle to find graduates with technical skills. By allowing the private sector to jump into the education field, governments can encourage a flowering of career-oriented schools that prepare students for the workplace.

In sum, much potential exists in the region. It is urbanized, has a large and growing consumer base and entrepreneurial tradition and it sits at the intersection of Asia, Europe and Africa. The MENA region has a rapidly growing and young population that can be a valuable human resource, complemented by the abundant natural resources the region is blessed with. The region is home to 60% of the world’s oil and around 40% of its gas reserves. Given the ongoing efforts to diversify the economies away from the hydrocarbon sector, the region now offers significant investment opportunities for those with a long-term investment horizon and an appetite for risk.

MENA also has deep pools of capital, several pockets of innovation and talented youth. What is missing is a conducive and stable investment climate that will help boost the confidence of private investors and create a critical mass of entrepreneurs that can help unleash the full potential of the region.

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More from  Dimitris Tsitsiragos