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3. The Middle East and North Africa’s “sclerotic” private sector
A thriving private sector is the cornerstone of good jobs. Entrepreneurship and innovation can propel economies toward prosperity. Youth are energized as they participate in the private sector, learn valuable skills, and gain a sense of purpose as they become stewards of their own destiny. For far too long, this has not been the case for the Middle East and North Africa. The private sector has been a poor job creator. The growth rate of employment between 2012 and 2019 was only 1 percent per year on average—markedly lower than the 5 percent on average in lower-middle-income peers and 3 percent for upper-middle-income economies. The lack of private sector dynamism also manifests in the small share of young firms in the region, which is lower than in respective income peers. Furthermore, young firms as a share of all firms has fallen between 2012 and 2019 (Figure 1).3 This could be due to low entry of firms, or high exit of young firms as they are unable to stay in the market. The role of young firms as the largest source of jobs has been well documented in advanced economies as well as in the Middle East and North Africa (Adelino, Ma, and Robinson 2017; Gatti et al. 2013; Heyman, Norback, and Persson 2018; Huber, Oberhofer, and Pfaffermayr 2017; Rijkers et al. 2014).
Figure 1. Young firms (5 years or younger) as share of all firms Share of firms 5 years or younger, percent 35 30 25 20 15 10
5 The challenge is that few firms are engaging in the types 0 of activities that generate jobs. Firms in the region are less likely to invest than their income peers. Only onequarter firms on average invested in physical capital over the last fiscal year. The percentage of firms that invest also fell between 2012 and 2019. Similarly, a smaller share of firms offer formal training in the region than income peers. About 22.8 percent of firms in the Middle East and North Africa provide formal training, far lower than middleincome economies (34 percent). Lack of investment by firms is one factor, but type of investment matters too. Firms that operate in economies with the right structure and incentives are more likely to experiment with new ideas and then implement them. Research and development spending is low in the region. The percentage of firms that spend on research and development is lower than in income peers, and the share of firms that spend on research and development declined between 2012 and 2019.
Morocco TunisiaLebanon Jordan West Bank and Gaza Egypt,Arab Rep. MaltaMENA2019Lower-middle income Upper-middle income J 2012 J 2019 Source: World Bank Enterprise Surveys. Note: Young firms are defined as those five years old or younger. Income group averages consist of economies surveyed between 2014 and 2019.
Using a measure of political connection available for the first time in the World Bank Enterprise Surveys, about 8 percent of firms in the Middle East and North Africa affirmed that the owner, chief executive officer, or top manager (or any board member) had been elected or appointed to a political position in the country (much higher than in middle-income countries peers), with the highest share recorded in Tunisia, with about 28 percent of firms. See section 4 for a detailed discussion.
3 The analysis using cross-sectional data entails several caveats. It is not possible to account for firm entry and exit, so the sample is biased toward firms that have survived. The lack of firm-level panel data that follows firms over time is an impediment to rigorous analysis. The existence of panel data allows for the possibility of capturing firm dynamics across multiple dimensions that provide a clearer picture of the state of the private sector. An illustration is the case of Tunisia, where panel data have been harnessed to produce high-quality empirical work on entry and exit rates and the dynamics of high growth firms (Rijkers, Arouri, Freund, and Nucifora, 2014).
