Main Findings

Firm productivity and the business environment

Improving the business environment in MENA economies is essential for unlocking the potential of the formal private sector to drive a more sustainable model of growth in the region. That requires addressing some of the key constraints in the business environment, notably political instability, corruption, unreliable electricity supply, and inadequate access to finance. Although large firms have higher labor productivity they tend to be over reliant on capital as a response to distorting incentives; at the same time small and medium-sized enterprises typically experience a more challenging operating environment.

Access to finance

The financial and banking sectors in MENA economies are relatively large, but credit is mostly channeled to a small number of large firms. While a smaller share of firms encounter difficulties obtaining credit than in comparable regions, large numbers of firms have disconnected from the banking sector altogether and by doing so they lose growth opportunities. Compared with credit-constrained firms, disconnected firms are more likely to be small, less likely to have audited financial reports, and less likely to use the banking system even for payments. Collateral standards affect firms’ propensity to disconnect from the banking sector and ultimately their growth prospects.

Jobs and skills

Compared with other regions, formal private sector employment in MENA economies is concentrated in larger, older and exporting firms. Employment of women is low, and youth employment is strongest in young innovative firms. More productive firms grow faster and have easier access to credit. They also pay higher wages, which suggests that labor markets are, to some extent, able to facilitate the reallocation of human capital resources to firms with the most potential to grow and provide rewarding jobs. Nonetheless, firm dynamics is weak and high-productivity, high-paying private sector jobs remain scarce, which is likely to encourage jobseekers to pursue public sector jobs instead.

Competitiveness: trade, innovation, and management

The growth of the small yet productive private sector in MENA economies may be constrained by wider considerations of competitiveness. The region’s exporters are numerous but small, with labor productivity gains concentrated in large “superstar” exporters. While nearly a third of firms in the region engage in basic forms of innovation, innovative activities are associated with certain supporting conditions: human capital, access to knowledge, and access to finance. While better-managed firms are more likely to benefit from innovation, poorly managed firms are more likely to benefit from improving their management practices.