OECD CONFERENCE on Investment in MENA Istanbul, February 11-12, 2004 Part I Investment Climate Reform: Challenges for the MENA Region Xavier Forneris, FIAS, World Bank & International Finance Corporation (xforneris@ifc.org)
PART 1: Economic & Social Challenges facing the MENA Region They are huge Well known, described in many studies and reports by WBG and others For instance, my colleague Gilles Garcia of the World Bank European Office well summarized the challenges in the following 8 slides
Growth in the MENA Region: huge challenges ahead 18 countries (from Morocco to Iran not including Turkey -> ECA region) 300 million inhabitants (60% < 24 years old) 40% of the under 24 are unemployed 100 million jobs must be created in the next 20 years => 5 million new jobs a year needed
Past 20 years : Slow growth and rising unemployment Growth close to 2-3% (on average) => not sufficient to reduce poverty Unemployment > 14% Non-oil exports have remained low and stable (around 7% of GDP)
Low Growth Rates GDP Growth rate, MENA 1963-2000 (Algeria, Egypt, Kuwait, Oman, Morocco, Saudi Arabia, Syria,Tunisia) 16 14 12 10 8 6 4 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 pourcentage 2 0-2 Annee
Unemployment increased Unemployment rate, MENA 1980-2000 16 14 % de la population active 12 10 8 6 4 High-income countries Middle-income countries MENA 2 0 1980 1990 2000 On this page the MENA region includes 12 countries for which data was available: Algerie, Egypte, Iran, Jordanie, Liban, Maroc, Syrie, Tunisie, Yemen, Oman, Bahrein et Arabie Saoudite.
47 42 37 32 27 22 17 12 7 2 Exports have not increased Exports (% of GDP) MENA (all countries) 2000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2001 Year Non-oil Exports Total Merchandise Exports pourcentage
Non oil exports ($34 Billion) below other Regions of comparable size B illio n o f U S d o lla rs 250 200 150 100 50 0 MENA10 ECA5 EASIA3 LAC4 ECA-5: Czech Republic, Hungary, Poland, Russia, Turkey; EASIA-3: Indonesia, Malaysia, Thaïland; LAC-4: Bolivia, Chile, Mexico, Brazil
Trade and Investment are central for growth and employment WB research suggests that if only half of the trade & FDI potential of the region could be realized, the per capita income could increase by 4% a year
An unrealized FDI potential 5 4 3 2 1 0 pays les moins performants Pays les plus performants IDE net reels sur IDE nets attendus, USD/hab Algeria Morocco Iran, Islamic Rep. Syrian Arab Egypt, Arab Rep. MNA10 Tunisia Jordan Lebanon Saudi Arabia Cameroon Bangladesh Ghana Pakistan Turkey Cote d'ivoire Malaysia South Africa Russian Federation Philippines Guatemala Mauritius Korea, Rep. India Ecuador Hungary Costa Rica Slovak Republic Thailand El Salvador Colombia Mexico Bulgaria Jamaica Bolivia Czech Republic Poland Chile China Brazil Argentina Source: World Development Indicators. Note: Regression is based on 42 countries; values for 2 low-income countries (Indonesia and Yemen) are not reported because of negative values.
Conclusion of Part 1 MENA s challenges call for dramatic increases in both trade & investment Private investment (including FDI) is far below the Region s potential How to go about it? How to improve the investment climate?
PART 2: Improving the Investment Climate Resting on strong political will and partnership with the Private Sector, an effective strategy starts with a thorough, objective diagnosis of the constraints affecting a country s investment climate and their prioritization Many tools exist to diagnose the key constraints and monitor reform impact/progress over time
Assessing the Investment Climate: some tools used by the World Bank (1) Evaluating the overall climate -> the Big Picture approach The FIAS Diagnostic of the Investment Climate (not a survey) The Investment Climate Assessment - ICA (survey of firms)
Assessing the overall Investment Climate: Each approach (ICA and FIAS Diagnostic) has its merits Both nicely complement each other and lead to concrete recommendations for policy reforms
More on the ICA: a survey instrument A core survey instrument linking constraints to firmlevel productivity Quantitative questions in terms of dollars and days Standardized sampling and implementation across countries Additional modules reflecting country circumstances (e.g., Regulatory costs, SMEs )
What we can learn from a WB Investment Climate Survey: the example of Algeria The following 6 slides were prepared by my colleague Najy Benhassine of the MENA region when presenting the initial results of the Algeria ICA survey (Nbenhassine@worldbank.org)
Algeria ICA - constraints to doing business: the usual suspects Main Obstacles to doing business Informal sector/unfair comp. Access to credit Credit cost Tax rate Uncertainty on policy Bank delays Corruption Tax authority Access to land Access to forex Other Customs/regulations Firm creation Lack of skilled labor Port authority Access to telephone Labor legislation Access to energy Very severe obstacle Major obstacle Average obstacle Minor obstacle Not an obstacle Number of responses
Algeria - most severe constraints : informal/unfair competition, access to credit, land Most severe obstacle to business Informal/unfair comp. Access to credit Access to land Tax rate Uncertainty on policy Corruption Credit cost Tax authority Third most severe Second most severe Most severe Responses
Algeria ICA: Lack of qualified labor 100.0% 79.8% 80.2% 75.0% 57.5% 50.0% 27.6% 20.5% 22.1% 25.0% 0.0% Percent with recruiting problems Inadequate training Labor legislation Lack of qualified labor Unattractive location Other
Algeria ICA: Judicial system Perception on judicial system Had judicial case in the past 5 years Percent responses Never Rarely Sometimes Generally Often Always Quick Can enforce decisions Consistent Fair and unbiased Honest, corrupt-free
Algeria ICA: Public services Public services 250 200 150 100 216.7 133.9 121.5 106.6 60 50 40 30 20 Days 50 35 20.6 10 0 0 Delay Informal payments (if any) Thousands DA Installing a telephone line Reparing the telephone line Connection to electric network Getting a construction permit Company registration Longest delay permit/license
Algeria ICA: access to land and buildings 50% 6 Percent of firms searching 40% 30% 20% 10% 3.6 3.6 19.6% 18.9% 37.7% 4.9 42.1% 4.7 5 4 3 2 1 #years searching Series4 Series3 Percent searching #years searching 0% 0 Building/ offices (All) Building/ offices (5-19) Land (All) Land (5-19)
Assessing the Investment Climate: some tools used by the World Bank (1) We first looked at the Big Picture approach (assessing the overall investment climate, through ICAs and FIAS Diagnostics) (2) Now, let s focus on a frequent problem: the cost of doing business. How to measure it? How to address it?
The Cost of Doing Business To reduce transaction costs, one first needs to measure them. The WB has 2 useful tools: «Doing Business» and «FIAS reviews of Administrative Barriers to Investment»
Doing Business (WB research) compares the cost of doing business in 130 countries using 5 indicators: Starting a Business Enforcing a Contract Flexibility of Labor regulation Getting Credit Closing a Business (insolvency)
Doing Business : let s look at some of the results for the MENA region Starting a Business Closing a Business (insolvency) (Results available at: http://rru.worldbank.org/doingbusiness)
STARTING A BUSINESS
120 100 80 60 40 20 0 11 16 18 20 42 43 44 45 45 46 46 36 36 38 29 23 24 4 53 95 98 115 Denmark Netherlands Sweden UK Switzerland Italy Norway Algeria Finland Morocco Turkey Syria Egypt Israel Germany Greece Lebanon Tunisia France Portugal Jordan Spain Number of days required
18 9 10 13 13 14 16 11 11 9 7 6 6 11 10 10 5 4 4 4 3 6 0 2 4 6 8 10 12 14 16 18 20 Sweden Denmark Finland Norway Israel Lebanon Switzerland UK Netherlands Germany Italy France Syria Tunisia Morocco Portugal Spain Egypt Turkey Jordan Greece Algeria Number of steps required
140 120 100 80 60 40 20 0 0 0.8 1 3 3.1 3.9 4.7 5.9 8.5 12.5 13.7 16.4 16.4 16.7 19.1 24.1 31.9 37.1 49.8 61.2 69.6 129.9 Denmark Sweden UK France Finland Norway Israel Germany Switzerland Portugal Netherlands Spain Tunisia Syria Morocco Italy Algeria Turkey Jordan Egypt Greece Lebanon Administrative Costs & Fees (as % of income per capita)
6000 5000 4000 3000 2000 1000 0 0 0 13.2 19.6 32 32.1 33.1 33.8 41.4 43.4 49.6 52.3 70.7 73 83.1 103.8145.3 351.7 2 762.5788.6 Israel UK Turkey Spain Finland France Norway Switzerland Sweden Portugal Italy Denmark Netherlands Algeria Lebanon Germany Greece Tunisia Morocco Egypt Minimum Capital ( % of income per capita)
CLOSING A BUSINESS (INSOLVENCY)
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 0.9 0.9 1 1.2 1.3 4 4 3.5 2.6 2.6 2.5 2.4 2.2 2 1.9 1.8 1.5 4.1 4.2 4.3 4.3 4.6 Finland Norway UK Germany Italy Spain Turkey Morocco Sweden Greece France Tunisia Netherlands Portugal Algeria Israel Lebanon Syria Denmark Egypt Jordan Switzerland Time required for liquidation (in years)
40 35 30 25 20 15 10 5 0 1 1 1 8 8 8 8 8 8 8 8 8 8 8 4 4 18 18 18 18 1 Finland Netherlands Norway Algeria Switzerland Denmark Germany Greece Jordan Portugal Spain Sweden Syria Tunisia Turkey UK Egypt France Italy Lebanon Cost of insolvency procedure (% estate)
The Cost of Doing Business Comparing «Doing Business» and FIAS Admin. Barrier studies. «Doing Business» = good tool to quickly benchmark countries (130 countries covered and growing) against 5 key indicators (more to be added in 2005)
Reducing the Regulatory Burden «FIAS Admin. Barriers studies» focus on administrative procedures (not bankruptcy or access to credit) and: (a) cover all procedures an investor has to go through to set-up a business and start operating and (b) Provide an in-depth analysis of those and detailed, concrete, and implementable recommendations for their simplification.
Administrative Barriers Get Tax ID Get Employer ID Negotiate with Unions Get Import Permit Apply for Expatriate Work Permits Apply for License Claim Incentives Renew Investor Permits Repatriate Profits Acquire Business Visa Register with Investment Promotion Agency Apply for Incentives Apply for Investor Permit Find Land Export Goods Apply for Land Register Business Renew Licenses
PART 3: Improving the investment climate in MENA: Designing and Implementing a Strategy addressing the main Constraints
Investment climate reform in MENA region: some priorities emerge in spite of countries varying situations (1) Clear need for Governance, transparency reforms Accelerate economic reforms (liberalization) Reduce tariff and non tariff barriers to trade
Investment climate reform in MENA region: some priorities (2) Improve physical infrastructure, access to land Invest in Education, Labor Skills Reduce Transaction costs, regulatory burden Reform Tax System & Incentive Regimes
New reality call for New FDI Policies In the past: FDI was treated with suspicion Key objective was to protect local industry from competition State was dominant in the economy Result => restrictions to FDI, a command & control approach
From Control to Promotion With globalization came: Greater recognition of the benefits of FDI Focus on liberalization, deregulation, increased competition More limited role for government => More liberal FDI policy => Emphasis is less on control and more on promotion
Shift From Control to Promotion Creates Opportunities for the IPAs IPAs have a central role to play, not only through promotion per se, but: investment facilitation, servicing investors and policy advocacy here is the link with IC Reform
In the new context, calling from farreaching Investment climate reforms, the IPAs of the Middle East have a central role to play Ideally positioned to (a) identify constraints affecting firms and on this basis to (b) formulate proposals for specific reforms and (c) to advocate for these changes with the Government. Policy advocacy the new frontier for IPAs?
WHERE TO GO FOR ADVICE? For any assistance in designing & implementing investment policy reforms based on country s circumstances and best international practices one partner: the Foreign Investment Advisory Service (FIAS) of the World Bank and IFC Thanks for your attention. Xavier Forneris --xforneris@ifc.org