OECD CONFERENCE on Investment in MENA

Istanbul, February 11-12, 2004

Part IInvestment Climate Reform:

Challenges for the MENA Region

Xavier Forneris, FIAS, World Bank & International Finance Corporation (xforneris@ifc.org)

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

PART 1: Economic & Social Challenges

facing the MENA Region

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

Growth in the MENA Region:

huge challenges ahead

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)

-2

0

2

4

6

8

10

12

14

16

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

Annee

po

urc

enta

ge

Unemployment increased

Unemployment rate, MENA 1980-2000

0

2

4

6

8

10

12

14

16

1980 1990 2000

% d

e la

pop

ulat

ion

activ

e

High-income countries

Middle-income countries

MENA

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.

Exports have not increased

Exports (% of GDP)MENA (all countries)

2

7

12

17

22

27

32

37

42

47

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year

pourc

enta

ge

Non-oil Exports Total Merchandise Exports

0

50

100

150

200

250

MENA10 ECA5 EASIA3 LAC4

Bill

ion

of U

S d

olla

rs

ECA-5: Czech Republic, Hungary, Poland, Russia, Turkey;

EASIA-3: Indonesia, Malaysia, Thaïland; LAC-4: Bolivia, Chile, Mexico, Brazil

Non oil exports ($34 Billion) below other Regions of comparable size

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

0

1

2

3

4

5Al

geria

Mor

occo

Iran,

Isla

mic

Rep

.Sy

rian

Arab

Egyp

t, Ar

ab R

ep.

MN

A10

Tuni

sia

Jord

anLe

bano

nSa

udi A

rabi

a

Cam

eroo

nBa

ngla

desh

Gha

naPa

kist

anTu

rkey

Cot

e d'

Ivoi

reM

alay

sia

Sout

h Af

rica

Rus

sian

Fed

erat

ion

Philip

pine

sG

uate

mal

aM

aurit

ius

Kore

a, R

ep.

Indi

aEc

uado

rH

unga

ryC

osta

Ric

aSl

ovak

Rep

ublic

Thai

land

El S

alva

dor

Col

ombi

aM

exic

oBu

lgar

iaJa

mai

caBo

livia

Cze

ch R

epub

licPo

land

Chi

leC

hina

Braz

ilAr

gent

ina

IDE

net r

eels

sur

IDE

nets

atte

ndus

, USD

/hab Pays les p lus

perf o rmant s

pays les mo ins perf o rmant s

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?

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

PART 2: Improving the

Investment Climate

(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 Investment Climate: some “tools” used by the World Bank

Each approach (ICA and FIAS Diagnostic) has its merits

Both nicely complement each other and lead to concrete recommendations for policy reforms

Assessing the overall

Investment Climate:

More on the ICA: a survey instrument

• A core survey instrument linking constraints to firm-level 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 NajyBenhassine 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

Info

rmal

secto

r/unfa

ir co

mp.

Acces

s to c

redit

Credit

cost

Tax ra

teUnce

rtain

ty on

policy

Bank dela

ys

Corru

ption

Tax au

thor

ity

Acces

s to l

and

Acces

s to fo

rex

Other

Customs/r

egulat

ions

Firm cr

eatio

n

Lack of

skill

ed la

bor

Port a

uthor

ity

Acces

s to t

elephon

e

Labor

legis

lation

Acces

s to e

nergy

Num

ber

of r

espo

nses

Very severe obstacle

Average obstacle

Major obstacle

Not an obstacle

Minor obstacle

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

Res

pons

es

Third mostsevere

Second mostsevere

Most severe

57.5%

79.8%

20.5%

80.2%

22.1%27.6%

0.0%

25.0%

50.0%

75.0%

100.0%P

erce

ntw

ith

recr

uiti

ngpr

oble

ms

Inad

equa

tetr

aini

ng

Lab

orle

gisl

atio

n

Lac

k of

qual

ifie

dla

bor

Una

ttra

ctiv

elo

cati

on Oth

er

Algeria ICA: Lack of qualified labor

Perception on judicial systemP

erce

nt r

espo

nses

Never

Rarely

Sometimes

Generally

Often

Always

Quick

Can enforce decisions

Consistent Fair and unbiased Honest,

corrupt-free

Had judicial case in the past 5 years

Algeria ICA: Judicial system

Public services

216.7

20.6

133.9

106.6

35

121.5

0

50

100

150

200

250

Insta

lling a

telep

hone l

ine

Repar

ing th

e tele

phone l

ine

Connec

tion to

elec

tric n

etwor

k

Gettin

g a co

nstructi

on per

mit

Compan

y reg

istra

tion

Longe

st dela

y per

mit/

licen

se

Day

s

0

10

20

30

40

50

60

Tho

usan

ds D

A

Delay

Informal payments (if any)

Algeria ICA: Public services

19.6% 18.9%

37.7%

42.1%

3.6 3.6

4.94.7

0%

10%

20%

30%

40%

50%

Building/ offices(All)

Building/ offices(5-19)

Land (All) Land (5-19)

Per

cen

t of

firm

s se

arch

ing

0

1

2

3

4

5

6

#yea

rs s

earc

hin

g Series4

Series3

Percent searching

#years searching

Algeria ICA: access to land and buildings…

(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?

Assessing the Investment Climate: some “tools” used by the World Bank

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 »

Starting a Business

Enforcing a Contract

Flexibility of Labor regulation

Getting Credit

Closing a Business (insolvency)

“Doing Business” (WB research) compares the cost of doing business in 130 countries

using 5 indicators:

Starting a Business

Closing a Business (insolvency)

(Results available at: http://rru.worldbank.org/DoingBusiness)

“Doing Business” : let’s look at some of the results for the MENA region

STARTING A BUSINESS

4

1116 18 20

23 2429

36 36 3842 43 44 45 45 46 46

53

9598

115

0

20

40

60

80

100

120

Den

mar

k

Net

her

lan

ds

Sw

eden U

K

Sw

itzer

lan

d

Italy

No

rway

Alg

eria

Fin

lan

d

Mo

rocc

o

Tu

rkey

Syr

ia

Eg

ypt

Isra

el

Ger

man

y

Gre

ece

Leb

ano

n

Tu

nis

ia

Fra

nce

Po

rtu

gal

Jord

an

Sp

ain

Number of days required

18

9

10

13 13

14

16

1111

9

7

66

11

1010

54 44

3

6

0

2

4

6

8

10

12

14

16

18

20

Sw

eden

Den

mar

k

Fin

lan

d

Nor

way

Isra

el

Leb

ano

n

Sw

itzer

lan

d

UK

Net

her

lan

ds

Ger

man

y

Ital

y

Fran

ce

Syr

ia

Tu

nis

ia

Mor

occ

o

Po

rtu

gal

Sp

ain

Eg

ypt

Turk

ey

Jord

an

Gre

ece

Alg

eria

Number of steps required

5.90 0.8 31 3.1

16.4 16.7 19.1

3.9 4.78.5 12.5

24.131.9

69.6

61.2

49.8

37.1

16.413.7

129.9

0

20

40

60

80

100

120

140

Den

mar

k

Sw

eden UK

Fra

nce

Fin

lan

d

No

rway

Isra

el

Ger

man

y

Sw

itze

rlan

d

Po

rtu

gal

Net

her

lan

ds

Sp

ain

Tu

nis

ia

Syr

ia

Mo

rocc

o

Ital

y

Alg

eria

Tu

rkey

Jord

an

Eg

ypt

Gre

ece

Leb

ano

n

Administrative Costs & Fees(as % of income per capita)

0 0 13.2 19.6 32 32.1 33.1 33.8 41.4 43.4 49.6 52.3 70.7 73 83.1 103.8145.3351.7

762.5788.6

24

0

1000

2000

3000

4000

5000

6000

Isra

el

UK

Tur

key

Spa

in

Fin

land

Fra

nce

Nor

way

Sw

itzer

land

Sw

eden

Por

tuga

l

Italy

Den

mar

k

Net

herla

nds

Alg

eria

Leba

non

Ger

man

y

Gre

ece

Tun

isia

Mor

occo

Egy

pt

Minimum Capital( % of income per capita)

CLOSING A BUSINESS(INSOLVENCY)

0.9 0.91

1.21.3

1.5

1.81.9

22.2

2.42.5

2.6 2.6

3.5

4 44.1

4.24.3 4.3

4.6

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5F

inla

nd

No

rway UK

Ger

man

y

Italy

Sp

ain

Tu

rkey

Mo

rocc

o

Sw

eden

Gre

ece

Fra

nce

Tu

nis

ia

Net

her

lan

ds

Po

rtu

gal

Alg

eria

Isra

el

Leb

ano

n

Syr

ia

Den

mar

k

Eg

ypt

Jord

an

Sw

itzer

lan

d

Time required for liquidation(in years)

1 1 1

4 4

8 8 8 8 8 8 8 8 8 8 8

18 18 18 18 1

0

5

10

15

20

25

30

35

40

Fin

land

Net

herl

ands

Nor

way

Alg

eria

Swit

zerl

and

Den

mar

k

Ger

man

y

Gre

ece

Jord

an

Por

tuga

l

Spai

n

Swed

en

Syri

a

Tun

isia

Tur

key

UK

Egy

pt

Fra

nce

Ital

y

Leb

anon

Mor

occo

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 implementablerecommendations for their simplification.

Administrative Barriers

•Acquire Business Visa

• Register with Investment Promotion Agency

•Apply for Incentives

•Register Business

•Apply for Investor Permit

•Find Land

•Apply for Land

•Get Employer ID

•Get Import Permit

•Apply for Expatriate Work Permits

•Get Tax ID

•Apply for License

•Negotiate with Unions

•Repatriate Profits

•Claim Incentives •Export Goods•Renew Investor Permits

•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 far-reaching 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