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More than a decade after the Arab Spring, the Middle East and North Africa (MENA) region finds itself facing momentous challenges. The coronavirus pandemic has disrupted economies and the Russian invasion of Ukraine sent shockwaves through the region, with higher hydrocarbon prices, risks to food security, and lower tourist arrivals. Beyond lies the looming threat of climate change. But challenging times provide opportunities for positive change. The region’s private sector can seize this moment. It remains the hope for many young people for their future and has the potential to drive a greener region with a sustainable model of growth.

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About the report

This report sheds light on the state of the MENA private sector through surveys of over 5 800 formal businesses across six economies — Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza — conducted between late 2018 and 2020, largely before the pandemic.

The surveys are nationally representative — following the methodology of the World Bank Enterprise Surveys — and are of great value for a region that is significantly short on data. They are comparable to a previous round of surveys conducted in 2013, providing a measure of change across two points in time — a first for the Enterprise Surveys in the region. They also contain new information on the green economy and the political connections of businesses.

Nine research papers have been produced from analysis of the data capturing different aspects of the private sector. The report, a joint publication of the European Investment Bank, the European Bank for Reconstruction and Development and the World Bank, is a cohesive analytical work based on the findings of these scholarly studies.

Individual country datasets are published at enterprisesurveys.org.

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Economic performance and the business environment

Middle East and North African countries face a challenging macroeconomic context, characterised by persistently low GDP per capita growth. Since the global financial crisis of 2007-09, GDP per capita grew by only 0.3% a year on average in Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza. That compares with 1.7% in the average middle-income country and 2.4% in the developing economies of Europe and Central Asia. In the 13 years since the crisis, the accumulated growth in GDP per capita in benchmark countries is 20 percentage points higher than in the average MENA economy. However, this observation is subject to several caveats: First, the average masks significant heterogeneity across countries. For example, GDP per capita growth in Egypt is high (2.1%) and the performance of Morocco also compares favourably to the benchmarks. Second, negative per capita growth in Jordan and Lebanon is at least partly related to high population growth, which reflects the large number of refugees from Syria that both countries host. To the extent that the refugee populations are supported by the international community, the GDP figures may not fully reflect the experience of the native populations.

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Factors holding back the private sector

This report seeks to understand what lies beneath the relatively slow growth in the Middle East and North Africa, with a particular focus on the reasons for stagnating productivity and inadequate accumulation of human capital and physical capital in the region’s private sector. The business environment in the Middle East and North Africa is perceived to be challenging. Among the top obstacles cited by Enterprise Survey respondents were:

• Political instability;
• Corruption;
• Management practices lagging behind best practices in comparable countries;
• Political connections and informality undermining fair competition;
• Businesses less capable of exploiting the benefits of trade, innovation and digitalisation;
• Few firms in the region investing in their workers;
• Difficult access to finance and low investment rates;
• Prohibitive market regulatory barriers.

Firms with political connections extract relative gains from their privileged positions. But the leveraging of influence also has the indirect effect of forcing competing firms to compensate with other means of political access. The region’s large informal sector also weighs heavily on established firms. Competition from informal economic activity results in lower growth expectations and consequently lower probability of accessing finance, as evidenced by fewer loan applications.

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Unlocking sustainable growth

The green transition is not yet a priority. Incentives for companies to decarbonise are weak as all of the region’s economies continue to subsidise fossil fuels and electricity generated from fossil fuels. Listed companies now have stronger incentives to take account of environmental, social and governance (ESG) issues, but average corporate ESG responsibility in the region remains low. Middle East and North African firms are less likely than their Europe and Central Asian counterparts to adopt measures that reduce their environmental footprint. Some economies in the region do significantly better than others, however, indicating that opportunities exist for reforms to increase growth and make it more sustainable.

The report calls for countries in the region to lower regulatory barriers for businesses, promote competition and reduce disincentives emerging from political influence and informal business practices. Reforms that facilitate innovation, the adoption of digital technologies and investments in human capital are crucial. Companies should also be incentivised to exploit the benefits of participating in cross-border trade and global value chains more broadly. Reforms to support these objectives will also need to take account of sustainability and the global agenda to limit climate change and protect the natural environment more generally. Governments have a duty to ensure that this transition process is just — through measures that help workers take advantage of opportunities to obtain new, higher-quality jobs linked to the green economy, while also protecting those at risk of losing their jobs.