91703 World Bank MENA Regional Issues Brief: Jobs or Privileges Number 2 of 5 Startups and Innovators Wanted Private Sector Growth and Job Creation Number of newly registered limited liability firms per Problem 6 1,000 working-age people Most workers are employed in micro firms representing low- productivity, subsistence 5 activities. Analysis 4 The private sector has been characterized by low firm turnover – firm entry and 3 exit – and slow productivity growth, limiting the pool of startups and productive 2 Summary firms which create most jobs in MENA. Solution 1 Remove barriers to entry and exit and competition. 0 The targeting of private OECD ECA LAC GCC SSA EAP SAR non-GCC sector development MENA programs should focus on startups and innovative firms instead of small firms. 2004-2006 2007-2009 2010-2012 PROBLEM rather than a vibrant informal sector. • Young firms, especially startups, are the engine of job creation. GDP per capita growth was moderate and • The share of total employment in driven by an increase in the share of the micro firms with less than five • More productive firms also create working age population (i.e., demographic employees ranges between 37% in more jobs. change) rather than by labor productivity. Tunisia and 60% in Egypt. The share The private sector did not create enough of employment in large firms with • Among the pool of young firms, a jobs to absorb the expanding labor force over 1,000 workers is below 10%. small number of rapidly growing firms into the formal economy. • Lower productivity services in retail – the so-called ‘gazelles’ - drive trade, personal services and hotels aggregate job creation. • Formal sector workers as a share of and restaurants create the majority working-age population in MENA are of jobs, mostly in the informal sector. The drivers of private sector job creation only 19% compared to 27% in Latin in MENA are no different America & the Caribbean (LAC), and ANALYSIS 40% in Eastern Europe & Central Asia. • Job creation in MENA is dominated The drivers of job creation around the by young firms. Independent of firm Most workers are employed in micro world… size, young firms grow faster and firms representing subsistence activities World Bank MENA Regional Issues Brief: Jobs or Privileges Number 2 of 5 Tunisia Lebanon Micro-startups – firms less than five years old 500,000 60,000 and with a maximum of 50,000 400,000 four employees – Net Job Creation Net Job Creation 40,000 accounted for 92% of 300,000 30,000 net job creation in 200,000 20,000 Tunisia between 1996 100,000 and 2010 and 177% in 10,000 Lebanon between 2005 - - and 2010. [1,4] [5,9] [10,19] [20,49] [50,99] (100,000) [100,199] (10,000) [200,999] >=1,000 Size Size create more jobs, particularly during Why has job creation been weak? that more productive firms create their first four years of activity. more jobs, the misallocation of • Low turnover (firm entry and exit) resources towards less productive • More productive firms create more limits the pool of young firms. Entry firms reduces aggregate job creation. jobs. Firms with higher productivity and exit rates are remarkably low by experience higher subsequent job international standards. In MENA for SOLUTION growth in all MENA countries with every 10,000 working-age persons, on available data. average, only 6 limited liability Increasing the pool of younger firms and companies were created annually. In more productive firms – the engines of job • A few fast-growing firms (the contrast, the average across 91 creation – requires more competition and “gazelles”) account for a significant developing countries was 20 and as equal opportunities for all entrepreneurs. share of job creation. Gazelles are high as 40 and 80 per 10,000 firms which double their employment working-age persons in Chile and Governments should reform policies that over a four year period. They are 4 to Bulgaria, respectively. Moreover, unduly constrain competition and equality 6 years younger and more productive Tunisia, Lebanon and Morocco all of opportunity for all entrepreneurs to than non-gazelle firms. Gazelles have exit rates below 7%, whereas increase firm entry and thus the pool of accounted for 64% and 42% of total exit rates in Columbia or Turkey are young and productive firms. net job creation in Jordan and Tunisia about twice as high. and all net job creation in In addition, the findings of this report manufacturing in Morocco and Egypt. • Low within-firm productivity growth suggest that if governments want to reduces the potential for job pursue private sector development • However, most firms in MENA did creation. After 35 years in operation, programs targeting specific types of firms, not grow over time, especially small establishments in Tunisia and Egypt they should target startups and innovative firms. After 25 years in operation, barely increase their productivity firms instead of the traditional approach surviving firms only double their whereas establishments in Mexico, focused on supporting small firms. number of employees in Egypt, India, and Turkey increase their Jordan, or Tunisia. Between 40% and productivity about two-or three-fold 87% of all firms in MENA that employ over the same life cycle. less than ten workers do not grow beyond ten workers, during a five • Low efficiency in the allocation of year period. The probability that resources across firms has also For references and detailed analysis and medium-size manufacturing firms diminished prospects for job policy recommendations, refer to (between 20-49 workers) grow to creation. Estimates for the efficiency Chapter I in the complete 2014 World employ more than 50 workers is in resource allocation in Egypt and Bank Regional Report: “Jobs or Privilege: small; 12% in Egypt and Morocco, and Morocco are lower than those of Unleashing the Employment Potential of 10% in Jordan. Chile, Columbia, or Indonesia. Given the Middle East and North Africa”. 2