91706 World Bank MENA Regional Issues Brief: Jobs or Privileges Number 5 of 5 Privileges instead of Jobs Politically connected firms receive generous policy privileges undermining competition and job creation Problem 70% 63% Policies in MENA countries often 60% limit competition and job creation by constraining firm 50% 45% startup and productivity growth. 40% 30% 29% Analysis 30% 26% Policies have often been 20% captured by a handful of 8% 10% politically connected firms. This has created privileges rather 0% than a level playing field, High energy-intensive Moderate energy- Low energy-intensive undermining competition, the intensive ability of all entrepreneurs to Politically connected firms All firms Summary pursue opportunities on an equal footing, and job creation. Egypt: Politically connected manufacturing firms are much more likely to Solution operate in energy intensive industries, reflecting their privileged access to energy subsidies and thus capital. Reform all policies that unduly We identify politically connected firms in Egypt as firms which were constrain competition. Achieving managed or owned by influential businessmen controlling high political and sustaining this reform posts in the government or the National Democratic Party (NDP) before agenda requires institutions that 2011. safeguard competition. Equally The graph shows that 45% of politically connected manufacturing firms important, ensure policy making operate in energy-intensive industries compared to only 8% percent of all is transparent and open. manufacturing firms. PROBLEM MENA countries. This has led to a policy privileges for a few connected firms; many environment that created privileges of these policies are still in place Policies in MENA countries often stifle rather than a level playing field, formal sector job creation by limiting firm The governments in Egypt and Tunisia undermining job creation. entry and exit and productivity growth. erected barriers to entry and competition Such policies include legal barriers to FDI Analysis is based on novel data even as they engaged in economic in services; administrative barriers to firm liberalization. In particular, the data on New data and information on first-tier entry and competition; energy subsidies politically connected firms (defined politically connected firms in Egypt and to industry; trade barriers, including non- above) show that Tunisia became available after the Arab tariff measures; exclusive license Spring. They provide, for the first time,  78% of connected firms in Tunisia requirements to operate in specific quantitative evidence on the entire operated in service sectors (onshore sectors; or barriers in access to the microeconomic transmission mechanism economy); in Egypt, their presence judiciary, land, and industrial zones; or from political connections to policy was more widespread (60% in discretionary rule enforcement. privileges limiting neck-and-neck services and 30% in manufacturing). ANALYSIS competition, to weak firm dynamics and  They accounted for the lion’s shares slow aggregate job growth. These policies have often been captured of profits in both countries. by a few politically connected firms in Policies in Egypt and Tunisia have led to World Bank MENA Regional Issues Brief: Jobs or Privileges Number 5 of 5 43% Tunisia: Politically connected firms are much more 39% likely to operate in sectors which are protected from competition through entry barriers. 24% We identify politically connected firms as firms whose 14% assets got confiscated after the Jasmine Revolution in 2011 as they were owned by the Ben Ali family. The graph shows that 39% of the sectors with at least 1 Ben Ali firm require authorization by the government, Authorization FDI Restriction relative to 24% of non-connected sectors. Similarly, Sectors with BA firms (45 out of 332) Sectors without BA Firms (287 out of 332) 43% of connected sectors are protected from foreign entry relative to only 14% of non-connected sectors.  In Egypt, connected firms indicators; make more frequent use An even-handed enforcement of laws disproportionally profit from trade of non-tariff trade barriers; demands that public officials have protection through non-tariff frequently have patronage networks incentives to exercise discretion fairly and technical import barriers on goods between the military and business. transparently. Such incentives are more they are selling; privileged access to likely when laws are clear; entry and  In Yemen, politically connected firms energy subsidies, land, or permits; promotions into the administration are control the oil, telecommunication, fewer inspections by public officials. based on merit instead of connections; and Qat production sectors. and when merit is judged by contributions  In Tunisia, politically connected firms  In Iran, the military establishment to legitimate public policy goals. are protected by exclusive benefitted from privileged access to authorization requirements to Create institutions that safeguard privatized state owned enterprises. operate in profitable service sectors competition and restrictions on foreign direct Political connections limited competition Such institutions include, but are not investments in their sectors. in MENA but not necessarily in East Asia limited to, an independent competition  Connected firms appear not to have Politically connected firms are not specific authority; appropriate procurement laws, benefited disproportionally from to MENA but were also common in East an independent judiciary, an accountable fiscal advantages in Tunisia or credits Asia. How can we explain the different and competent public administration. by state banks in Egypt. economic outcomes? Available evidence Ensure open and transparent policy suggests that connections were not  After accounting for these privileges, making sufficient for East Asian firms to escape connected firms are not more (and competition. For instance, privileges were It is hard to conceive how institutions that sometimes even less) profitable than credibly linked to performance targets safeguard competition can emerge other firms in both countries. (even for insiders) while export without citizen access to information on  Privileges suppress the firm dynamics orientation exposed firms to competition proposed laws and regulations; citizen associated with job creation: in in contested global markets. knowledge of politicians’ stakes in firms; sectors dominated by connected and citizen awareness of the beneficiaries SOLUTION firms in Egypt, firm entry is 28% lower of subsidies, procurement tenders, public despite the higher rents in these Reform policies that constrain competition land transactions, privatizations, etc. sectors; firms report less competition. These policies include, among others, Finally, this report provides a decision-  In Egypt, job growth declines by administrative barriers to firm entry; making guide, summarizing the above, about 1.4 percentage points annually cumbersome bankruptcy laws; energy which governments can use as a when connected firms enter new, subsidies to industry; legal barriers to FDI framework when designing and previously unconnected sectors. in services; trade barriers; exclusive implementing policies. license requirements; or barriers to access Qualitative evidence points to similar For references and detailed analysis and the judiciary, land, and industrial zones. mechanisms in other MENA countries policy recommendations, refer to Reduce the space for discretionary policy Chapter IV in the complete 2014 World  MENA countries lag behind other implementation Bank Regional Report: “Jobs or Privilege: regions in governance or corruption Unleashing the Employment Potential of 2 the Middle East and North Africa”.