March 2018 - Number 165 � WHAT GETS MEASURED GETS DONE� ADDRESSING POLICY CAPTURE AND PRIVILEGE-SEEKING IN THE MENA REGION AND BEYOND Mahmood Syed Akhtar, and Meriem Ait Ali Slimane.1 Introduction: Countries around the globe are seeking to diversify their economies and make them competitive. For this to happen, resources need to flow to firms that can make the best use of them. This is not the case in many countries. A good example is the MENA region where, in many countries, the policy regime has evolved in a manner such that a small number of firms end up getting a disproportionate share of resources - public land, procurement contracts, energy, finance and investment incentives, to name a few - not because they are more efficient but because they are politically connected. This skewed distribution of productive resources is a major cause of the high unemployment rates in the region, especially for young graduates - ranging between 15 and 25%. In brief, the ones with resources do not create many jobs. The ones that could have created jobs do not get the resources to do so. Although ubiquitous in MENA, this problem afflicts many other countries. What to do? So, what can be done about this? How can one make a dent in such systems and move towards a policy framework that encourages competition and productivity growth? A recently published World Bank report2 responds to this challenge and seeks to answer the following question: What good governance features should be instilled in private sector policy and institutions to shield them from capture, discretion and arbitrary implementation? 1 Syed Akhtar Mahmood, GMTBR, World Bank. Meriem Ait Africa: Measurement and Operational Implications. Ali Slimane, GFCME, World Bank Washington, DC: World Bank 2 Mahmood, Syed Akhtar, and Meriem Ait Ali Slimane. 2018. Privilege-Resistant Policies in the Middle East and North March 2018 · Number 165· 1 Country dashboards, a tool to assess privilege efficient, are either unable to enter the activity or resistance of policies relegated to low-productivity niches with little prospect to grow and create jobs. The study builds upon previous work in the region, which established the presence of policy The new report seeks to move the debate and capture or privilege-seeking, starting with a rhetoric on privilege, capture, and cronyism pioneering regional study in 20093. This was toward a more operational approach that focuses followed by in-depth country studies carried out on concrete and specific policy design features after the Arab Spring, as more data became that could limit opportunities for privileges. It available to researchers. Analytic work attempts a systemic measurement of various conducted in Egypt4 and Tunisia5 sheds light on dimensions of policymaking that could lead to the relationship between business regulation and discretionary and unfair behavior. Based on a the business interests of former regimes. conceptual framework, it develops a check-list of Connected firms accounted for a large share of good governance policy features in selected areas employment, output and profits, especially in of private sector development policy, such as sectors subject to authorization, and restrictions those mentioned above. It benchmarks eight on import or foreign direct investments. Clans, MENA countries on where they stand in each of connected to their respective regimes, abused the above areas, in terms of how much of these entry regulations for private gain thereby policy and good governance features are undermining competition. In Egypt, politically prevalent, and offers operational guidance on connected manufacturing firms were much more how this policy agenda can be moved forward. likely to operate in energy-intensive industries thanks to their privileged access to energy Several policy areas can be captured and their subsidies. In Tunisia, connected firms protected implementation tilted towards a privileged set of by restrictions on foreign direct investments businesses. Burdensome business regulations, created the space for politically-connected firms erecting barriers to entry, a wide import tariff to dominate profitable service sectors. structure opening the door for cheating and underreporting, non-transparent allocation of MENA’s Dualistic Economies and Privilege: monetary incentives and subsidies to the private Privilege-seeking is an important factor behind sector, and unfair access to public procurement the emergence of a dualistic structure in MENA and public land are examples of weaknesses in economies with a few leading firms, enjoying an various policy areas that can lend themselves to artificial, and unfair, competitive advantage, co- privilege seeking and undermine competition, existing with a much larger number of informal business entry and growth. Such problems are small firms, which use unproductive accentuated when rules and regulations are not technologies to serve local market niches. This accessible or unclear, when no grievance situation is consistent with the Schumpeterian mechanism is in place, when numerous human prediction stating that large policy privileges interactions are needed, and when there is room lead to sectors with a few colluding, politically- for interpretation and discretionary connected large firms, a larger number of implementation with no obligation to justify unproductive small firms, and overall low decisions nor reverse them in case of complaint. productivity and poor job creation. Restrictions on entry and the post-entry privileges generate a Procurement Policy: Consider the case of public substantial cost advantage for the politically- procurement, which is an essential source of connected firms that dilutes incentives to be business for many private firms including small productive. Other firms, potentially more 3 Benhassine, Najy. 2009. From privilege to competition: 5Freund, Caroline; Nucifora, Antonio; Rijkers, Bob. 2014. All unlocking private-led growth in the Middle East and North in the family: state capture in Tunisia. Policy Research Africa. Washington, DC: World Bank Group. working paper; no. WPS 6810. Washington, DC: World Bank 4 Diwan, I., P. Keefer and M. Schiffbauer (2014) On Top of Group. the Pyramids – Crony Capitalism and Growth in Egypt. World Bank. March 2018 · Number 165· 2 and medium enterprises. Several aspects of budget. They should have the power to shed light public procurement policies and practices can be on and dismantle cartels, lower barriers to entry, assessed to determine how privilege-proof this and protect users and consumers, thereby policy area is. There is need for a strong and removing distortions that have taken root and independent institution governing public opening the field for new, more efficient and procurement, which is free from any innovative new comers, thus allowing for involvement in procurement operations and creative destruction. planning, to avoid any conflict of interest. Procurement opportunities should be widely and Public Accountability Mechanisms : Public transparently advertised to ensure equal accountability mechanisms (access to opportunity of access to all bidders - failure to do information laws, asset disclosures by politicians, so opens the way for corruption and conflict of interest regulations) are also to be discretionary treatment. A non-transparent considered as corrective mechanisms. Finally, procurement system discourages SMEs to apply and upstream of these policy areas, consulting for public procurement opportunities, depriving the private sector in an inclusive way during the them from an important source of income and design of policies affecting businesses can growth. Reducing competition in public improve the policy making process and its procurement opportunities leads to higher cost outcome. and inefficiencies that also hurt growth. Looking Forward: The prosperity and social Trade and Customs: Another example is trade cohesion of the MENA region still rests on its and customs. Here, we need to look at tariffs ability to transform its public administration to structure and transparency. The wider is the gap better deliver services to the private sector to between tariffs, the more incentive there will be absorb a young and increasingly well-educated to cheat and under-declare. Import restrictions labor force. This will particularly be the case in and the existence of special regimes can lead to post conflict countries were social issues and the same behavior. The obligation – de jure or de stability concerns are more acute. Making policy facto- to use a broker in customs transaction can areas resistant to privilege is important for this create rents for a cast of intermediaries and fuel agenda. The complex political economy corruption. The existence and enforcement of underlying policy capture and privilege-seeking Customs codes of conduct, and grievance and may make this a seemingly intractable problem. appeal mechanisms for the private sector to However, the new study is inspired by recent contest customs decisions, are safeguards that literature on dynamics of policy change point to reduce the space for discretion and abuse. windows of opportunity within a complex political economy setting that allow incremental Access to Finance: Access to finance is also a very improvements with substantial cumulative effect critical area where capture can occur. If over time. It breaks new ground by applying, to regulations governing lending to related parties the private sector governance space, the motto and politically exposed persons are absent or not “What gets measured gets done� enforced, the financial system could be captured to the benefit of politicians and the connected Contact MNA K&L: business elite while crowding out lending to new Samia Msadek, Director, Strategy and comers who have new business ideas and a Operations. MENA Region, the World Bank competitive edge but not connections. Sajjad Ali Shah, Manager, MNADE Regional Quick Notes Team: Omer Karasapan, Mark Volk Tel : (202) 473 Competition Policy and Institutions: Lower 8177 barriers to entry foster competition and The MNA Quick Notes are intended to encourage entrepreneurship. Such openness summarize lessons learned from MNA and needs to be enforced by competition authorities. other Bank Knowledge and Learning activities. These public entities need to be independent The Notes do not necessarily reflect the views of from political influence and have their own the World Bank, its board or its member countries. March 2018 · Number 165· 3 March 2018 · Number 165· 4