INCREASING THE COMPETITIVENESS IN THE AFRICAN MIDDLE INCOME COUNTRIES: STRENGTHENING THE INVESTMENT CLIMATE Sahar Nasr Senior Financial Economist World Bank Cairo, Egypt March 11, 2008 Slide 1 Good Afternoon, Before discussing the link between increasing competitiveness and strengthening the investment climate, lets first agree on what do we mean by competitiveness. However, it is not just a function of cost, but also quality.

What is Competitiveness? Describes the overall performance of enterprises within a national business environment, particularly its level of productivity and its ability to export. Productivity—magnitude and growth in value added (per unit input) of firms. Ability of firms to operate efficiently in relation to others due to low cost or superior technology. Function of quality not just cost Depends on a host of factors that can be firm-specific; industry-specific or country-specific. Slide 2 Describes the overall performance of enterprises within a national business environment, particularly its level of productivity and its ability to export. A key feature of competitiveness is productivity, which refers to the magnitude and growth of value added for a given amount of inputs. Ability of firms to operate efficiently in relation to others due to low cost or superior technology. Function of quality not just cost. Depends on a host of factors that can be firm-specific; industry-specific or country-specific.

Usually, sustained growth requires attaining manufacturing export competitiveness... Slide 3 Looking at the experience of countries that have enjoyed sustained periods of high growth, we find that almost all of them have succeeded in achieving manufacturing export competitiveness.

…based on growing private investment. Slide 4 We see in these countries, that private investments have played a critical role. . . . . . No where more than in East Asia.

What Affect Competitiveness? The Firm’s Business Environment Trade policy Entry/Exit barriers Macroeconomic environment Capital markets Labor Land Infrastructure Access to information Protection of property rights Markets openness and liberalization Firm Investor Slide 5 A firms’ business environment critically influences its competitiveness. Of course, there are important factors internal to the firm. However, the set of the factors that are external to the firm are what we refer to as, the business environment or investment climate. This involves, everything from the macro environment to the product market. For example, land markets, entry & exit barriers, protection of property rights, trade policy, etc. Product markets Factor markets

Investment Climate Assessments In many ways, the World Bank Group supports business environment reform to enhance competitiveness Creating policy and institutional foundations for effective markets (property rights, land registration, collateral systems, corporate governance, financial market infrastructure). Promoting open and competitive markets—opening up entry, access to finance for promising firms, deeper bankruptcy financial markets, and exit for failing firms). Initiate reform agendas, through sharing of cross-country experience—what works and what does not. Ensure effective coordination with development partners. Diagnostics/ Formulation Implementation Policy Dialogue Strategy and Solution Policy-based Loans Doing Business Design Enterprise Surveys Investment Loans Investment Climate Assessments Slide 13 The World Bank Group uses its diagnostic and analytical tools to contribute to the design of country–specific strategies, and solutions. Through a variety of means, it can also support the implementation of these strategies and solutions. Grants and Trust Funds Technical Assistance

Investment Climate Assessments In many ways, the World Bank Group supports business environment reform to enhance competitiveness Diagnostics/ Formulation Implementation Policy Dialogue Strategy and Solution Policy-based Loans Doing Business Design Enterprise Surveys Investment Loans Investment Climate Assessments Grants and Trust Funds Technical Assistance

from entrepreneurs their key costs and constraints. World Bank ICA work allows us to learn from entrepreneurs their key costs and constraints. Slide 6 When the bank does its diagnostic work, such as the Investment Climate Assessment, we look for the critical constraints that are impeding firm level competitiveness. One of the things we look at is firms’ own evaluation of the environment in which they are operating. Here in this figure, we see the order that MENA entrepreneurs, assign to various constraints.

from entrepreneurs their key costs and constraints. World Bank ICA work allows us to learn from entrepreneurs their key costs and constraints. Similar survey data is collected and analyzed for African MIC’s Slide 7 Similar work has been carried out throughout Africa. As shown here in this slide from the Botswana ICA.

. . . . especially MSMEs, receive little financing One of the main constraints identified in the Egypt ICA was Access to Finance . . . . especially MSMEs, receive little financing Percentage of firms currently with a loan from a financial institution 5 10 15 20 25 30 35 40 17.4 % All 13 % 36 % Small and Micro Large Size does Matter. . . Only 17.4% of firms have access to bank credit MSMEs have more difficulty accessing credit: only 13% of MSMEs have access compared to 36% of large corporations Banks do not provide much financing to MSMEs (only 12% of MSME that have a bank account also borrow from banks) Slide 8 Within this analysis we go deeper into particular issues, such as access to finance, depending on countries needs and priorities. For example, in Egypt, our diagnostic work revealed serious deficiencies in the provision of the finance, especially to SMEs. Source: Egypt ICA

Can these countries compete on an equal footing without using all of their human resources? Slide 9 Gender is another issue that is illuminated by this work, looking at the evidence for Africa and the Middle East, we could ask: “Can these countries compete on an equal footing without using all of their human resources?”

Doingbusiness Indicators Measures of business regulations and their enforcement across 178 countries. Doing Business is a guide for evaluating regulations that directly impact economic growth, making cross-country comparisons, and identifying good practice reforms. Regulations affecting 10 stages of a business’s life are measured: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. Slide 10 Another diagnostic tool that the Bank has been producing since 2003 is the Doing Business Indicators. These influential indicators have encouraged countries to compete in improving various regulatory factors influencing competitiveness.

Doingbusiness Indicators Regulation of Entry Labor Regulations Contract Enforcement Credit Markets Credit information Bankruptcy 2004 Corporate Governance Property registration Updates of ‘04 topics 2005 Business Licensing Taxation Trade Infrastructure Transport Customs Standards Updates of ‘04 and ‘05 2006 Dealing with licenses Employing workers Protecting investors Getting credit Closing a business Updates of ‘06 and ‘07 2007 Starting a business 2008 Slide 11 Year by year, these indicators are covering an increasing range of key features of country conditions. . . . The Doing Business team is now working on creating new indicators on gender, corruption, and infrastructure. Products: Report, academic papers, country summaries, website database www.doingbusiness.org

What does Doing Business 2008 say about the business environment in Africa’s MIC countries ? Slide 12 “Doing Business 2008” shows the broad range of performance of MIC in Africa.

Doing Business Sub-National Measures the ways in which government regulations enhance business activity or restrain it at the sub national level. Highlights good practices within the country that can be replicated easily in other cities. Focuses on three Doing Business topics: Starting a business Dealing with licenses Registering property Deals with three Governorates: Alexandria Assiut Cairo Provides information on other Governorates’ reform efforts, including getting credit, protecting investors, paying taxes, and trading across borders.

EXAMPLE Financial Sector Development Policy Loan WB and AfDB, along with other development partners supported the Government’s “Financial Sector Reform Program” (2004–2008) Improve the soundness and efficiency of the financial sector through comprehensive structural and financial reform, to enhance financial intermediation. Objectives Reforming the Banking Sector (consolidation, privatization, mergers) Restructuring the Insurance Sector (mergers, restructuring, privatization) Deepening the Capital Market Developing a Well-functioning Mortgage Market Strengthening the Regulatory and Supervisory Authorities Improving the Institutional Infrastructure (credit bureau, payments system, etc.) Main Components of the Program Slide 15 Egypt, provides one good example of the strong relationship the Bank has with some Middle Income Countries in the region. Diagnostic work, including the FSAP provided a basis for an agenda for Financial Sector Reforms. This led to a strong policy dialogue, and ultimately support the implementation of reforms through a Development Policy Loan, which was done in partnership with AfDB, USAID, and the EU. Implementing Agencies Ministry of Investment and Central Bank of Egypt (CBE)

Financial Sector Development Policy Loan

In what ways and areas, could WBG support your countries better? Encourage Dialogue? Technical Advise and Analytical Work? Developing New Strategy? Identifying Priority Areas of Reform? Sharing of Cross-country Experience? Providing New Products? Other Delivery Mechanisms? Slide 16 We recognize that countries have their own needs, to which the Bank should be able adjust. In light of that, we would like to offer for the discussion period this questions: “In what ways and areas, could WBG support your countries better?” Encouraging dialogue? Technical Advise and Analytical Work? Developing New Strategy? Identifying Priority Areas of Reform? Sharing of Cross-country Experience? Providing New Products? Thank You!

Increasing the Competitiveness in the African Middle Income Countries: Strengthening the Investment Climate Thank you! World Bank Financial Products and Services for Improving the Investment Climate