1. INVESTMENT CLIMATE AND JOBS Arab Economic Forum May 12 th,2016 Beirut, Lebanon 1

2. The role of SMEs and the Influence of Firm Size and Age 90% of the world’s jobs are generated by the private sector and some 50% by SMEs This suggests a focus on supporting SMEs to establish, innovate and grow, particularly in the world’s faster growing service sector and manufacturing sectors and a particular challenge to foster this growth in MENA. 2 In contrast to other regions of the world, in most of the MENA countries formal private sector nowhere offers employment to more than 20% labor force which continues to have a high preference for public sector employment.

3.  What matters for employment and productivity is how firms evolve over time. In U.S: employment increases by a factor of 10, TFP by a factor of 8 from age 5-35; moving from MENA to US firm life-cycle increases aggregate employment substantially.  Firm age (NOT firm size) drives aggregate employment outcomes.  Young firms are the engine of job creation and it is a few fast-growing, young innovative firms (Gazelles) that drive most of aggregate employment growth.  Gazelles are not limited to IT and high-technology industries. Evidence is that they exist in all industries. 3 Employment and firm age over firms’ life cycles (normalized to 1 for firm-age<5) Productivity and firm age over firms’ life cycles (normalized to 1 for firm-age<5) The role of SMEs and the Influence of Firm Size and Age

4. Defining the Investment Climate 4  There is no single definition of the investment climate.  Stated broadly, the investment climate includes all policy areas that affect the costs and incentives of businesses and entrepreneurs. This includes;  macro-economic policy and political stability  business entry, trade, exit, finance, and other areas….  These are many areas where the government has a key “enabling role”. This is not a role that governments are always very good at.

5. I.Leading Constraints to Business World Wide 5  “Business regulations”, include a subset of items, tax rates and administration (15.6%), informality (12.2%), and corruption (6.9%)  These set of factors rank as the most significant business constraints worldwide.  Access to Finance is the second largest constraint (16.2%) followed by electricity (9.8%)

6. Indicator Overall 2015Overall 2011 Country Algeria 163136 Bahrain 6528 Djibouti 171158 Egypt 13194 Iraq 161166 Jordan 113111 Kuwait 10174 Lebanon 123113 Morocco 75114 Oman 7057 Qatar 6850 KSA 8222 Syria 175114 Tunisia 7455 UAE 3140 WB&G 129135 Yemen 170105 Doing Business in MENA 6 DOING BUSINESS INDICATORS  The MENA region has a best performing UAE with an overall Doing Business ranking of 31, followed by Bahrain at 65 and Qatar, Oman and Tunisia ranked at 65, 70,74 respectively, Morocco at 75, and Saudi Arabia at 82.  The remaining countries from the region included in this estimation all place after 100. With the exception of some of the GCC countries, Morocco and Tunisia, all countries have experienced declines in their rankings since 2011. Source: Doing Business Rankings

7. Enterprise Sector Dynamism 7 firms most likely to innovate, to offer formal training, to use email and establish websites  Research suggests that firms most likely to innovate, to offer formal training, to use email and establish websites are those high growth firms that have the gazelle characteristics. privileged firms that appear not to grow – the outcome of being able to operate in a weak competitive environment with access to subsidized credit and\or privileged status in terms of their treatment within the prevailing regulatory environment  Conversely, privileged firms that appear not to grow – the outcome of being able to operate in a weak competitive environment with access to subsidized credit and\or privileged status in terms of their treatment within the prevailing regulatory environment –crowd out start-ups and the evolution of gazelle-type firms. indicates that an average of 80 emerging countries significantly outperformed the best from MENA in terms of newly registered limited liability firms per 1000 working age people.  This is strongly suggested by the Chart which indicates that an average of 80 emerging countries significantly outperformed the best from MENA in terms of newly registered limited liability firms per 1000 working age people. Source: Jobs for Shared Prosperity, World Bank, 2013

8. A Closer Look - Access to Finance in MENA  Financial Sector in MENA region widely seen as sound. But many in the private sector does not consider the banking system as an option.  Banks focus on traditional lending technologies and conservative lending to established customers. This does not fit well with the importance of “Gazelles” as drivers of job creation.  The surveys reveal a tangible “disconnect” between the private sector and the financial sector that may have considerable consequences for the productive potential and growth of these economies. 8

9. A Closer Look - Implementation Challenges 9 Percentage of firm respondents disagreeing that regulations are interpreted consistently and predictably ENTERPRISE SURVEY RESULTS  Significant percentages of enterprise survey respondents across the MENA region indicated a perception that regulations were not being interpreted consistently and predictability by authorities.  Further survey results also indicate that, notwithstanding the relatively competitiveness of business regulations in countries such as Jordan and Morocco, there are wide variations in waiting times across firms that result in uneven treatment of different businesses.  These weaknesses in the investment climate inhibit enterprise risk-taking and depress investment and job creation. Source: Jobs for Shared Prosperity, World Bank, 2013

10. A Closer Look – Where is Policy Implementation Most Weak 10  The graph highlights in yellow the aspects of the investment climate particularly susceptible - in the eyes of business - to uncertainty and poor implementation.  There is also growing evidence that investment climate implementation performance has significant impact on the vibrancy and robustness of private sectors in the region.  One outcome, there is a lack of dynamism in terms of firm start- ups, growth and eventual exit – a process famously referred to as “creative destruction”.  Gazelles need not be small firms, but they do need to be operating within a transparent, level, predictable and competitive environment. “From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa” Mena Development Report- The World Bank

11. IV. Some Policy Considerations 11 Markets need to “contestable” - firms can enter and challenge incumbents on a level playing field. The “threat of entry and exit” so firms maintain urgency to innovate, improve productivity and grow. Market dynamism is good for both entrant and incumbent firm but even more significantly it is good for the wider economy and labor market, particularly the more skilled labor that innovative growth- oriented firms most demand. Leveling the playing field by reducing policy uncertainty and improving the transparency, fairness and predictability of regulatory implementation. Investment climate reforms are often necessary, but rarely sufficient. Quality implementation of an integrated package (finance and non-financial business services, infrastructure, skills) is often required to effect overall improvements in firm and employment outcomes.