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More competitiveness needed
Published in Al-Ahram Weekly on 16 - 08 - 2018

The United Arab Emirates (UAE) has the most competitive economy in the Middle East and North Africa (MENA) region, ranking 17th in the Global Competitive Index (GCI) of the 2018 Arab World Competitiveness Report, which was launched on Tuesday.
Other MENA nations to crack the top 30 were Qatar (25th) and Saudi Arabia (30th). The rankings are based on 12 factors including education, innovation, the labour market, infrastructure and the macroeconomic environment and business sophistication.
According to the report, part of a series that examines competitiveness in different areas of the Arab world, the region's economies have not significantly changed over the last 10 years.
“MENA is, overall, less competitive than East Asia and Europe and more competitive than Latin America and the Caribbean, South Asia and Sub-Saharan Africa,” it says.
The report pinpoints flaws in the region's economies, namely that they are largely financed by exports of natural resources and foreign assistance, a fact that has led to “expansive employment in the public sector, widespread subsidies, and government control over large parts of the economy.”
It praises countries that have made significant progress in infrastructure development to enhance competitiveness. For example, in the Gulf countries, the total value of infrastructure projects amounted to $2.7 trillion in 2017.
In North Africa, Egypt invested in a new extension to the Suez Canal and is expanding two of its major ports, while Morocco's Tangier-Med Port has become one of the main gateways to the Mediterranean and is set to become one of the largest ports in the world once its expansion is complete.
While there were improvements over the last decade in areas like infrastructure development and technological advancement across the region, the report says that many countries in the region are struggling to diversify their economies and develop a vibrant, competitive private sector that can foster innovation and job creation.
According to the report, the region will need to generate 58 million jobs by 2040 to maintain unemployment rates and even more to lower them.
Most Arab countries have faced difficulties in diversifying their economies over recent years. Few countries in the region have levels of diversification that compare well to others at their level of income.
The report highlights the key reasons behind this low diversification, saying that the persistent reliance on oil and gas exports, especially in resource-rich countries, is an economic paradigm that makes macroeconomic conditions volatile due to changes in prices. This may reduce incentives for reforms to the business environment, it says.
“Over the 10 years ending in 2015, oil and gas exports accounted on average for more than 70 per cent of exports of merchandise in nine countries in the region. Oil and gas are the main exports for many comparatively stable countries, such as Qatar and the UAE, as well as some of its most unstable and weakly governed ones, such as Libya and Yemen.”
While education and innovation improve countries' ability to diversify through raising labour productivity, facilitating entrepreneurship, and enhancing the capacity to produce higher-value-added goods, there are significant weakness in these two fields in the region.
Another factor that limits the scope of economic competitiveness is the fact that the financial sector in the region does not always meet the needs of its productive sectors.
“Rather than encouraging efficient capital allocation, competition, and new firm creation, it tends to focus on lending to large, sometimes state-owned or well-connected firms, and have few incentives to serve medium and small-sized enterprises [MSMEs],” the report notes.
“Loans to MSMEs account for a smaller share of bank loans in the Arab world than in any other region. This results in less competition, does not encourage the development of new firms and new sectors, and eventually impedes the diversification process.”
However, the report acknowledges some improvements on this front. Countries in the Gulf Cooperation Council (GCC) have made a concerted effort to provide crucial seed-funding for start-ups, for example.
Saudi Arabia has created a $1 billion fund to invest in small and medium enterprises, while Bahrain ($100 million) and Oman ($200 million) have also launched funds to support start-ups.
In Lebanon, the Central Bank has pledged to invest $600 million in innovative firms. The Central Bank of Egypt has also been pushing banks to gradually raise their financing for smaller businesses to 20 per cent of their total credit portfolio by 2019.
The legacy of large state involvement in the economy is another key reason for the lack of competitiveness as state-owned enterprises obstruct competition, often have privileged access to factors of production (land and finance, particularly), and are frequently inefficient and protected.
Despite its attractive geographical positioning at the crossroads of European, African, and Asian trade routes, the Arab world is the least-integrated region in the world due to its protective trade policies.
The Arab world has high average tariff rates, mainly resulting from various non-tariff barriers. It is not well-integrated into global value chains, has relatively protected service sectors, and low levels of regional trade and investment, the report says.

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