The Middle East & North Africa Countries - Reforms & Performance - Case Study Example

Introduction The Middle East & North Africa (MENA) countries continue to witness challenges associated with development. Job creation is an aspect which is totally ignorant and is due to the weak contract enforcement which will result in around seventy million people seeking employment in the next twenty years. Reports published by the World Bank clearly brought forward the need and importance of having a transition phase so that strong enforcements and laws can be created which will help to ensure that the private sector business contributes positively towards the business. This will require that the weak contract enforcement is replaced with better rules so that business environment and the private sector is able to ensure better growth. This paper looks towards dealing with some of the implications entrusted with weak contract enforcement on MENA’s business environment and the manner the private sector has been able to deal with the different challenges. This will help to ensure that an environment is created which is more formidable and ensures that the private sector is able to create jobs and ensure that systematic reforms and developments takes place in the MENA countries. Private Sector Development: Reforms & Performance All MENA countries like Bahrain, Egypt, UAE, Iran and so on look towards developing significant programs so that structural reforms can be developed so that a conducive environment which helps the private sector to ensure better performance can be ensured. This will help the private sector is market driven and the weak contract enforcements are replaced through which better reforms can be passed. Since independence of nations like UAE & Egypt a social contract between the government and the private sector along with public has been developed so that the social inequity which is present gets reduced. This will help to deal with the weak enforcement which is present and will ensure that stronger reforms can be developed but hasn’t been achieved till now. The social contract was developed keeping in mind the paternalistic view so that the state could be involved in state planning, protecting the local market from external competition, ensuring better public welfare in the organization, developing social service programs and creating public sector jobs (Brown, 1995). This would require that the contracts which are developed should be strong and should remove the differences which are present so that the private and the public sector are able to contribute positively towards the growth of the economy. Businesses which are developed under the patronage of the government should be such that organizations working under it are able to benefit from it. To ensure maximum benefit the contracts needs to be ensure strong enforcement so that better monitoring becomes possible as the business environment will be developed based on it. In the early 1970’s some of the MENA countries like Bahrain, Iran & Iran along with UAE started reforming the economic sector by ensuring that the private sector is able to take initiative and ensure that they have a greater role in market development and promoting international trade. Many countries like Palestine, Kuwait and Saudi Arabia continue to face problems associated with slow or negative growth rates, negative balance of payment and so on; have looked towards making structural enforcements so that the private sector through the process of strong enforceable contracts is able to contribute positively towards the growth (Brown, 1995). The process was started by one MENA countries i.e. UAE and then was followed by other countries so that economies could deal and develop the business environment in a positive manner. Despite continuous efforts to deal with the issue of economic growth countries in MENA regions like Palestine, Kuwait & Saudi Arabia were continuing to witness slow economic growth rates and was primarily due to the poor business environment which was on account of poor enforcement policies. The rapid growth in the rate of unemployment matched by a slow demographic transition has resulted in social and economic pressure in relation to the infrastructure and has impacted the manner in which business decisions are taken (Lew, 1995). The outlook changed in the 2000’s as MENA countries started to witness better growth rates and was primarily due to the fact that oil prices started to rise and the favourable global environment contributed strongly towards the performance (Francis 2001). The growth was however behind the growth the world economies were witnessing and was due to poor reforms across different countries. This was aided by the lack of proper enforcement policies which resulted in labour loss, resource loss and productivity loss for both the private and the public sector enterprises. It becomes imperative that the private sector is developed through a dynamic business environment so that competitiveness among the sectors results in multidimensional benefits. Creating proper reforms which were enforced would develop an environment where the private and other sectors would be able to perform in a better way and would thereby help to improve efficiency in the use of the different resources. This would lead towards more open trade regimes, better regulatory frameworks, stronger financial sectors and less of government ownership and more of privatization. The diversity on the whole would lead towards multiplication of productivity and would create an environment through which better results and growth would have been possible. Macroeconomic Environment Businesses are largely dependent on macroeconomic stability so the investors’ decisions which are taken ensure better financial stability. Macroeconomic stabilization needs to be impressive so that better debt negotiation can take place. This will help to bring down debt burden, reduce inflation, ensure better trade reforms and reduce the level of external debt. The macroeconomic developments and stability is something which hasn’t been achieved due to poor policies which had provided an opportunity where businesses are able to take advantages in a different way (David 1990). The overall impact of such a decision has been such that it has reduce the level of benefits which economic reforms should have provided and has created the need and importance of developing policies which are aimed towards improving the overall effectiveness of carrying out the different activities. Trade Reforms Apart from the macroeconomic environment businesses look towards trade and exchange rate policies which at the same time ensure competitiveness and provides an opportunity for better reforms and policies. Most of the MENA countries like UAE & Iran have taken significant steps in this direction and have looked at trade liberalization so that the different trade impediments are dealt in a better manner. This has provided productivity towards the working culture of the organization but the lack of policies which are strong and governing has marginalized the benefits which could have been witnessed in the field of trade. The growth in bilateral and regional trade agreements has dominated the MENA countries and the private sector has been able to garner huge benefits from it. The agreements have favoured the resource rich countries and have provided an opportunity where the private sector has been able to gain from the trade which has taken place between them. The impact has been so strong that the private sector is witnessing a continuous change and growth as poor policies and lack of reforms ahs provided the opportunity and gap through which different trade benefits have been achieved. The region like UAE has been able to reduce the tariffs which has contributed towards improving the overall progress of the economy and has provided the required dimensions through which overall progress has been gained. Despite the reduction in tariffs the region continues to face problems associated with behind the border constraints and is entirely due to poor enforcement policies. The reduction in tariffs has provided an opportunity for MENA countries to be competitive in comparison to other countries but the lack of strong reforms and policies is an area which is ignored. The efforts thereby has to be developed so that trade liberalization improves and the process helps to develop a culture through which better productivity is ensured. This is supported by the fact that different trade policies have been adopted by different MENA countries. Countries which are poor in resource like Syria & Yemen continue to have high tariff rate whereas the resource rich countries like UAE & Kuwait look at having policies which ensure more and more behind the border work. This has multiplied the complexities as conducting business despite the different hurdles is a problem. This is an aspect which presents a challenge before the business sector and being able to deal with those will require better policies and support from the government through the form of reforms. Business & Regulatory Reforms A favourable business environment requires proper regulations and reforms which is aimed towards promoting competition, ensuring better resource allocation, protecting the property rights, and a strong legal environment which forbids any unlawful activities. MENA countries have taken actions through which they look at liberalizing the legal environment so that across the borders agreements can be entered at and policies can be developed through which better growth and reforms becomes possible. The liberalization of the MENA economies has focused on different areas through which competition has permitted and provided an opportunity through which obstacles can be reduced for carrying out business. MENA countries have also taken steps through which efforts are being taken so that the private sector is able to deal with the different issues so that the obstacles can be removed. The interventions has further been targeted towards specific sectors and areas so that business productivity improves but a lack of control and measures which ensures proper enforcement has resulted in increasing the complexities for the business. When comparing the same to the rest of the world it is seen that the regulatory environment developed by MENA countries is weak which has thereby created an environment of distrust and suspicion. The economies have developed the infrastructure which will support growth and business but the lack of efficiency in developing the required process and procedures has affected business development. This is an area of concern for the business environment as the lack of efficiency in dealing with the issues has intensified competition and has made it difficult to carry on business in the most effective manner. Financial Sector A favourable business environment which supports growth and productivity is supported by the manner in which financial institutions work as the ability of the business to mobilize the funds so that business is able to grow at a better rate. MENA countries like UAE and Kuwait have witnessed a mixture of incidents as the financial sector has improved in some areas but is also lacking in others (Nugent, 2002). This has multiplied the financial pressure and has made it difficult for organizations to garner a process through which business will be able to manage the finances and has resulted in the creation of financial problems which needs to be analyzed and dealt with. One of the major concerns for MENA countries like Yemen & Syria is the disconnection between the financial sector and the private economy as the different microeconomic indicators highlights it. This has thereby made it difficult to ensure that the business is able to manage and maintain the same finances thereby multiplying the complexities and concerns for future considerations. Despite the fact that the banks in MENA countries have huge liquidity and funds their roles are limited as they hardly contribute towards the growth and development because their role has been limited as an intermediary. This has led towards creating an environment where the contribution of the financial sector has been marginalized and has impacted the business potential. This has limited credit among a few thereby limiting the private sector from obtaining the required finance from the market. The lack of reforms and policies has impacted the capacity of the business and is an aspect which requires strong policies so that the business is able to gain from it. Since a strong linkage is witnessed between the finance and development it is imperative that for economic development and employment generation that the investment opportunity is created at the firm level. One of the major impediments to lower growth rate in the MENA countries is the lack of access to credit along with the high cost of borrowings making it difficult for the business to sustain those. It is quite evident that MENA countries have one of the worst arrangements when it comes to raising finance from banks as 75 percent of the finances are made through retained earnings and only 12 percent is through bank finance. This has impacted the overall capacity of the business and the lack of enforcement policies and reforms to support those for the private sector is acting as a hindrance in the path to growth (Galanter, 1981). It has further been identified that six critical factors has resulted in the structural disconnect between the plentiful resources which is available and the lack of people raising finance through external financing. This are (a) the level of public ownership is very high which limits the efficiency and robustness of the banking sector to work according to the predetermined terms; (b) access to banking sectors remains a hindrance as lack of proper infrastructure along with policies and reforms has restricted the ability of the business to raise easy finance; (c) the regulatory frameworks are such that it has created an adverse market where discipline and enforcement policies are lacking; (d) contractual savings and capital market remains underdeveloped which thereby reduces the level of competition and doesn’t provides an opportunity through which external finances can be raised; (e) government structure undermines the formal relationship as lack of reforms and policies to structure the overall growth is lacking; (f) problems associated with the business environment and climate has restricted and put a burden on the manner in which business decisions are taken (El-Ahdab, 1995). The overall aspect brings forward the manner in which MENA countries have been unable to develop policies and reforms which will ensure better growth. This has led towards a situation where the required infrastructure is not developed and the private sector is facing difficulties in dealing with the complex environment (El-Dean, 2002). This has limited the ability of the business to raise the required finances from different sources and makes it difficult for the business to be able to carry out the different functions in the effective manner. Weight of Public Sector Privatization is lacking in case of MENA countries like Yemen & Syria as compared to other developing regions of the world. In MENA countries the dominance of the state to produce goods and services is high which thereby limits the private sector. This is primarily due to the fact that oil remains to be controlled by the state and the lack of reforms which will support the private sector is missing. The fact that the resource rich sectors are being controlled by the government and the state it has limited the role of the private sector. The reforms which has been developed in the past 20 to 25 years have looked towards providing some support to the private sector but the response to the reforms is poor and the performance level is low. This is due to lack of strong enforcement policies and mechanism which will look at supporting the private sector so that the manner in which the different resources are being used improves. This will have a long term baring on the performance of the organization and bring about a turnaround through which operational efficiency and resource efficiency will be achieved. Economic reforms are essential so that the business is able to deal with the demographic transition which is taking place as it will help to create employment opportunities and will ensure that the resource are sued in the best possible manner. To be able to achieve the same the role of the private sector has to improve. The level of private investment for MENA countries is low as compared to other regions highlighting the need and importance of building reforms through which better efficiency can be gained and manner in which business finance is raised can be improved (El-Dean, 2002). Since, the private sector is becoming one of the pillars based on which business growth and achievement can be monitored it has become imperative that MENA countries look towards the sector and reduce their reliance on the public sector through the development of better reforms and policies so that resources are used wisely. Even while looking at the performance of the private sector across varied MENA countries the results are shocking. This is due to the fact that the performance varies as the resource rich labour abundant countries depict better performance compared to other countries and is primarily due to different reforms. The inefficiency of the government to be able to visualize the entire phase through a single window and develop policies which will ensure maximum possible use of resources and gains has limited the ability of the business to be able to focus on the dame growth and other factors. Factors shaping reforms in MENA countries The manner in which reforms has been developed or variations in reforms across different MENA countries remains a topic of discussion and it leads towards inconsistencies and lack of policies through which different things can be implemented for the private sector. There are different views regarding the lack of reforms and the reduction in the role of the private sector in economic development of the region (Richard 1999). This section will look towards understating the reason for having such a situation and the manner the business would have grown if slight changes and better reforms would have been enforced. This will thereby help to visualize the manner in which the changes in different aspect and arena will contribute positively towards the long term prospect of the economy. Authoritarian Political System It is widely recognized that the economic reforms are largely shaped and dependent on the political system which is present in the economy. The political system in MENA countries like Iran & Iraq is authoritarian which has thereby limited the progress and reduced the level of accountability which has been created for public sector. This has resulted in the role of the public sector to be one of dominance and has limited the ability of the business to use the different resources in the most appropriate manner (Avner, 1989). This has resulted in the fact that MENA countries lack in having proper democratic institutions which will support the growth of the private sector and makes the public sector to have a larger role on the business affairs. This has reduced the level of accountability which has been created for the public sector and provides an opportunity where even the resource rich laden countries are finding it hard to deal with the manner the other economies around the world perform. The limited role of the private sector has created a level of distrust and has created an environment where organizations are finding it difficult to be able to have high growth rates. Pervasiveness and Persistence in Conflicts & Violence Regional security and conflicts are further being highlighted and one of the major reasons which has led towards poor growth rates in the region. Since there is civil unrest and conflicts among different countries the government looks towards controlling most of the things so that the level of risk can be reduced. This has thereby led towards limiting the roe of the private sector as they can influence and bring a change in the economic decision which could be fatal. Having increased role of the private sector would mean more and more finances in the hand of the private sector which could be used in wrong ways. This will have an impact on the level of development of the MENA countries and could lead towards creating more and more conflicts in the region. The overall impact would be that the concentration of power would fall under the private sector and would thereby limit the long term expectations. Given the different directives the government looks to control most of the business functions and has limited the role which has been provided to the private sector so that better growth can be ensured. Large Oil Reserves & Rents MENA countries like Kuwait & UAE are largely dependent on oil reserves to carry out their business and drive their income as it shapes the manner in which the economy will perform. Both the resource laden rich and poor countries gain from trade which takes place due to oil but the impact and benefits is limited mostly for resource rich countries. The existence of large natural resources has impacted the reforms which takes place as accountability through the form of rent which is paid remains a factor which needs accountability. The opportunity of having large rent due to the presence of natural resources weakens the directives and incentives which is gained and thereby making the private sector is doubted with suspicion. The lack of proper reforms and the control by the government sector mostly propounds for a structure through which the business is not able to reap the different benefits. This has impacted the overall level of economic growth and makes it difficult for the business to be able to garner the required resources through which growth can be ensured. Reforms & Private Sector Response Despite the manner in which MENA countries have grown both the rich and poor resource laden countries haven’t developed the required reforms which are seen in other parts of the world. This has impacted the level of decision making and created a scope through which different benefits and gains are being made. The reforms haven’t been developed in a manner which will support the private sector which thereby makes the public sector to have control of most of the business proceedings. There are different reasons which has created an environment where the private business hasn’t been able to flourish at the same pace and some of the underlined causes are Weak Demand & Coalition of Reforms The dominance of authoritarian form of political system restricts both the insider and outsider to gather and garner valuable information. Since, the process limits the creation of accountability especially of the huge rents which accounts on oil reserves the reforms are not developed. The democratic form of government would have provided the required flexibility and would have reduced the impact of accountability (Amanda, 2000). This has thereby made few institutions to grow which has thereby limited their demand as the dominance of public organizations undermines the needs and requirements of the private sector. In developing countries private business is considered as a lobby for policy changes but MENA countries have little dependence on the private sector which has thereby resulted in the creation of more and more reforms for the public sector. The relative strength of the private sector is low which limits them from carrying out the different business activities. This has created an environment where private business is few and public sector dominates. The fact that some of the reforms have loopholes and look towards maximizing the gains for the public sector has created an obstacle and path in the growth of the private sector which has been matched by poor enforcement policies. Weak & Varied Progress in Reforms The reforms for the private sector are further not developed and not up to the required standards so that the different needs and requirements of the business can be filled. The presence of authoritarian regime, conflicts and differences between rich and poor resource laden countries has created differences among the different countries. This is matched by the fact that the reforms are not according to the required standards which is present in the international community. This has resulted in many gaps which need to be plugged. Some of the private sector organizations have been able to take advantage of it but to a limited extent. The lack of effective policies and reforms to support the different needs of the private sector is one of the biggest hurdles which have impacted the manner in which the business and the economy grow. The result is such that it will multiply the difficulties and will make it difficult for the private sector to be able to create an environment where reforms support them and the mechanism adopted by the government ensures fairness in all the dealings. This will ensure that the business will be able to carry on the fundamentals through which better returns will be expected and will provide the scope through which development takes place. Conclusion MENA countries are thereby largely dependent on the oil reserves for their business. The dominance of the public sector enterprise as compared to the private sector has impacted the overall potential of business. This is aided by the fact that the reforms for the private sector is weak and the dominance of authoritarian form of government has ensured that business continues to be dominated by the public sector. This has thereby created an environment where the business hasn’t been able to provide the same returns and growth. The lack of effectiveness of having the same environment for the public and private sector has slowed the pace of growth. This has been further impacted by the lack of policies with regard to the enforcement of the different reforms. This has provided an opportunity where the business has been able to take advantage at some places and lose at others. The overall impact by such an incident has resulted in multiplying the complexities for the private sector and is an area which needs to be watched and developed so that better reforms and policies provides an opportunity for the private sector to be able to function properly. 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