Introductory Remarks By Murilo Portugal, Deputy Managing Director of the International Monetary Fund

At the Conference on the Role of the Private Sector in Economic Development and Regional Integration in the Maghreb
Tunis, Tunisia, November 28, 2007

1. Ministers, Governors, and distinguished guests,

2. I would like to thank the Tunisian authorities for hosting this important conference on the Role of the Private Sector in Economic Development and Regional Integration in the Maghreb and say how pleased I am to be here. I would like to express my appreciation to the delegations of Algeria, Libya, Mauritania, and Morocco for attending the conference. I would also like to extend a special welcome to representatives from the private sector, whose presence is essential to the success of this gathering.

3. The new Managing Director, Mr. Dominique Strauss-Kahn, who knows the region very well, fully supports this initiative to energize discussions for a deeper integration of Maghreb countries and collaboration toward a prosperous future for the region. He asked me to convey to you his best wishes for success in this important endeavor.

4. I am confident that this forum, by bringing together private and public sector representatives from all five Maghreb countries, can be a catalyst for regional cooperation and a base for developing new regional initiatives aimed at expanding the private sector, thereby strengthening its positive impact on growth. The quality of the discussions that took place during the technical meetings over the past two days is certainly encouraging and I would like to thank the experts that participated in these meetings for their productive preparatory work.

5. This is my second visit to the Maghreb as Deputy Managing Director of the IMF. During my first visit to Morocco and Tunisia in April 2007, I was able to see first-hand the impressive achievements of this region, its great potential as well as the many challenges that it faces. All the Maghreb countries have undertaken important growth-enhancing reforms over the past two decades, placing considerable effort into achieving macroeconomic stability, liberalizing trade, strengthening the financial sector, and improving the business climate.

6. As a result, Maghreb countries have made important strides toward economic prosperity in recent years. The region now enjoys stable macroeconomic conditions, and per capita incomes are on the rise. Average real GDP growth reached almost 5 percent in 2001-06 from 2.7 percent in 1991-2000. This is a big achievement. The main challenge faced by Maghreb countries is to reach an even higher sustained growth path that would enable the region to reduce the still high unemployment rates and raise living standards faster.

7. Reform effort should continue in order to increase the level and quality of investment and enhance productivity. The investment level in the Maghreb, at 24 percent of GDP, is higher than the average for developing countries, but it remains below that of many emerging and Central European countries, and below what is needed to achieve faster per capita income growth. Public investment also still represents a relatively large share of total investment. Empirical evidence shows that growth in the Maghreb has been generated mainly through factor accumulation and that the contribution of total factor productivity to growth has generally been low.

8. It is evident that the region needs a dynamic private sector to take the lead in permanently raising investment and productivity. Indeed, the public sector presents little scope for higher investment and new job opportunities given the limited fiscal space, particularly in the non-oil producing countries. Higher private investment, including foreign direct investment, would contribute to higher productivity through learning-by-doing and technology transfer. To boost private investment, the private sector and governments of all Maghreb countries should form a partnership to ensure that three key factors are in place: adequate market size, easier access to financing, and positive investment climate.

9. As stressed in the Algiers Conference, removing impediments to regional trade could create an attractive market for both domestic and foreign investors. Implementing the action plan on trade facilitation adopted by ministers of finance and central bank governors during the Rabat Conference last year will improve trade flows among the Maghreb countries—which currently amount to less than 3 percent of their total trade—and stimulate domestic and foreign investment in the region. However, little progress has been achieved since the Algiers Conference and further efforts are needed to implement its recommendations and remove impediments to intra-Maghreb trade. The discriminatory trade barriers existing between Maghreb countries should be rolled back and governments should explore the possibility of extending to intra-Maghreb trade the tariff preferences granted to the EU and adopting the rules of origin based on the Pan-Euromed protocol for intra-Maghreb trade.

10. Access to adequate financing is essential to private sector development. A healthy and dynamic financial sector, which can efficiently mobilize savings and provide resources for entrepreneurs, is critical to investors and, therefore, to growth. Progress in financial sector reform, both at the country and regional level, has been encouraging. The 2006 Rabat Conference on Financial Sector Reform and Financial Integration in the Maghreb laid the foundation for an action plan that is expected to be adopted during this conference. These measures will serve as a sound basis for further reforms leading to more integrated financial systems. It is important that all Maghreb countries implement the action plan without delay, and continue with the broader reform agenda to deepen and modernize the financial systems. A first step toward this goal would be the start of operations of the Maghreb Bank for Investment and Foreign Trade.

11. A good investment climate characterized by low transaction costs energizes private sector investment. It increases productivity by providing opportunities and incentives for firms to develop, to adopt better production processes, and to adapt to the changing environment. The Maghreb countries have made significant progress in improving the business environment. Policy reforms are being implemented to improve institutions and governance, to reduce the cost of doing business, and to promote private sector activity. However, there are still many remaining hurdles to potential investors. Drawing on the report prepared by private sector representatives and the background paper prepared by IMF staff, I hope that our discussions will help us identify these obstacles and formulate a strategy for their removal. I would suggest that our discussions here follow a pragmatic approach, informed by reforms and experiences already in place in the five Maghreb countries, allowing us to learn from, and build on, the successful initiatives in each country. In addition to maintaining a sound and stable macroeconomic environment and to pursuing trade and financial reforms, I would like to propose, for your consideration, five desirable features that would further improve the investment climate in the Maghreb.

12. First, the legal framework for property rights and commercial laws should be strengthened. Investors prefer to invest where property rights are well defined and fully enforced, since investment returns are then more secure. The Maghreb countries have made significant efforts to ease the registering of property. Algeria, Morocco, and Tunisia are making advances in enhancing the enforceability of contracts through improved accounting standards. The protection of intellectual property rights has also been improved throughout the region. However, there remain some gaps between the promulgation of the laws and their enforcement, and the legal resolution of commercial disputes is unfortunately still lengthy.

13. Second, the markets for factors, goods and services should be more efficient. Private businesses' capacity to adapt to a changing environment and the returns on investment hinge on the flexibility of these markets. For instance, rigid labor market regulations are often associated with unemployment and low productivity. Many Maghreb countries have made recent advances in that area, particularly with easing regulations pertaining to hiring new employees. Nonetheless, the challenge posed by cumbersome dismissal rules remains in some countries and limits job creation by the private sector. Despite recent progress resulting in efficiency gains, there is considerable scope for strengthening competition through restructuring and privatizing some of the public enterprises in the goods and services sector and through opening borders to foreign firms. The privatization programs under way in Maghreb countries are promising in that respect.

14. Third, procedures for new businesses should be further streamlined. In order to help countries better capitalize on their impressive successes in post-secondary education through the emergence of a new generation of entrepreneurs, the process of starting a new business should be made as free as possible from legal and administrative impediments. In recent years, most Maghreb countries have reduced the number of procedures, required to start a business along with the total cost of these procedures. However, available indicators on the ease of starting a business still show considerable differences across Maghreb countries, and there is clearly scope for improvement in all five countries.

15. Fourth, the public administration effectiveness should be improved, including through simplified laws and regulations. An efficient bureaucracy, simplified administrative procedures and a streamlined tax code all contribute to achieving and maintaining internationally competitive transaction costs and establishing an attractive investment climate. The Maghreb countries are all implementing reforms in these areas. Over the past decade, most countries have streamlined investment regulations. Algeria, Mauritania, Morocco, and Tunisia are also reforming their revenue and customs administrations and are rationalizing their tax systems. All countries streamlined their import tariffs as well. These initiatives are very encouraging, but further reforms are needed. The Maghreb countries have recently reduced their top corporate income tax rates, but they remain high relative to other emerging economies. In addition, average tariffs in Maghreb countries remain substantially higher than in the rest of the world. Also, available indicators show that the relative ranking of government effectiveness could be improved for all Maghreb countries.

16. Fifth, the infrastructure quality and coverage need upgrading. Businesses perform better if their transactions costs are minimized through access to adequate technology, developed telecommunications systems, efficient energy supply, and high-performance transportation services. Improving infrastructure continues to be at the top of the policy agenda of all Maghreb countries. Targeted areas are the construction of airports, ports, highways, electricity generating plants, water distribution, and oil refineries. To implement these improvements in infrastructure, Maghreb countries are following diverse strategies. Some are relying on a public investment program while others are engaging in public-private partnerships.

17. Despite recent initiatives, the quality and coverage of infrastructure in the Maghreb need to be further upgraded to be competitive. In particular, the Maghreb as a whole needs an integrated transportation network. The trans-Maghreb highway, which has been planned for a long time, would facilitate trade within the region and foster economic integration. On the telecommunications front, the fixed telephone density and the number of mobile telephone subscribers remain relatively low in the Maghreb. The quality of supply of utilities such as water and electricity could be improved as well through more efficient production and delivery.

18. Measures implemented by each Maghreb country to enhance the business environment will be more effective if they are supported by a Maghreb-wide strategy. Indeed, there is a powerful synergy between regional integration in the Maghreb and the rise of a dynamic private sector in each of its member countries. This point came out clearly from the previous conferences on Maghreb integration. Participants agreed that it is easier for member countries to reform their trade regulations and national financial systems if their policy impetus is part of a larger regional effort.

19. There are many measures that the Maghreb countries could adopt at the regional level to improve the investment climate. These include, for instance, progress toward harmonization of accounting standards; procedures for intellectual property protection; investment codes; labor market regulations; and customs and revenue administration procedures. Intraregional infrastructure projects could exploit returns to scale. For all these endeavors to be successful, the private sector would need to be an active participant, in close partnership with the governments of the five Maghreb countries.

20. The timeline of implementation for the different measures varies with their complexity and their current stage of completion in different Maghreb countries. In the short run, I would think that representatives of the private sector could set up a study group for identifying key issues and formulating policy recommendations in the various areas affecting the investment climate. It would also be beneficial if governments of all Maghreb countries instituted a clearly defined body that would facilitate investors' understanding of the legal environment in each country, as well as any regulatory changes. Over the medium term, changes in legislations would have to be prepared and effected to overhaul and harmonize the legal and regulatory frameworks pertaining to commercial and property rights, labor markets, banking, business licenses, and tax and customs codes.

21. I would like to stress that the IMF's role in this conference is that of a facilitator of the discussions and exchange of experiences among the Maghreb countries. Effective progress depends on actions by government and private sector representatives. Beyond this conference, we are ready to support the Maghreb countries as they pursue their reform programs and deepen their regional and global integration, with policy advice in the context of the annual consultations with each country and with the provision of technical assistance.

22. Let me conclude by saying that the Maghreb's outlook is certainly a bright one. Reforms undertaken over the past few years have contributed to macroeconomic stability and strong economic growth. I believe that the Maghreb countries can move to an even higher sustained growth path, which would further increase job creation and lift the standard of living of the Maghreb population. The development of a dynamic private sector has to be the cornerstone of the strategy to achieve these goals.

23. I look forward to productive discussions, and to listening to your views and suggestions on the way forward. Thank you.



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