Souvenir shop, Morocco. Small-and-medium sized businesses face obstacles to grow and create jobs in the Middle East (Photo: Michael Riehler/Newscom)
Conference on Private Sector in Saudi Arabia
To achieve its potential, the key constraints facing the private sector need to be identified and addressed.
The private sector accounts for over 60 percent of GDP in most countries, similar to dynamic emerging markets in other regions. In this light, it appears that the slower growth is not a result of the size of the public sector, rather a reflection of constraints that impact the dynamism of the private sector.
Since the 1980s, private sector investment in the Middle East and North Africa has averaged between 13 and 15 percent of GDP in comparison to nearly 20 percent in South Asia and 30 percent for East Asia (both of which saw investment shares accelerate from below 13 percent in the late 1980s). At 40 percent of GDP, bank credit to the private sector in the region is well below that in other regions.
To discuss how to develop the private sector so that it can contribute more to growth, the IMF will co-host a conference with the International Financial Corporation and the Council of Saudi Chambers in Riyadh, Saudi Arabia on December 3, 2013. The conference will bring together private sector business people and academics from the region and elsewhere as well as representatives of international organizations.
In an interview, the IMF’s mission chief for Saudi Arabia, Tim Callen, explains what the conference will try to achieve, discusses some of the challenges facing the private sector in the region, and clarifies the link between private sector development and inclusive growth.
IMF Survey: What is the significance of this conference and who are the main participants?
Callen: We all know that the population in the Middle East and North Africa is very young and many people are approaching their working-age years. However, economic growth has not been sufficient to create enough jobs and to meet the aspirations of the people.
Governments have played a central role in economic growth in the past, but that’s unlikely to be sustainable going forward. Many governments throughout the region are already running large fiscal deficits and have little room to expand as public sector wage bills in many countries are already inflated.
So, the private sector is clearly going to be central to the development of the region in the future and I think it’s very important for the IMF to meet and hear the views of the business people as we form the policy advice we give to our member countries. We would like to understand better the issues holding back private sector growth and its ability to create jobs, how the sector can contribute more to employment and growth, and what governments can do to make that happen.
The conference will also focus on lessons learned from international experience. It will feature a number of panelists from Korea, Turkey, and international organizations that deal with private sector issues. In particular, they will look at the role of export-led growth in the development of the private sector as we have seen in the Asian growth experience.
We would really like to continue and deepen our ongoing dialogue with all stakeholders in the region, and we hope that this conference will be a starting point to build relationship with the private sector.
IMF Survey: What are the main issues that conference participants will discuss?
Callen: We expect conference discussions to focus on three major issues: how macroeconomic and financial policies affect the development of the private sector, the extent to which the region is open to trade and investment, and the state of the business environment in the region. Let me briefly touch upon each of these areas in turn, but I’ll elaborate more on the IMF’s core mandate—the role of macroeconomic and financial policies.
Macroeconomic policies in a number of countries in the region have not really been conducive for doing business. Entrepreneurs always look for a stable macroeconomic environment in which they can decide to establish businesses and to make investment and employment decisions. When there’s uncertainty about the main prices in the economy or the macroeconomic policies—as it has been the case in many countries in the region—it becomes very difficult for business to plan for the future. For instance, there is strong evidence that high inflation rates dampen economic growth, especially in the region’s oil-importing countries. Also, volatile exchange rates and interest rates tend to depress investment levels.
In addition, governments’ fiscal deficits, which are quite large in some oil-importing countries, usually get financed from the domestic banking sector. This mean less availability of credit and higher borrowing costs for businesses.
Conference participants will also try to answer the following questions: is the region sufficiently open to regional and international trade? Does it export enough, beyond energy? Is it integrated into global supply chains? Are countries doing enough to benefit from the very strong growth in emerging markets and other regions of the world, particularly Asia?
Finally, we look forward to discussions on the constraints businesses face, and how the private sector can shed the negative perceptions it sometimes faces in the region. We expect to learn about the length of time it takes to start a business, the ease of access to government services, and the availability of bank credit. Banks’ reluctance to supply credit, even to worthwhile projects, hinders private sector growth and job creation. This issue is particularly relevant for the region where small-and-medium enterprises do not get enough access to credit.
IMF Survey: The IMF has recently emphasized the nexus between private sector development and inclusive growth. Could you please explain what that means?
Callen: It’s evident that total and youth unemployment rates—at 10 and 24 percent—are higher than in other regions, and exceed the world average rates of just 6 and 13 percent, respectively. In addition, businesses, especially in the sector of small-and-medium- enterprises face many obstacles to grow. Also, labor force participation and employment opportunities for women remain limited. At 22 percent, female labor force participation rates remains the lowest among other regions. These features have created a sense of exclusion and discontent in some parts of the region.
Against this background, the IMF has repeatedly advised governments to promote the private sector in a way that would create more jobs and business opportunities for all. Growth becomes inclusive only when it benefits all segments of the population not only a privileged few. People would then find jobs and meet their aspirations, and firms would get the opportunity to grow irrespective of their size as long as they have sound business endeavors. More female participation in the labor market—including by supporting women’s independent mobility and equal opportunity in employment—could also boost inclusive growth and productivity.
