Economic Policies, Firms’ Entry and Exit and Economic Performance in Four MENA Countries

FEM32-05 | February 2009

Title

« Economic Policies, Firms’ Entry and Exit and Economic Performance in Four MENA Countries »

By

Khalid Sekkat, Université de Bruxelles, Belgium

Contributeurs

L. Achy, INSEA, Morocco; R. Ben Jelili, Arab Planning Institute, Kuwait; N. Barakat, To Excel Consulting & Associates, Jordan; M. Goaied, University of Tunis, Tunisia; T. Pamucku, Middle East Technical University, Turkey; I. Saif, Centre for Strategic Studies, Jordan, E. Taymaz, Middle East Technical University, Turkey

Note :

This document has been produced with the financial assistance of the European Union within the context of the FEMISE program. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union.

Summary :

The starting point of the analysis is the confrontation of two results in the literature concerning the impact of trade liberalization on firm’s efficiency. On the one hand, evidence show that, after more than 20 years of liberalization, the main manufacturing industries in which Jordan, Morocco and Tunisia are specialized suffer high degree of inefficiency. On the other hand, the recent literature suggests that the major channel by which liberalization affects firms’ efficiency is natural selection in the same industry: less efficient firms restructure or exit while more efficient ones enter or expand in the market. The question is, therefore, whether or not the process of entry and exit has played a similar role in these countries and why. Given Turkey’s similarity (e.g. level of development, same region, comparable culture, adoption of liberalization) and difference (i.e. better economic performance) with the 3 other countries, it is used as a benchmark for comparison.

The analysis showed that over recent years the process of entry and exit has, indeed, contributed to improve industries’ productivity in Jordan, Morocco and Turkey. This improvement took place either through exit of the less productive firms (Jordan), entry of more productive firms or both (Morocco and Turkey). The effect on industries’ productivity operates through entry and exit in their own and not through their impact on the productivity of survivors. Exit seems to clean industries from their less productive plants while entry allows replacing these plants by more productive one. Productivity is also driven by other factors such as factors of production availability (especially capital) and actual competition.

Although the process of entry and exit has improved productivity in a similar way in the countries of interest as in other emerging economies, the question remains about the relative persistence of inefficiency in the corresponding manufacturing sector. The response might be found in the intensity of the process.

Comparing the intensity of entry and exit across the 4 countries and with other emerging economies (both at the sector and at the industries level), shows that the intensity is the highest in the Turkish manufacturing sector, where it is comparable to other emerging economies. From 2000 on, intensity is the lowest in Tunisia. In Jordan, Morocco and Tunisia entry and exit rates are much lower than in other emerging economies. Hence, it seems that while the process has played a similar role as in other emerging economies, its limited impact on industries’ productivity is due to its weak intensity. It is, therefore, important to study the determinants of entry and exit in the 4 countries.

Regressions of the intensity of entry and exit rates on a series of firm, industry and country specific characteristics, show that entry is higher in those industries offering some opportunities (sales or productivity improvement), and lower in industries with high natural (capital intensity and wage level) and strategic barriers (concentration of incumbents). Exit is lower when demand is growing, there are high sunk costs and competition either foreign or domestic is limited.

The above results are in accordance with the literature (see the introduction) and suggest a number of policy recommendations. First, intense competition either foreign or domestic seems to affect productivity directly and indirectly through higher entry and exit rates. Hence, enforcement of competition policy seems to be a good instrument for improving productivity. The 4 countries have adopted a competition policy. However, its enforcement varies greatly across countries: Tunisia and Turkey went significantly further in this respect than Jordan and Morocco. The latter should urgently improve their record in term of enforcement of competition policy. Moreover, higher openness to trade seems also in order especially in Jordan, Morocco and Tunisia. The 3 countries are member of the WTO and have, in particular, signed a free trade agreement (FTA) with the EU. Jordan and Morocco have also a FTA with the USA. Morocco and Tunisia have a FTA with Turkey. It seems, however, that their FTA induces faster dismantling of barriers to trade than their participation to the WTO. Their continuous and firm commitments to such agreements could, therefore, have a very beneficial impact on productivity. Second, better access to factors of production also appears to affect productivity directly and indirectly through higher entry and exit rates. This is especially true for capital. The cost of using capital encompasses a number of components such as getting credit, protecting investors, paying taxes, enforcing contracts etc. Comparisons with around 170 countries over the World show that in 2005, Turkey performs fairly well in this respect, Jordan have an “average record” but Morocco and Tunisia exhibit in general disappointing records. The latter have, however, recently implemented a number of reforms to address the problem of access to capital. Third, industries offering demand opportunities witness higher entry but lower exit rates. Since the positive effect of entrants on productivity improvement is found to be much higher than the negative effect of potential exitors, the net effect is expected to be positive. Abstracting from internal demand, which is a macroeconomic issue, it seems that productivity improvement can also be achieved though more export orientation of the economy. Interestingly comparison with major exporters from Asia (Korea and Japan) shows that although the obstacles to exporting are higher in the 4 countries, the differences are not dramatic. The problem may come from the export strategies which seem less active in terms of promotion, advertising, lobbying etc.