exports will need to skew more towards high value-added sectors, and this may require policy measures to strengthen particular features of the legal and governance framework in addition to more financial sector development. The analysis in this paper contributes to the FSD and governance policy reform discussion.

The next sections are organized as follows. Section 2 benchmarks trade dynamics and two areas of MENA’s business environment focused in this study, financial sector development and governance. Sections 3 and 4 discuss the estimation strategy and data employed. Results are discussed in Section 5, and Section 6 concludes.

# **2. EXPORTS, FINANCIAL SECTOR DEVELOPMENT AND GOVERNANCE IN MENA**

# **2.1. EXPORT DYNAMICS**

MENA’s export-to-GDP ratio outpaced the world average until the mid-1970s, subsequently took a downward turn and has continued to decline since then. By 2008, only 1.8 percent of global exports originated from MENA. Empirical studies repeatedly find that exporters in the MENA region export at rates below their potential. Behar and Freund (2011) find the MENA region undertraded by 60-70 percent in the 2000s. Bhattacharya and Wolde (2010) estimate MENA export levels are 86 percent lower than expected given the characteristics of their economies. Iqbal and Nabli (2007) find that non-oil exports in MENA are only one-third of their expected levels based on country characteristics. Between 2005 and 2010, MENA countries exhibited lower mean exporter size, and exported fewer products and to fewer destinations than other countries<sup>11</sup> (World Bank’s Export Dynamics Database (EDD)).

Using data from the EDD for the 2005-2010 period, summary statistics corroborate previous empirical studies showing that MENA countries export less and are less diversified than comparable countries in the rest of the world.<sup>12</sup> Table 1 summarizes the sample statistics for 6 MENA countries and 26 non-MENA countries. The principal differences in export dynamics between these MENA and non-MENA countries lie in the number of exporters and the value of exports per exporter. The number of exporters and mean exporter size is much lower in MENA countries than in non-MENA countries. The average number of exporters in a MENA country is 5,552 and 13,258 in non-MENA countries.

A final point to illustrate using the EDD, is that MENA and non-MENA countries export different goods. In MENA, trade is concentrated in labor-intensive sectors; the goods sector with the largest number of exporters is food products (25 percent of all exporters are in this sector). However, less than 10 percent of exporters from non-MENA countries are in this sector. In the rest of the world, the sector with the most exporters is more industrialized (machinery and electrical goods). The predominance in MENA of exports in the non-technical industries is related to the low level of regional skills, human capital and technological sophistication.

> 11 Other countries exclude low-income countries.

> 12 The Exporter Dynamics Database is restricted to data from 2005 – 2010, we also exclude agriculture and extractive industries. Since no MENA country is low-income, we also exclude low-income countries from the rest of the world.

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