<!-- Start of picture text --> Figure (11): Leading Constraints in MENA, by Firm Size<br>60<br>Small (5-19) Medium (20-99) Large (100 or more)<br>50<br>40<br>30<br>20<br>10<br>0<br>Corruption Electricity Tax Rates Informal sector Access to Land Access to Skills and<br>competition Financing Education of<br>Available<br>Workers<br>percent rating constraint as "major" or "very severe"<br><!-- End of picture text -->

**_Source:_** World Bank Enterprise Surveys.

# **A. Regulatory Burden**

Countries with good investment climates and business regulations are characterized by lower unemployment levels. A conducive business environment and improved regulations are important enablers of job creation. Most governments in the Arab World have undertaken major reforms to improve the business environment by streamlining their regulations, restructuring the financial sector, and removing trade and investment barriers. International indices of the business environment point unequivocally to these improvements. The business regulations measured by the Doing Business Indicators offer good proxies of reform trends, reports that the average number of reforms achieved in Arab countries has been increasing steadily over the last few years (Annex II). Consistently, OECD reports show that the macroeconomic indices in most Arab countries are not that much different than those in highgrowth dynamic emerging economies.

Nevertheless, the private sector in several Arab countries faces constraints that prevent it from exploiting its full potential. Privileges and cronyism distort private sector competition and economic dynamism by creating a _de facto_ business environment that is not the same for all firms.(World Bank, 2009).Barriers in the business environment, such as costly and timely procedures to obtain licenses, register property and movable collateral, resolve disputes, and close a business constrain private sector growth and job creation. Lack of a level playing field is another key challenge. Even when the legal and regulatory framework is set it is not implemented consistently and predictable for all firms. The exclusion of a large number of private sector firms, mainly underserved SMEs, from access to a competitive business environment, limits labor demand and corresponds to the exclusion from formal employment on the labor supply side. Hence, burdensome business regulations, lack of transparency and poor governance can constrain job creation.

When examining the leading seven constraints to SMEs in nine recent enterprise surveys (Table 2), corruption is the most commonly identified as the top constraint, appearing in the top seven constraints in all ten countries. Informal sector competition rates second, identified in seven countries. Electricity is next, identified as a leading constraint by SMEs in six countries. Among infrastructure challenges, only unreliable electricity supply stands as an inescapable obstacle to business success. This is followed by regulatory policy uncertainty and political instability, each identified in five countries. Access to finance, access to land and macroeconomic uncertainty are each identified in four countries as leading constraints (Figure 12).

Table 2: Leading Constraints to SMEs in ICA Enterprise Surveys 15