more transparency, more even-handed application of the “rules of the game”, a clear set of regulatory rules, and a stable polity. Thus an important part of SME priorities could be characterized as fair rules of the game for economic participation, free from corruption, informal and unfair competition, regulatory policy uncertainty and political instability.

Among the major constraints facing the private sector is a weak judicial and legal system. Most Arab countries underperform in the enforcement of contracts, according to the Doing Business Indicators. The legal and regulatory framework of contract enforcement has not changed significantly in many countries. However, the legal business environment in the GCC countries compares well with most advanced OECD countries in many policy areas. Even across the individual sub-indicators Saudi Arabia, the United Arabian Emirates, Qatar, Bahrain, and to a lesser degree also Kuwait and Oman appear to perform well. A second group comprises countries with a legal business environment that is among the most difficult and restrictive to private sector development in the world, including Syria, Iran, Algeria, Iraq, and Djibouti. These countries require first generation legal business regulation reforms. A third group consists of Egypt, Lebanon, Tunisia, Morocco, and Jordan, have legal business environments that are comparable to dynamic emerging economies. All of these countries have improved their corporate legal systems in the last decade. However, there still remain issues of concern that urgently need to be addressed in these countries.

Good business regulations and governance are associated with lower levels of unemployment. A recent World Bank study (2012), showed that business regulation and governance are more important than labor regulations in generating “employment miracles’, where the unemployment rate drops at least three percentage points over a four year period. According to Freund and Rijkers (2012) a one point improvement in economic regulation as proxied by the Economic Freedom Index increases the probability of the onset of an employment miracle by approximately 3.6 percent to 5.0 percent. The findings also suggest that better regulation not only improves average labor market outcomes, but also minimizes vulnerability. Moreover, the formulation and enforcement of sound regulation goes hand-in-hand with good governance. Countries with better rules of law, good governance, and effective governments are more successful in creating employment.

# **B. Access to Finance**

Finance matters for inclusive growth, and enhancing financial intermediation for SMEs is central in that context. The evidence suggests that financial innovation is important in fostering economic growth and expanding economic opportunities. As reviewed by Levine (2005), a large and growing body of research shows that the services provided by financial markets and intermediaries have a positive impact on the rate of long-run economic growth. This is evident in that countries with better functioning financial systems grow faster over many decades (Levine and Zervos, 2008). Moreover, the rate of economic growth is accelerated through improvements in the operation of financial systems (Haber _et al_ ., 2003).

One of the ways in which a better functioning financial system promotes economic growth is by

**Figure (15): Percentage of Investment Finance by Banks             Figure( 16): Percentage of Firms with a Line of Credit**

<!-- Start of picture text --> 0.35 0.70<br>0.30 0.60<br>0.25 0.50<br>0.20 0.40<br>0.15 0.30<br>0.10<br>0.20<br>0.05<br>0.10<br>0.00<br>0.00<br>SMEs Large SMEs Large<br>Sub-Saharan Africa<br>18 East Asia and Pacific<br>Eastern Europe and Central Asia Middle East and North Africa<br>Latin America and Caribbean<br>South Asia<br><!-- End of picture text --> Source: World Bank Enterprise Surveys (2006-2009).