IFC challenges highlighted in the Middle East

indicators come under fire

1 April 2008

By Amy Ekdawi, Bank Information Center

The International Finance Corporation (IFC), the private sector arm of the World Bank, is rapidly increasing its investment in the Middle East and North Africa (MENA) region, raising questions about the development value of its activities. A Norwegian study of the IFC’s Doing Business indicators questions the usefulness of the index to making real-life improvements to a country’s business environment.

MENA is the fastest growing region in the IFC’s portfolio, with investments doubling from $670 million in 2006 to $1.2 billion in 2007. The portfolio in 2007 consisted of 41 projects throughout the region primarily invested in financial institutions. Investment is expected to surpass $1.5 billion in 2008.

During a January visit to Saudi Arabia, IFC head Lars Thunell expressed the IFC’s commitment to help expand housing finance – a priority area for the IFC. He signed a public-private partnership agreement with the General Authority of Civil Aviation to work closely with the Saudi government in developing three “airport cities” in the country. This in one of the richest countries in the world currently enjoying an unprecedented oil bonanza.

Doing Business is not able to clearly distinguish the quality of the business environment

Yemen is the poorest country in the region and one of the ‘frontier countries’ that the IFC has committed to focus on (see Update 58). While oil revenues currently account for three-fourths of Yemen’s revenues, experts expect that it could become a net crude oil importer by 2011. The IMF and the World Bank have emphasised the importance of diversification, however a significant part of the IFC portfolio remains in the oil and gas sector.

Despite trumpeting the importance of small and medium enterprises to build the backbone of frontier countries’ economic systems, the IFC has yet to invest in them in Yemen. It has decided to cooperate mainly with stronger private groups after it “suffered in the past from dealing with weak sponsors”. Out of the six projects that the IFC has approved for Yemen in the last two years, two are owned by the same well-established Yemeni investor, the HSA Group.

In March the IFC organised a workshop for Yemeni government officials and the private sector to discuss the country’s tax reform process. The initiative is one of a series of conditions introduced by the Bank with its latest $50 million grant to support the Yemeni government’s economic reform programme. While the IFC takes the lead on advising the government to lower corporate taxes to be “in conformity with international norms” as mandated by the IMF, Yemen will be required to make up for lost revenue by doubling the general sales tax to 10 per cent in 2009. Other proposed reforms include ending domestic fuel subsidies by 2010 and cutting wages and salaries by 1.6 per cent of GDP. With 42 per cent of Yemenis living in poverty, the Bank estimates that the elimination of petroleum subsidies will increase the poverty rate by 9.2 per cent. The spike in global food prices could lead to a further 6 per cent increase. The introduction of a higher regressive sales tax will also hit the poor the hardest.

Not Doing Business

Influential in the region has been the IFC’s annual Doing Business indicators, which rank countries on how ‘business friendly’ they are (see Update 57). The report is used as a guide both for foreign investors and for governments prioritising so-called ‘investment climate reforms’. Egypt topped the list of reformers in the most recent report released last October. The week of the report’s release, 27,000 employees of the country’s largest textile mills, most of whom receive salaries below the poverty level, went on strike demanding higher wages and benefits. Saudi Arabia was also among the top reformers, receiving the best possible score on the ’employing workers’ index, despite its prohibitions of freedom of association, the right to organise and collective bargaining.

The Bank’s evaluation unit, the Independent Evaluation Group, is due to release a study of the Doing Business indicators. The IEG evaluation has been pre-empted by a study commissioned by the Norwegian ministry of foreign affairs. Conducted by the ESOP research centre at the University of Oslo, the study questions the value of the indicators as a policy tool. The indicators, assuming that they do capture the underlying business environment, are not able to “clearly distinguish the quality of the business environment of an economy ranked at number 75 from one ranked at number 40”. While questioning the indicators’ assumption that extra labour costs are always bad for business, the study finds the effect of the ’employing workers index’ on the overall ranking marginal. The authors call on the IFC to be more transparent about its methodology, and warn against governments designing policies to improve their relative position in the rankings.

Peter Bakvis of the International Trade Union Confederation (ITUC) believes the critiques of the ESOP research centre do not go far enought: “The MFA paper does not attempt to investigate the relevance of the Doing Business index to the World Bank’s stated goals nor the claims which the Bank makes about the index, notably that it is an accurate reflection of “investment climate”, i.e. a higher ranking leads to higher investment levels, economic growth and employment creation.” Bakvis argues that the Norwegian study misses the point by narrowly focusing on the minimal impact of the ’employing workers index’ on the overall ranking. This, he says, “fails to acknowledge that the Bank isolates the employing workers indicator and uses it to make specific policy recommendations to promote labour market deregulation in countries which rank lower than others according to this indicator.”