Shifting gears: how the private sector can be an engine of growth in MENA

The global economy is facing heightened uncertainty, clouding economic forecasts. In our recently launched April 2025 Middle East and North Africa Economic Update , we report that growth in MENA averaged a modest 1.9% in 2024 and is forecast to accelerate moderately to 2.6% in 2025.

But growth forecasts for countries across the region are shadowed in uncertainty, given the potential impacts of changing trade dynamics on global growth, inflation and oil markets. Figure 1 presents an uncertainty index that reflects the prevalence of news coverage on topics pertaining to economic policy uncertainty. Trade policy uncertainty increased 60-fold between September 2024 and March 2025.

Figure 1: Heightened global policy uncertainty

Panel A. Global Economic Policy Uncertainty Index	Panel B. Economic policy uncertainty by category

_{Source: Baker et al, ‘Measuring Economic Policy Uncertainty,’ at www.PolicyUncertainty.com.}

The new report maps out the potential channels of impact. Heightened trade policy uncertainty could have a negative influence on private sector decisions, especially about investments, market entry and exit, and productivity. In the near term, lower demand from major destinations could negatively affect those MENA exporters that are better integrated into international markets – even though trade liberalization and integration are typically associated with higher long-term growth, albeit with distributional effects (see Figure 2).

Countries with significant oil exports are more vulnerable to developments in global oil markets, both through the impact of trade shocks on global demand and adjustments in supply. Vulnerability to trade shocks may also be higher when exports are concentrated in a few products or a few trading partners, as the lack of diversification limits the ability of the economy to absorb sector- or country-specific shocks.

At the same time, the ability to specialize in sectors where countries have a comparative advantage can lead to a more efficient global resource allocation, overall productivity and wage gains, as well as job creation. Through these channels, trade liberalization and integration are typically associated with higher long-term growth and economic development.

Figure 2: Trade composition in the Middle East and North Africa

_{Source: World Bank staff calculations based on data from Base pour l'Analyse du Commerce International (BACI) from Centre.}

In a longer time horizon, trade shocks faced by other countries could also affect MENA indirectly through trade reorientation. Reorientation of global trade patterns could present some opportunities for MENA countries in key products or critical parts of different value chains, further leveraging their proximity to the large markets in the European Union. How these shifts unfold will depend on the global economy, as well as the policy responses of the main trading partners of MENA economies.

Weather shocks, volatility in global oil markets, fragility, a potential slowdown in global demand and increased global policy uncertainty all intertwine with a long history of sluggish economic growth in MENA. Since 2000, GDP growth in MENA has been lower than its median income peers.

Much of this lacklustre growth stems from the poor performance of the private sector. Labor productivity growth is largely declining across the region. Annual employment growth is below income peers. Few firms invest and innovate. There is little entry into and exit from markets (see Figure 3).

Moreover, there is a persistent divide between a small formal private sector and a large informal sector. Notwithstanding increased schooling, with lower secondary education completion rates averaging around 70%, the region has long underused human capital. Women are largely left out of the labor market.

Figure 3: Productivity, investment and formal training

Panel A. Sales per worker growth in MENA and income groups MENA: -8, LMIC: -0.4, UMIC: 0.4 HIC: 2.4	Panel B. Percentage of firms investing in physical capital MENA: 21.7, LMIC: 36.7, UMIC: 39.6 HIC: 50.7	Panel C. Few firms in MENA provide formal training MENA: 14.5, LMIC: 30.1, UMIC: 34.3 HIC: 41.1

_{Source: World Bank staff calculations based on data from the World Bank Enterprise Surveys.}

To boost the performance of the private sector, governments in the region may need to rethink their role. Governments engage with markets in several ways such as employing workers, owning enterprises, shaping the business environment and conducting industrial policy. Promoting competition in markets, levelling the playing field for private and state-affiliated firms and fostering a business-friendly environment could go far toward unleashing the growth potential of the region.

Embracing data openness and evidence-based policymaking could guide the path forward, including the constant evaluation of industrial policy, which is a topic of debate among policymakers and economists around the world.

In parallel, businesses can build capacity by harnessing talent. At the intensive margin, improvements in management practices – which account for about a third of the total factor productivity gap between the frontier and other economies – can pave the way for more innovation and growth. At the extensive margin, businesses can find more talent by attracting women leaders, who in turn will hire more women.

The region has the world’s lowest rate of women in the workforce – at 19%, well below the world average of 49% in 2023. Research estimates that closing the gender employment gap would increase income per capita by around 50% in the typical MENA economy.

Emerging evidence also shows that putting more women in leadership positions could bring more women into the workforce. In MENA, on average, the share of women workers in firms run by women is almost twice that in firms run by men, regardless of the sector of activity (see Figure 4).

But MENA economies have fewer firms with top managers who are women than their income peers. Even in Saudi Arabia, which has implemented important reforms that have increased women’s labor force participation, only 2.95% of firms have a woman top manager –lower than the high-income average of 18.7%.

Figure 4: Top managers who are women are rare, but they hire more women

Panel A. Percentage of women workers by gender of top manager	Panel B. Women top managers (percentage of firms)

_{Source: World Bank staff calculations based on data from the World Bank Enterprise Surveys.}

But it will take government action to increase the number of women managers in economies where men are unlikely to want to work with women, let alone be supervised by them. The MENA region has consistently scored the lowest in the Women Business and Law (WBL) Index over the past five decades, indicating that despite recent changes, there are still many laws that favor men over women.

Policies to remove some of the structural challenges women face, such as reforming laws that discriminate against women, could help to increase the number of firms with women managers.

In summary, worldwide, businesses are a key source of productivity growth, innovation and jobs. But in MENA, the private sector is not dynamic. With limited productivity growth and segmented markets, firms in MENA are ill prepared to absorb shocks such as those arising from conflict and extreme weather events. A brighter future for the MENA private sector is within reach if governments rethink their role and firms harness talent effectively.

This article was published in May 2025 by the Economic Research Forum (ERF) as an ERF policy article. The original article can be accessed here.