Quality of institutions and structural transformation: distortions and resource allocation in North Africa

Abstract

Understanding why North African economies are not growing as dynamically as they possibly could to generate enough jobs is a central question. Since the 2008 financial crisis, the gap between employment growth and overall labor force growth has widened steadily. The lack of job creation against a growing number of people entering the job market has led to an increase in unemployment, which is a critical problem for the subregion. In the present report, it is argued that the growth process may be influenced by the allocation of resources between sectors. Growth through the reallocation of resources from less to more productive sectors is referred to as structural transformation (or structural change). Also pointed out in the report is that efficient allocation of resources within sectors is critical for growth and job creation in North Africa. By decomposing labor productivity growth into between sectors (structural change) and within sectors components, relatively low structural change and low within productivity growth are documented in the report. Based on a most recent knowledge, Governments in North Africa should focus on the optimal allocation of resources across firms within and between sectors. The report contains some recommendations to tackle the negative effect of inefficient institutions on misallocation of resources within the economies of North Africa. These recommendations encompass mainly governance issues, as the building of checks and balances through national and local institutions, the building of effective State capacity to reduce arbitrary behavior from bureaucrats and increase transparency. They also enclose measures to reduce credit constraints and increase foreign direct investment competition.