How High Tariffs and Weak Competition Are Holding Back Growth in Middle East and Central Asia

An IMF study finds that high tariffs and weak competition policies across the Middle East and Central Asia strengthen corporate market power, slow productivity growth, and reduce long-term GDP per capita growth, particularly in the Caucasus and Central Asia. The report urges governments to reduce trade barriers, strengthen competition laws, improve governance, and promote private-sector competition to accelerate innovation, investment, productivity, and sustainable economic development.

Trade policy is emerging as one of the most powerful yet underappreciated drivers of economic competitiveness across the Middle East and Central Asia (ME&CA). A new International Monetary Fund (IMF) Working Paper finds that while many countries have pursued structural reforms over the past two decades, high tariff protection, weak competition policies and governance shortcomings continue to limit productivity, innovation and long-term income growth. Based on 517,972 firm-year observations from 135,876 firms across 13 economies between 2002 and 2021, the research concludes that economies with stronger competition, lower trade barriers and more effective institutions consistently deliver better business performance and faster economic growth.

High Tariffs Continue to Protect Market Power Rather Than Productivity

The study finds that market competition remains uneven across the region, with firms in many industries enjoying substantial pricing power. Resource-intensive sectors such as mining consistently recorded the highest corporate markups, often exceeding 1.8 and peaking above 2.3 during commodity boom years. Financial services, real estate and several service industries also maintained relatively high market power, while manufacturing markups have risen significantly in the Caucasus and Central Asia (CCA) since 2019.

Perhaps the report's strongest finding is the direct relationship between tariff protection and declining competition. The researchers estimate that a 1% increase in tariffs raises sectoral markups by approximately 0.9 to 1.4 percentage points over five years, demonstrating that trade barriers allow domestic firms to increase prices rather than improve productivity. Manufacturing receives the highest tariff protection across most ME&CA economies, particularly within the Middle East and North Africa (MENA), limiting foreign competition and reducing incentives for technological upgrading.

For policymakers, the message is clear: tariffs may provide temporary protection for domestic industries, but prolonged protection risks creating less competitive markets that discourage innovation and productivity improvements.

Competition Reforms Could Become a Major Growth Strategy

The report argues that improving competition policy may generate economic benefits comparable to trade liberalisation. Stronger enforcement of antitrust laws, better protection of private enterprise, effective anti-corruption measures and improved property rights consistently reduce market concentration.

The study estimates that a one-point improvement in competition policy scores lowers sectoral markup growth by roughly 3.4 to 3.8 percentage points over five years. Similar improvements are observed where governments strengthen anti-corruption frameworks and reduce discretionary state intervention in markets.

Institutional performance also varies significantly across the region. Gulf Cooperation Council (GCC) countries generally demonstrate stronger market institutions and more open trade regimes than MENA economies, while Central Asian countries have made notable progress but still face important governance gaps. The report suggests that competition policy should no longer be viewed as merely a regulatory issue but as a central component of national productivity and industrial development strategies.

For governments seeking to diversify economies beyond natural resources, strengthening domestic competition could deliver sustained gains without requiring large fiscal expenditures.

Productivity and Income Growth Depend on More Competitive Markets

The research establishes a strong link between competition and productivity. Firms operating in highly competitive industries consistently achieve stronger efficiency gains, while businesses protected by high market power experience slower technological progress.

According to the estimates, a 1% increase in sectoral markups reduces firm-level total factor productivity growth by approximately 0.07% to 0.09% during the following year. These productivity losses are particularly severe across the Caucasus and Central Asia, where weak competition creates significantly higher economic costs than in many MENA economies.

The effects extend beyond individual firms to national economies. A 10% increase in sectoral markups reduces GDP per capita growth by roughly 0.08% to 0.09% over the following two years, confirming that excessive market concentration limits overall economic development.

The study also identifies persistent productivity gaps between leading firms and weaker competitors. Manufacturing industries display wider productivity gaps than service sectors because advanced technologies, modern equipment and production know-how spread slowly among firms. This suggests that stronger competition not only improves efficiency but also accelerates technology diffusion throughout the economy.

What This Means for Governments, Development Partners and Business

The findings carry important implications for multiple stakeholders. Governments can improve long-term growth by reducing unnecessary tariff protection, strengthening independent competition authorities, simplifying market entry regulations and improving governance. Such reforms would help attract investment, stimulate innovation and improve industrial competitiveness without relying on prolonged protectionist policies.

For international development partners including the IMF, World Bank, Asian Development Bank and regional development institutions, the report reinforces the importance of combining infrastructure financing with governance reforms. Future development programmes could increasingly integrate competition policy, regulatory reform, anti-corruption initiatives and private sector development alongside traditional investment support to maximise economic returns.

Private-sector stakeholders face both opportunities and risks. More competitive markets will increase pressure on inefficient firms while creating significant opportunities for businesses that invest in productivity, technology, digital transformation and innovation. Companies that rely heavily on protected domestic markets may encounter greater competitive pressure as trade reforms advance, whereas efficient exporters and internationally competitive manufacturers stand to benefit from improved market openness and stronger business environments.

Looking ahead, the IMF concludes that sustainable economic growth across the Middle East and Central Asia will depend less on protecting industries behind tariff walls and more on building competitive, transparent and innovation-driven markets. Lower trade barriers, stronger competition policy, better governance and effective institutional enforcement together offer one of the region's most promising pathways to higher productivity, stronger private investment, faster technology adoption and rising living standards over the coming decades.