How Stronger Competition and Lower Tariffs Can Unlock Faster Growth in Middle East and Central Asia

An IMF study finds that stronger competition, lower trade barriers, and better governance significantly improve productivity and long-term economic growth across the Middle East and Central Asia, while high tariffs and weak competition increase market power and slow economic progress. The report urges governments, development partners, and businesses to prioritize competition reforms, institutional strengthening, and market openness to accelerate investment, innovation, and sustainable private-sector-led growth.

Prepared by researchers Walid Faris, Etibar Jafarov, and Umang Rawat, a new International Monetary Fund (IMF) Working Paper combines data from the Bureau van Dijk Orbis database, the World Integrated Trade Solution (WITS), the Bertelsmann Stiftung Transformation Index (BTI), the World Bank, and the IMF to examine how competition, trade policy, and institutions shape economic performance across the Middle East and Central Asia (ME&CA). Covering 517,972 firm-year observations from 135,876 firms across 13 economies between 2002 and 2021, the study concludes that stronger market competition, not just higher investment, is essential for improving productivity, attracting private investment, and achieving long-term economic growth. The findings arrive as many countries in the region are pursuing economic diversification, industrial expansion, and private-sector-led development.

Competition, Not Protection, Drives Stronger Economies

The report finds that many industries across the region continue to operate with limited competition. Mining, finance, real estate, and several service industries show consistently high market power, allowing firms to maintain higher prices with limited competitive pressure. More importantly, manufacturing, often considered the engine of economic growth, has also experienced rising market power, particularly in the Caucasus and Central Asia (CCA).

One of the study's strongest findings concerns trade policy. Researchers estimate that every 1% increase in tariffs raises sectoral markup growth by around 0.9 to 1.4 percentage points over five years, suggesting that higher import protection allows firms to increase prices instead of improving efficiency. While tariffs may temporarily protect domestic industries, they also reduce competitive pressure, slowing innovation and making firms less prepared to compete globally.

For governments promoting import substitution or local manufacturing, the message is clear: protecting industries for too long can weaken competitiveness rather than strengthen it.

Better Institutions Deliver Better Markets

The research shows that institutional reforms are just as important as trade reforms. Countries with stronger competition laws, effective anti-corruption measures, better protection of private businesses, and independent competition authorities consistently experience lower market power.

According to the study, a one-point improvement in the BTI Competition Policy Index reduces five-year sectoral markup growth by about 3.4 to 3.8 percentage points. In simple terms, better enforcement of competition rules creates fairer markets where businesses compete through innovation and efficiency rather than political influence or market dominance.

The findings also highlight differences across the region. Gulf Cooperation Council (GCC) countries generally perform better on market institutions and trade openness, while several Middle East and North Africa (MENA) economies continue to face administrative barriers and weaker competition frameworks. Central Asian economies have made progress but still require stronger regulatory institutions to sustain private-sector growth.

Higher Competition Means Faster Productivity and Growth

The economic benefits of competition are substantial. Firms operating in competitive industries become more productive because they invest in technology, improve management practices, and use resources more efficiently.

The report estimates that a 1% increase in market power reduces firm-level productivity growth by around 0.07 to 0.09 percentage points, with the impact even stronger in Central Asia. At the national level, the effects are equally important. A 10% increase in sectoral markups reduces GDP per capita growth by approximately 0.08 to 0.09 percentage points within two years. Although these numbers appear small annually, they accumulate over time, slowing income growth, job creation, and economic resilience.

The study also finds that manufacturing has much larger productivity gaps than services, meaning advanced technologies and best business practices spread more slowly across factories. This limits industrial competitiveness and reduces the returns from public investment in manufacturing.

A Roadmap for Governments, Development Partners and Business

For policymakers, the report recommends shifting the focus from protecting industries to creating competitive markets. Reducing unnecessary tariffs, strengthening competition authorities, simplifying business regulations, improving judicial systems, protecting private enterprise, and increasing transparency in public procurement can deliver stronger long-term economic gains than prolonged protectionist policies.

International development partners, including the World Bank, Asian Development Bank, European Bank for Reconstruction and Development, Islamic Development Bank, African Development Bank, UN agencies, and bilateral donors, can use these findings to expand support beyond infrastructure financing. Technical assistance for competition policy, governance reforms, regulatory modernization, and digital public services could generate lasting productivity improvements while making economies more attractive to investors.

For private-sector stakeholders, the study presents both opportunities and challenges. Businesses that invest in innovation, technology, digital transformation, and operational efficiency will benefit from more open and competitive markets. However, firms relying on regulatory protection or limited competition may face increasing pressure as reforms advance.

Overall, the IMF study argues that competition should be viewed as a core development policy rather than simply a regulatory issue. Stronger competition, supported by better institutions and more open trade, can raise productivity, encourage innovation, improve investment quality, and help Middle East and Central Asian economies achieve faster, more inclusive, and sustainable economic growth.