This Working Paper should not be reported as representing the views of the IMF.

a b s t r a c tThis paper first analyzes the impact of capital inflows on the real effective exchange rate for a sample of 42 emerging and developing countries over the period 1980-2006. The results from the pooled mean group estimator show that both public and private inflows are associated with an appreciation of the real effective exchange rate. Among private inflows, portfolio investments display the biggest impact on the appreciation -almost seven times that of foreign direct investment or bank loans -while private transfers have the smallest effect. The paper also shows that a more flexible exchange rate regime, measured by different indicators, could effectively dampen the real appreciation associated with capital inflows, supporting countries' competitiveness.

Firm productive performances in five Middle East and North African (MENA) economies and eight manufacturing industries are compared to those in 17 other developing countries. Although the broad picture hides some heterogeneity, enterprises in MENA often performed inadequately given the middle-income status of the MENA economies, with the exception of Morocco and, to some extent, Saudi Arabia. Firm competitiveness is a more constant constraint, with a unit labor cost higher than in most competitor countries, as well as investment climate (IC) deficiencies. The empirical analysis also points out how IC matters for firm productivity through the quality of infrastructure, the experience and education of the labor force, the cost and access to financing, and different dimensions of the government-business relationship. These findings bear important policy implications by showing which dimensions of the IC, in which industry, could help manufacturing in MENA to be more competitive in the globalization context.