The Middle East Region: Where Will Jobs and Growth Come From?

The 20 countries of the Middle East and North Africa region have a population of 486 million, a combined GDP of $3.7 trillion, and a GDP per capita of about $7,600.

The questions of politics and armed violence in this region, along with details of how COVID has affected this area, are both obviously important and also beyond my ken. Here, I focus on some of the economic issues that caught my eye in two recent overview reports.

One report is the Arab Human Development Report 2022: Expanding Opportunities for an Inclusive and Resilient Recovery in the Post-Covid Era (United Nations Development Programme, June 2022). The other is Promoting Inclusive Growth in the Middle East and North Africa: Challenges and Opportunities in a Post-Pandemic World, a collection of eight essays edited by Roberto Cardarelli, Mercedes Vera-Martín, and Subir Lall (International Monetary Fund, October 2022).

The Arab Human Development Report describes the fundamental economic challenge in a straightforward way:

Few Arab States have competitive private sectors, particularly for tradables, and the economies that are based on oil and gas are subject to highly volatile prices. The productivity of labour, much of it informal, is relatively low. The capacity of government institutions is generally weak. This persistent equilibrium of low growth–low productivity–low employment–low institutional capacity emerges from a social contract based on a deep-seated rentier state that favours the status quo and rejects truly transformative economic reforms.

The region’s well-known economic fragilities are not destiny, however. They can be corrected with a strong human development approach to tackle the region’s long-term structural challenges. Five priorities stand at the top of the agenda. First is to diversify and transform the Arab States region’s economies to reduce exposure to commodity cycles and macroeconomic volatility. Second is to boost growth to generate decent jobs for poor people and informal workers and for new entrants to the labour force. Third is to improve the investment climate and level the playing field for businesses, large and small, and investors, domestic and foreign. Fourth is to increase access to finance for women and smaller enterprises. And fifth is to pursue regional economic integration to expand markets and deliver regional public goods.

Both economic output and investment for the region continue to be dominated by the oil and gas industry. But that industry tends to be capital-intensive, rather than job-intensive. Thus, these economies have not had great success in creating formal jobs outside this sector. Again, from the AHDR:

Structural challenges in the labour markets of the Arab States region stem primarily from the strong divide between “good” formal jobs in both the public and private sectors and “bad” informal jobs in the private sector. This duality has been a direct consequence of the social contract adopted from the 1950s through the 1970s, based on a state-led model of industrialization. The resulting role of the public sector, including both government administration and state-owned enterprises, entrenched the preference for public employment due to its higher wages and nonwage benefits. This social contract began to fray in the 1980s, following exchange rate and budget crises that forced most oil-importing middle-income countries and fragile and conflict-affected countries to move towards neoliberal models of economic development.

The gradual decline of formal public sector employment in subsequent decades was not matched by an increase in formal private sector jobs, leaving new entrants to the labour market at a considerable disadvantage to older cohorts. … The collapse of the social contract has resulted in increased unemployment, as educated workers wait for good jobs, particularly in the public sector. … At 25.3 percent in 2019, unemployment has been particularly high among young people. Youth unemployment in Northern African countries was the highest in the world in 2019, at about 26 percent, and followed by the Arab Middle East, at about 23 percent. … Even more concerning, the share of young people in informal employment reached 87.8 percent in countries with data … The region has the world’s widest gap between young people and adults in formal employment, reflecting the deteriorating labour market conditions for young people, who face increasingly more difficult school-to-work transitions. … Young people who enter the labour market in informal jobs rarely transition to formal employment, regardless of education or experience.

In the IMF volume, Suchanan Tampbunlertchai, Monica Petrescu, and Mahdi Ansari dig into these issues in their chapter on “Fostering Private-Sector- Led Growth in the MENA Region: A New Role for the State.” They write:

The MENA region is at an important crossroad as the state- led growth strategy has begun to reach its limits. In the coming decade, over 100 million people will enter the MENA workforce. Meaningful jobs are vital for their inclusion in economic activities, ensuring their livelihoods, and preserving the social fabric. Strong state involvement may have been a mechanism for nation building in the MENA region in the past, but stagnating growth, high unemployment, and increased inequality in the region point to the need for a different strategy. The average annual total factor productivity growth during the last 10 years has been negative for many countries in the MENA region, and particularly low for oil producers …

Their discussion focuses on possible reforms that would affect state-owned enterprises in the region, many of which are gentle-sounding and obviously hard to do. For example, they suggest that state-owned firms publish financial reports on a regular basis and separate their commercial and non-commercial activities. “It is also important to subject SOEs to the same laws, regulations, and tax provisions that apply to their private sector counterparts, (including on public procurement).” They suggest clarifying red tape and rules, in part because it will reduce the scope for corruption and bribery: “Corruption also favors publicly owned firms: a third of private firms in the MENA region report being expected to give bribes to secure government contracts (compared to less than 10 percent of SOEs [state-owned enterprises]); and one in five private firms (vs. one in nine SOEs) are expected to give gifts to public officials for regular activities.” They suggest that improved access to banking and finance for private firms could matter a lot. They emphasize that a broad-based investment in transportation and communications infrastructure would have substantial spillovers for private firms.

In their chapter, Sidra Rehman and Agustin Velasquez discuss “The Changing Nature of Work: Improving the Functioning of Labor Markets. They point out:

The acceleration in automation and remote work presents both challenges and opportunities for the MENA region in the years to come. We find that its labor force is relatively more vulnerable to automation compared to other regions, but with differences varying across skill, gender, and sector. The overall vulnerability is attributable to the dominance of sectors such as construction and manufacturing—all of which are performed largely by occupations that tend to be routine and noncognitive in nature. The MENA region has not pivoted away from high levels of employment in low- and medium-skill occupations, which tend to be routine and non analytical in nature. This reliance is even more prominent in the private sector—a feature that may limit the region’s dynamism.

These authors suggest improving education levels, especially by thinking seriously about the sorts of skills employers of the region will need, along with moving labor regulation in more flexible directions. At present, the region is not especially well-prepared to shift to participate in the global markets for providing services digitally.

The practical and political difficulty of the transitions described here cannot be overstated. But it seems extraordinarily unlikely that the current path of the oil-and-gas industry, state-owned enterprises, and direct government employment can be the primary source for the future jobs that demographic trends tell us will be needed in this region.