Jobs, Growth and Governance in the Middle East and North Africa

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23 World Bank MENA Development Reports Jobs, Growth and Governance in the Middle East and North Africa Mustapha K. Nabli Chief Economist Middle East and North Africa Region The World Bank Brussels, February 16, 23

The 4 reports focus on areas of central concern to policy makers, researchers and outside observers: Unlocking the Employment Potential of the Middle East and North Africa: Toward A New Social Contract Better Governance for Development in the Middle East and North Africa: Enhancing Inclusiveness and Accountability Trade, Investment and Development in the Middle East and North Africa: Engaging the World Gender and Development in the Middle East and North Africa: Women in the Public Sphere 2

MENA s Employment Challenge Creating 1 million new jobs by 22 or doubling the current level of employment. In the next two decades the labor force will expand by 8 million new workers. The expansion of the labor force in the next two decades is equal to the cumulative increase over the period 195-2. Currently, the labor force is increasing by 4.2 million workers per year compared to 3.2 million in the 199s and 2.1 in the 198s. The current unemployment rate is around 15 percent affecting close to 2 million workers. 3

From Demographic Transition to Rapid Labor Growth MENA s slow demographic transition has resulted in the highest and most persistent labor market pressures anywhere in the world in the past half-century. 4 3.5 3 Labor Force Growth Rates by Region, 197-21 197-198 198-199 199-2 2-21 2.5 2 1.5 1.5 South Asia East Asia Latin America and the Caribbean MENA Sub-Saharan Africa 4

The Emergence of High Unemployment in the 199s Employment growth in the 199s fell short of labor force. Unemployment falls disproportionately on the youth. Unemployment rates tend to be higher for females. 35 International Comparison of Unemployment Rates 3 25 Percent 2 15 1 5 OECD MENA: GCC South Asia Latin America & the Caribbean Europe and Central Asia East Asia and the Pacific MENA: Non-GCC Sub- Saharan Africa 5

Unemployment (%) 35 3 25 2 15 1 Current Unemployment Rates in Arab Economies High Unemployment Rates in MENA countries 1999 1997 2 1996 21 1999 22 21 22 21 21 22 21 5 1999 23 UAE Kuwait Saudi Arabia Lebanon Egypt Oman Syria Yemen Qatar Bahrain Jordan Note: Data include most recent estimates available for each country; rates in GCC countries are for nationals only. Source: Compiled by World Bank staff from ILO and country sources. Tunisia Morocco West Bank and Gaza Algeria 6

Youth are especially affected: First-time job seekers: 9% of unemployed in Egypt; 2/3 in Yemen and UAE; more than 5% in Jordan and Morocco 1 9 8 7 First-Time Job Seekers Among the Unemployed Percent 6 5 4 3 2 1 Morocco 21 Jordan 23 Yemen 1999 UAE 2 Kuwait 1995 Egypt 2 Source: ILO 23b; except for Kuwait, Population Census 21; For Jordan, HES, 23. 7

Workers are increasingly educated and facing increasingly difficult job prospects Distribution of unemployed by level of education Percent of total Figure unemployed 4.4. Distribution of the Unemployed by Level of Education (percent) 8 None Primary Secondary Tertiary 7 6 5 4 3 2 1 Bahrain Oman Jordan Egypt Morocco Tunisia Algeria Djibouti Sources: ILO 22; except for Bahrain, ILO 23a; for Egypt ELMS, 1998; for Morocco, LSMS 1999. 8

Unemployment rates for women are 3% higher than for men 4 35 3 25 2 15 1 5 Unemployment Rates by Gender in Arab Countries (percent) Female Male Algeria 2 West Bank and Gaza 21 Jordan 2 Morocco 1999 Tunisia 1997 Bahrain 21 Qatar 22 Yemen 1999 Syria 21 Egypt 2 Lebanon 1997 Saudi Arabia 1999 Source: For Algeria, Jordan, Syria, Egypt, West Bank and Gaza, Yemen, ILO 23b; for Tunisia, INS 21; for Bahrain, Qatar, Saudi Arabia, Kuwait and UAE, Girgis, Hadad-Zervose, and Coulibaly 23; for Morocco, LSMS 1999; for Yemen, NPPS 1999. UAE 1999 9 Kuwait 23

Worker Productivity Growth Was Also Low in the 199s For the MENA region, productivity was the lowest among all other regions except for Eastern Europe and Central Asia. As a result, real wages increased marginally in a few countries. In most, they either stagnated or fell in the 199s. 8 Average Annual Growth of GDP Per Employed Person by Region, 199s 7 6 5 Percent 4 3 2 1 East Asia and Pacific South Asia High income / OECD Europe and Central Asia Latin America and the Caribbean MENA 1

Old modes of employment in the public sector in MENA fast dwindling Has depended upon Oil Aid Labor Remittances : diminished opportunities to GCC and Europe and all financial resources declining 11

GCC and MENA 12 1 8 6 4 Per capita oil exports, 198-2 Per Capita Oil Exports, 198 2 MENA (right axis) GCC (left axis) Non-GCC (right axis) 3 25 2 15 1 Non-GCC 2 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 12

Figure 1.5 Aid-to-GDP ratio in the M ENA region, 198 2 Aid to GDP ratio in the MENA region, 198-2 8. 7. 6. Percent 5. 4. 3. 2. 1.. 198 1985 199 1995 2 13

Worker remittances as % of GDP: Egypt and Morocco, 197-2 Percent 16 14 12 1 8 6 4 2 Egypt Morocco 197 1973 1976 1979 1982 1985 1988 1991 1994 1997 2 14

MENA Needs a New Development Model to unlock its potential From public sector dominated to private-sector driven, From closed and passive to more open and active, From oil dominated and volatile to more stable and diversified.. the challenge of job creation requires a comprehensive approach to reform. 15

The private sector in MENA remains underdeveloped 1 Private Sector Contribution to GDP in MENA (percent) 9 8 7 6 1995 1993 22 1985 1997 199 1999 1999 2 22 1985 1999 1983 1997 1995 5 4 2 199 21 199 2 2 3 2 198 1 Lebanon Egypt Morocco Jordan Iran Palestine Syria Tunisia Yemen UAE Algeria Saudi Arabia 16

Exports outside of oil have been limited $US Million 25 Trade Potential of Non Oil Exports, 2 Figure 1.15 Trade Potential of non-oil exports, 2 2 2 Million US Dollars 15 1 15 1 5 5 MENA1 ECA5 EASIA 3 LAC4 MENA 1 Europe and East Asia 3 Latin America Central Asia 5 Caribbean 4 17

3.5 3. Arab Non-Oil Export Potential Non-oil exports remain largely below potential 2.5 High performing countries 2. 1.5 1. Weak performing countries.5. Algeria Egypt, Arab Rep. Lebanon Syrian Arab Republic Arab9 Tunisia Saudi Arabia Jordan Morocco Iran, Islamic Rep. Colombia Argentina Brazil Russian Federation South Africa Note: Regression is based on 42 countries, but values for 8 low income countries, including Yemen, are not reported because of negative values. Arab9 = Algeria, Egypt, Jordan, Lebanon, Morocco, the Republic of Yemen, Saudi Arabia, Syria, and Tunisia. Turkey Guatemala Poland Bulgaria El Salvador Mauritius Bolivia Chile Jamaica Ecuador Slovak Republic Czech Republic Costa Rica Korea, Rep. Mexico Hungary Thailand Philippines 18 Malaysia

Oil has dominated development affecting growth but not producing jobs Figure 1.2 Real oil prices and growth, 1976 99 Real oil prices (left) and GDP growth (right) Real oil price (dollars per barrel) 5. 4. 3. 2. 1. 16 14 12 1 8 6 4 2 GDP Growth (percent). 1976 1981 1986 1991 1996-2 Real oil Price GDP grow th 19

These Economic Transitions Require Three Fundamental Transformations Reducing governance gaps in inclusiveness and accountability Promoting greater participation of women in economic activity, in order to utilize all their potential/talent Improving the quality of educational outputs which meet the needs of the new economy 2

Indicators of governance are well under potential in MENA 2 Figure 6.9. Governance and Per-Capita Income in MENA MENA Index of Governance Quality 1-1 Rest of the World MENA Trend Rest of the World Trend Average MENA gap in quality of governance -2 6 8 1 Log of Per Capita GDP Source: Per capita GDP, WDI 22; governance quality, World Bank 23a. 21

Better Governance Can Not Wait A vigorous state role in improving public administration is essential to establishing the conditions that will permit economies to grow. Governance reforms are needed to enhance the investment climate required for the emergence of a vibrant private sector. Governments need the institutional and regulatory instruments to manage the difficult process of transition under conditions of vulnerability. Governance reforms are essential to permit governments to credibly articulate and realize a new vision of state society relations. 22

Participation of women in economic activity is also well below potential 2 1.8 1.6 MENA 198 MENA 2 Non-MENA 198 Non-MENA 2 1.4 Actual / Predicted 1.2 1.8.6.4.2 Morocco Kuwait Tunisia Egypt Algeria Syria Iran Bahrain Jordan Iraq MENA LAC4 India Turkey ECA2 EAP4 China AFR4 23

Understanding the Obstacles of the Past Is Critical Soft budget constraints: External revenues cushioned the impact of economic stagnation and permitted governments to adopt limited reforms while postponing difficult decisions. Political challenge from radical movements meant that economic and political reforms were de-linked as governments responded by reviving political control and national security concerns. As a result, top-down management of Reform by Decree replaced earlier efforts to generate support for economic reform by opening the political arena. 24

Moving the Reform Process Forward requires From the countries of the region a change from the selective, top-down approach to economic reform that sidesteps the need for political change to secure the legitimacy of reform and government credibility, which is no longer adequate. Governments will need to revive national conversations about the restructuring of redistributive programs and a redefining of the terms of the social contract. 25

. And from external partners Rethinking the response to persistent conflict in the region. Multilateral efforts are needed to resolve the Israeli Palestinian conflict and return Iraq to a state of normalcy. Determined and programmatic efforts to support the wide-ranging reform agenda, going beyond the transaction specific support To support deeper integration of MENA into the world economy, encouraging more trade and investment, and lifting economic sanctions. 26