By Nemat Shafik
(Version in عربي)
I’ve been in Jordan this weekend, attending a vibrant meeting of the World Economic Forum on jobs and growth in the Middle East. I participated in a panel on employment with Queen Rania, and I’d like to share some of the ideas generated during that discussion and at the meeting more generally.
The atmosphere was both cautious and optimistic—cautious because of the growing risk of the downturn in advanced economies (particularly Europe) spreading to the region, and optimistic because of the recent political gains in both Libya and Tunisia in particular.
One of my biggest (and heartening) takeaways was that there were more young people bubbling with ideas and entrepreneurial spirit (ready to take risk) than ever before at this regional forum—which reflects a growing recognition of their current role in the Arab Spring and the role they will have to play in the future as drivers of economic change.
Creating jobs for the young and growing population in the Middle East and North Africa remains the dominant topic. Here on the Dead Sea, it’s jobs, jobs, jobs that are still on everybody’s mind. And it’s clear that there’s a tension between the high hopes for a better future in the long term and the impatience and frustration with difficulties and challenges in the short term.
Need for a better business climate
Building a better climate for business and trade that will help create jobs is essential for improving growth in the region. Governments must put employment generation at the center of policy by removing obstacles to job creation such as excessive regulation. Creating a stable economic environment in which the private sector can grow and create opportunities, particularly for youth, is vital. About a quarter of young Arabs are unemployed, and the statistic is even higher among women. This costs the region about $ 15 billion.
Burdensome regulations, exemplified by stringent labor rules, excessive labor costs—such as minimum wages that exceed productivity, and high severance pay—and high taxes tend to raise the cost of operating in the formal economy in several countries across the region, and hence drive firms to the informal sector where they can avoid such costs. Since Tunisian street vendor Mohamed Bouazizi set himself on fire that fateful day in December last year in protest against the arbitrary confiscation of his wares, street demonstrations have highlighted the high unemployment, hikes in food prices, and unequal access to economic resources that have hampered growth in parts of the region and fostered discontent.
Making the Middle East and North Africa more business friendly is not beyond reach. In fact, there are numerous success stories within the region itself.
A number of countries have established “Smart Villages” or “Education Cities” where entrepreneurs find modern infrastructure and face simplified regulation and low taxation. Others have established a base in services such as tourism and call centers. In some cases, such improvements have also succeeded in attracting foreign direct investment from global companies, including those in high-tech sectors such as information technology and aeronautics. And all of these new businesses have created jobs, directly and indirectly.
But more is needed to spread the benefits widely, to add training, curb corruption, and provide the right incentives.
In the years leading up to the Arab Spring, there was an increasing sense that business environments were unfair, set up to benefit a privileged few. To succeed, the region’s economies now need a vision not hijacked by crony interests. Public institutions have to be reformed to become effective and pro-business. Corruption has to be tamed by enforcing oversight rules to make all actors more accountable.
The region also needs to focus on improving its economic governance. An agenda to do this should include the strengthening of public institutions, both fiscal and financial; modernizing regulatory institutions to improve the business climate and level the playing field for private sector participants; improving the delivery, coverage and cost effectiveness of social protection; and enhancing the quality and dissemination of information and statistics.
Governments can create more room in budgets by making costly subsidies more efficient. As we’ve argued, the best way to do this is to reduce generalized subsidies—which disproportionately benefit the better offer—and replace them with well-targeted safety nets to protect the most vulnerable.
Access to markets
Countries in the Middle East and North Africa have been trading far below their potential. One explanation is that trade policies in some of these countries are among the most restrictive in the world. Many countries in the region have tariffs almost twice the size of those in emerging Asia.
And despite geographic proximity, countries such as Egypt, Jordan, Morocco, and Tunisia have lagged behind others in trade integration with Europe. These countries face significant problems with access to European markets, which has resulted in weak export performance and sluggish growth. They could also forge closer ties with new trade partners in the fast-growing emerging markets.
We’d welcome reactions from readers in the Middle East, particularly from entrepreneurs from the region. Give us your thoughts on the way forward and what should be the priorities. Looking forward to your ideas.