Job Creation Requires Labour Reform
A Commentary by Masood Ahmed, Director, Middle East and Central Asia Department, International Monetary Fund
Published in Financial Times online, October 27, 2010
Having weathered the great recession better than most other parts of the world, the emerging market countries of the Middle East and North Africa (MENA) are seeing trade and economic growth recover to pre-crisis levels.
This is no cause for complacency, however: these countries are still falling further behind in the race to create enough jobs for their young and fast-growing populations. Creating more jobs, more quickly, will in turn require an acceleration of economic growth.
Unlike many emerging markets, the region's oil-importing countries saw only a mild slowdown in economic growth last year to 4.5 per cent. This was due, in part, to the relatively conservative international portfolios of their banks and to the speedy and sensible policy responses of their governments. They were also helped by increased government spending in their oil-producing neighbours, with whom they have growing trade, investment and expatriate labour links.
This year, MENA oil importers are likely to see growth nudge up to about 5 per cent. However, as the International Monetary Fund's October Regional Economic Outlook for the Middle East points out, these countries need to grow at an average of 6.5 per cent a year to create the 18m jobs needed to absorb labour-market entrants and eliminate chronically high unemployment over the next decade.
Where will this growth come from? In a world of shifting economic tides - in which the Middle East's traditional advanced-economy export markets are suffering sluggish growth - the region must seize the opportunities offered by rising middle-classes elsewhere, especially in Asia.
Recent years have witnessed a renewal of economic ties between the two regions and produced some success stories in trade and investment in energy, infrastructure and manufacturing. But MENA exports remain oriented toward Europe, and Asian markets are a formidable force to contend with.
Aside from raw material sales, MENA countries have often found it difficult to compete with lower-cost Asian producers, especially in areas such as textiles and other basic manufacturing. As such, the task is to invest in the region's vibrant labour force - the young and unemployed - to raise their productivity and change their skills to match the demands of private-sector employers. With a trained and energised labour force, economies will find it easier to find new niches and switch to more sophisticated products.
Much also remains to be done to buttress the efficiency of labour markets. Labour laws are often overly rigid and discourage employment. In many countries, a dominant public sector attracts many of the most qualified graduates, but also serves as a safety net for those who cannot find jobs elsewhere, often at wage levels well above those for comparable private-sector work. Government pay scales should differentiate across skills within a framework of overall wage and hiring restraint; and education will need to realign curriculums closer to private-sector demands.
These reforms should accompany a transformation of burdensome regulations and weak institutions, which inhibit job-creating, private-sector activity. While countries in the region have made substantial progress, according to the World Economic Forum's Global Competitiveness Index, only some Gulf Co-operation Council countries outrank the average for emerging Asia. Among the oil importing nations, only Tunisia comes close to matching that average.
But being competitive also requires MENA countries to establish sophisticated transport, communications and financial services that will allow them to integrate into the global supply chain and, thereby, tap new export markets.
Dubai, for example - notwithstanding the fallout from its reliance on large-scale, highly leveraged property development - has transformed itself into a dominant regional hub for international trade and services by setting up a cutting-edge logistics industry, and thereby multiplying the emirate's gross domestic product.