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Why jobless? The growth pattern

Caroline Freund's picture
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This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs.

Kim Eun YeulHigh unemployment in the Middle East and North Africa (MENA) largely reflects the growth deficit.  While China has been growing at 10 percent for a decade and has unemployment below 5 percent—MENA is the mirror image, growing at 5 percent and suffering unemployment above 10 percent.

The absence of strong growth in MENA has been a serious constraint to employment. It's worth noting though that MENA’s employment situation is not accurately described by the jobless growth that has plagued much of the industrial world in recent years. Rather it largely is a result of insufficient growth. In fact, the response of job growth to income growth in MENA is in general relatively high.

One issue is that MENA’s labor force is growing rapidly, so in order to employ all the new young jobseekers, growth would have to be much higher or the employment response to growth would have to be well above average.

How can this happen?  Growth could be higher if resources were used more effectively. Employment’s response to growth could increase if there were relatively greater incentives for growth in employment creating sectors.  A number of opportunities to stimulate growth and employment are underscored in the forthcoming MENA jobs report.  My three top choices (going beyond standard ingredients, such as the need for macro stability) are:

Remove input price distortions.  Energy and labor are both inputs into production.  The high energy subsidies prevailing in many countries imply that energy is a relatively cheaper input than it is elsewhere in the world, and that firms may prefer to use subsidized energy in place of taxed workers.  This leads countries to specialize in sectors and production processes that are relatively energy intensive.  Such subsidies are therefore a major distortion in countries rich in human resources: they retard growth by using resources inefficiently while limiting the labor response to growth.

Incentivize the private sector.  Despite being low productivity, the public sector is still the main employer in MENA, with the private formal sector accounting for a paltry 10 percent of employment on average.  This sucks resources out of their most productive uses, retarding growth and employment creation.  Fast growing young private firms and large enterprises are typically the big job creators in an economy.  But growth in these firms is constrained in MENA by a weak business climate coupled with incentives for jobseekers to prefer public sector.

Manufacture more. Employment elasticities of manufacturing are much higher than of resource extraction and a large body of literature finds that growth accelerations are accompanied by manufacturing surges.  In other words, manufacturing creates both jobs and growth. In MENA, however, manufacturing contributes less than 10 percent to value added growth, with natural resources above 20 percent on average.  This compares poorly to the 15-25 percent for manufacturing and less than 10 percent for natural resources in countries like Turkey, Malaysia, and Indonesia.  In addition to private sector growth highlighted above, manufacturing requires a competitive exchange rate and openness to trade and foreign investment that has for the most part been absent in the region.

Growth and employment creation in MENA are about channeling the tremendous wealth in human resources into productive uses.  Labor policies alone will therefore do little to solve the unemployment problem because a number of other distortions prevent workers from being employed efficiently.  Incentivizing labor-intensive private sector employment—as opposed to current incentives which encourage excessive fuel use and public sector employment—is fundamental.

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This blog is part of a weekly series that we hope will provide some food for thought on the critical questions outlined in the forthcoming MENA Flagship Report on Jobs. The common thread and objective of these blogs are to spur a conversation on “what to tell your Finance Minister.” This is in preparation for the World Bank Annual Meetings in October 2012, where the report's main messages and the results of the live chat will be presented to MENA policy makers. We want to know what YOU think is holding people back, and what can be done to create more and better jobs in MENA. Please send us your thoughts and join us for a live web chat on jobs on September 17.

Read the previous weeks' blogs in the series:

 

  • Let’s have a conversation about what exactly I should tell your Finance Minister
  • Why jobless? Privilege not competition in the Private Sector
  • Is working a privilege in the Middle East & North Africa? Who is most affected by MENA’s Joblessness Trap?
  • Is being employable enough to get a job in the Arab World? The double transition from education to work in MENA
  • Governance and Public Sector employment in the Middle East and North Africa
  • Comments

    Submitted by Anonymous on

    Dear Caroline,

    Your hypothesis that high unemploymeent largely reflects the growth deficit is not true for some countries. Take Jordan. Coincidentally, the World Bank concluded to the opposite in its report “Resolving Jordan’s Labor Market Paradox of Concurrent Economic Growth and High Unemployment”, Report No. 39201-JO, 2008.

    Jordan’s annual GDP growth increased from 3.5% during 1996- 2000 to 6% during 2000-05. In 2009 around 180,000 Jordanians were unemployed, while more than 335,000 non-Jordanians were working in the kingdom. Between 2001 and 2005, an estimated 200,000 jobs were created but 63% of those were filled by non-Jordanians. While there is demand for labour, most job vacancies are either filled by migrant workers or remain unfilled. As SOAS put it "this implies that increasing economic growth per se would not succeed in reducing unemployment in Jordan." http://www.soas.ac.uk/cdpr/publications/dv/dv65.html

    I have been involved in development assistance in this region for more than 15 years. The Middle East and North Africa is composed of countries with very different social and economic fabrics and root causes for unemployment are hence very diverse.

    In the 2000's, the international donor community failed to recognise this diversity and failed to bring about sustainable social and economic development to the region as some donors ackowledged it following the Arab Spring. But some still have a tendency to consider the MENA as a monolithic block. It is high time to shift from one-size-fits-all approaches to country-based strategies.

    Regards, Olivier

    Submitted by Caroline Freund on

    Dear Olivier,

    Thank you for your comment.

    I fully agree that each country in the region has unique social and economic factors and as a result the constraints to employment growth are more complex than growth alone, and assistance requires country specificity. But there are also many similarities among countries in the region that cannot be overlooked, and insufficient growth over a long period is among them.

    Growth was reasonably strong in Jordan in the early 2000s after a slow period in the 90s, and in fact unemployment reflects this. Specifically, unemployment fell from 16 percent at the beginning of the new millennium to under 12½ percent in 2004. But, even in this period of seemingly high growth in Jordan and in MENA as a whole, growth lagged well behind other similar countries.

    In particular, growth in MENA and Jordan of around 6 percent does not compare favorably with growth in the developing world, which averaged close to 8 percent before the financial crisis. And on a per capita basis the gap is even more extreme. So while each country has unique employment issues (such as migration in the case of Jordan) that are important, the lack of strong and sustainable growth has been a broad concern with negative consequences for employment in the region.

    This does not negate your view on the importance of a country-specific work, as the constraints to growth also vary across countries, though again there are some similarities that help tease out important issues.

    Submitted by RG on
    What is a job. That needs to be better understood. Being productively occupied is a better concept for me.

    Joblessness results when lifestyles change. When people migrate from rural to urban locations. The urge to 'enjoy' a city lifestyle encourages migration and often results in joblessness and in undignified jobs and in exploitation. Results in congested cities and accompanying problems. How do we control that.

    One type of job creation is what large corporations offer. These are almost always in cities. Jobs in a city usually bring humans and machines together. Humans become skilled in pressing buttons and lose basic skills.

    Another could be when rural people become self sufficient and adopt/ continue a community lifestyle. This is environmentally and economically sustainable, is not resource intensive and keeps people happy and sensitive and less prone to extreme thoughts and behaviour. Can we make a contribution here? Ca these opposing approaches be balanced.

    Could be relevant for MENA which is a region undergoing a lot of lifestyle change.

    The challenge for us is that engaging at a community level needs small initiatives which are not bound by the uniformity and bureaucracy of national programs delivered by governments bound by budgets and targets. And that is a model we are not fully geared for.

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