Middle East and North Africa facing unprecedented employment challenge, says World Bank report

As the region's increasingly-educated and young populations complete their schooling, its already strained labor markets, with unemployment rates averaging 15 percent and a labor force growing at more than 3 percent annually, are facing a daunting test. The report says that to meet this employment challenge—unseen anywhere in world in the past fifty years—the region's countries must reinvigorate the private sector, integrate into the global economy, and better manage oil recources. To fuel these economic reforms, a new "social contract" between the governments and their citizens is needed, according to the report.

"In no small measure, MENA's economic future will be determined by the fate of its labor markets," says Christiaan Poortman, World Bank Vice President for the Middle East and North Africa. "The challenges to be overcome are enormous; their complexity is enormous. Yet the costs of inaction and the benefits of dynamic labor markets underscore the imperative of acting quickly and decisively."

The report Unlocking the Employment Potential in the Middle East and North Africa: Toward A New Social Contract is the fourth and last in a series of reports highlighting the development challenges facing the MENA region. The studies are being launched ahead of the September 23-24 Annual Meetings of the IMF and the World Bank in Dubai, the first such gathering to take place in the Arab world. Bringing together finance and development ministers from 184 countries, the meetings will discuss the state of the global economy and address challenges facing the developing world.

In 2000, notes the report, MENA's labor force totaled some 104 million workers, a figure expected to reach 146 million in 2010 and 185 million by 2020. Creating work for today's unemployed workers and future, first-time job-seekers will require nearly 100 million new jobs over the next two decades. This is much more than the number of jobs created in the region during the past fifty years.

Already half the region's young people find themselves without work, with youth making up a big chunk of the total unemployed, ranging from 37 percent in Morocco to 73 percent in Syria. Most of the young unemployed have intermediate or advanced education and are on the lookout for a steady government job with benefits. Unemployment rates are low for those with no formal education who are not eligible for jobs in the public sector.

While more and more women are getting employed, they remain vulnerable, reflecting limited opportunities and restrictions on their role in the public sphere. Unemployment rates for the region as a whole are nearly 50 percent higher for women than for men.

Real wage levels may seem somewhat flexible, shrinking in times of slow growth. But the dominant role of government as employer leads to a rigid wage structure that distorts labor market incentives. The public sector rewards formal education, which encourages government workers to collect academic degrees even if they do not necessarily help boost productivity and remain undervalued by the private sector.

From Demographic Burden to Demographic Gift
Though annual population growth in the region has slowed to 2 percent, the region's population is still increasing by 6 million people every year. It is safe to conclude, however, that the era of high population growth is over and that population growth rates will continue to slow.

"As a result, the maturing of MENA's age structure has placed the region in a unique position at the dawn of the 21st century," says Tarik Yousef, the report's principal author. "Between 1990 and 2020, the growth of the economically-active population—those aged 15-64—will exceed that of the economically-dependent population by a much greater rate than in any other region. As East Asia's experience has shown, this differential—the so-called demographic gift—offers MENA an opportunity to accelerate economic growth."

Spurring Far-Reaching Economic Reforms
The report says MENA's employment challenge calls for a comprehensive approach to reform. It stresses that the priorities and sequencing of reforms will vary across countries—depending on country-specific conditions such as resource endowments, reforms to date, and quality of institutions.

Labor market reforms are clearly needed, says the report. Private-sector jobs are far and few between; the government continues to dominate labor markets. Although fairly effective in reducing poverty, government employment is an inefficient safety net since most of the benefits go to educated workers who are usually not poor. Governments can make public-sector jobs less attractive by cutting perks while encouraging private-sector job creation.

But while labor markets reforms are necessary, they are not sufficient. Unlocking the Employment Potential in the Middle East and North Africa: Toward A New Social Contract, along with the three accompanying World Bank reports on trade and investment, governance and gender, argues that to boost job creation and growth the region's countries must tackle long-standing policy and institutional challenges aimed at spurring three fundamental and interrelated changes in their economies:

• From public-sector-dominated to private-sector-dominated, by reducing barriers to private activity while creating regulatory frameworks to ensure that private and social interests are mutually reinforcing;

• From closed to more open, by smoothing the integration into global markets while putting in place safeguards for financial stability and social protection.

• From oil dominated and volatile to more stable and diversified, by making fundamental changes in institutions managing oil resources and their intermediation to economic agents.

Better Governance Is Central to the Transition
The report argues that reforming MENA's economies hinges on the credibility of government and the capacity of state institutions to manage a complex, long-term process of change. That is why broader governance reforms are key to permitting MENA governments to credibly spell out and realize a new vision of state-society relations. To move forward, says the report, governments must link economic performance to governance quality.

The government's role in the economy needs to be redefined. It should support the private sector in creating and sustaining jobs. And an active state role in improving social services, especially health, education, and social security, is essential to establishing the conditions that will let workers thrive and economies grow at healthy rates. Governments should streamline administration of social programs to overcome dysfunctions in labor markets and to protect workers during economic transition.

Needed : a New Social Contract
The report goes on to argue that the implementation of such a wide-ranging reform agenda calls for a new social contract that can inspire and drive ahead the reform process.

For the first three decades after World War II, the "old" social contract—emphasizing redistribution and equity, and states over markets—helped spur economic growth while keeping income inequality low. Mortality dramatically declined, life expectancy increased, school enrollment surged, and literacy levels rose.

But over time, gaps widened between institutional arrangements and expectations on one side and the diminished capacity of governments to deliver welfare on the other side. By the early 1980s the inability of the MENA social contract to sustain the economic gains of previous decades became clear, and by the late 1980s, the strains had grown into a major economic crisis. Causing the economic difficulties were declining oil prices, shrinking demand for migrant labor, reduced remittance flows, and declining productivity. In response, governments launched reforms, which helped reduce debt levels and curb inflation.

"But implementation of these reforms have been uneven, hesitant, and incomplete," says Mustapha Nabli, Chief Economist for the Middle East and North Africa region at the World Bank. "Partly as a result, MENA's economic recovery in the 1990s was generally weak. In the past 15 years, labor productivity has remained low, unemployment rates have increased and GDP growth per capita has averaged 1 percent a year. The rigid, exclusionary, and inefficient aspects of the 'old' social contract need to be restructured."

This new social contract must couple political and economic reforms, says the report. The selective, top-down approach to economic reform that sidesteps the need for political change to secure the legitimacy of reform and the credibility of government commitments is no longer adequate. To move the reform process beyond its current limits, governments will need to breathe life into national conversations about labor market reform, restructuring welfare programs, and redefining the terms of the social contract. The report says that with large middle classes in MENA societies, the revival of political life—once again a prerequisite for economic growth—is possible.

"Reforms will not be credible unless they take into account the social needs of workers and ensure that economic outcomes are socially acceptable among MENA's citizens," says Yousef. "This requires a renewed political commitment to widely valued social policies—a new social contract that links reform to the principles of poverty reduction, income equality, and security that have guided MENA's political economies for almost 50 years."

Though the main responsibility for reforms lay with MENA, external partners can help by opening their markets to products from the region, encouraging more intra-regional trade, boosting aid, and helping resolve the conflicts that continue to blight the region.