Demographics drive reform in the Middle East

Demographics and diversification. These are the two biggest issues facing the Middle East. The two are closely linked.

In most countries in the region more than half of the population is under the age of twenty. As the oil boom baby boomers begin to look for jobs the labour force is set to grow at annual rate of 4-6% until 2020. Jordan for example must create over 40 thousand jobs a year, equivalent to 1% of its population.

To do so the region will have to turn away from its traditional strength of oil and diversify its economic base. The strains are already emerging.

Unemployment, unknown a decade ago, is rising and living standards are falling. Even in the oil rich Gulf per capita GDP growth has stagnated. The
region's traditional drivers of growth are unable to create sufficient productive employment.

The oil sector is capital intensive and labour light. The public sector cannot afford to remain as the employer of last resort. Spiralling wage bills have led to deficit financing and increasing levels of public debt.

However there are important exceptions. The UAE stands out. Twenty years ago the energy sector accounted for 60% of the UAE's GDP, in 2002 it was 21%. This is critical for the country's young population.

The IMF estimates that the UAE's private sector creates ten new jobs for every local entrant into the labour market. What is significant is that
diversification has occurred despite the country's vast oil reserves, which at current rates will last another 100 years.

The UAE has been able to develop a thriving and dynamic private sector alongside its oil industry and has avoided the 'resource curse' that befalls many other oil rich countries.

Other countries have taken note and begun to develop similar non oil sectors. But the lesson from the UAE is not what sectors to develop, but how to develop them.

The UAE's success has been through liberalising its business environment, eliminating bureaucracy and trade restrictions, and attracting private sector investment.

This may not sound like much but in a region where it takes an average of 1.5 years to connect a phone line it can be remarkably powerful. But it may also not be enough.

Job creation also needs to be matched by providing the population with the right skill set. Developing human capital across the region will be just as important as providing the right conditions in which it can flourish.