Over the next decade, the Middle East and North Africa (MENA) faces the challenge of creating 40 million jobs for its youth with an estimated 10.7 million new entrants expected to join the labor force. With nearly one in five people between the ages of 15 and 24, the region has one of the youngest populations in the world. Caroline Freund, MENA Chief Economist, notes that the employment response must be well above average to employ the current and future jobseekers.
Policymakers in the region are increasingly looking to the private sector to address MENA’s employment challenge. Speaking on behalf of Arab Governors at the recent World Bank/IMF annual meetings in Tokyo, Qatari Economic and Finance Minister Youself Kamal said: “We see the private sector as the main driver for future growth and the key to realizing the region’s potential for robust and sustained job creation, technological innovation, and regional economic integration that are urgently needed.” But for this to happen, the region needs to retool its business environment.
MENA’s upcoming Flagship Report on Jobs makes an urgent case for greater private sector employment in the region. But multiple factors pose a challenge: Informal employment in MENA (67 percent of the workforce) is higher than other middle income regions, such as Latin America (61 percent) and Europe and Central Asia (40 percent). Many jobseekers in MENA also gravitate towards the public sector, which has limited productivity, but offers highly desirable working conditions. Over 30 percent of the region’s youth would prefer to work in the public sector (see figure 1). With respect to gender, three out of four working-age women do not participate in the labor force and constitute 80–90 percent of MENA’s inactive population. The result is a labour market characterized by informal low-paid work on one side and a bloated public sector work force on the other.
Furthermore, crony capitalism which has, in many cases, actively discouraged competitive pressures from both international and domestic sources, has also resulted in stunted private sectors, producing a non-diversified basket of goods, generally with a low technological content. Putting in place the conditions for the expansion of private sector firms – particularly innovative micro, small, and medium enterprises (MSMEs) – can help address the inequality and inefficiency of the labor market in MENA.
But constraints facing private sector growth are significant. As a measure of the business enabling environment, only 6.3 businesses in the region are formed every year for every 100 people seeking employment, compared to 42 in high-income countries. This represents one of the lowest start-up rates worldwide. In the Doing Business rankings, the Arab world as a whole, earned a composite score equivalent to that of the 98th country in the rankings. MENA ranked last in the legal rights index for getting credit. Similarly, access to finance for MSMEs is highly constrained. A recent MENA survey shows SME lending accounts for only 8% of total lending in the region, held back by an underdeveloped regulatory environment, deficient financial infrastructure, and concentrated banking systems that have little to no incentive to lend to MSMEs. Of the total estimated financing gap of $320-390 billion for MENA, 83% of the finance gap pertains to formal SMEs.
In fragile and conflict-affected situations in MENA, job creation, particularly for youth, is an even greater socio-economic priority with potential impact on national security and stability. In the 2011 World Development Report on Conflict, Fragility and Development, it was recognized that low GDP per capita and unemployment are major drivers of conflict – a fact underscored by the events of the Arab Spring – while job creation can contribute to stability and confidence building. This is supported by survey data cited in the report. Asked for the reasons why young people join rebel groups or gangs, the biggest share of respondents indicated unemployment as the main reason. The report asserts the need for early projects to create jobs through the private sector during recovery, "Especially if creating jobs and incomes is to out-last donor-funded, short-term emergency works." Such early projects may require a different design and focus, particularly in situations where business confidence is weak and private sector activity has been undermined by disrupted markets and insecurity.
The Road Forward
The way forward has to be a conducive investment climate which promotes both competition and innovation. Investments in the innovation and business eco-system - skills, training, finance, support services and external linkages for firms to expand and flourish - are all urgently needed. This can be done through strengthening business incubation services, providing targeted skills training and nurturing SMEs in value-adding technology and innovative industries. On the business enabling environment, regulators also need to simplify procedures to start a business, register property, access permits, enforce contracts, and hire workers.
Young people in MENA have relatively high levels of education so programs that bridge the gap between labour supply and demand in value-adding industries should yield handsome dividends. And of course, no business will grow without financing. This means investors dedicated to funding start-ups and very-fast-growing MSMEs in the form of angel finance, seed finance, and venture capital. It also means investing in financial infrastructure such as credit guarantee schemes and credit bureaus, improving the competition and efficiency of banks, and developing financial inclusion strategies that explicitly target the MSME sector.
This is a big list but all do-able. All urgent. And a key to realizing the potential of MENA’s youth.
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 was in preparation for the World Bank Annual Meetings in October 2012, where the report's main messages and the results of the live chat were presented to MENA policy makers.
Global Arab Network: by Peter McConaghy Peter works as a financial sector analyst (JPA) within MENA FPD where he steers the unit's financial inclusion work and provides analytical support for senior staff members. Prior to joining the Bank, Peter worked as a business development officer at the First MicroFinanceBank in Dushanbe Tajikistan and was the lead researcher and contributing author on the New Microfinance Handbook (World Bank Publications; Dec. 2012). Peter holds an M.A. in international economics and international development from Johns Hopkins SAIS. A native of Canada, Peter enjoys traveling, learning new languages, and fitness.
(© 2012 The World Bank Group