Unemployment in the MENA region deconstructed
The Middle East and North Africa region (MENA) has been growing at five per cent and suffering from unemployment of above 10 per cent in recent years, says Caroline Freund, World Bank chief economist for the MENA region, emphasising that this unemployment is largely due to insufficient growth. Growth could be higher if resources were used more effectively, she told Al-Ahram Weekly in an online interview, also giving further tips on how to combat the region’s stubbornly high unemployment.
What do recent studies on Egypt and the MENA region tell us regarding the causes and possible solutions for unemployment?
The World Bank’s flagship report on jobs in the MENA region documents high and persistent unemployment rates, especially among youth and women. The report, which focuses primarily on medium/long-term structural issues, goes on to show the historical reliance on the public sector for jobs and the need for a more vibrant and competitive private sector to grow employment. The report shows that the private sector has underserved the region because of both demand and supply constraints.
In terms of demand, the following points are emphasised in the report: connections — how well a private businessman performs depends upon who they know rather than what they know; regulations and taxes — complicated regulations and taxes make the business climate difficult to navigate, limiting business growth, and regulations and taxes may favour certain parties over others; and less integration with the global economy has held back foreign investment and exports, both of which tend to be creators of good jobs.
In terms of demand, the report makes the following points: because of generous benefits and job security, people prefer employment in the public sector and are queuing for those jobs, raising the reservation wage; there is a skills mismatch, where people are acquiring the wrong skills as compared with the skills that businesses want; and fuel subsidies have lowered the cost of energy relative to labour, increasing the specialisation in energy intensive goods.
The policy implications speak largely to improving incentives for the private sector to grow, for example through simpler and more uniformly applied regulations. Cutting energy subsidies and reducing public employment are important as well, but carry some short-term costs. And improved education and business-supported vocational training can also help.
How do you see the transition period affecting unemployment and the provision of job opportunities in the region?
Transitions make for difficult economic times. We have seen rising unemployment in Egypt and Tunisia, as growth remains weak and high-employment sectors like tourism, manufacturing and construction have been negatively affected. Political uncertainty is keeping investors on the sidelines, limiting employment creation. In Egypt, growth was to some extent buoyed by strong revenues from the Suez Canal and growth in government and agriculture.
With an economy that has slowed down, how can jobs be created quickly to at least provide temporary employment?
A World Bank report entitled “Infrastructure and Employment Creation in the Middle East and North Africa” shows that investment in infrastructure contributes significantly to job creation in the MENA region. In the short-run, every $1 billion invested in infrastructure has the potential of generating, on average, around 110,000 infrastructure-related jobs in the oil-importing countries (like Egypt and Tunisia), 26,000 jobs in the Gulf Cooperation Council economies, and 49,000 jobs in the developing oil-exporting countries. These jobs would be foregone if countries instead decided to trim their public investment rates by $1 billion going forward.
Estimated infrastructure needs for the region are $106 billion per year for a decade. The region could generate 2.5 million infrastructure-related jobs by meeting these needs, but the potential varies greatly across countries and sectors. Because of per capita income differences, $1 billion of spending generates more than six times as many jobs in a sector in Djibouti as in Lebanon, but the latter would find it considerably easier to finance investment expenditure. Spending on the construction of roads and bridges would generate more than twice as many direct jobs as the same amount of spending in any of the other sectors. Construction of roads and bridges is the most job-intensive activity relative to spending, followed by water and sewage infrastructure, while transport and communication is the least job-intensive activity. In addition to infrastructure, temporary wage subsidies and training programmes can also help ease the transition.
How do you believe poverty has been affected by the transitions?
Given the slowdown in growth and the increase in unemployment, poverty has surely increased. One estimate shows 25 per cent of people below the poverty line, up from 20 per cent before the revolution in Egypt.
It is important, therefore, to ensure that the social safety net reaches the poor. Unfortunately, fuel subsidies, which make up the bulk of spending on social policies, do little to help the poor. This is because the rich have more cars and larger apartments and therefore reap more of the gains from cheap energy. Estimates show that the richest 20 per cent of the population in Egypt receives more than half of the spending on fuel subsidies. If instead even a fraction of that money was transferred to the poor, for example as a cash transfer, poverty in Egypt could be much lower.
At what rate does the Egyptian economy need to grow in order to meet the challenge of growing unemployment and combat poverty?
We have regional estimates, and these suggest that fewer than three million jobs were created annually in the 2000s, but the region needed to create one million more jobs to bring down unemployment rates between four and six per cent, a range prevalent in fast-growing economies. Employment acceleration can become a reality if real annual growth picks up to six per cent during the next decade, an acceleration of roughly one per cent per year over the historical growth average for the ten-year period starting in 1999.
Some people believe that the economic slowdown has hit the poor the hardest. What is your view?
I would agree, because any loss in income is much more deeply felt by the poor, who consume all of their income and tend to have little or no savings. In addition, the poor spend a larger fraction of their income on food and necessities, and what has made this period especially difficult is the fact that food prices have remained high, so any loss in wages has not been reflected in prices.