The recent economic and political developments across the Arab region, popularly referred to as the Arab Spring, have highlighted a shared challenge of generating employment, promoting inclusive growth and improving competitiveness.
It has revealed the demands of the people who are calling for equal access, a level playing field, transparency and accountability, a sense of dignity, and a better economic environment for the majority of citizens. Crony capitalism – the privileged access of certain elites to favourable legal and regulatory treatment, and the coincidence of political and economic power – was a major concern contributing to the uprisings in several Arab countries.
Many saw privilege and corruption as the source of unemployment and inequality, effectively raising barriers to entry and growth for the majority of entrepreneurs. Practices such as connected lending and preferential land allocations were also perceived to be contributing towards the poor performance of key institutions that were underpinning the market economy.
Political and economic uncertainties in many parts of the Arab region continue to affect its short-term economic prospects. Overall growth in the Middle East and north Africa (Mena) is expected to be 4.8% in 2012, surpassing the 3% growth achieved in 2011, but still lagging behind other developing regions’ average of 6%.
Countries recovering from political turbulence remain in vulnerable positions with diminishing foreign reserves and rising fiscal deficits as well as high unemployment rates. The macroeconomic outlook remains highly uncertain and is contingent on political developments in the region, as well as external downside risks including volatility in oil markets, a deeper than expected global slowdown and potentially weaker growth in developing countries. Growth has been below its potential and has failed to generate enough employment. More importantly, economic growth in the region has not been inclusive.
Demographic transformation
It is critical for the Arab countries to achieve the aspirations of their people and attain sustainable and inclusive economic growth through expanding private sector-led employment and creating entrepreneurship opportunities. The Mena region has been unable to make substantial progress in reducing persistently high unemployment rates of about 10%, especially among youth and women at 16% and 25%, respectively – the highest in the world.
The rising unemployment rates in the Arab region are associated with various factors. The demographic transformation has led to an abundance of young working-age adults, whereby the rising labour supply has outstripped demand. It is estimated that there is a need to add between 40 million and 50 million jobs by 2020 to address unemployment concerns given the projected population growth.
Moreover, there is a mismatch between the skills and knowledge acquired at school and university versus those needed by the market. Since public sector jobs are still associated with relatively generous benefits, many educated young graduates, mainly females, are still keen on getting a government job. As a result, the private sector has fallen short of creating sufficient jobs while the public sector jobs have created distortions in the employment market.
In the Arab world, a large amount of formal job creation occurs in large firms and within governments. Nevertheless, in recent years the public sector has been unable to support job or income growth, while finding quality jobs in the private sector has been hard. Consequently, the number of jobs created in the past decade was considerably less than the number needed to address key challenges.
Unemployment and a belief that growth has excluded large segments of the population is at the heart of the discontent associated with the Arab Spring in several countries in the region. Needless to say, the problem of unemployment has been sharply exacerbated in the aftermath of the recent revolutions and subsequent social unrest and political uncertainty, which has weakened investor confidence, leading to a decline in private investment and foreign direct investment to the region.
Difficult environment
The investment climate in many Arab countries has not been particularly conducive to private sector development. The large informal sector in many of these countries highlights the difficulty that enterprises experience in entering into what is a relatively closed formal private sector. These were symptoms of a discriminatory business environment that prevents firm entry or exit and hence distorts the competitive process of 'creative destruction', which motivates productivity growth and innovation. The non-conducive business environment has prevented start-ups from entering the market and hindered the expansion of existing firms, exacerbating the predicament of a growing young population confronted with the lack of job and entrepreneurship opportunities.
Although small and medium-sized enterprises (SMEs) contribute significantly to gross domestic product and are a major source of private sector employment in the region, accounting for 30% of all private sector employment (compared to 41% in Latin America; 49% in the Organisation for Economic Co-operation and Development countries; and 49.5% in south Asia), they often lack access to the type of business development and financial services that they need to start-up, operate and grow. For example, most Arab countries also suffer from a lack of effective and well-enforced competition and consumer protection policies.
The Arab Spring has of course raised further challenges, but it has also enhanced prospects for change and an appetite for reform. Addressing these challenges and building on the opportunities to create greater economic dynamism and inclusion at this critical time is essential.
Reforms should be centred upon creating a fairer and more competitive economy that utilises market mechanisms to generate equal opportunities and create jobs. With huge popular expectations, the authorities need to find best practice solutions. In order for the private sector to act as an 'engine of growth' and advance the development process, firms need to be able to survive and grow.
High stakes
The only way countries can unleash the real potential of sustainable growth through the private sector is to move from nurturing a privileged class of entrepreneurs to allowing a level playing field for all classes and businesses so that marginalised enterprises and entrepreneurs can compete with them fairly. With this in mind, the promotion and enhancement of SMEs is essential given their instrumental role in generating employment.
It is critical to create a conducive policy environment by allowing the smooth entry and exit of private businesses, reducing red tape, speeding up enterprise registration and licensing approvals, access to land, enhancing access to finance, and reducing regulatory barriers. Creative destruction, whereby old firms are allowed to exit and new, more productive firms to enter and grow, occurs more easily when regulations are fair and lean.
Financial institutions can expand SME finance prudently by opening specialised SME units at banks, transaction-based lending techniques, packaging a bundle of products to clients, modernising the payment systems and advancing electronic technology. At the same time, financial product diversification is needed to improve the viability and outreach of SME finance. Other important measures that should be taken are improving the credit information system (for example, by setting up credit information bureaus), reforming the judicial system and developing non-bank financial services.
Expectations are extremely high. Governments are under tremendous pressure to deliver results quickly and are faced with ongoing demonstrations, strikes and social unrest; which may lead them to overlook longer term policies focused on creating sustainable, private sector job opportunities and instead favour populist measures that only temporarily address the unemployment problem and alleviate short-term hardship.
Such populist measures can impose a substantial fiscal burden, are distortive to the market and are difficult to retrench. Policies need to focus on creating a fairer and more competitive economy that utilises market mechanisms to generate equal opportunities and jobs, bolstered by building the capacity and developing the skills of the market players.
There is a momentum of change that needs to be built on. Much remains to be done to translate economic reforms into real positive changes.
Sahar Nasr is the lead financial economist for the Mena region and finance and private sector development co-ordinator for Egypt at the World Bank
