Structural Reforms Keys To Future Job Creation In The Middle East And North Africa

The Middle East and North Africa (MENA) region is experiencing an economic boom driven largely by soaring oil revenues, but this growth remains insufficient for addressing the region's daunting development challenge of creating jobs, according to a World Bank report released today.

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By  Massoud Derhally Published  April 18, 2005

The Middle East and North Africa (MENA) region is experiencing an economic boom driven largely by soaring oil revenues, but this growth remains insufficient for addressing the region's daunting development challenge of creating jobs, according to a World Bank report released today. The first in a series of annual reports that monitor major economic developments in the region, Middle East and North Africa Economic Developments and Prospects 2005 says that close to 100 million new jobs will be needed over the next 20 years to absorb new entrants into the labor force and today's unemployed workers. Over the last two years, economic growth averaged 5.6 percent in MENA, up from the 3.6 percent growth over the 1990s. This exceptional growth was steered by external factors—escalation in oil prices and a subsequent rise in oil production-which significantly boosted government consumption and investment. Moreover, this growth was concentrated in oil—producing countries that account for most of the regional growth acceleration. The report points out however that in per capita terms, the growth upturn in MENA continues to lag behind most other regions of the world. "MENA's strong growth over the last two years does not change the fundamentals for this region," says Mustapha Nabli, World Bank Chief Economist for the Middle East and North Africa. "We are still talking about a region with limited private sector activity and employment creation, limited integration into the global economy, and strong dependence on volatile oil markets. What has essentially happened over the last two years is a positive terms of trade shock." Structural Reforms Essential for Long Term Growth The report argues that in order to meet the challenge of job creation, the region's economies need to be realigned along three fronts—from closed to more open economies, from public sector dominated to private sector-led economy and from oil dominated to more diversified economy. However the report reveals that the region has by and large not kept pace with worldwide progress in embracing structural reforms, as shown by its measurement of progress in reforms in the areas of trade, business environment and governance. It urges MENA countries to take advantage of the favorable economic climate to pursue an aggressive reform agenda. "There are tremendous demands on this region, in terms of the levels of growth and employment creation needed over the next two decades," says Jennifer Keller, the report's principal author. "So it is paramount that we understand whether MENA is implementing the economic realignments to meet these challenges." According to the report, the region has made great strides in trade reforms, motivated in part by regional and bilateral trade agreements. Two-thirds of MENA countries ranked above half of all countries in the world in terms of reducing tariff and dismantling non-tariff barriers to trade. Progress was particularly strong in a few countries including Egypt, Jordan, Lebanon and Saudi Arabia. MENA's progress in improving the business environment, on the other hand, has been the weakest in the world. On average, MENA countries rank in the bottom third of the world in terms of advancing a range of business regulatory and financial sector reforms. The pace of reform in politically difficult areas, such as the judiciary to improve enforcement of contracts, has been particularly weak. The report also points to a lack of progress in improving governance, based on the twin criteria of quality of public administration and public sector accountability. Although the region points to a few successes in improving the quality of public administration, progress in public sector accountability has been among poorest in the world. "We cannot talk about 'second generation' reforms in MENA without talking about the governance agenda," says Christiaan Poortman, World Bank Vice President for Middle East and North Africa. "The economic and regulatory reforms that MENA governments are now finding difficulty in moving forward are precisely the kinds of reforms which need the support and involvement of key actors such as the private sector, labor unions and other segments of civil society." Iraq Reconstruction Brings Economic Dividend to Region The report says that other than the oil price shock, the war in Iraq and its reconstruction and reintegration represents the largest economic shock to the region in the past three to four years. From a regional standpoint, the initial economic impact of the war were limited, largely because Iraq was in many ways economically isolated from the rest of the region. In terms of Iraq's reconstruction, however, many countries in the MENA region are poised to reap numerous potential economic dividends, as a result of trade and business related activities related to the reconstruction. Clearly, an improved security situation will need to occur to pave the way for greater progress on the reconstruction front. Looking forward, the report predicts that shifts in external factors will continue to shape the profile of the region's growth in the short run. Moderately easing oil prices, partially counterbalanced with European growth conditions suggest growth will continue, particularly in the labor abundant diverse economies. Overall, regional growth is expected to average 4.9 percent in 2005, moderating to 4.3 percent in 2006.

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