Middle East and North Africa

2007 Economic Developments and Prospects

Job Creation in an Era of High Growth? Challenges and Opportunities

Mustapa K. NabliChief Economist

Middle East and North Africa RegionWorld Bank

Cairo, May 31, 2007

2006 was another year of robust economic growth in MENA

• Strong economic growth in MENA for the fourth year in a row

• Growth driven by oil revenues, ongoing recovery in Europe and policies broadly in the right direction

• GDP in MENA (exc. Iraq) increased by 6.3 percent up from 4.6 percent in early 2000s

But significant differences among sub-groups and countries

• Resource poor labor abundant grew by 5.6 percent

• Resource rich labor abundant grew by 4.3 percent

• Resource rich labor importing grew by 7.5 percent

Regional growth steps up to 6.3% in 2006

2

4

6

8

1996-1999 2000-2003 2004 2005 2006

RPLA

RRLA

RRLI

MENA excl IRQ

Source: National Agencies and World Bank.

real GDP growth, percent

Diverse outcomes across resource poor economies in 2006real GDP growth, percent

-6 -3 0 3 6 9

Morocco

Egypt

Jordan

RPLA

Tunisia

Djibuti

Lebanon

WB/Gaza

20052006

Source: National agencies and World Bank estimates.

-12%

General step-up in growth for MENA oil exporters in 2006

real GDP growth, percent

0 3 6 9 12

IranSyria

RRLAYemenAlgeria

QatarUAE

LibyaRRLI

BahrainOman

KuwaitSaudi

20052006

Source: National agencies and World Bank estimates.

On a per-capita basis much better performance than in the past

• Per-capita growth was 4.2 percent, the highest level recorded in at least two decades, up from 1.7 percent in 1990s

• MENA’s per-capital income is now growing at 75 percent of the rate attained by other developing regions, up from 61 percent in the 1990s.

Surge in oil revenues underpins growth of MENA exporters crude oil and product revenues $bn [left];

oil price, WB $/bbl [right]

50

100

150

200

250

300

350

400

450

500

550

2002 2003 2004 2005 2006

25

30

35

40

45

50

55

60

65RRLA revenues

RRLI revenues

Oil Price

Source: UN Comtrade, IMF, IEA, World Bank.

There is a shift in domestic demand in favor of investment

• The contribution of gross investment to growth almost doubled in 2006 to 4.1 GDP growth points

• Private investment as a share of GDP reached almost 16 percent and is increasing for all sub-groups

• FDI is low but growing particularly in resource poor countries• Imports of capital goods significant

Private investment as a share of GDP

10

11

12

13

14

15

16

2000 2001 2002 2003 2004 2005 2006

Source: National Agencies and World Bank.

RPLA

RRLA

RRLI

MENA

Fiscal balances improved but not everywhere

• Fiscal deficits for resource poor countries declined from 6.7 percent of GDP in 2005 to 6 percent of GDP in 2006. Lebanon, WBG and Djibouti deficits expanded.

• Fiscal surpluses for resource rich labor importing countries improved to 25. 8 percent of GDP. All improved but UAE

• But for resource rich labor abundant countries they declined to 3.1 percent of GDP.

-10

0

10

20

30

40

50

Kuwait UAE RRLI Saudi Oman Algeria RRLA Iran

2005

2006

Source: National Agencies and World Bank. *selected economies.

RRLI fiscal surplus continues at high levels

fiscal balance as a share of GDP %

Labor markets are more dynamic

• High economic growth has gone together with:

– Strong employment creation– Declining unemployment rates– Strong labor force growth– Increasing labor force participation rates,

particularly among women

Summing up MENA’s labor market story, 2000-2005

Includes: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, West Bank and Gaza.

2.8

3.6

4.55.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

WAP LF JOBS GDP

Unemployment declining

• Between 2000-05 MENA’s aggregate unemployment fell from 14.3 to 10.8 percent (for the 12 countries in the sample)

• This took place at the same time that the region is experiencing the crest of the labor force growth path

Most progress in the largest countries

0

5

10

15

20

25

30

35B

HR

QT

R

SA

U

EG

Y

MO

R

IRN

TU

N

ALG

KW

T

UA

E

JOR

WB

G

LBN

YM

N

IRQ

2000 2005

Falling unemployment rates

Increasing unemployment rates

What kind of new jobs?

• Mostly created in the private sector as public employment demand slows down

• New jobs primarily in services and agriculture

• Productivity remains low but some promising sings of more employment within sectors with raising productivity

Most new jobs are in the private sector

Contribution to total employment growth (in percentage points)

-0.1 -0.2

2.2

2.3

3.7 3.2

1.9

4.2 3.6

0.3

0.20.4

2.5

-1

0

1

2

3

4

5

6

7

MO

R

IRN

SA

U

JOR

EG

Y

ALG

Work at HomePrivatePublic

The services sector has been leading job creation except in Morocco and IranContribution to employment growth (in percentage points)

1.9 1.91.4

-1.4

0.5

1.5

0.6

0.82.1

1.9

2.5

3.61.4

0.9

0.0

0.40.3

0.4

0.8

0.1

2.5

-2

-1

0

1

2

3

4

5

6

7

WB

G

MO

R

TU

N

IRN

EG

Y

JOR

AL

G

Agriculture Industry

Services Work at home

Is this a new era of opportunities?(1) Global prospects

• Positive prospects for oil revenues?

• Positive global growth prospects?

• Asian potential

Oil Market Conditions 2007-2009

• Oil receipts from 2004 amount to $1.25 trillion, large portion held as int’l reserves or invested

• Oil prices expected to stay elevated but after a gradual softening (~49$/B) by 2009

• However, there is substantial uncertainty about the path of oil prices, of oil supply, and of oil demand.

0

10

20

30

40

50

60

70

2000-2004

2005 2006 2007 2008 2009

World Bank avg oil price

-1

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Weaker but still robust prospects

Real GDP annual percent changeForecast

Developing

High-income

2009

Developing ex. China &

India

Is this a new era of opportunities?(2) Domestic country prospects

• Reforms starting to bear fruit? – Private sector investment– Exports and integration into the global

economy– Diversification of economies/exports

• Higher sustainable growth spreading beyond major oil exporters?

Table 1

Is this a new era of opportunities?(3) Regional prospects

• Potential for matching of availability of investment funds (from oil exporters) and good opportunities for investment in non-oil exporters?

• Is this the time for progress on regional integration?

Record flows of foreign direct investment to the region during 2006

$ billions

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: National agencies, IMF, UNCTAD, World Bank. Note: RPLA = resource-poor, labor-abundant (countries).

Total FDI

RPLA FDI

But an era of major challenges: (1) employment challenge: quantity

of jobs

MENA will continue to face very high labor force growth in the near future

High sustained economic growth will be needed to meet labor force growth and tackle unemployment

But the job creation challenge continues to be high

Labor force growth, MENA and other developing regions, 2000-2020.

EAP

ECA

LAC

SA

SSA

MENA

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000-2005 2005-2010 2010-2020

% g

row

th p

er y

ear

Job creation needed to reach different goals for employment rates

68

81

99

0

20

40

60

80

100

120

Current scenario: 60 percent EU current: 64 percent EU goal: 70 percent

Employment rates by 2020

Jo

bs

ne

ed

ed

by

20

20

But an era of major challenges: (2) employment challenge:

quality of jobs

• Is there a trade-off between quantity and quality of jobs?

Labor productivity growth and job growth in

subsectors, Ireland, Tunisia, and Morocco

-4

-2

0

2

4

6

8

10

12

14

-6 -1 4 9 14

Productivity growth

Em

plo

ym

en

t g

row

th

Ireland 1995-1999: positive relationshipTunisia 1997-2001: negative relationshipMorocco 1999-2003: negative relationship

Annual employment growth vs. annual productivity growth, agricultural, industrial, and services

sectors, 2000–05

ALG SERV*EGY NON-AG

IRN AGR

ALG AGR

ALG SERV

EGY AGR

SAU SERV

SAU AGR

IRN INDJOR SERV

TUN SERVALG IND

JORD IND

JORD AGR

IRN SERV

SAU IND

MOR SERV

TUN IND

TUN AGRMOR IND

MOR AGR

WBG AGR

WBG SERV

-1.0

1.0

3.0

5.0

7.0

9.0

-15.0 -10.0 -5.0 0.0 5.0 10.0

Labor productivity growth

Em

plo

ym

en

t g

row

th

Employment grew in sectors with labor productivity growth

Employment grew in sectors where labor productivity fell

Trendline excluding WBGR2 = 0.55

But an era of major challenges: (3) risks of increased inequality?

• Inequality between countries in the region

• Inequality within countries

• Need for more modern social safety nets for those who may not be sharing in higher economic growth

• Risks for sustainability of reforms

But an era of major challenges: (4) More global competitive

environment• The emerging giants: India and China

• Risks of reversal to protection in the advanced countries

• The European Neighborhood

More capital is going to East Europe and Central Asia and to East Asia and Pacific regions

Europe & Central Asia

26%

Latin America & Caribbean

47%

East Asia & Pacific

15%

Sub-Saharan Africa

5%South Asia5%Middle East &

North Africa2%

2000 2006

Total net private capital flows to developing countries

Latin America & Caribbean

14%

Middle East & North Africa

4%

South Asia6%

Sub-Saharan Africa

6%

East Asia & Pacific

28%

Europe & Central Asia

42%

But an era of major challenges: (5) Managing the oil revenues?

• Investment vs. consumption of the windfall revenues

• Productive investment and transformation of oil wealth into other sustainable wealth

• Diversifying inside and outside the region

• Managing the financial risks: financial bubbles, real estate bubbles

• Major implications for non-oil exporters