In Jordan, young entrepreneurs face difficulty getting financing and limited start-up services. In Tunisia, the paperwork to launch a new business took a month, compared to two days in France.
Such examples show some of the challenges facing young working-age people in the Middle East and North Africa (MENA), a region with the world’s highest youth unemployment rate and lowest rate of female participation in the labor force.
The labor market stagnation continues to undermine economic development and social progress in the MENA region a decade after the Arab Spring uprisings. Now a new flagship World Bank report examines the sclerotic labor market with unprecedented research that provides a new perspective on the issue.
Titled “Jobs Undone: Reshaping the Role of Governments toward Markets and Workers in the Middle East and North Africa,” the report offers policy recommendations for how MENA governments can overcome crippling joblessness by enabling a more prominent and vibrant private sector and enacting regulatory reforms in the product and labor markets.
“It’s about rethinking the role of government towards markets and workers, especially youth and women,” said report co-author Federica Saliola, lead economist with the Social Protection and Jobs Global Practice at the World Bank.
REDUCE ROLE OF STATE-OWNED ENTERPRISES
In particular, the report advocates reducing the role of state-owned enterprises (SOEs) in MENA economies, using new research to show how the dominance of government-linked entities blocks the development of a strong private sector needed to create enough jobs for the expanding working-age population.
Employment within firms in MENA countries grew 1% per year circa 2016-2018, which is much lower than the 5% average of middle-income economies. The high youth unemployment rate — estimated at 26% in 2019— and female labor force participation of only 20% illustrate the severity of the problem.
Using two rounds of World Bank Enterprise Surveys (WBES) available for the first time for several MENA countries, the report shows the poor performance of the private sector as a job creator. The number and quality of jobs in the economy depend on the ease of entry, growth, and exit of private sector firms — what is called market contestability. Most of the region’s economies lack market contestability, and a major reason is SOEs that play a dominant role and receive preferential treatment regarding taxes, financing, and subsidies, the report says.
“Competition is key,” said co-author Asif Islam, a senior economist in the MENA Office of the Chief Economist at the World Bank. “In the MENA region, we have educated youth. We have talented young entrepreneurs. However, the private sector is kind of squashed because it doesn’t face a level playing field.”
URGENT NEED TO IMPROVE MARKET CONTESTABILITY
To improve market contestability, the report says, governments should reduce the presence of SOEs in economic sectors where the private sector could potentially thrive. Using new evidence on product market regulations collected in eight MENA economies and compared with 51 high- and middle-income countries outside the region, the report shows that reforms should focus on reducing preferential treatment for SOEs regarding access to financial support and exclusions and exceptions from regulations, price controls, and tax laws applied to private operators.
“There’s no way governments can change the status quo if they own the firms that benefit from the competition,” said co-author Dalal Moosa, economist with the Social Protection and Jobs Global Practice at the World Bank.
Tarek Talbi, a 36-year-old business executive in Tunisia profiled in the report, told how starting a business in France involved two days of filling out registration paperwork. The same process in Tunisia took him a month, Talbi said.
The report notes that MENA countries tend to rely on middle-skill occupations, arguably driven by their outsized public sectors, with workers performing significantly fewer tasks that require non-routine interpersonal and analytical skills essential for jobs of the future.
“Finding technical staff such as technicians and engineers is not an issue in Tunisia, but people with soft skills and communication skills are very hard to find,” Talbi said.
Sarah Hawilo, who founded a guest experience platform, serVme, for the hospitality industry in Lebanon that has spread across the region, called a shrinking talent pool in her country her biggest challenge.
“While we have moved our head office to Dubai, UAE, however, we still lost key employees who immigrated from Lebanon, in search of permanent foreign citizenship as a security blanket,” Hawilo said.
The report also calls for reforms in some countries to address restrictions on women working in specific industries, as well as limited working hours for women, unequal pay compared to men, and the need for women to obtain spousal permission to get jobs. For example, many men in Jordan’s conservative culture oppose their wives and daughters going to work or starting their own businesses.
Noting the potential political and social opposition to such reforms, the report advocates an incremental approach to structural changes and focusing initially on emerging sectors such as the digital economy and the green economy — which have fewer incumbents and powerful interest groups — to minimize the political challenges.
The digital economy provided opportunity for Talbi, Hawilo, and five other young entrepreneurs profiled in the report.
Their stories reveal common obstacles facing young entrepreneurs in the MENA region — lack of access to financing for new businesses; onerous lending terms and taxes; and social resistance to untraditional work.
In Jordan, Hamdi Tabbaa started an online education platform to help others gain the academic advantages that benefited him. A previous attempt to launch a small food business failed due to a lack of technology infrastructure, experience, and resources.
Businesses in non-tech industries have difficulty obtaining financing, he explained, because of unrealistic requirements for young entrepreneurs with limited credit history including high interest rates and a fast repayment schedule. Certain regulations by the government could hinder new entrepreneurs from entering established markets, Tabbaa said.
In Lebanon, where a government strategy in 2020 described systemic political and administrative corruption, Hawilo noted that the current system provides advantages to businesses based on their political ties. Careers advance due to connections to influential leaders, rather than competency, she said.
To Ferid Belhaj, World Bank Vice President for the Middle East and North Africa, the report provides a blueprint for structural reforms as the region recovers from the devastating COVID-19 pandemic.
“Market dynamism can transform economies in the MENA region into modern states where innovative firms thrive and allocate resources to their best use,” Belhaj said. “The COVID-19 pandemic, as difficult as it has been, is an opportunity to support a resilient and inclusive recovery that can generate better jobs by addressing longer-term challenges.”