67730 January 2012 – Number 54 INFRASTRUCTURE AND EMPLOYMENT CREATION IN THE MIDDLE EAST AND NORTH AFRICA Caroline Freund, Elena Ianchovichina1 Introduction: Lack of job opportunities is a pressing have much more limited fiscal space than the oil issue in MENA, especially among youth. A exporters (Figure 3). While public investment rates forthcoming report assesses the potential for job increased in the oil exporters in the 2000s relative to creation through infrastructure investments in the the 1990s, the opposite happened in the oil Middle East and North Africa (MENA).2 It is well importing countries (Figure 1). Recent growth in known that infrastructure investments can serve as a potential source of immediate jobs, and can boost Figure 1: Public Gross Fixed Capital Formation long-term growth and employment. Indeed, the (Averages, % of GDP) MENA countries have been investing in infrastructure over the years. Both in the 1990s and 2000s, public investment spending in MENA was higher than in most developing regions (Figure 1), largely because of robust spending in the oil exporting countries which benefited from rising fuel prices. Spending on infrastructure was reflected in employment in the construction sector, which was a major source of job growth in the 2000s relative to both other sectors and other countries (Figure 2). Maintaining momentum in infrastructure will be important to keep growth and job creation from retreating. Regional Variations in Infrastructure Needs: While infrastructure investment in the region overall has been strong, there is wide variation across countries in the quality and quantity of infrastructure. High income GCC has had a massive build up of infrastructure in the last decade or so. Infrastructure deficiencies in developing MENA are however a concern. Public investment spending has been particularly weak in oil importing countries, which 1 Caroline Freund, Chief Economist, Middle East and North Africa Region (MNACE), World Bank. Elena Ianchovichina, Lead Economist, MNACE, World Bank. 2 This Quick Note is based on the World Bank report entitled Infrastructure and Employment Creation in MENA – to be available shortly at worldbank.org/MENA. Source: World Bank (2011) Figure 2: Sectoral Contribution to Annual Figure Figure 3: Fiscal Space Indicators Employment Growth in the 2000s (percent) Source: World Bank, IMF and Government sources. Source: World Bank (2011) While oil exporters will be able to meet their national infrastructure needs if they maintain public-private partnerships was beginning to fill the investment spending at rates prevailing in the 2000s, gap in some oil importers. But, the economic oil importers will fall short (Figure 4). Since the consequences of the Arab uprisings, combined with majority of funding for infrastructure comes from economic difficulties in Europe, are straining fiscal public budgets, it will be critical to protect public budgets in developing MENA as well as reducing investment budgets and try to increase resources private investment, with possible negative going to the sector in the case of oil importers. Doing implications for infrastructure spending. so will be a smart choice for governments looking to create jobs and growth. Estimates of Infrastructure Needs Through 2020: The report estimates MENA’s infrastructure investment and maintenance needs through 2020 at Figure 4: Infrastructure needs and Financing 106 billion dollars per year or 6.9 percent of the (annual, % of GDP) annual regional GDP. Developing oil exporting countries (OEC) will need to commit almost 11 percent of their GDP annually ($48 billion) on improving and maintaining their national infrastructure endowments, while the oil importing countries (OIC) and the GCC oil exporters need approximately 6 and 5 percent of their GDP, respectively. Investment and rehabilitation needs are especially high in the transport sector, particularly roads, and the electricity sector, jointly accounting for almost half of total needs. Fulfilling the electricity needs alone would require 3 percent of the yearly regional GDP. Source: World Bank (forthcoming, see reference 2). January 2012 · Number 54 · 2 Figure 5: Infrastructure Related Job Creation Figure 6: Estimated Cost of one Direct Job in Egypt (per US$1 billion) in 2009 (In US$ thousands) Source: World Bank (forthcoming see reference 2). Investment in infrastructure contributes significantly to job creation in MENA. In the short-run every one billion of US$ invested in infrastructure has the potential of generating, on average, around 110,000 infrastructure-related jobs in the oil-importing Source: World Bank (forthcoming see reference 2). countries, 26,000 jobs in the GCC economies, and 49,000 jobs in the developing oil-exporting countries The long-term employment effect of infrastructure (Figure 5). The region could therefore generate 2 investment could be significant. The report finds million direct jobs and 2.5 million infrastructure- that the employment response induced by related jobs just by meeting estimated domestic infrastructure investment resulting in 1 percentage investment needs, but the potential varies greatly point additional growth is expected to be 9 million across sectors and countries. Put differently, these additional jobs in the course of ten years in MENA, jobs would be foregone if countries instead decide to or a little less than 1 million jobs per year. Such a trim their public investment rates by one billion response is significant as it accounts for dollars going forward. approximately 30 percent of the jobs created in the region during the 2000s. Had these jobs been created Because of per capita income differences, one billion during the last decade, the unemployment rate dollars of spending generates more than six times as would be substantially lower than the 10 percent many jobs in a sector in Djibouti as in Lebanon, but registered in 2009. the latter would find it considerably easier to finance investment expenditure. Spending on construction Conclusion: Infrastructure investment has the of roads and bridges would generate more than potential to create jobs quickly, while providing a twice as many direct jobs as the same amount of foundation for future growth. This is especially spending in any of the other sectors. Construction of important in the oil importing countries, where the water and sewage infrastructure is the second most infrastructure gap is the greatest and employment job-intensive activity relative to spending while needs are growing. However, it is also likely to be transport and communication is the least job- most difficult in these countries because of strained intensive activity. To get a sense of the wide finances. Going forward, government decisions on variation across sectors, Figure 6 shows the what types of spending to expand and what to estimated cost of one direct job in various sectors in contract to achieve balanced budgets will have Egypt in 2009. Sectors also differ in their propensity important implications for jobs. Prudent to generate indirect jobs. It depends on the extent to infrastructure development will be critical for short- which the sector requires inputs from other sectors and long-term growth and job creation. to produce its output. January 2012 · Number 54 · 3 References Contact MNA K&L: Laura Tuck, Director, Strategy and Operations. 1. World Bank (2011) Middle East and North MENA Region, The World Bank Africa, Economic Development & Prospects Report, Investing for Jobs and Growth, Regional Quick Notes Team: September. Omer Karasapan, , Roby Fields, and Hafed Al-Ghwell Tel #: (202) 473 8177 2. World Bank (forthcoming) Infrastructure and Employment Creation in the Middle East and The MNA Quick Notes are intended to summarize lessons North Africa. learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its board or its member countries. January 2012 · Number 54 · 4