May 2018 - Number 169 DISRUPTIVE TECHNOLOGY: NEW GROWTH ENGINE FOR MENA? Governments are no longer able to afford their Lili Mottaghi 1 end of the bargain, and youth frustration continues to rise. Challenges abound. While the Unable to find a job as a hardware engineer, I now public sector is still perceived as the major drive for Snapp making about $900 a month, higher provider of job opportunities, it is failing to create than the average income in Iran, says Hossein, a enough jobs due to government fiscal constraints. Snapp (Iranian Uber) driver. With more than 5 The private sector remains weak and million users and 120,000 drivers, Snapp has created undeveloped, unable to create decent jobs for the thriving start-ups including goods and foods ordering youth. The growing number of young and and online delivery services in Iran. educated people coming to the labor market each year means that millions of additional jobs will be Introduction. The economic outlook for the needed. Data from the World Bank show that Middle East and North Africa (MENA) region is unemployment rate in MENA stands at 11% positive, and growth is expected to exceed 3% (recent available year), but the jobless rate is over the next two years after a sharp fall in 2017. higher across MENA countries. While the growth increase offers hope, the current growth trajectory is well below potential and insufficient to absorb the hundred million young and educated people who will enter the labor market in the coming decades. In fact, of all the economic challenges facing MENA countries, the most pressing may be the continuing rise in unemployment rates for the youth and, especially, women. Recent World Bank data show that youth unemployment in MENA is above 30% and is much higher for women. Jobless Growth. MENA economies have been experiencing moderate to high growth in GDP with stagnant growth in employment, a phenomenon of “jobless growth� since the 1970s. This dire situation in MENA is a result of the existing social contract, in which the state is the main provider of public sector jobs and social and economic benefits to citizens in exchange for The official unemployment rate in Djibouti was limited public participation and accountability. 39% (in 2015), with women at 49% and rural areas 1 The author is Senior Economist in the Chief Economist’s World Bank. Cleared by Rabah Arezki, Chief Economist for Office of the Middle East and North Africa region of the Middle East and North Africa, World Bank. May 2018 · Number 169· 1 at 59%. In Morocco, unemployment remains high Conversely, decades of efforts to diversify their among the youth (26.5%), and in Tunisia economies away from oil have resulted in lack of unemployment rate among university graduates diversification in the manufacturing sector, increased to 31% in 2017 from 23% in 2010. shrinking of the services sector and Without a renewed social contract that can foster overdominance of oil and gas sector in the high and inclusive growth in the private sector MENA region. together with governments’ commitment to better transparency and accountability, many At about 14 percent, MENA has the world’s youths will still be trapped in a persistent “jobless lowest share of nonoil manufactured exports and growth� situation. the highest share of fuel exports—between 60 and 80 percent. Compared to the rest of the MENA’s Economic Prospects. A favorable global world, the region’s total nonoil exports are lower economic environment, stability in the oil market than, for example, Finland’s even though the at slightly higher prices, and resumption of region’s population of above 300 million dwarfs construction activities in conflict-affected Finland’s 5 million people. MENA countries are countries (Iraq) have helped economic growth the least integrated into the world economy and return to the MENA region in 2018. Economic in particular among themselves. The region’s 6% and social reforms are happening, albeit at a slow ratio of FDI to GDP is the world’s lowest. pace. Almost all countries are reducing or eliminating energy subsidies, considering The growing numbers of young people— increasing non-oil revenues, and taking on compounded by a possible increase in labor force comprehensive social programs to shield the participation, particularly among women— poor from the adverse effects of some reforms. means that millions of additional jobs will be Economic growth in MENA—which fell to 2% in needed over the coming decade. With reforms 2017 from 4.3% in 2016 because of a sharp decline started to bear fruit and economic growth in economic activity among oil exporters—is expected to improve in the region, the time is ripe expected to increase to 3.1% in 2018. The increase for MENA economies to look into the sectors is broad-based; almost all countries will (other than the public sector and oil) that can experience an uptick in growth this year. grow fast and create a massive number of jobs for Stabilization policies, austerity measures, and a the unemployed youth, at a faster rate. Studies surge in foreign receipts are expected to lower have shown that the gap between MENA MENA’s fiscal and external imbalances in 2018 economies and fast-growing ones is the poor and beyond. In the short term, the outlook for performance of the services sector (Figure 1). MENA remains positive, and the growth rebound is expected to continue over the next Figure 1 Services Led Growth two years, reaching 3.3% in 2019 and 3.2% in 2020. However, increasing geopolitical tensions, North America 80 the challenges posed by the forcibly displaced High income Services value added (% of GDP) people, including refugees, and the rising level of 75 Europe & Central European Union Asia OECD youth unemployment and public debt in the World 70 region could cloud the positive outlook. 65 Sub-Saharan East Asia & Transforming MENA’s Jobless Growth Africa Pacific 60 Trajectory. Traditional engines of growth which South Asia were dominated by public sector and oil have 55 Middle East & North Africa proved incapable of creating sufficient jobs for 50 the cohort of MENA’s youth bulge. In fact, 3 3.5 4 4.5 5 evidence shows that investment and growth in Log real GDP per capita manufacturing that is the traditional path to diversification in developing countries has not Source: World Bank. happened in MENA. May 2018 · Number 169· 2 Technological advancements and rapid increases Bank report, Economic Transformation argues in digital technologies offer new opportunities that combining these two critical elements could and have the potential to boost (non-oil) private- serve as the foundation for a digital economy that sector-led growth. Promoting high tech jobs are could create much-needed private sector jobs for crucial for creating a thriving private sector that the young and especially for the educated over can create decent jobs at a faster rate at least for the next decade. three important reasons. Firstly, high tech jobs in developed and developing countries are more The State of MENA’s Digital Economy: Several resilient to economic downturns than any other MENA countries have developed strategies to private-sector industries. A recent study finds transform their economies and take advantage of that employment growth in tech jobs outpaced disruptive technologies to create private sector gains in other professions by a ratio of 27 to 1 growth and more jobs at a faster rate. But between 2001 and 2011 - during the 2008 Great effective and better policies are needed to capture Recession. Secondly, estimates by McKinsey the opportunity. In Iran, E-commerce is growing show that demand for high tech jobs will be fast giving rise to the emergence of local start- higher than demand for other professions at least ups. Smartphone activity has recently risen through 2020. Finally, demand from a larger rapidly boosting online shopping and ride digital sector could create jobs in other local sharing, thanks to Digikala (Iranian Amazon) goods and services sectors. This jobs multiplier and Snapp (Iranian Uber). According to recent effect is four times higher in the high-tech sector estimates, Iran’s ICT (Information and than the manufacturing sector. The industries Communications Technology) market would that take advantage of the digital experience will reach $30 billion in 2020, up from $21 billion in have the highest productivity increases and small 2018. Egypt’s Vision 2030 foresees a competitive, and medium enterprises that make better use of balanced, and diversified economy, dependent digital activities will grow faster (McKinsey on innovation and knowledge. 2016). New sources of growth are emerging in fintech For each job created in the high-tech sector, and innovative financing instruments in Algeria approximately 4.3 jobs are created across all and Bahrain. Saudi Arabia’s Vision 2030 seeks to income groups and occupations—including raise the country’s ranking in E-government, teachers, lawyers, physicians, among others prioritizing digital transformation as one of the (McKinsey 2016). And a digital economy creates top four Common National Goals. The program positive interlinked spillovers among economic identified five digital platforms, 29 essential and social sectors. E-health enables new forms of digital initiatives for key sectors, and several healthcare management and provision, national digital assets to receive further increasing patient coverage and improving investment to support the government’s digital quality. E-education and online learning reach transformation. many people, even in rural areas, at low cost and good quality. Poverty reduction experiences, As part of the United Arab Emirates’ Vision 2021, particularly in Bolivia and India, confirm that the National Innovation Strategy pinpointed digital delivery can enhance inclusion and digital technology as one of the top seven increase income among the disadvantaged. primary national sectors. The strategy focuses on the development of smart cities, software, and With advances in technology, it is the right time applications including advanced technology in for MENA governments to look into the “new areas of global interest such as artificial normal� of promoting private sector-led growth intelligence, semiconductors, nanotechnology, through boosting high-tech jobs, particularly in and 3D printing. Qatar’s Vision 2030 prioritizes the services sector. The MENA region has a fast- the creation of a knowledge-based economy growing pool of university graduates and characterized by innovation, entrepreneurship, significant penetration of internet and social excellence in education; a high-quality media, and access to smartphones. A new World infrastructure; efficient delivery of public May 2018 · Number 169· 3 services; and transparent and accountable government. Promoting digitalization particularly in the services sector could transform the growth path in MENA from a “jobless growth� to a “job creating� private sector-led growth that has the potential to generate massive numbers of jobs for the youth, for example through emerging start- ups. If MENA countries address the constraints to the growth in the services sector and improve digital adoption, they will not only create opportunities to move away from oil, increase new products, and boost labor productivity through skill development; they will also increase potential growth in the medium term. The new engine of growth in MENA has important implication for the future of education, skills, and work, and on how economic policy including improving business climate and investment should be designed and implemented. May 2018 · Number 169· 4