Middle East and North Africa 2007 Economic Developments and Prospects Job Creation in an Era of High Growth? Challenges and Opportunities Mustapa K. Nabli Chief Economist Middle East and North Africa Region World 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 Source: National Agencies and World Bank. real GDP growth, percent

Diverse outcomes across resource poor economies in 2006 real GDP growth, percent Source: National agencies and World Bank estimates. -12%

General step-up in growth for MENA oil exporters in 2006 real GDP growth, percent 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 MENAs 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] 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 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 Lebanon, WBG and Djibouti deficits expanded. Fiscal surpluses for resource rich labor importing countries improved to percent of GDP. All improved but UAE But for resource rich labor abundant countries they declined to 3.1 percent of GDP.

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

Unemployment declining Between MENAs 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

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)

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

Is this a new era of opportunities? (1) Global prospects Positive prospects for oil revenues? Positive global growth prospects? Asian potential

Oil Market Conditions Oil receipts from 2004 amount to $1.25 trillion, large portion held as intl reserves or invested Oil prices expected to stay elevated but after a gradual softening (~49$/B) by 2009 However, there is substantial uncertainty about the path of oil prices, of oil supply, and of oil demand.

Weaker but still robust prospects Real GDP annual percent change Forecast 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 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,

Job creation needed to reach different goals for employment rates

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

Annual employment growth vs. annual productivity growth, agricultural, industrial, and services sectors, 2000–05

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 Total net private capital flows to developing countries

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