Economic Research Forum (ERF)

Creating jobs: East Asian success and MENA failure

898
Comparing the experiences of MENA and East Asia in recent decades reveals the delicate nature of the latter’s remarkable structural transformation: several parts of the economy had to be pulling in the same direction. This column explains how East Asia succeeded – and MENA failed – in generating productive employment.

In a nutshell

The East Asian miracle can essentially be ascribed to six key factors that are mutually reinforcing.

In MENA in contrast, the chosen development model has made it difficult for these key factors to be emphasised individually, much less as a package.

The question is how can MENA countries learn from the East Asian experience and make the transition to employment-creating exports, especially in the current climate of civil wars, terrorist attacks and instability.

In 1960, South Korea and Taiwan had roughly the same per capita income ($1,500 in 1995 US dollars) as Egypt, Jordan, Morocco, Syria and Tunisia; China was much poorer.

Today, Korea and Taiwan are high-income countries and China a rising middle-income country. All are manufacturing export powerhouses that have generated productive employment during their youth bulge. Meanwhile, the MENA region has the highest unemployment rate in the developing world – with youth unemployment double the average – and it has yet to take off as a manufacturing exporter.

How did these two regions start out at the same place and end up in such different circumstances? Howard Pack and I have been looking at the factors that contributed to East Asia’s success and comparing them with MENA’s policy choices.

Since the publication of The East Asian Miracle by the World Bank nearly 25 years ago, a consensus (albeit with disagreements at the margin) has emerged that the proximate sources of East Asia’s rapid growth were: (i) export orientation; (ii) openness to imports and foreign investment; (iii) quality education; (iv) infrastructure investment; (v) innovation and technology transfer; and (vi) macroeconomic stability.

Not only were all six of these factors necessary, but also they were mutually reinforcing. For example, openness to imports and foreign direct investment (FDI) enabled these countries to learn new technologies and adopt advanced production practices.

The focus on quality education, especially science and engineering, meant that university graduates could take advantage of technology imports. They also had an incentive to study these subjects because of good employment prospects in growing industries.

Infrastructure investment was an added incentive for FDI, as was macroeconomic stability, especially low inflation. Significantly, East Asian countries maintained high investment rates without threatening macroeconomic stability because they also had high savings rates.

By contrast, most MENA countries pursued only some of these policies, thereby missing out on the synergies of having all six. In some cases, countries followed policies in the opposite direction, making it even harder to achieve productive employment growth. The reasons had to do with the rents that were created and their distribution.

For example, Tunisia restricted FDI and imports as a means of restricting competition and generating monopoly rents for politically connected entrepreneurs. The fact that the protected sectors included banking, telecoms and transport – all of which are necessary for manufactured exports – meant that Tunisia’s export competitiveness suffered.

Similarly, the virtual guarantee of a job in the public sector, also seen as a way of distributing rents, acted as a disincentive to study science, engineering and other technical subjects that are more suitable for a dynamic, technology-intensive private sector.

Finally, many countries in MENA are oil and gas exporters, and fluctuations in the prices of these commodities have made macroeconomic stability a challenge. But these countries make matters worse by pursuing pro-cyclical fiscal policies. High energy subsidies – a source of rents to energy-intensive, often politically connected, firms – don’t help either. Most of these policies also undermine savings.

This comparison reveals the delicate nature of East Asia’s remarkable structural transformation. Several parts of the economy had to be pulling in the same direction for the strategy to succeed. In MENA, the particular development model chosen made it difficult for these factors to be emphasised individually, much less as a package. And some of the choices worked against structural transformation.

The question is: how can MENA countries learn from the East Asian experience and make the transition to employment-creating exports, especially in the current climate of civil wars, terrorist attacks and instability?

If we remember that youth unemployment was a major cause of the Arab Spring, and its subsequent turmoil, then there is clearly political pressure for the system to deliver on jobs for young people. To succeed, the current system of rent distribution will have to change – or it will be changed.

Tags: , , ,

  • Shanta Devarajan
    Shanta Devarajan
    Professor of the Practice of International Development, Edmund A. Walsh School of Foreign Service, Georgetown University

Most read

Making trade agreements more environmentally friendly in the MENA region

Trade policy can play a significant role in efforts to decarbonise the global economy. But as this column explains, there need to be more environmental provisions in trade agreements in which developing countries participate – and stronger legal enforcement of those provisions at the international level. The MENA region would benefit substantially from such changes.

Iran’s globalisation and Saudi Arabia’s defence budget

How might Saudi Arabia react to Iran's renewed participation in global trade and investment? This column explores whether the expanding economic globalisation of Iran, following the lifting of nuclear sanctions, could yield a peace dividend for Saudi Arabia, consequently dampening the Middle East arms competition. These issues have attracted increased attention in recent times, notably after a pivotal agreement between the two countries in March 2023, marking the resumption of their political ties after a seven-year conflict.

Labour market effects of robots: evidence from Turkey

Evidence from developed countries on the impact of automation on labour markets suggests that there can be negative effects on manufacturing jobs, but also mechanisms for workers to move into the services sector. But this narrative may not apply in developing economies. This column reports new evidence from Turkey on the effects of robots on labour displacement and job reallocation.

Global value chains and domestic innovation: evidence from MENA firms

Global interlinkages play a significant role in enhancing innovation by firms in developing countries. In particular, as this column explains, participation in global value chains fosters a variety of innovation activities. Since some countries in the Middle East and North Africa display a downward trend on measures of global innovation, facilitating the GVC participation of firms in the region is a prospective channel for stimulating underperforming innovation.

Food insecurity in Tunisia during and after the Covid-19 pandemic

Labour market instability, rising unemployment rates and soaring food prices due to Covid-19 are among the reasons for severe food insecurity across the world. This grim picture is evident in Tunisia, where the government continues to provide financial and food aid to vulnerable households after the pandemic. But as this column explains, the inadequacy of some public policies is another important factors causing food insecurity.

Sustaining entrepreneurship: lessons from Iran

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

Manufacturing firms in Egypt: trade participation and outcomes for workers

International trade can play a large and positive role in boosting economic growth, reducing poverty and making progress towards gender equality. These effects result in part from the extent to which trade is associated with favourable labour market outcomes. This column presents evidence of the effects of Egyptian manufacturing firms’ participation in exporting and importing on their workers’ productivity and average wages, and on women’s employment share.

Intimate partner violence: the impact on women’s empowerment in Egypt

Although intimate partner violence is a well-documented and widely recognised problem, empirical research on its prevalence and impact is scarce in developing countries, including those in the Middle East and North Africa. This column reports evidence from a study of intra-household disparities in Egypt, taking account of attitudes toward gender roles, women’s ownership of assets, and the domestic violence that wives may experience from their husbands.

Do capital inflows cause industrialisation or de-industrialisation?

There is a clear appeal for emerging and developing economies, including those in MENA, to finance investment in manufacturing industry at home with capital inflows from overseas. But as the evidence reported in this column indicates, this is a potentially risky strategy: rather than promoting industrialisation, capital flows can actually lead to lower manufacturing value added and/or a reallocation of resources towards industries with lower technology intensity.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.