Economic Research Forum (ERF)

Creating jobs: East Asian success and MENA failure

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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.

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