Economic Research Forum (ERF)

Creating jobs: East Asian success and MENA failure

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.

Most read

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

An appeal for Sudan’s future

Sudan today is on a knife-edge: it can evolve toward peace and democracy – or spiral into instability and violence. As this Project Syndicate column argues, vital and timely international assistance can make the difference between success and failure for the new government.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.