Economic Research Forum (ERF)

Global value chains, wages and skills in MENA countries

562
The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

In a nutshell

Global interlinkages foster labour market outcomes in MENA countries: through participation in GVCs, both job quantity and job quality are enhanced.

Investment in human capital is necessary to strengthen the positive effect on real wages and move up to higher value-added activities and escape the trap of dependence on trade in commodities like oil and gas.

Coherent trade and fiscal policies are key to supporting small and medium-sized enterprises participating in global markets; this will encourage the economic diversification that is necessary for fostering higher skill levels across the workforce.

‘Decent work for all’, as reflected in higher job quantity and better job quality, is a key sustainable development goal to be achieved by 2030. This ambition is particularly important for the Middle East and North Africa (MENA), where unemployment is high and the annual growth rate per capita is 2.6% compared with 6.8% in middle-income counterparts outside the region (Islam et al, 2022).

What’s more, the demand for skilled labour in the region is constrained by a low-skilled workforce and high concentration on low-value-added extractive activities. In parallel, although participation in global value chains (GVCs) contributes to better labour market outcomes through a variety of channels, only a small fraction of MENA firms participate (Ayadi et al, 2024).

GVC participation contributes both directly and indirectly to increased returns and higher skills. First, the direct mechanism includes the production scale accompanying specialization, leading to higher real returns. In addition, because GVC is skill-biased, increased integration fosters demand for skilled employment, providing incentives for the acquisition of higher skill levels in the workforce. Second, due to the foreign learning effects of GVC participation, it indirectly fosters real wages through accompanying foreign knowledge, innovation, and skills.

In the MENA region, which is characterized by stagnant wages and low skills, facilitating firms’ participation in GVCs aspires to foster labour market outcomes. On the one hand, labour market conditions converge across participants in different regions. On the other hand, because of upgrading, demand for skilled labour increases, leading to more employment in higher-quality jobs.

Research on global value chains and labour market outcomes

In recent research (Eissa, 2024), we show that in Egypt, Jordan, and Tunisia, individuals working in firms that participate in GVCs – that is, importing intermediate goods and exporting – earn higher real wages on average than individuals working in non-participating firms. This GVC-driven effect on real wages is strengthened with skill requirements. In particular, jobs requiring skills strengthen the positive effect of GVC participation on real wages.

Furthermore, firms that participate in GVCs employ more skilled production workers than non-participating firms. As Figure 1 shows, firms participating in GVCs employ more skilled workers on average than non-participating counterparts.

Because of the transferability of skills and knowledge through GVCs, participating firms demand skilled workers with a higher ability to employ innovative inputs. On average, firms that participate in GVCs employ 30% more skilled production workers than their non-GVC counterparts.

Despite the foreseen opportunity to foster skill levels in the MENA workforce through GVC participation, the dynamics of this effect can be mitigated by commodity dependence. If GVC participation is limited and concentrated in low-value-added primary goods, realizing labour market prospects in terms of skills and job quality remains ambiguous.

To escape the commodity trap, diversification of trade activities across industries is necessary. Figure 2 presents the shares of firms participating in simultaneous importing and exporting across manufacturing sectors. As presented, garments have the highest share in firms’ GVC participation on average in Egypt, Jordan, and Tunisia.

Notably, the apparel sector, characterized by its female-friendly nature, holds a relatively high share within GVCs. Promoting GVC participation in this sector can significantly enhance female employment opportunities and help bridge the substantial gender divide prevalent in the MENA region.

Figure 1: Skilled production workers across GVC, on average
Source: Own construction based on the World Bank Enterprise Surveys

Figure 2: GVC across sectors on average
Source: Own construction based on the World Bank Enterprise Surveys
Note: Figures averaging: Egypt years 2013, 2016, and 2020;  Jordan years 2013 and 2019; and Tunisia years 2013 and 2020

Implications for policy

From a policy standpoint, recommendations to promote GVC participation to achieve ‘decent work for all’ in the MENA region are threefold.

First, at the trade policy level, reducing unnecessary trade costs facilitates the bottlenecked integration of GVCs in the MENA region with high non-tariff measures. Controlling trade costs and engaging in deep trade agreements particularly those with provisions for small and medium-sized enterprises (SMEs) will streamline the integration process and promote inclusive participation.

Second, facilitating GVC participation must be accompanied by coherent policies aimed at improving labour conditions. Investment in education, training, and entrepreneurship programs is essential for promoting skill levels. Skill upgrading is not only important for fostering higher wages, but it is also necessary for moving up to higher value-added activities across the chain and escaping the commodity dependence trap in MENA countries. In this respect, fiscal policy is key to allocating more spending on education and providing financial support to SMEs to provide training programmes for local employees.

Finally, strengthening labour laws to protect workers’ rights ensures decent working conditions, and fosters a productive ecosystem for attracting foreign labour and capital. Through GVC participation, foreign knowledge transfer incentivizes skills acquisition, boosts innovation, and enhances the global market competitiveness of MENA firms.

Further reading

Ayadi, R, G Giovannetti, E Marvasi and C Zaki (2024) ‘Trade networks and the productivity

of MENA firms in global value chains’, Structural Change and Economic Dynamics 69: 10-23.

Eissa, Y (2024) ‘GVCs and Labor Market Outcomes: Evidence from MENA’, ERF Working Paper No. 1730.

Islam, AM, D Moosa and F Saliola (2022) Jobs undone: Reshaping the role of governments

toward markets and workers in the Middle East and North Africa, World Bank.

Author’s note: This research has been supported by the German Institute of Development and Sustainability (IDOS). It was funded by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, Sector Project ‘Employment Promotion in Development Cooperation’, on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ).

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.