A Time for Action
Oil-exporting countries, meanwhile, are grappling with a steep
decline in energy prices that has led to large fiscal deficits and a
decline in growth.
The uprisings of 2011 ushered in a period of unprecedented change in the
Middle East and North Africa. While demands for political transformation
commanded the world’s attention, those calls were largely motivated by
unresolved socioeconomic issues. Demonstrators in the streets of Cairo and
Tunis demanding “bread, dignity, and social justice” expressed widely held
aspirations for basic economic rights, along with greater prosperity and
Almost seven years later, notable progress has been achieved in terms of
public finance reforms. However, these reforms still have a long way to go
to reduce disparities in the distribution of wealth within most countries of
the region or narrow the development gaps between them. Protracted regional
conflicts, low oil prices, weak productivity, and poor governance have
inflicted a heavy toll. Growth has not been strong enough to reduce
unemployment significantly; a staggering 25 percent of young people are
As a result, countries in the Middle East and North Africa now face a stark
choice between short-term retrenchment and resolute pursuit of the long-term
reforms needed to secure their future economic prosperity. Forsaking
important economic adjustments needed to strengthen inclusive growth and
modernize the state and private sectors would set the region back, possibly
for decades. A healthy global economy provides a welcome opportunity to
accelerate the pace of reform.
While countries in the region have maintained macroeconomic stability,
growth has been far too slow to keep pace with an expanding population, with
the result that unemployment is rising. Economic growth has averaged just
3.6 percent a year since 2011, a pace one-third below that of the previous
decade. The overall unemployment rate of 10 percent does not appear
alarming, but it ranges from less than 1 percent in Qatar to more than 18
percent in Jordan, and women and youth are disproportionately affected.
Maintaining the status quo will only make things worse. The IMF estimates
that if growth continues at its post-2011 pace, average unemployment could
rise above 14 percent by 2030.
Furthermore, conflicts in Afghanistan, Iraq, Libya, Syria, and Yemen have
taken a tragic toll: half a million people are estimated to have died in
these conflicts since 2011. In Syria alone, 12 million people have been
displaced. The economic impact has been devastating: homes, hospitals,
roads, and schools have been damaged or destroyed, with an estimated cost
four times the countries’ preconflict GDP. The exodus of refugees from
conflict areas is adding considerable pressure to budgets, infrastructure,
and labor and housing markets in host countries, such as Lebanon and Jordan.
The conflicts have also disrupted trade, tourism, and investment.
Oil-exporting countries, meanwhile, are grappling with a steep decline in
energy prices that has led to large fiscal deficits and a decline in growth.
On average, deficits increased to more than 10 percent of GDP in 2016, and
public debt has doubled to more than 30 percent of GDP since 2014. Still,
these figures mask significant deficit-reduction efforts. The non-oil
primary balance—which excludes the impact of oil prices and can be seen as
the fiscal effort undertaken by governments—has improved by more than 12
percentage points of GDP since 2014.
Budget deficits also remain elevated in oil-importing countries, even though
these countries are benefiting from lower oil prices. Deficits exceed 6
percent of GDP on average, and debt levels surpass 90 percent of GDP in
Egypt, Jordan, and Lebanon. Although these countries have managed to reduce
deficits enough to maintain economic stability, they need to make additional
resources available to address social and development issues. Growth is
projected to increase to more than 4 percent this year as a result of
stronger private consumption and exports.
Policymakers in the region recognize the need to generate more employment
and stronger growth and have added these goals, along with better inclusion,
to their national development plans. If well executed, these plans could go
a long way toward meeting those goals. Recognition of the need to grant
equal rights to women and better integrate them into the labor force will be
particularly important. Recent moves—including Saudi Arabia’s decision to
allow women to drive—are steps in the right direction, but more is needed.
Education and labor market policies will also be key, given that about 60
percent of the population is under the age of 30. With proper opportunities
and education, the region’s young people could fuel unprecedented economic
growth and generate a demographic dividend like the one that propelled the
Asian Tigers a few decades ago.
Fortunately, stronger global growth and innovations in
technology help create a favorable environment for reforms.
Governments are making efforts to stimulate trade and investment. Many
countries—from Jordan to Saudi Arabia—have reduced trade barriers. Morocco
and Tunisia have joined the G20 Compact with Africa aimed at promoting
private investment, which should help improve infrastructure. Jordan,
Morocco, and Tunisia have made efforts to diversify their manufacturing
bases, supporting exports and jobs. Morocco, for instance, has attracted
automakers, including PSA Peugeot Citroën and the Renault Group, by
providing good infrastructure, power supply, and skilled labor. As a result,
its automotive sector aims to create 90,000 jobs by 2020. How much more
growth could more trade bring? The IMF estimates that if the region matched
its best one-year improvement in openness so far, the average annual pace of
economic growth would rise 1 percentage point over the next five years,
compared with a baseline forecast of 3.3 percent.
Governments are also putting job creation at the forefront of their policy
agendas. These plans aim to develop the private sector by providing better
job opportunities for youth and women and increasing access to finance. They
also seek to provide better public services, improve transparency and
accountability, and contribute higher and more efficient social and
investment spending. Many of these themes were already at the forefront of
the debate in 2014 when regional leaders gathered in Amman to define
policies to boost jobs, growth, and fairness in the Arab world. They remain
at the center of debate today as people demand faster and deeper change.
Fortunately, stronger global growth and innovations in technology help
create a favorable environment for reforms. It will take time to generate
results, so policymakers should act sooner, rather than later, and seize the
opportunity to strengthen economic stability and promote growth for the
benefit of society as a whole.
Governments need to develop and execute agendas for inclusive growth:
medium-term action plans that offer practical solutions to pressing
priorities and help restore the confidence of investors and citizens. Five
levers will be critical: sound fiscal policy, financial inclusion, reform of
the labor market and the educational system, improved governance, and a
stronger business environment. This approach will also enable governments to
rethink their growth models and implement more equitable social contracts
over time, while preserving macroeconomic stability. The first step is a
vision that inspires citizens; specific goals and a strategy for achieving
them should follow.
Fiscal reforms remain the main policy lever to promote inclusive growth.
Countries with larger fiscal buffers and lower debt can gradually reduce
deficits to avoid unnecessarily curbing growth; those with large deficits
and high debt, such as Jordan, Lebanon, and Mauritania, need to step up
their deficit-reduction efforts.
One way to reduce deficits is to raise more revenue by broadening the tax
base. The region’s average tax-to-GDP ratio of less than 10 percent is low
relative to the average of 18 percent in emerging markets. Reducing
exemptions, combating tax evasion, and a more progressive personal income
tax will also help, as will slimming down excessive public sector wage
bills. These make up almost 10 percent of GDP in the six countries of the
Gulf Cooperation Council, compared with an average of 6 percent in emerging
and developing economies as a whole. Reducing the discrepancy between public
and private sector wages will help absorb the 27 million young people
projected to enter the workforce in the next five years. Currently, many
qualified young people choose to remain idle for long periods as they wait
for highly paid public sector jobs to become available.
Some countries have already shown that savings from such measures can be
used to increase investment and spending on much-needed social services.
Eleven countries have replaced fuel subsidies that apply to the whole
population with cash transfers targeted at the poor. Among such countries is
Egypt, which has raised targeted cash transfers tenfold, to 1.7 million
households, over two years. But progress is uneven, and more social spending
is needed to improve growth and living standards significantly over the
medium term. Accelerating the sale of state-owned companies will help—as
will selecting and managing projects with a view to robust economic returns
to improve the quality of public investment.
Increasing access to finance will go a long way toward fostering private
sector activity. About two-thirds of the population lacks a bank account,
and bank loans to small and medium-sized firms, at 2 percent of GDP, are
among the lowest in the world. Better bookkeeping by companies would help
improve access to finance because banks could more easily assess credit
risk. Capital markets also need to be developed further to make it easier
for companies to obtain equity and debt financing.
With 60 percent of the region’s population using mobile phones, financial
technology presents an opportunity to give more consumers access to
financial services. Yet most countries in the region have not enacted
reforms to allow nonbanks to enter this space. Regulators should develop
frameworks that promote innovation while protecting consumers and data
privacy and preventing money laundering and terrorism financing.
More broadly, technology can boost productivity and growth; green technology
in particular, including solar energy, offers considerable promise. But
while technology can make workers more efficient and create jobs in new
sectors, it may also render some jobs obsolete. Income and employment gaps
could continue to grow if these workers are not effectively reintegrated
into the economy.
That’s why improved education and training are critical. Except in a few
countries, such as Bahrain, Egypt, and Saudi Arabia, the pool of working-age
adults with postsecondary education is far smaller than the global average
of 17 percent. Education should focus more on skills demanded by employers
in industries such as electronics, automobiles, aeronautics, and financial
Education will also be the key to promoting gender equality. Women
participate in the labor force at just one-third the rate of men. Policies
that encourage women to work, such as flexible hours and child care
services, help bring more women into the formal job market and boost
productivity and growth. But those are just a start. It’s hard to imagine a
bright economic future for the region without profound changes in rigid
conceptions of social and gender roles. Equal access to finance, training,
and technology should be the foundation for empowering women and enabling
them to compete on an equal basis with men.
Along with lack of jobs, corruption and inefficiency were among the sources
of popular discontent that fueled the uprising. Improving governance would
not only help address social grievances, it would also boost business
confidence and investment. Most countries in the region still rank in the
bottom half of global indexes that measure governments’ ability to function
effectively and control corruption, and the rankings have deteriorated in
recent years. Governments should provide the resources and legal authority
to improve transparency and financial management while also fighting
The devastation of war poses the gravest test of all. Refugees need food,
housing, education, and help finding jobs; host countries can’t afford to
bear these burdens alone. When conflicts end, the next task will be to
mobilize the resources needed to rebuild infrastructure and institutions and
bring displaced people back into the labor force. Postconflict countries
tend to experience volatile patterns of financing. Strong coordination at
the international level will be needed to ensure adequate support. Official
financing should come in the form of grants, or on highly concessional
terms, and needs to be complemented by significant private sector flows,
including donations and remittances.
There is little doubt that the region is at a crossroads in its modern
history, with potentially significant consequences for global prosperity.
There has never been a more critical time for policymakers to focus on
empowering a sizable pool of untapped talent. Progress will be limited if
women, who represent half the population, do not have opportunities to
succeed. Transition will therefore not be sustainable without accelerating
the pace of reforms, with economic inclusion as a primary goal. The global
recovery provides a unique opportunity, and when peace returns to the
region, the impact of reforms undertaken today will be magnified many times
over. Action therefore is needed now to raise growth and living standards in
a sustainable fashion and meet the aspirations of the people in the region.
Inaction would be disastrous and would mean continued economic stagnation,
rising unemployment, social tensions, and protracted conflict. Now is the
moment to move from goals to action.