The Employment Challenge in MENA: Unemployment high and rising Unemployment rates in MENA region are among the highest in the world; they range from 10% (Egypt) to 29% (Algeria) and average around 20% Labor force is growing faster than employment growth in MENA countries---tripling open unemployment rates between 1980-98 Real wages fell by 30-50% in 1980-90, and have stagnated or fallen since

Vastly More Jobs Needed in Future 50 million new jobs need to be created over the next 10 years to employ expected additional job seekers---four times bigger than in Europe &C.Asia, about same as in all of Latin America, a region 3 times bigger in size (GDP), and 2/3rds in all of Sub-Saharan Africa. Employed workforce would need to rise by almost 60% in 10 years; this was not accomplished even by East Asia in its period of high growth 6.5 million new jobs required annually, just to cut the present unemployment rate by half

Unemployment Severest Among Young, Educated, & Female Unemployment Severest Among Young, Educated, & Female. Sixty percent unemployed are first-time job seekers. Unemployment rates are 2.7 times and 1.4 times higher for job-seekers aged 15-19 and 20-24 years old.

Previous engines have run their course—govt Previous engines have run their course—govt. jobs, migration, agriculture MENA public employment is already high—53% in Algeria, 35% in Egypt, 32% Jordan, 20% in Morocco—versus 6% in all DCs and 18% in OECD. Queuing for public sector jobs growing, as resources for public sector expansion have dissipated Migration opportunities, 10% of workforce in Egypt, are slowing Agriculture employment, 30% of workforce, is falling

Trade expansion has promoted job creation in many countries Trade expansion, especially in the form of rising exports of manufactured goods, has been a major source of job creation in many countries Examples include Mexico after NAFTA, east Asian economies before the crisis of 1997, and accession countries in ECA But equally, many others have not gained, as in large parts of Latin America and elsewhere

Mexico: Big jump in manufactured exports and employment after NAFTA in 1994

Indonesia: Big jump in manufactured exports and employment after reforms in 1986

Morocco: Employment and Exports Go Together---Rising in 80s, Stagnant in 90s

Cross-country regression results show robust positive link between trade flows and jobs in the manufacturing sector The relationship between trade openness and the employment ratio in manufacturing draws on a regression on a panel of developing countries that also controls for differences in real wage costs, productive capacity (measured by the capital-to-labor ratio), and country-specific fixed effects. The evidence suggests that developing countries with greater participation in trade have the potential of creating more jobs in manufacturing, because trade expansion leads to delocalization of production in developing countries in labor-intensive manufacturing—such as textiles and clothing, footwear, and food processing. Despite still high market access barriers in labor-intensive manufactures, developing countries’ exports increased sharply in the 1990s, and their export market share now surpasses that of high-income countries. Faster growth of, export-oriented, labor-intensive manufacturing, spurs the demand for labor and boosts workers’ earnings.

However, in MENA, trade expansion has contributed little to the creation of jobs in manufacturing

Possible causes of weak impact of trade on jobs in MENA: Exports are concentrated in resource-based, low value-added products, whose growth has only a limited impact on labor demand and employment; In hydrocarbon-rich countries, manufactured exports are concentrated in the downstream energy industries, which are capital-intensive and have only a limited impact on job creation; FDI remains limited, because MENA trade is poorly integrated into rapidly expanding cross-border production sharing networks. Weak responsiveness of foreign and domestic investment reduces the impact of trade liberalization on job creation. Over-valued exchange rates can devastate firm competitiveness, as in Egypt, as can financial sector imperfections Labor markets---public sector, wage rigidities

Weaknesses in the investment climate play a critical role—and trade creates more jobs in developing countries that attract large amounts of FDI… Evidence from a regression run on a panel of developing countries that receive large amounts of FDI as a share of GDP.

…while trade expansion does not significantly add to jobs when investment climate is weak and FDI is low Evidence is from the same regression, run on a panel of developing countries where FDI as a share of GDP is limited.

Improving trade-related services and strengthening the investment climate would help MENA participate in global production sharing and make trade work for jobs Preconditions: Removing bottlenecks in transport logistics, communications, and the provision of financial services by opening up services markets to competition; Streamlining customs clearance procedures and removing paratariffs; Strengthening the investment climate Because of low labor costs and good human resources, MENA countries could become attractive locations for assembly operations The association agreements with the EU have the potential of facilitating integration into EU production networks

Employment growth for young educated workforce in small firms and high start-up rates in small enterprises is critical and evident New entry and investment, usually in small enterprises, is the key Trade reform shows fastest annual labor growth in small firms with less than 20 employees, and highest start-up rates---e.g., in Ghana In Tunisia and Jordan, smaller firms have shown rapid gains in employment in recent years (10,000 jobs in the IT sector, and similar in new export sectors). Regulatory improvements, exchange rate policies, are especially central to spur new entry

But the political economy adjustment costs are also very large, and need to be carefully managed Losers from trade liberalization are inevitable---usually large often state enterprises in protected sectors with high wages and unionization Politically well-connected and influential beneficiaries can undermine trade reform, with winners dispersed and losers concentrated---the information asymmetry problem Experience suggests the critical necessity of coherent and united economic teams in charge of reform Political support for trade and investment reform is also essential amongst exporters, private sector, unions, and the battle for ideas in the media. The pace and sequence of reforms may favor building pro-reform coalitions and transition time for firms to restructure.