JOBS FOR SHARED PROSPERITY
FIGURE 4.10 Employment growth in selected countries in MENA, 2007–10
or oc co M
Lib Eg ya yp t, A ra b Re p.
Re Syr pu ian bl ic Le ba no n Ye m en ,R ep .
Percent
100 90 80 70 60 50 40 30 20 10 0
Ar ab
128
≥ 10% employment growth 0–10% employment growth < 0% employment growth Source: Stone and Badawy 2011. Note: MENA = Middle East and North Africa.
During their expansion, these firms tend not only to create employment but also to demonstrate economic dynamism by adopting new technologies and processes or by diversifying into new products. However, so far, such firms are rare in MENA economies.
Explaining the lack of economic dynamism in MENA The following sections document how policy distortions—including burdensome business regulation and their inconsistent implementation as well as energy subsidies that distort relative input prices—depress the demand for labor. MENA’s performance is benchmarked against that of dynamic emerging economies in other regions.
Energy subsidies depress the demand for labor One reason for MENA’s lackluster performance in generating jobs is that labor taxes and subsidies on other inputs, such as energy, increase the relative cost of labor and limit its demand. High energy subsidies in Arab countries continue to distort price signals, resulting in a misallocation of investments toward
energy-intensive industries. In turn, this misallocation has discouraged investments in labor-intensive industries and hence has limited job creation. As a result, economies in the Arab world are among the most energyintensive in the world (figure 4.11). Energy-intensive production is associated with large investments in capital. Figure 4.12 compares the capital intensity in Egyptian and Turkish firms in selected sectors and shows how in some manufacturing (textiles and garment, food products, and chemicals), firms in Egypt are more capital intensive than firms in Turkey,11 despite Turkey’s higher GDP per capita. Fuel subsidies are disadvantageous not only because they repress the demand for labor but also because they suppress incentives to innovate, thereby impeding productivity growth, which is a crucial determinant of long-run labor demand. They tend to benefit older and publicly owned fi rms disproportionately, which in turn are likely to use more outdated technologies and consequently to use more energy (see, for example, figure 4.13, which depicts the kernel density of energy use in Egypt by fi rm age and ownership). In benefiting less efficient fi rms, subsidies not only distort the demand for labor but also repress market forces that would push older and public fi rms to innovate and improve energy effi ciency to remain competitive. Moreover, subsidies are fiscally very costly. For the year 2010, they have been estimated to account on average for about 9 percent of GDP in MENA countries (Silva et al. 2013). Their removal could pay a double dividend in employment creation if (some of) the freed-up fiscal space were used to reduce labor taxation, which may affect the demand for labor.
A business environment that maintains privilege On average, MENA economies rank average in overall business environment—on par with China; worse than, say, Turkey but better than Brazil or Indonesia. A comparison of the scores of MENA countries in