At the heart of the region’s economic story over the past 50 years has been some of the fastest population growth in the world.

Since 1950, the number of people living in the Middle East and North Africa (Mena) region has quadrupled from about 104 million to about 450 million today, second only to sub-Saharan Africa in terms of population expansion.  

The growth is set to continue, with the region’s population projected to reach about 700 million by 2050, according to the Washington-based Population Reference Bureau.

Youth boom

The region’s demographic expansion is characterised by the increasing proportion of young people, with more than 50 per cent of the population under 25. This is a huge opportunity to drive economic growth, but it also puts enormous pressure on governments to meet the expectations of the region’s 'youth bulge’. 

The threat of failing to meet these expectations was highlighted by the Arab uprisings of 2011, which were driven by a growing frustration with government corruption and the state’s failure to create jobs and meet living expectations.  

Five years on from the so-called 'Arab Spring’, meeting these expectations and harnessing the economic power of the region’s demographics remain the biggest challenge as well as the biggest opportunity for the Middle East.

The biggest challenge is creating jobs for local nationals. The inability to create new jobs at the same rate as the growth in population of people at working age means governments risk missing out on the ‘demographic dividend’, which is when a growing, educated population enters the workforce but before it begins to age.

Harnessing demographics

“Strong population growth and a large youth population can be a spur for growth if this is met with employment opportunities, and this is the critical point,” says Monica Malik, chief economist at Abu Dhabi Commercial Bank. “A rising workforce is a stimulus for consumption and wider economic growth.”

A proportionally larger working population can drive rapid economic growth, but huge numbers of people in the Middle East are economically inactive.

In the region’s three most populous markets – Egypt, Iran and Algeria – just 52.9 per cent of working-age people were employed in the formal sector in Egypt in 2014, 47.5 per cent in Iran, and 46.8 per cent in Algeria, according to the Washington-based World Bank.

For working-age women, the picture is worse, with just 26 per cent, 18 per cent and 16 per cent of women employed in Egypt, Iran and Algeria respectively.

Disappointing results

Policymakers are acutely aware of the importance of the issue, and multiple policies have been designed to reduce unemployment and stimulate private sector investment and growth. But the results have been disappointing so far.

“We are at the cusp of taking advantage of this demographic dividend, and the window of opportunity lasts 10 or 15 years,” says Bessma Momani, associate professor of political science at the University of Waterloo in Canada, and author of 'Arab Dawn: Arab Youth and the Demographic Dividend they will Bring’.

“It is incumbent on governments to provide policies and reforms that create the environment for economies to take off; to attract investment and put in transparency and accountability measures, undertake real reforms towards diversification, and challenge the crony capitalism that continues to dominate the economic system.”

Structural reform

The region is failing to create enough jobs to absorb growing numbers of labour market entrants by a wide margin. Only 49.2 per cent of the population in the Mena region participates in the labour market, compared with 63.5 per cent globally, according to the World Bank. Of these, 11.2 per cent are unemployed, almost double the global average.

Among graduates, unemployment has reached unsustainable levels. A third of unemployment in Egypt was among its university graduates in 2012, according to the World Bank.

However, a 2015 report by US-based JP Morgan and regional employability non-governmental organisation (NGO) Injaz suggests graduates are unwilling to take the private sector jobs on offer due to a mismatch in expectations. The NGO says the graduates prefer the security and ease of public sector employment, which has been used to soak up unemployment for decades.

In Egypt, this tactic inflated the public sector wage bill to £E179bn ($22.8bn) in 2013/14, and is projected by the Washington-based IMF to reach £E289bn in 2018/19.

Private participation

The tightening of fiscal belts in the region, following the fall in oil prices over the past 18 months, places increasing emphasis on the need for the private sector to take up the slack.

“With low oil prices, the GCC private sector is increasingly required to lead economic development plans and be the main source of employment, especially in countries with comparatively larger populations relative to hydrocarbons resources, namely Saudi Arabia, Bahrain and Oman,” says Malik.

Earlier attempts at reform have not seen the desired results: foreign and domestic private investment; job creation; and rapid economic growth. Annual GDP growth stalled at 2.5 per cent across the region in 2014, compared with 6.9 per cent in South Asia and 4.5 per cent in sub-Saharan Africa, according to the World Bank.

The population growth rates mean living standards are stagnant, with GDP per capita growing at just 0.5 per cent in 2014.

Increased foreign direct investment (FDI) could provide a solution, but the same bureaucracy and corruption that stifle the domestic private sector put off outside investors.

“The region needs a business environment that attracts [FDI], to support employment growth,” says Malik.

SME focus

Small and medium-sized enterprises (SMEs) account for 30.2 per cent of employment in the Mena region, compared with 49 per cent in OECD countries, and represent a major opportunity for inclusive growth.

“There is a high rate of entrepreneurialism among the youth, but they face the pressures many small companies do,” says Momani. “Crony capitalists suck up the market and don’t leave SMEs room to expand. Governments need to make a choice between supporting start-ups and protecting large family firms. Economies are not based on these 10 or 20 favoured firms but on lots of small businesses.”

Attempts to boost SMEs and their expansion through creating friendly legislation and funds for lending have fallen short due to entrenched bureaucracy and banking policies that prevent SMEs from accessing finance.

Some countries have made attempts to redress the situation. Oman set up the Sanad and Al-Raffd funds in 2001 and 2013 respectively, while banks in the sultanate are mandated to increase the proportion of their lending to SMEs to 5 per cent of the total.

In North African countries, the government and development banks have set up specific SME funds, such as the Bedaya fund in Egypt, while initiatives like Wamda – described as an enabling platform for entrepreneurs – provide different types of support across the region. Cairo has also promised a one-stop shop to reduce the burden of bureaucracy on SMEs.

Empowering women

Promoting SMEs could also raise the level of economic participation by women, which is currently stuck at 21.7 per cent regionally, compared with more than 50 per cent globally.

“Small businesses need microcredit to scale up, but banking laws still discriminate, especially against women who have [fewer] assets and so are at a disadvantage,” says Momani. “The Grameen Bank model has been a great success in Bangladesh, listening to the business case rather than assets. Islamic banking has yet to really think about this.”

Due to cultural factors, such as having to work regular hours close to home, and hiring discrimination, women tend to prefer either public sector jobs or setting up micro enterprises. The situation has been slow to change, leaving a large proportion of the population not contributing to the economy.

“In Saudi Arabia, some women want to work, but are facing real barriers,” says Momani. “We have seen an enormous amount of change in the past three years and the number of women working in the public sector has increased rapidly.”

There is also an opportunity to bring informal economic activity into the formal sector. Not only would this increase job security, it would expand the government’s revenue base.

“The informal economy should be supported by bringing companies into the formal economy,” says Momani. “Informal jobs can become profitable, but we need to understand how much is just a survival mechanism, or a form of begging.”

Education reform

Many say education reform is essential to delivering real progress and call for curriculums in the region to move away from systems heavily focused on memorisation and theory to ones centred on encouraging creative thinking and practical skills.

There is also a lack of soft skills and career guidance, according to the JP Morgan/ Injaz report, meaning graduates do not know how and where to search for jobs and effective training schemes.

“The key requirement is creating a workforce suited to the needs of the economy and the private sector,” says Malik. “There are some good programmes within the private sector for on-the-job programmes, given the time for educational reforms to filter into the workforce.”

For the current generation, various schemes are under way to redress the situation, involve the private sector in education and provide training for young people. These include the Nitaqat (Saudisation) strategy in Saudi Arabia and Injaz regionally, but results have been mixed.

Better resources

But without investments in teacher training, and better resources for schools and universities, the majority of young people will be left without the skills they need for the workplace. As the global economy becomes ever more focused on knowledge and technology, the Mena region is falling further behind.

Creating a better environment for the private sector and foreign investment, more investment by governments in infrastructure, and education reform should all support one aim: increasing the rate of economic growth. Without genuine progress in this direction, the pressure of population growth will build again, wasting the demographic dividend.

“This is a political challenge,” says Momani. “People said loudly during the Arab Spring that they wanted firstly bread – jobs and economic opportunities – and secondly political reform. If they don’t see the economic situation change for the better, they will lose faith in governments and call for political change