To create jobs in the Middle East you need to have growth

31 October 2003
The Middle East is suffering from high levels of

unemployment and underemployment. Estimates vary, and none should be treated as authoritative, but joblessness in the more populous countries of the region could be 25 per cent or more.

Unemployment causes poverty and associated evils, including ill-health and reduced life expectancy. Some argue that extremism, including Al-Qaeda-style movements, is due to high levels of joblessness among young men in Muslim countries. Everyone agrees that involuntary unemployment is bad and should be reduced, if not eliminated. The arguments start when people debate how jobs should be created.

For a quarter of a century, the dominant school of thought is that market solutions should be used and governments should desist from using macroeconomic measures to promote employment. If the state must intervene, it was argued, this should be confined to tinkering with the supply side, not demand.

The results of this global experiment are ambiguous. Fiscal restraint helped cut inflation and allowed interest rates to fall to their lowest levels for half a century in the US and Europe. This stimulated borrowing and investment but also encouraged in the late 1990s a stock market bubble and an unsustainable property price boom.

The employment growth record has been mixed. The US enjoyed a job creation boom in the 1990s while German unemployment, some say due to inflexible labour markets, spiralled in the same period to a post-1945 high. Employment in the UK is at a record level. But was this due to tight fiscal policies in the 1990s or to the more relaxed fiscal posture since 2001? There is evidence to support each school of thought.

When it comes to developing countries, the issue is clearer. Economies generating the largest number of jobs are the ones with the highest rates of growth.

So how do you stimulate growth in developing countries? In those parts of the Middle East where oil is the principal source of hard currency earnings, the economic model is simple. The state through its control of national oil companies enjoys a balance of payments surplus with the outside world. It in turn spends this money in the local economy and usually runs a deficit with the domestic private sector as a result. Local business completes the cycle by exporting some of its surplus back to the outside world. An increasing amount of this surplus is staying at home, but mainly in the high-growth economies of the region.

To keep economies moving forward, therefore, governments in oil-rich Middle East countries must keep spending, even if that means budget deficits are larger than the IMF is happy with. Rising domestic indebtedness is a price worth paying to maintain growth and job creation. And it is sustainable provided the external balance can be kept under control in the medium term.

The origin of rising unemployment in the Middle East in the past 20 years is the deterioration in the balance of payments position of leading economies following the 1986 oil price slump, which forced most of them to adopt deflationary policies. Some Middle East countries have won plaudits for prudence, but this ensured the rate of job creation fell well below target, in some places to crisis levels.

We now appear to be at the end of this cycle. Oil prices around or above target levels in the past four years have helped Saudi Arabia, Iran and other major oil exporters rebuild their finances. It is now time for them to put their foot on the job-creation accelerator through major public programmes. The result, undoubtedly, will be deficits in excess of what the IMF would prefer. But there is no real alternative. Without high levels of public spending, growth in most of the Middle East will fall far below the level needed to maintain employment levels.

Economic history has clear lessons for those seeking to create jobs in the region. Balanced budgets please accountants, but they often make unemployment worse, not better.

Microeconomic measures like new investment rules and tax codes help, but growth is the key to achieving full employment. The Middle East needs more economic expansion. Responsibility falls on the governments to make it happen. And the rest of the world, if it is sincere about wanting to create a better life for the young people of the region, should help rather than hinder them in their efforts.

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