The Middle East in a Post Oil-Boom Era?

Navtej Dhillon
Navtej Dhillon Former Brookings Expert

January 30, 2009

Editor’s Note: Adapted from remarks delivered at a Project on Middle East Democracy (POMED) and SAIS International Development Program panel: “Foreign Assistance in a Time of Crisis: Priorities for a New Administration” on January 29, 2009. Daniel Brumberg, Acting Director of the United States Institute of Peace’s Muslim World Initiative, and Jim Kolbe, Member of the United States House of Representatives, 1985-2007, were co-panelists.

A year ago, my colleagues and I were espousing that, for the first time in the Middle East’s recent history, the region was enjoying two dividends simultaneously: an oil boom and a large youthful population. We argued that economic growth coupled with expanding opportunities for a large youthful population could create a spiral of economic development. This would be the generation that secures good jobs, accumulates savings, buys their own apartments, and marries in good time, forming the region’s future middle class.

Today both of these dividends – high economic growth and expanding employment opportunities – appear to be in jeopardy, at least in the short and medium term. With the global financial meltdown and the drop in oil prices from their peak last July, economic growth is slowing in the Middle East. This means the existing challenges of employing a large youthful population are bound to be exacerbated, with real risks of heightening economic discontent.

U.S. foreign assistance to the Middle East must be reassessed in order to effectively support countries through this difficult transition, as economic security and recovery will take on a renewed urgency in the region. This means agreeing on the main goal of U.S. assistance given that resources will be limited and many different agendas will beckon, ranging from democracy promotion to counter-terrorism to development. It will mean maintaining investments in areas where gains have been made, and identifying new opportunities – some of which might emerge from the current conditions – to support economic reform.

Demographic Transitions in the Middle East and the Varied Stages of the “Youth Bulge”

Young people in the Middle East (15-29 years old) constitute about one third of the region’s population and comprise nearly half of the region’s working-age population. This has provided the region with a so-called demographic window of opportunity: a potential for increased economic growth driven by the decline in dependency ratios, an increase in per capita labor inputs, and rising rates of savings and domestic investment. However, this demographic dividend only materializes if there is sufficient investment in human capital development and opportunities for employment.

Countries in the region are at different stages of this demographic transition, and therefore a slump in economic growth and the recovery phase will exert different pressures on individual countries. For example, Lebanon’s fertility rates began to decline before the 1970s, thus their youth bulge has already peaked. A small economy like Lebanon’s with very limited natural resources has only its human capital as a comparative asset, and now faces a shrinking window of opportunity to take advantage of it. Among oil exporting countries, Iran’s youth bulge has already peaked where as Saudi Arabia’s will not peak for years to come. Egypt’s youth bulge has only recently peaked, and a maturing cohort is now exerting pressures not only on the education system and labor markets but also the housing market. Some of the poorest parts of the region such as the West Bank & Gaza and Yemen will continue to face a growing youth population for the next decade and beyond.

Looking Back at Boom Times: How did the Young Fare?

So how successful have Middle Eastern countries been in tapping into this demographic dividend? So far, the record is mixed. Progress has been made in access to education: at the primary level, access is nearly universal in countries across the region; secondary enrollment has risen to nearly 74 percent. Importantly, women’s educational outcomes have improved and have even surpassed those of men in several cases. There have been some modest improvements in the quality of education, as some countries have attempted to reform curricula, incorporate additional measures into rigid national examinations, and modify university admission criteria. Finally, successful expansion of private sector job creation has occurred in a number of countries, contributing to a drop in unemployment rates across many countries.

However despite these gains, young people continue to face severe challenges in securing employment. As my colleague Djavad Salehi-Isfahani and I have argued elsewhere, this generation remains trapped in an incomplete transition: the public sector is not big enough to absorb them and the private sector is too small.

This stalled transition is reflected in four major trends common to most labor markets in the Middle East. First, while some countries (such as Algeria, Morocco, and Egypt) have seen a drop in their unemployment rates, the youth unemployment remains considerably higher than adult unemployment. In Egypt, recent data shows that youth unemployment stood at 16.9 percent in 2006 down from 25.6 percent in 1998. While declining, this is still much higher than the overall unemployment rate of about 8.3 percent. Second, unemployment is increasingly concentrated among the educated youth. For example, my colleague Ragui Assaad shows that of the 1.6 million young Egyptians out of work, 95 percent have attained a secondary education or higher. Third, unemployment spells for youth can last years: the average duration of unemployment for new labor market entrants is 2.5 years in Egypt, 3 years in Iran, and 3 years in Morocco. This shows a severe disconnect between the skills and expectations of the young workers and the availability of jobs. Finally, the majority of new jobs created in the private sector have been created in the informal sector or in temporary positions in the formal private sector. These jobs often lack training to build skills, are characterized by low wages and fewer benefits, and do little to help youth transition to the next phase of their life. As Assaad has shown, among those youth who begin their career with an informal job, a small percentage end up making the transition to a formal job. Not surprisingly, young people prefer the “safety” of public sector employment – perhaps even more so now, with confidence in the private sector and risk-taking at historically low levels worldwide, following the economic collapse.

Looking Ahead: Weathering the Downturn

Today, these existing challenges in the economies of the Middle East risk becoming bigger and more intractable, as the effects of the global economic downturn continue to be felt. Already, GDP growth projections for the Middle East in 2009 have been slashed to 3.9 percent compared to 6.1 percent last year (IMF). While other regions are experiencing these shocks more sharply than the Middle East, a slowdown in growth has particularly strong effects because of the powerful demographic pressures in the region. Over the past decade, the annual growth of the regional labor force averaged nearly 3.5 percent, compared to 0.8 percent in East Asia and 2.3 percent in Latin America.

During these uncertain times, it will be important to watch the five transmission mechanisms through which the Middle East, and consequently its young population, are affected, while noting that the effects will not be uniform across countries.

Oil Prices.
Dropping oil prices is bad news for net exporters such as Saudi Arabia, Iran, and Kuwait but provides relief for commodity importers, such as Jordan.

As consumer demand in Europe and the United States weakens, export markets – not just for hydrocarbons, but for other goods and services such as phosphates, food and garment manufacturing, and textiles – will suffer and this could slowdown job creation.

Capital flows.
All countries in the region are, or aspire to be, big destinations for foreign direct investment (FDI). Egypt has had notable success in attracting FDI over the past several years, however Trade and Industry Minister Rachid Mohamed Rachid recently predicted it would decrease from $14 billion to $10 billion in 2009.

Many households in countries like Egypt, Morocco, Jordan, and Yemen depend heavily on remittances from family members working abroad to finance their consumption and investments. Slowing demand for oil will particularly impact expatriate Arab workers in the Gulf countries, and a recession in Europe could slow flows to North African homes.

Foreign Aid.

It is hard to remember a time in recent history in which all major donor economies were tanking at the same time. It is hard to predict the effects this will have on aid flows. President Obama had promised while campaigning to double foreign assistance, but that may be one of the first campaign priorities to be jettisoned in this time of fiscal austerity.

U.S. Foreign Assistance to the Middle East: Toward a Positive Agenda

Arab leaders are now voicing their concerns about the impact of the grim global economic outlook on their populations, especially the young. U.S. assistance should heed these calls from Arab leaders and support a new agenda for economic development and regeneration. By maintaining our aid commitments to the region, President Obama can demonstrate the U.S. government’s commitment to a positive agenda toward the Muslim world. The question is: how can the U.S. use its increasingly limited resources more effectively? The following are some initial recommendations:

  • Establish clear goals.
    There are too many agendas at the moment – from democracy promotion to counter-terrorism to economic development. A major task must be to place U.S. aid in a vision of peace and prosperity, which takes into account the opportunities and risks posed by the current economic landscape. Many Middle Eastern countries face a complex set of challenges which go beyond getting more kids enrolled in school or building more health clinics. They entail changing education systems for better quality, stimulating private sector-led growth, shifting public attitudes away from public sector jobs, expanding credit and housing markets that work for ordinary people. These changes require institutional reforms and, in dialogue with Middle Eastern governments and civil society, U.S. assistance strategy should be updated to support these reforms.

  • Capitalize on new opportunities for promoting economic reform in countries.
    With crisis comes opportunity – the economic climate could provide new opportunities for institutional reform. Middle Eastern countries might be more ready to undertake reforms such as introducing better developed mortgage financing to improve access to affordable housing, vocational education reforms, and introducing better social protection for workers. As high-end tourism falls, my colleagues are quick to point that countries like Jordan and Egypt might be able to position themselves as middle-low end tourism venues, which will in turn create employment. The development of small and medium enterprises (SMEs) has huge potential – efforts can be coordinated between the U.S. and local partners to improve their access to credit and information technology.

  • Preserve the development gains made in the past decade.
    U.S.-sponsored activities through the Middle East Partnership Initiative (MEPI) and other programs have contributed to widening access to education, skills, and training programs and building a more open civil society. As we face fewer resources, it is critical that those initiatives that have been successful are scaled up, not scaled back. For example, women’s participation in labor markets across the region has been steadily increasing, though from very low levels. Building on these achievements, U.S. assistance should continue to prioritize the inclusion of women in the region.

  • Target new Middle Eastern countries now, rather than post-crisis.
    U.S. aid tends to target countries that are in the midst of, or recovering from, conflict and instability. For example, Afghanistan wasn’t a priority country to the U.S. until after 2001. Between 2001 to 2006, the U.S. gave 4 times as much aid to Afghanistan as it had in the previous 30 years. As U.S. commitments to Iraq are scaled back, perhaps there is an opportunity to re-direct aid toward countries that have been neglected. The U.S. can help to preempt problems in countries such as Yemen – which faces the twin crises of depleting natural resources and strong demographic pressures for years to come. In 2007, U.S. official development assistance amounted to around $4.7 billion for the Middle East, of which Yemen got only $19 million (constant 2006 dollars OECD ODA). Effective education systems, private sector labor markets, and economic institutions are more easily improved than built from scratch following conflict or decades of deterioration.

In conclusion: what was true in boom times is even truer in tough times. In a post-oil boom era, Middle Eastern economies need their young workers more than ever before, because it is this section of the population which will work, produce, and stimulate domestic demand to ensure economic recovery and regeneration. Unfortunately, it is also the part of the population that is most vulnerable to being pushed further out during a downturn.