Oil-producing Middle Eastern nations must embark on radical reform of public sector labour markets in order to diversify their economies and overcome the slump in oil prices, the World Bank said yesterday.
As research shows that countries with higher male unemployment rates are more likely to send fighters to so-called Islamic State (Daesh), economic development needs to be inclusive and raise employment levels, Shanta Devarajan, the World Bank’s chief economist for MENA, told GlobalMarkets.
“These countries are trying to diversify their economies to reduce their dependence on oil,” said Devajaran. “I do not think you can do that without reform of the public employment programme.”
Public sector wages are so high, and there are so many people employed in the state sector, that it is very difficult to develop a competitive private sector, said the economist.
Bruno Versailles at the IMF’s Middle East & Central Asia department said these countries were facing “a new reality”. “They will have to transform their economies. The government cannot give so many public sector jobs, and there needs to be a re-orientation of growth to the private sector, he said.
Data from the IMF show that all Gulf countries increased their dependency on oil from the start of the century until crude prices hit their peak in 2014. Between 2011 and 2014, oil accounted for more than 90% of fiscal revenues in Saudi Arabia, and more than 80% in Bahrain, Kuwait and the UAE. The World Bank now expects growth to fall by more than half to 1.6% in 2016, and prospects for a rebound look tepid if reforms do not arrive.
In some nations, progress has begun on the public employment side: Algeria has announced a freeze in public salaries. These moves go in the right direction, but are mostly “tiny steps”, says Devajaran.
With the rise of extremism in the region, countries need to act fast. Unemployment — in particular among young males — is one of key factors encouraging radicalisation and driving recruits for ISIS. The higher the rate of male unemployment in a given country, the greater the propensity for that country to send fighters.
Economic development is therefore crucial. “We need economic development of a particular kind — development that brings inclusion. That is the key,” said Devarajan. “If you want to reduce that level of extremism, you need to work on stimulating employment via private sector job growth.”
As well as the human cost of the conflict, violent extremism has had a devastating effect on Syria and Iraq’s economies. The UN estimates investments of $150bn-$200bn will be needed to bring Syria’s GDP back to pre-conflict levels. In Iraq, the non-oil economy contracted by 14% in 2015.