How the Middle East Can Escape the Middle-Income Trap
The Middle East and North Africa urgently needs a new social contract focused on economically empowering the hundreds of millions of youth who are expected to join the labor market in the coming decades. The key to success will be technological adoption, adaptation, and innovation, encouraged and facilitated by governments.
WASHINGTON, DC – For developing countries, achieving middle-income status is both a blessing and a curse. While extreme poverty and deprivation have been overcome, what typically follows is a growth slowdown that, historically, has made further progress toward high-income levels exceedingly rare. That has certainly been the case for the largely middle-income countries of the Middle East and North Africa (MENA). But is there a way out?
Over the last 50 years, MENA countries have faced economic slowdowns and even stagnation. While many of these economies, especially those that are dependent on hydrocarbon exports, have experienced periods of stronger growth, no durable catch-up has occurred.
The pervasiveness of the middle-income trap among MENA countries points to common structural impediments to growth. In particular, all suffer from a lack of private-sector dynamism, owing to their lack of will or ability to adopt the latest technologies. This has precluded sustained productivity growth, without which it is impossible to sustain an increase in overall living standards.
Underlying the private sector’s lassitude is a social contract that has endured for more than 50 years, whereby the state provides public-sector jobs and universal subsidies, in exchange for public quiescence and a lack of accountability. By de-risking the economic lives of citizens, this social contract stifles entrepreneurship and innovation. It has also undermined the delivery of public services, while stoking mistrust of government.
Even if MENA governments wanted to uphold their end of the bargain, they could not. Rising debt levels are already forcing them to cut public spending, traditionally the main engine of economic growth in the region, and start dismantling universal subsidies. As geopolitical tensions reduce tourism and foreign investment, uncertainty continues to mount.
Moreover, MENA public sectors can no longer absorb rising numbers of university graduates. While there are serious concerns about the quality and accessibility of schools, the fact is that those entering the labor market are increasingly educated, with women having caught up to and even surpassed men in many countries.
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Yet these improvements to human capital have not translated into faster economic growth. Instead, the MENA region has some of the world’s highest rates of youth unemployment, leading to the world’s largest brain drain, as educated young people seek opportunities abroad. One major reason is that MENA governments fail to encourage – and, in some cases, actively discourage – innovation. While some countries worry that automation is resulting in job losses, the MENA region’s failure to adopt new technologies is impeding job creation.
The problem is that MENA governments, seeking to protect incumbents – especially in sectors like banking and telecommunications – impose excessive and outdated regulations that deter new actors from entering the market. This short-circuits competition, undermines the diffusion of general-purpose technology, and blocks the type of adaptation and evolution that underpins a vibrant private sector.
This is not the case in, say, Asia, a region that embraced new technologies in order to establish itself as a global manufacturing hub. In fact, thanks to automation, Asia is likely to retain its manufacturing dominance, even after wages rise above the traditional levels of manufacturing-intensive economies.
Against this background, MENA countries cannot hope to pursue the traditional development path of reliance on manufacturing exports. Instead, they will have to develop a more sophisticated digital economy that takes advantage of young, educated workforces. This will require, first and foremost, the adoption of new technologies, and even the provision of “digital public goods” like fast and reliable broadband Internet and digital payment solutions.
Although Internet connectivity and digital devices have become ubiquitous in the MENA region, they are used for accessing social media, rather than for launching new enterprises or employing people. This probably has something to do with the fact that the region rates the lowest in the world for bandwidth per subscriber. When it comes to mobile money, for example, East African countries outperform their MENA counterparts.
The MENA region urgently needs a new social contract focused on using technology to empower the hundreds of millions of youth who are expected to join the labor market in the coming decades. This will require not just the provision of digital public goods, but also an overhaul of the regulatory system, with Kenya – where a light-touch regulatory approach facilitated the rapid growth of the peer-to-peer payment system M-Pesa – offering a useful model. Easier market entry for new actors, including non-bank operators, is also essential.
Technology can lift MENA countries out of the middle-income trap – but only if the region’s governments take the lead. Otherwise, the region will continue to lag, and its people will continue to seek their fortune elsewhere.