Middle East

Last week I attended a high-level conference in Marrakesh on jobs and growth in the MENA region. What became clear is that, like the mythical Roman god Janus, there are two faces to most of the region’s economies. We can call them the young and the old. And that the choice for MENA governments to make is not which face of Janus to support, but rather how to ensure that both can co-exist and prosper.  

The most visible successes in this genre are companies like e-commerce site Souq.com (bought last year by Amazon) and online transport-booking firm Careem, which are both now worth hundreds of millions of dollars and provide employment opportunities not just for IT professionals but drivers, accountants, marketing experts, lawyers, and blue collar workers alike. While it's noteworthy that Careem now employs 2,000 people and 500,000 drivers, what is more important is that it has empowered women to take up a profession that was hitherto male dominated.

And beyond these household names there are thousands of other new ventures that are spurring innovation and dynamism in the region, sometimes in the most unlikely circumstances. From a service matching job seekers with opportunities in Yemen to the Tunisian company that has designed and produced an amphibious car that it is successfully exporting to Europe and elsewhere, there are many examples of innovation in the region that are a match for any other part of the world.

One particular focus for innovation is Fintech. Around the world, the exponential growth in digital financial innovation is already disrupting how we transact: providing new ways of saving money, taking loans, making payments, sending remittances, and raising capital. In the MENA region where most people still do not have a bank account, the potential for using Fintech is even greater and some exciting new ventures have taken off in this field in recent years. Startups like Verify, which launched in 2017, are using blockchain technology to facilitate transactions and new ventures taking advantage of new technologies are emerging every week. So, one side of economic activity in the region is very positive, with examples of innovation and entrepreneurship and the promise of exponential growth and financial reward.

These are often companies that depend on the region’s high import barriers for protection from more competitive international rivals, or depend on favorable access to finance from public banks and a preferred position in selling their products to the government. Some of them are public enterprises that have lagged behind in modernizing their plant and equipment, management techniques, and business models, which need not just protection but regular handouts from the public purse to make ends meet.

The very technology driving growth and innovation in one part of MENA economies is seen as a threat by other companies whose business model and employment prospects will be disrupted unless they adapt and change much more quickly than in the past. To be sure, not all large enterprises are a drag on the economy. Some of the best known names are also the most effectively managed—from flag carrier airlines in the Gulf to fertilizer producers in the Maghreb. But still too many of the region’s traditional companies are lagging in a world where the pace of change is accelerating and only the agile will survive.

There is much to be done on both fronts to reconcile these clashing realities into strong, future-facing, diversified economies. And with a quarter of young people in the region out of work, 20 million more joining the labor force in the next five years, and tens of millions of women who want to take their rightful place in the economy, time is running short to take action.

Thus, I propose the following set of steps:

One of the biggest challenges for any entrepreneur in MENA is dealing with the government bureaucracy. Everything from getting a building permit to a start-up license to paying taxes or dealing with labor regulations can be much more onerous and time consuming than in most other parts of the world. Corruption—petty and grand—can make life even more complicated. In a recent survey, 55 percent of businesses in the region cited corruption as a major constraint. This is higher than the 39 percent in Latin America and the Caribbean or 36 percent in sub-Saharan Africa. Another big concern for MENA businesses is not being able to enforce contracts or to get fair and timely decisions from the courts when they have a commercial dispute. In today’s world when capital is mobile, it is more important than ever for countries to make a concerted effort to attract international firms, and retain the resources and talents of national investors. MENA’s countries must step up their efforts.

As economies become more complex, the state needs to update its role as a regulator. Too many regulations in MENA countries were designed for the state dominated economies of the last century. They need simplifying and modernizing. At the same time, the public sector needs to shed much of its role as a producer. Why are government-owned factories in the region still producing cement or running hotels, businesses that are neither strategic nor natural monopolies? And the public sector can no longer be the employer of last resort—a model that has resulted in bloated bureaucracies, made it harder for private businesses to recruit competitively, and led to a public-sector wage bill that is no longer sustainable given the fiscal constraints that most countries now face. The technology revolution can also be used by governments to simplify how they work and how they interact with their citizens.

Digital economy startups in some MENA countries are hampered by the high cost of internet access—not just for themselves but for their potential clients. Access to finance is harder for firms who work with ideas and algorithms instead of factories and equipment that were part of traditional businesses. Fintech firms generally need a regulatory environment that is more flexible for their startup phase than is the case for established firms in the financial service industry. However, only a handful of MENA countries have specialized Fintech regulations in place today. A key to developing a supportive environment for digital economy firms is for governments to engage with them in a regular dialogue—to understand better what drives them and what is holding them back. This will require developing new channels of communication since the traditional private sector interlocutors for governments are generally representative of the established and older firms.

At the same time, there is a need to modernize the "old" economy. While the digital economy will generate many new successes and attract substantial media attention, the bulk of private sector activity and jobs in the MENA region will continue to come from the kinds of businesses that have been around for a generation. Helping these businesses to grow, modernize, and adapt to a more competitive global marketplace remains a key priority for growth and prosperity. This is where actions to improve the business environment will be most impactful. This is also where gradually opening MENA economies to international trade and investment will help to bring the technology, management skills, and market access that will raise value added and product quality. Finally, this is where a mindset change is necessary to move to promoting private business rather than protecting well connected private businesses.

Education systems worldwide are struggling to adapt to the new skills that will be needed by tomorrow’s workers. In MENA, too many graduates don’t even have the right skills for today’s private sector jobs. There are some good examples of vocational and job related training in countries across the region but these need to be scaled up and mainstreamed. A special challenge is to ensure that the 28 million children in the MENA region in need of humanitarian assistance due to continuing violence, displacement, natural disasters, and economic inequality do not end up as a lost generation robbed of their education and of their prospects. And it is important that women and girls receive the same education and training so they too have the right skills for private sector jobs. Increasing women’s participation in the job market is not just important for them but could generate a trillion dollars of economic growth over the next decade.

In order to implement these four changes, the MENA governments must have a more proactive approach to learning from the successes of their peers. Within the region there are good examples in every area. The United Arab Emirates, Jordan, and Egypt have made fast progress in enabling Fintech startups. Morocco has been able to strategically target and catalyze the establishment of new industries (automobiles and aeronautic parts) which today generate more export revenues than its traditional sectors. Qatar and the UAE have made rapid progress in improving their business environment. Iran and Jordan have valuable experience to share in phasing out generalized and wasteful energy subsidies and replacing them with targeted cash transfers to needy households. Drawing upon the repository of knowledge in regional and international organizations can be an added source.

The task ahead is to learn from each other’s experiences and to adapt them to each country’s own circumstances. This is not glamorous work but it’s what’s needed to move forward. The priority, as Christine Lagarde concluded at the conference, is to act now.

Photo by UN Women/Christopher Herwig

On a recent research trip to Jordan, I (Kate) met a young Syrian woman—we’ll call her Hala. Since fleeing the civil war, Hala has been living as a refugee in one of Jordan’s northern municipalities. With her university plans cut short, she opened a mobile beauty clinic traveling to customers—Syrians and Jordanians—around town for appointments. Jordan does not automatically give refugees the right to work. Under the Jordan Compact, launched at the Supporting Syria and the Region conference in London in February 2016, donors committed $1.8 billion in grants and concessional loans, including to support significant  efforts to increase jobs and improve livelihoods for refugees and Jordanians. As one of several parts of the Compact agreement, the Jordanian government began distributing work permits to refugees working in certain sectors.

Hala is not one of the Syrians to have received a permit, and her beauty clinic did not fall into one of those sectors in which refugees are permitted to work.

Her business was cut short when she started receiving blackmail calls, threatening to turn her into Jordanian authorities for working without a permit if she didn’t agree to anonymous demands. Shuttering her first business, Hala next opened a dress shop in town with her brother—housed in what might compare to a one-room bodega on a New York City corner. On a busy street surrounded by other shops, with men working and resting along the sidewalks, Hala’s dress shop was bustling (our interview relocated a few times within the shop to avoid interrupting customers). Yet Hala no longer stays at her shop if her brother is not there. Men in the area have learned her brother’s schedule; once he leaves Hala to run the shop alone, patterns of intimidating harassment begin.

Being a young refugee woman in Jordan and opening her own business—twice—reflects clear resilience and entrepreneurship that belies the rhetoric of refugees as passive aid recipients. But the lack of personal security hinders Hala’s pursuit of a sustainable livelihood. Verbal harassment and intimidation itself is enough to dictate when and whether Hala, as a business owner, can keep her doors open and turn a profit.

Hala’s situation is not unusual—not for Syrian refugees nor their Jordanian hosts. The personal security challenges extend beyond street harassment. The rise in domestic violence among Syrian refugees is well-documented. There was a spike in early marriage among Syrian refugees in Jordan between 2013 and the first quarter of 2014 (when nearly 32 percent of registered marriages were considered early marriages), and the majority of early marriages as of 2014 involved Jordanian girls. Early marriage puts women and girls at greater risk for domestic abuse and undermines their education and earning potential.

Refugees are entering an economy already under pressure. Even before refugee populations are considered, Jordan’s job market faces serious challenges: a 34 percent youth unemployment rate, a total unemployment rate of 13.2 percent (and per Jordanian officials, reaching more than 18 percent in the first quarter of 2017), and a female labor force participation rate of just 14 percent.

The majority of Syrian refugees are unemployed in Jordan, and while many work informally, those who have received formal work permits since 2016 number less than 70,000 (against the 200,000 goal under the Jordan Compact). The barriers to secure, formal employment for refugees are significant. They face discrimination, harassment, and difficulty accessing safe, affordable transportation, among other challenges.

The other side is that many refugees may not want to formalize. The reasons vary depending on who you talk to. Perceptions that refugees refuse formalization out of fear of losing cash assistance or resettlement opportunities are common. Others (refugees and aid workers especially) indicate it may be the hesitancy of Jordanian employers to formalize. Business owners may be unwilling to register either their refugee employees or their business as a whole—which requires they meet the standards and employee care obligations set by the Ministry of Labor.

Creating sustainable livelihoods, providing the right to work and to own a business, and creatively bringing refugees and native businesses into the formal economy can be steps in the right direction.

Jordan hosts more than 650,000 registered Syrian refugees (and unofficial estimates are closer to 1-1.3 million). The number grows when considering the more than 64,000 Iraqi refugees, and nearly 15,000 refugees from Yemen, Sudan, Somalia, and other countries. Jordan is also home to 2.1 million registered Palestinian refugees. Jordan has a per capita refugee population of 89 refugees to every 1,000 Jordanians, a rate second only to Lebanon.

Jordan has time and again adapted to absorb and integrate refugees into the country. But in the face of the ongoing Syria crisis, international support and domestic measures have fallen short of meeting needs. Refugees must be better included into the Jordanian economy, alongside development of the native labor force and greater economic inclusion of Jordanian citizens.

Ensuring refugees have access to livelihoods opportunities is one of the key factors to broader stability. Poverty can exacerbate personal and community-level security risks. When refugees are seen as aid-dependent, it can stoke host perceptions that refugees are stressing local infrastructure and taking jobs from often already impoverished host communities. But when refugees are allowed to contribute meaningfully to the economy, they gain self-reliance and economic security. This lessens the aid burden on the host country, and alleviates pressure on community-wide social tensions. However, this is no easy task in an environment where unemployment may be as high as 18 percent.

But research shows that refugees can provide complementary skills that increase productivity—one empirical research study shows no direct relationship between the arrival of Syrian refugees and the Jordanian labor market. While there may be potential displacement when adding new numbers to a workforce already facing high unemployment, good policies around right to work, including without sector-specific limitations, and right to own a business can mitigate adverse impact and even create new opportunities benefiting Jordanians and Syrians alike.

Beyond job creation, training, and matching initiatives, it is important to support the development of small Jordanian and Syrian owned businesses. In Jordan, micro and small enterprises (MSEs) supply about 40 percent of GDP, and in 2014 made up 98 percent of registered businesses. Policies and programs that help entrepreneurs create, formalize, and grow more of these businesses could be a prime opportunity to develop the local economy. For comparison, Syrian business owners in Turkey have invested almost $334 million into the Turkish economy, with more than 10,000 estimated Syrian-owned businesses in Turkey. This also benefits the host communities: Syrian businesses create jobs, with Syrian business owners employing 9.4 people on average.

CGD research on refugee compacts, conducted in partnership with the International Rescue Committee,  shows how donors can play an important role by providing resources and support to both refugees and host communities, helping shift from a zero-sum mentality to one of mutual benefit. The Jordan Compact has been an important turning point in responding to the needs of Syrian refugees and their hosts. Critical avenues for dialogue around policy, programming, and investments have been unlocked.

But there are still areas that require substantial improvement, particularly around policy changes with respect to refugees’ right to work across sectors, right to own a business, and a better business environment to bring (and keep) greater investment to Jordan.

The livelihoods element is just one of several pillars of the international and host government response. These solutions will require innovative approaches that not only address the livelihoods challenges of refugees, but that also tackle challenges endemic to the Jordanian economy and labor market. Building sustainable self-reliance and economic viability in and of itself can be a security guarantee.

There is much-needed attention on the significant security implications of the conflict. The international community should harness similarly robust focus and resources when looking several layers deeper, addressing other security challenges at the individual level. For the many cases like Hala’s, pursuing a small business is a step forward, but greater protection and sustainable livelihoods opportunities are necessary. Increased international support and partnership is critical to making this a reality.