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Youth unemployment in the Arab world: tackling the demographic time bomb

The threat to stability in the Arab world posed by youth unemployment is such that governments old and new must urgently address the worsening economic environment. If a solution is not found soon, the whole region risks instability or even secondary revolutions.

The FT’s beyondbrics touched on this issue recently in an article about moves towards a higher minimum wage in Saudi Arabia, arguing that job creation is “imperative” for “a country that is throwing money at its potentially restive population”. This is an important point. With commentary on the region mostly focusing on the struggle for freedom and political change, it is often forgotten that the issue that was at the core of these revolutions was the chronic and widening deficit of economic opportunity, combined with the demographic time-bomb of a rapidly growing youth population.

And this is not just an issue for those looking to avoid potential unrest. Arab nations in transition must also address the economic crisis. Expectations are high but just because regimes have toppled does not necessarily mean that jobs and housing will become immediately available.

Egypt, the most populous Arab country, is an important example. The euphoria of Cairo’s Tahrir Square has long died down and, despite burgeoning democratic development and a newly elected government, the country faces immense challenges on the domestic front. While there have been slight improvements in recent months, public security has generally deteriorated since the revolution, with a rise in killings, abductions and theft, in addition to the riots that were so widely reported earlier this year.

At the same time, the economy continues to worsen. More than 40 per cent of Egyptians live below the poverty line and the critical tourism and construction sectors have ground to a halt, causing a liquidity crisis. Fuel shortages are also an increasingly urgent issue.

The fact is that 700,000 jobs per year must be created in Egypt, just to keep unemployment from rising. That pace of growth is just unrealistic. The World Bank expects Egypt’s growth rate per year to be 1 per cent or less, and foreign direct investment has plummeted. In its June draft budget, Egypt’s government projected that its deficit will increase to nearly 11 per cent of GDP.

Egypt’s long-term prospects could be very positive, but without action to stabilise the short to medium-term jobs crisis, the country may never achieve that potential. The IMF recently agreed to a $3bn standby loan to help the country bridge its deficit for fiscal year 2011-2012, but this is only the tip of the iceberg.

So what’s the answer?

Government leadership is, of course, essential. Labor market reform, as we are seeing in Saudi Arabia, is certainly one way of defusing the “region’s social time-bomb”, as is tackling corruption and improving education.

The private sector also has a crucial role to play. Investment in infrastructure projects, such as construction of highways and bridges, and large rural or agricultural projects, could provide attractive returns and create jobs speedily. The private sector could implement them, but the funding needs to be provided. The GCC is probably best placed in this respect, given that gulf companies are already major investors in Egypt and don’t face the same mistrust as western firms.

Egypt is not the only Arab nation facing these issues. Before the so called “Arab Spring”, regional youth unemployment stood at 24 per cent and the stark reality is that 100m jobs need to be created in the Arab world in the next two decades alone, more than was created in the whole of the last century. Tackling unemployment is by no means a panacea but, for those playing a part in the transition of the region the lessons are clear: it is not wise to separate political rights from economic rights.

Opinion Editorial in Financial Times

Two years on, the so-called Arab spring is now turning into a bleak winter.Governments have failed to deal effectively with the underlying cause of continued instability – chronic unemployment and a dearth of economic opportunities.

An international but Arab-led investment plan is urgently needed to deal directly with the job shortage and promote economic stability across the region. Taking inspiration from the Marshall Plan which the US adopted after the second world war to rebuild western Europe’s battered economies and shield them from falling to communism, the Arab Stabilization Plan focuses on job creation through critical infrastructure investments to achieve economic stability and prevent the rise of extremism.

The plan is a private sector led policy response developed by a team of development economists in consultation with regional governments, international institutions and business leaders from the Arab world. It envisages a multilateral economic plan focused on creating jobs through fast tracked, project-based investment, achieving significant returns for investors and countries alike.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights. With the population of the Arab world set to increase from 355m to 500m by 2025 and a majority below the age of 30, 100m jobs will need to be created in the next two decades alone. Ironically, the underlying economic causes of the uprisings have been made worse; youth unemployment now exceeds 30 per cent in many countries and has reached a tipping point, with high expectations turning into dashed hopes. The turbulent political transitions have weakened the investment climate in what is now a vicious circle of weaker economies and greater instability.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights. Despite that, the focus to date has been on bickering over new constitutions and elections with limited action in terms of economic policy, which has been restricted to short-term fiscal stabilisation through outside loans. Such loans normally just disappear on existing salaries and state subsidies, resulting in little new investment or job creation.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights. Domestic policies and finances are hampered by burgeoning deficits and dwindling reserves and the prospect of the private sector acting alone to restore economic growth is dim. In order to ensure a safer transition and prevent further instability and the potential for extremism, there is now an urgent need for investment intervention over the medium term.

The World Bank estimates that the region already requires $100bn of infrastructure investments annually, in sectors such as transport, telecoms and energy. Infrastructure still only accounts for 5 per cent of expenditure in the region (compared with 15 per cent in China), but according to World Bank figures each $1bn invested in infrastructure could create 100,000 new jobs, particularly in the oil importing countries where the need is greatest. Yet investment levels have weakened in most Arab countries, with Egypt’s minister of planning declaring last month that foreign direct investment into the country was now “near zero”.

Directly investing the money into infrastructure projects and bypassing government coffers, would circumvent political wrangling and bureaucracy and enable quicker and tangible economic improvements in countries such as Jordan, Yemen and Egypt, and across north Africa.

With income growth from sustained high oil prices, the Gulf Co-operation Council states, which boast a vibrant corporate sector in need of investment outlets, are well placed to play a leading role as investor countries. Other investor nations and multilateral institutions could provide additional investment and technical assistance. The plan would help restore economic confidence, in addition to spurring internal private sector investment in the region.

A multilateral framework would ensure funds are managed, invested and governed through a transparent and co-ordinated mechanism, building upon global best practice. A governing board at ministerial level would have ultimate authority over policies and investment decisions, with an investment committee and team of technical experts to administer and manage the trust fund and provide due diligence on project proposals and results monitoring.

At country level, the national project development teams would be responsible for identifying national investment priorities with the host governments, including critical sectors for development and maximum positive impact.

While each country has its own set of priorities, supporting regional economic growth and reducing the underlying causes of extremism are goals that should be shared by all. Through a common regional investment platform, participating countries will be able to benefit through enhanced regional economic development, stability and security.