Making Trade Work for Jobs Dipak Dasgupta The World Bank MDF4 Amman, October 8, 22
The Employment Challenge in MENA: Unemployment high and rising Unemployment rates in MENA region are among the highest in the world; they range from 1% (Egypt) to 29% (Algeria) and average around 2% Labor force is growing faster than employment growth in MENA countries---tripling open unemployment rates between 198-98 Real wages fell by 3-5% in 198-9, and have stagnated or fallen since
Vastly More Jobs Needed in Future 5 million new jobs need to be created over the next 1 years to employ expected additional job seekers---four times bigger than in Europe &C.Asia, about same as in all of Latin America, a region 3 times bigger in size (GDP), and 2/3rds in all of Sub-Saharan Africa. Employed workforce would need to rise by almost 6% in 1 years; this was not accomplished even by East Asia in its period of high growth 6.5 million new jobs required annually, just to cut the present unemployment rate by half
Unemployment Severest Among Young, Educated, & Female. Sixty percent unemployed are first-time job seekers. Unemployment rates are 2.7 times and 1.4 times higher for jobseekers aged 15-19 and 2-24 years old. Female unemployment in MENA is severe (unemployed as % of female labor force) MENA Has the Greatest Problem in Educated Unemployed, 1998 25 2 15 1 5 198 199 highinc MICs mena Probability of Unemploy ment % mena mic highinc 3 25 2 15 1 5 sec ter prim
Previous engines have run their course govt. jobs, migration, agriculture MENA public employment is already high 53% in Algeria, 35% in Egypt, 32% Jordan, 2% in Morocco versus 6% in all DCs and 18% in OECD. Queuing for public sector jobs growing, as resources for public sector expansion have dissipated Migration opportunities, 1% of workforce in Egypt, are slowing Agriculture employment, 3% of workforce, is falling 35 3 25 2 15 1 5 Egyptian Workers Abroad, Stagnant Since 1997 1985 199 1995 2 25
Trade expansion has promoted job creation in many countries Trade expansion, especially in the form of rising exports of manufactured goods, has been a major source of job creation in many countries Examples include Mexico after NAFTA, east Asian economies before the crisis of 1997, and accession countries in ECA But equally, many others have not gained, as in large parts of Latin America and elsewhere
Mexico: Big jump in manufactured exports and employment after NAFTA in 1994 6.4 6.2 6 5.8 5.6 5.4 5.2 5 Employment in manufacturing and manufacturing exports/gdp (% of Working age population) Percent 7 3 Manufacturing Exports 6.8 (% of GDP) 25 6.6 (Right axis) Employment in manufacturing (Left axis) 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: Employment data are from OECD-STAN. Working age population, manufacturing exports and GDP data are from WDI World Bank. 2 15 1 5
Indonesia: Big jump in manufactured exports and employment after reforms in 1986 4 3.5 3 2.5 2 1.5 1.5 Employment in manufacturing and manufacturing exports/gdp (% of Working age population) Percent Employment in manufacturing (Left axis) Exports in manufacturing (% of GDP) 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 Source: Employment and Manufacturing exports data are from Unido. Working age population data are from WDI World Bank. 16 14 12 1 8 6 4 2
Morocco: Employment and Exports Go Together---Rising in 8s, Stagnant in 9s Morocco: Manufacturing Employment and exports/gdp (% of Working age population) Percent 3.3 Employment in 3.1 manufacturing (Left axis) 2.9 Exports in 2.7 manufacturing (% of GDP) (Right axis) 2.5 2.3 2.1 1.9 1.7 1.5 1.8 1.6 1.4 1.2 1.8.6.4.2 198 1981 1982 1983 1984 1985 1986 1987 1988 Source: Employment data are from Unido. Manufacturing exports are from WITS-UN. Working age population data are from WDI World Bank. 1989 199 1991 1992 1993 1994 1995 1996
Cross-country regression results show robust positive link between trade flows and jobs in the manufacturing sector Employment in industry unexplained by factors other than trade openness (as a ratio of total working-age population; in logarithm) 1.6 R 2 =.466 1.4 1.2 1..8.6.4 Developing countries.2. 2 4 6 8 1 12 14 16 18 Foreign trade flows in per cent of GDP
However, in MENA, trade expansion has contributed little to the creation of jobs in manufacturing Employment in industry (as a ratio of total working-age population; in %) 18 16 14 12 1 8 6 Egypt Tunisia 4 2 Algeria 5 1 15 2 25 3 Non-oil merchandise exports; in per cent of GDP
Possible causes of weak impact of trade on jobs in MENA: Exports are concentrated in resource-based, low value-added products, whose growth has only a limited impact on labor demand and employment; In hydrocarbon-rich countries, manufactured exports are concentrated in the downstream energy industries, which are capital-intensive and have only a limited impact on job creation; FDI remains limited, because MENA trade is poorly integrated into rapidly expanding cross-border production sharing networks. Weak responsiveness of foreign and domestic investment reduces the impact of trade liberalization on job creation. Over-valued exchange rates can devastate firm competitiveness, as in Egypt, as can financial sector imperfections Labor markets---public sector, wage rigidities
Weaknesses in the investment climate play a critical role and trade creates more jobs in developing countries that attract large amounts of FDI Employment in industry unexplained by factors other than non-oil merchandise exports (as a ratio of total working-age population; in logarithm) 1.2 R 2 =.4639 1.8.6.4.2 Developing countries Large FDI recipients 1 2 3 4 5 6 7 Non-oil merchandise exports; in per cent of GDP
while trade expansion does not significantly add to jobs when investment climate is weak and FDI is low Employment in industry unexplained by factors other than non-oil merchandise exports (as a ratio of total working-age population; in logarithm).4.3.2 Developing countries Low FDI recipients.1 -.1 R 2 =.44 -.2 -.3 -.4 -.5 5 1 15 2 25 3 35 4 45 Non-oil merchandise exports; in per cent of GDP
Improving trade-related services and strengthening the investment climate would help MENA participate in global production sharing and make trade work for jobs Because of low labor costs and good human resources, MENA countries could become attractive locations for assembly operations The association agreements with the EU have the potential of facilitating integration into EU production networks Preconditions: Removing bottlenecks in transport logistics, communications, and the provision of financial services by opening up services markets to competition; Streamlining customs clearance procedures and removing paratariffs; Strengthening the investment climate
Employment growth for young educated workforce in small firms and high start-up rates in small enterprises is critical and evident New entry and investment, usually in small enterprises, is the key Trade reform shows fastest annual labor growth in small firms with less than 2 employees, and highest start-up rates---e.g., in Ghana In Tunisia and Jordan, smaller firms have shown rapid gains in employment in recent years (1, jobs in the IT sector, and similar in new export sectors). Regulatory improvements, exchange rate policies, are especially central to spur new entry
But the political economy adjustment costs are also very large, and need to be carefully managed Losers from trade liberalization are inevitable---usually large often state enterprises in protected sectors with high wages and unionization Politically well-connected and influential beneficiaries can undermine trade reform, with winners dispersed and losers concentrated---the information asymmetry problem Experience suggests the critical necessity of coherent and united economic teams in charge of reform Political support for trade and investment reform is also essential amongst exporters, private sector, unions, and the battle for ideas in the media. The pace and sequence of reforms may favor building pro-reform coalitions and transition time for firms to restructure.