The financial and economic

crisis: impact and response in

the Arab States

Tariq A. Haq

Research Economist

Employment Analysis and Research Unit

Economic and Labour Market Analysis Department

October 2010

Pre-crisis economic context6% GDP growth: high in oil-producing states, variable elsewhere

Growth sources: oil revenue, real estate investment, housing, tourism, financial assistance

Limited economic diversification, modest growth in exports

Challenges to foreign investment from:

Conflict and instability

Inadequate legal and regulatory environment

Declining living standards and increasing inequality

Pre-crisis labour market context

Labour force growth outpacing both (non-oil) GDP growth and employment opportunities

Employment predominantly in services (52.5% in 2008) cf. industry (21.3%)

Public sector bias; LM segmentation between public and private sectors (esp. in GCC countries)

Highest unemployment rates in the world: regional aggregate of 9.6% in 2007/8

Ue problem compounded by high underemployment: low-productivity, low income, precarious jobs

Pre-crisis labour market context

Defining characteristics:

Youth dimension

Gender dimension

Migration dimension

Crisis impact

The impact was:

Slower in affecting the region; less severe compared to others regions

• Surplus liquidity

• Relative insulation

• Low market capitalisation

Different from country to country; depending on the:

• Different economic and institutional characteristics

• Policy responses

But Arab economies have not been spared from slower, and in some cases negative, economic growth, rising unemployment and greater insecurity.

Crisis impact: Stock Market Indices

Feb 2008 – Feb 2009 change in per cent; source: Arab Monetary Fund, in Behrendt, Haq and Kamel (2009)

-60.9

-45.9

-48.7

-22.6

-41.0

-63.3

-67.8

-71.4

-13.7

-67.1

-60.3

-80 -70 -60 -50 -40 -30 -20 -10 0

Abu Dhabi Securities Market

Amman Stock Exchange

Bahrain Stock Exchange

Beirut Stock Exchange

Doha Securities Market

Dubai Financial Market

Kuwait Stock Market

Muscat Securities Market

Palestine Securities Exchange

Saudi Stock Market

Composite*

Change in percent

Crisis impact: Regional Real GDP:

Annual percent change

Source: IMF, World Economic Outlook, Oct 2010

-2

0

2

4

6

8

10

World Advanced Economies

European Union

Emerging & Developing Economies

Sub-Saharan Africa

Central & Eastern Europe

Middle East & North Africa

GD

P g

row

th r

ate

in p

erc

en

t

2007 2008 2009 2010

Crisis impact: Real GDP in Arab

States: Annual percent change

Source: IMF, World Economic Outlook, Oct 2010

-10

-5

0

5

10

15

20

25

30

Bah

rain

Jord

an

Ku

wait

Leb

ano

n

Om

an

Qatar

Saud

i Arab

ia

Syria

UA

E

Ye

me

n

Alge

ria

Egypt

Mo

rocco

Sud

an

Tun

isia

GD

P g

row

th r

ate

in p

erc

en

t

2007 2008 2009 2010

Crisis impact: Arab Region

Unemployment Rate

Source: ILO, Trends Econometric Models, Oct 2009

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Total

Males

Females

Youth

Transmission channels

Transmission channels for growth and employment impact include:

Financial channels

• sharp reversals in stock market indices

• reduced net worth of region-specific sovereign wealth funds

Declining exports

Rising commodity prices

• benefits for net energy exporters

• costs for net importers

Declining tourism

Declining remittances and migration for L-exporting countries

Declining private capital flows

Declining official development assistance

Crisis responses

Many governments in the region took measures to mitigate the negative effects of the crisis:

A variety of monetary and financial measures to stabilize the financial sectors and reduce the systemic effect arising from lack of credit

Fiscal measures to maintain aggregate demand

Increases in public spending (incl. ‘rescue packages’) have been introduced, despite a sharp drop in revenues (esp. oil exporters)

Selective support to various industrial sectors deemed to be critical during the period of the crisis

Increase in minimum wages in several countries and some income protection schemes have been introduced

Greater focus on employment and social protection is required to speed up labour market recovery

Implications

Measures taken often do not constitute a comprehensive response; more focus on employment and social protection needed

More emphasis needed on measures to mitigate the impact on women, young people and vulnerable groups, including migrant workers

Opportunity to enact policies not only to mitigate short term crisis impacts but to rectify pre-existing imbalances and structural challenges and contribute to the achievement of longer-term objectives

Use Global Jobs Pact adopted by the International Labour Conference (June, 2009)

The Global Jobs Pact

An expression of government, workers’ and employers’ commitment to work together to overcome the crisis and its negative impact on labour markets (ILC, 2009)

It contains a policy portfolio that countries can adapt to their specific needs and situation, covering:

Accelerating employment creation, jobs recovery and sustaining enterprises

Building social protection systems and protecting people

Strengthening respect for international labour standards

Social dialogue: bargaining collectively, identifying priorities, stimulating action

Shaping a fair and sustainable globalization

The Pact has strong international and regional backing and endorsement from:

G20 Heads of State

UN General Assembly

UNDP Board

Numerous other international and regional bodies

The GJP and Arab States

The gains in Arab labour markets in the past decade are threatened by the crisis and need to be preserved

The foundations of an employment-centred recovery and a job-rich pattern of growth must be strengthened by addressing the structural challenges in the region:

Slow labour productivity growth

Low demand for skills

High dependency on the dynamics of the international oil market as well as international aid and labour migration

Slow rate of poverty reduction in recent years

Small proportion of the region’s population that enjoys adequate social security

Low labour force participation of women

High levels of youth unemployment

Employment and social protection

focusDeveloping employment policies

Strengthening employment services

Skills development

Improving labour market monitoring mechanisms

Providing better protection against the risk of unemployment

Ensuring sustainability and extending coverage of social security

Strengthening national social protection strategies and monitoring mechanisms

Policy inventory

ILO/World Bank inventory of policy responses to the crisis

Common questionnaire covering macroeconomic/investment/sectoral policies, LM policies, Social Protection, Rights at Work and Social Dialogue

ILO: 60 countries, including G20

From the Arab Region: Bahrain, Jordan, KSA, Egypt

Evidence-based analysis, monitoring, evaluation, policy dialogue

Selected issues for discussion

How has spending on labour market and social protection policies been affected by the crisis?

What measures has your country taken to tackle the labour market impact of the crisis?

How effective have these measures been and how are they monitored?

What has been the involvement of the social partners in the crisis response?

What role could regional coordination play in mitigating the crisis impact at the national level?