Arab nations need to channel investment into services and manufacturing to create jobs and raise incomes, the World Bank said.
The numbers of people out of work have risen in parts of the region in the wake of popular uprisings against governments. In both Egypt and Tunisia, unemployment has increased by three percentage points compared with last year.
Historically, the majority of foreign direct investment to the region has headed into property and fuel, the World Bank report said.
"Services and manufacturing are where the action is," said Elena Ianchovichina, the bank's lead economist in the Middle East and North Africa (Mena) region and principal author of the report.
"Services have been a source of strength for both income and jobs, in levels and growth, especially in the oil importing countries."
Although manufacturing had also contributed to growth in income and jobs, in the Mena region the sector was small relative to the scale of manufacturing in countries such as Indonesia and Malaysia, the report said.
Unhappiness at bleak job prospects and low living standards was one of the catalysts of revolts in both Egypt and Tunisia as well as protests in Yemen.
The unemployment rate in the Mena region is among the highest in the world, according to the International Labour Organisation. As many as 10.3 per cent of people of working age in the regionare out of work, it estimated this year.
A decline in tourism revenue and other activity in Egypt and Tunisia since the uprisings has exacerbated unemployment woes in both countries.
Another factor was the public sector could not generate the attractive, high-quality jobs typically sought by graduates, said Ms Ianchovichina. But the private sector was not vibrant enough to make up the difference, she said.
The World Bank is urging regional governments to make economic reforms necessary to lure private investment.
"If we look at examples from other countries undergoing transition, investment surged in many economies that made early moves to improve governance," said Caroline Freund, the chief economist for the Mena region at the World Bank.
"Overall, while improving government institutions is necessary for voice and accountability, it is also necessary for growth and efficient use of resources."
Over the past two decades a lot of the investment in the region, especially in oil exporting economies, has been underpinned by increasingly large public expenditure.
In countries with weak governance, such an approach risks crowding out private investment and not driving growth, the World Bank warned. "When governance is good, public investments crowd in private investment by providing the energy, roads, logistics and communications links necessary for firms to function productively," said Ms Freund.
"But with poor governance, public investment is more likely to crowd out private investment by using resources that would otherwise be used by the private sector.
"Moreover, public investment may not stimulate growth because it is spent on unproductive assets."