x Abu Dhabi, UAE Friday 21 July 2017

Reading the facts correctly is essential for effective policies

"Why did nobody notice it?" the United Kingdom's Queen Elizabeth famously asked the director of research at the London School of Economics, referring to the 2008 financial crisis.

Queen Elizabeth II is shown a display about contemporary issues such as the credit crunch by professor Luis Garicano during a visit to the London School of Economics. PA Archive
Queen Elizabeth II is shown a display about contemporary issues such as the credit crunch by professor Luis Garicano during a visit to the London School of Economics. PA Archive

‘Why did nobody notice it?” the United Kingdom’s Queen Elizabeth famously asked the director of research at the London School of Economics, referring to the 2008 financial crisis.

The answer is simple: misinterpretation of facts.

The bubble that followed the deregulation of the financial sector was taken by most economists and practically all politicians to imply that the financial markets alone could create prosperity and do so indefinitely.

Now we accept what we knew before the euphoria created by the ascension to power and policies spearheaded by the late Mrs Thatcher: financial markets live off and are constrained by the wealth generated by the real economy. There is no free lunch.

Something similar happened after December 2010 when the self-immolation a Tunisian street vendor set in motion in some regional countries what is now referred to as the Arab Spring.

Following the increasing strains on the statist social contract and the economic liberalisation that followed in these countries since the 1990s, many economists focused on what mattered for them: declining budget deficits, public debts and inflation.

This is not what mattered for ordinary people who saw low returns to their education, meagre pay increases and greater exposure to market risks amid declining social protection.  The contract was annulled and insecurity had increased.

Reading the facts correctly is a prerequisite for evidence-based polices. According to the press release of a just-published report by the World Bank, 54 per cent of the working population in the Middle East and North Africa (Mena) region is unemployed or inactive.

This is a bad fact. However, given that the Arab population is young, it would be useful to take into account the number of those in schools – a good fact. When this is done the 54 per cent gets down to 44.5 per cent, of which more than 80 per cent are due to women’s low rate of employment. Thus policy should be less concerned with the apparent idleness and focus on the obvious position of women.

Also in the same report, youth unemployment was reported to be 25.9 per cent. This is a fact but, if it is not read in conjunction with another fact, it can lead to misguided policies. The other fact is that Mena has the highest unemployment rates among adults. As an also recent ILO/UNDP report notes, the problem is less on the education achievement and employability of youth.

The key issue is that regional economies lack higher productivity and consequently higher-paying sectors. The Arab region has one of the highest educated and skilled emigration rates in the world – it has skills but lacks high-productivity jobs.

Still, high unemployment rates can mean little. Rates can be misleading if the denominator is small.

For example, in countries where very few women are in the labour force, relatively small numbers of unemployed women can result in alarming unemployment rates – such as 54 per cent among female youth in Saudi Arabia. In this context, the ratio of unemployed to the working population in Mena comes to 5.5 per cent. This is not that bad compared with 6.5 per cent for developed economies

Where many regional countries fell short was in creating decent employment, that is, productive jobs paying fair wages and offering adequate, equitable and affordable social protection. The poor employment outcomes in the region have often been attributed to demographic pressure from “too many youth”. This is not even a fact: the so called “youth bulge” peaked in the 1980s in North Africa and 1990s in the Middle East.

Moreover, having a young population gives rise to the “demographic window of opportunity” as the youth are more educated than their parents and large numbers of young workers bring down the dependency rate.

What does this mean for the Arab world? Let’s get the youth, demographics and education out of the equation. Arab adults have not fared well either, while job-seekers are more than qualified for the jobs generated.

Second, what Arab countries lack, with exceptions, is a dynamic private sector – and this means what matters more is labour demand.

As Mena finance ministers gathered in Washington at the weekend to attend the spring meetings with their counterparts from the rest of the world, they came across yet another report, this one from the IMF, the organiser of the event.

It forecasts economic growth in Mena will slow to 4.3 per cent this year, one third down from 6.4 per cent last year. This will slow down employment creation and will leave less fiscal room for social spending. Furthermore, noting a scaling back of hydrocarbon production among the region’s oil-exporting states as world consumption falls, the report alerts a longer term challenge may be looming. This is not encouraging.

But noting what statistics mean for facts and facts for policies can help.

Zafiris Tzannatos is an economist living in the UAE, and formerly a professor and head of the economics department at the American University of Beirut. The opinions expressed are his own.