Job Creation: What Can the GCC Learn From Asia?

Asia’s job creation is one of the fastest in the world. Over the past decade, Asia grew rapidly thanks to high rates of savings and investment, human capital accumulation, diversification and knowledge transfers. Most of all, though, it put unskilled labor to work and enjoyed rising productivity. Overall, the informal sector – characterized by low skills and low earnings – has contributed the most to job creation. Over the last decade, East Asia was the fastest job creator in the world, closely followed by South Asia. While the agriculture sector shrunk all over the continent, manufacturing spurred job creation in East Asia and services drove employment in South Asia. If both the formal and informal sectors are considered, India is ahead. Over 2000-05, employment grew by an average of 2.8 percent per year and the economy generated a yearly average of 11.3 million net new jobs. Over the same period in China, ever year employment grew by 1 percent and the economy created 7 million new jobs.

The GCC share many similar traits with the Asian continent. Their political economy is very similar, and countless trade corridors and investment ties intertwine the two areas. In the past, Arab dhows sailed the waters of the Indian Ocean, and Asian caravans transported textiles and spices across the desert. Today, the oil-rich Gulf and an “energy-hungry” Asia are intensifying their political and financial relations. Every day, Middle Eastern resources – above all, capital and energy – spur East Asian growth, and Asian governments seek in the Arab world supplies for their domestic demand, and markets for their goods. Can this proximity become an inspiration? The GCC needs to create jobs. What are the lessons from Asia?

The GCC can learn from Asia’s model of job creation. First, Asia has shown that it is possible to preserve macro stability while sustaining employment growth with counter-cyclical fiscal and monetary policy. Second, sufficiently flexible labor markets permit to take advantage of the demographic dividend. Third, competitiveness is spurred by infrastructure and education spending and promoted by well-functioning economic zones. Last, economic diversification and a competitive real effective exchange rate could help reduce rent-seeking and “élite capture”. The eight available key policy options are highlighted below, in order of political feasibility.

Lesson 1 – Promote growth with counter-cyclical fiscal and monetary policy, while preserving macro stability. The recent Asian experience has shown the importance of sound economic management for job creation. Economic stability matters for employment, and maintaining it during a crisis requires strong institutional fundamentals as well as flexible macro-economic policies. When the 2008 crisis hit the Asian region, solid domestic fundamentals combined with a coordinated policy responses upheld growth. Supportive fiscal policies coupled with monetary expansion absorbed the economic and financial shocks. Importantly, large fiscal packages supported both GDP and employment: Asian countries spent on fiscal stimuli an average of 9.1 percent of 2008 GDP, far larger than the 3.4 percent of the advanced economies.

Lesson 2 – Spend in infrastructure and education, bet on PPP. Over the years, access to infrastructure and an educated labor-force will promote the circulation of goods, people and knowledge. In the GCC, abundant revenues should finance an upgrade of both the region’s logistical network and people’s skills, while maintaining a sound fiscal policy and improving public spending efficiency. The GCC lack of infrastructure and education restrains growth, as it hurts small and medium enterprises (SMEs) and discourages entry of domestic start-ups and foreign investors. As private investment is constrained by a number of institutional factors that are difficult to address in the short run, schemes for more public-private risk sharing are also needed. To alleviate bottlenecks the government should both reduce the risk and increase the returns on private investment. In other words, it is necessary to stimulate risk-sharing among investors – for example, via public-private-partnerships (PPP) – by co-financing public works (transport and communications) and in education, by addressing under-provision of training in areas where skills are lacking. Local people’s investment in skill acquisition and organizational capacity only materializes if private returns are appropriable.

Lesson 3 – Promote competitiveness via well-functioning economic zones. The GCC needs to guarantee simplified business procedures and enhance in situ competition, by ensuring – for example – that local institutions treat domestic and foreign firms equally and transparently (e.g., in dispute reconciliation). A key lesson comes from Asia’s economic zones. Over the last three decades, several Asian countries – when a rapid nation-wide reform of their governance was neither possible nor credible – created “economic zones” to promote trade, spur exports and stimulate economic development. These industrial enclaves created new employment and increased export flows. Although their track record is mixed across the continent, overall they have been successful in attracting investment and fostering economic development. Overall, the experience shows that to be successful, a zone must lie in a geographically defined area, where domestic and foreign agents can find: (i) first-rate infrastructure and human capital; (ii) investment incentives and simplified procedures; (iii) domestic and international linkages; (iv)  enabling institutions, such as – for instance – an equal treatment of domestic and foreign firms, and transparent dispute reconciliation mechanisms; and (v) coordination with a comprehensive country-wide reform, in the context of an overall growth strategy. Examples are the Export Processing Zones inSingapore andMalaysia in the 1970s, and the Special Economic Zones inChina, in the 1980s and 1990s. Well-performing economic zones create new wealth and bring about efficiency gains – without forcing an immediate redistribution of oligopolistic profits. Then, the investment in non-traditional activities increases, and provides demonstration effects for prospective entrants. Over time, the enhanced dynamism of the export-oriented sector is likely to diffuse beyond the original location, acting as a catalyst for reform of the economy as a whole.

Lesson 4 – Pursue a stable and competitive real effective exchange rate. The Asian experience shows that a volatile and appreciated currency is not conducive to the expansion of new exportables, and negatively affects the production of tradables. Hence, to foster the diversification of the industrial base, to induce investment and entrepreneurship in tradables, and to promote the production and export of non-traditional manufacturing and services, it is necessary to pursue a stable and competitive real effective exchange rate. A competitive exchange rate helps achieving rapid and sustained growth. In the past decades, fast-growing developing countries have simultaneously exhibited not-overvalued real exchange rates, high domestic savings, and current account surpluses. China is the present-day example, but in recent years this was the case also in high-performing Asian economies such as Korea, Malaysia, and Thailand. In sum, a competitive exchange rate increases demand for exports and import substitutes, and motivates entrepreneurs to produce non-traditional export commodities, expanding investment, employment, and economic grow.

Lesson 5 – Make good use of the demographic dividend and develop local capabilities. By putting its citizens to work, Asia used well its demographic dividend. The GCC has not, so far. Indeed, Asia evolved from low- to middle-income status by transferring a large pool of unskilled labor from subsistence-level activities into manufacturing jobs. Supported by capital expenditures and enhanced by imported technology, labor productivity rose and sustained GDP growth. For more than a decade, annual average increases in real wages were kept below productivity growth. Of course, when the pool of unskilled labor started shrinking and the expansion of manufacturing peaked, growth slowed; the model needs re-thinking. In other words, to attain high-income level require a better human capital, more sophisticated home-grown technology, and organizational capabilities. Transferring and adapting technology and organizational blueprints from abroad does not work anymore. The GCC and Asia are facing this challenge together.

Lesson 6 – Make the formal labor market more flexible. The GCC should consider adopting “flexicurity”, i.e.: the ability to balance the “flexibility” needed to adapt to economic changes with “security”, in order to maintain labor protection. In Asia, as a result of past pressures from domestic employers and foreign investors, most countries’ labor regulation is sufficiently flexible and not financially onerous for employers. In the late 1990s, Korea eliminated the guarantee of lifetime employment but provided policies to compensate. In Singapore and Malaysia employment is not secure but supported by active policies, such as skills training and self-employment promotion. Over the past decade China and Korea reduced restrictions on retrenchment but introduced unemployment insurance. In China, India (e.g.:, the National Rural Employment Guarantee Scheme) and Sri Lanka, where the informal and rural economies are large, governments often used public works, self-employment programs and skills training to reduce unemployment.

Lesson 7 – Diversify the economy. For speedier growth, and to sustain employment generation in the long-term, the economy needs a competitive diversification. Cross country comparisons show that growth accelerations are associated with the production and export of non-traditional manufacturing and services, in other words the products “in demand” in the industrialized nations. Hence, development policies should strategically promote a structural transformation toward these “more sophisticated” economic activities, by providing production incentives to new exportables. Policies should promote the manufacturing – and export – of non-traditional manufacturing and services, to foster a market-driven expansion of non-traditional products.

Lesson 8 – Address rent seeking and élite capture. The GCC should implement gradual reforms to tackle its rent-seeking conglomerate economy. Well-established in sectors that are strategic because of multiple backward and forward linkages, the conglomerates – by producing expensive inputs – skim rents from the economy and shrink the margins of the potentially most dynamic agents: the small and medium domestic private producers. They also control bank credit and dominate state procurement contracts through political connections. To accelerate economic growth, increase employment generation, and generate public resources for social programs, rent seeking by the élites that exercise political and economic power – or “élite capture” – must be addressed. First steps are improving the investment climate and competitiveness, and disseminating information on the distributional effects of government policies. But the key measure to attract raising investment and create more local jobs is opening and reforming the sectors dominated by rent-seeking corporate conglomerates. Greater access to bank lending for unconnected companies (foreign corporations, domestic medium and small firms) should be promoted. Given the strength of rent-seeking interests, the reform of oligopolistic practices in the traditional sectors of the economy can occur only gradually. Over time, the expanding competitive sectors should shrink the relative importance of patronage networks, and build – in association with the businesses that are currently bearing the costs of rent-seeking – a pro-reform political constituency.

Prepared for Oxford Analytica as supporting material for the Policy Analysis Workshop: “Job Creation Strategies for the GCC and Abu Dhabi”, Abu Dhabi Department of Economic Development, 2013.

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Richard Wood Richard Wood

Richard has published papers on wages policy, the taxation of financial arrangements and macroeconomic issues in Pacific island countries. Views expressed in these articles are his own and may not be shared by his employing agency. He is the author of How to Solve the European Economic Crisis: Challenging orthodoxy and creating new policy paradigms