Alarming decline in labour productivity growth in Arab States – but policy reforms can fuel recovery

BEIRUT (ILO News) –

A new International Labour Organization (ILO) report presents the most extensive analysis of labour productivity data and trends in the Arab States region from the 1950s to date.

The report, produced by the ILO Regional Office for Arab States and the Bureau for Employers’ Activities of the ILO, analyses the main barriers to productivity growth in the region, and offers recommendations to raise productivity for a swift economic and employment recovery.

Labour productivity refers to measuring the economic output of a country, sector or company through charting the amount of real gross domestic product (GDP) produced by labour during a specific unit of time. It is an important economic indicator that is closely linked to economic growth, competitiveness and living standards within an economy.

Senior researchers from four continents composed the research group that developed the report, titled “Productivity growth, diversification and structural change in the Arab States.” The study covers the Arab States region of the Gulf and Middle East, comprising Bahrain, Iraq, Jordan, Kuwait, Lebanon, the Occupied Palestinian Territory, Oman, Qatar, Saudi Arabia, Syria, the UAE and Yemen.

“The ILO Centenary Declaration for the Future of Work emphasizes the need to shape a future of work with full, productive and freely chosen employment, and identifies productivity as a cornerstone of achieving a human-centred approach to the future of work,” said ILO Regional Director for Arab States Ruba Jaradat. “Increasing labour productivity is a concern we share with our constituents: employers, workers and governments. We view it as a catalyst for creating decent work, inclusive growth and shared prosperity.”

“The message from this ground-breaking report is loud and clear: countries in the region can turn the recovery from the Covid-19 crisis into a real opportunity to achieve productivity growth in their economies in the future through targeted economic reforms,” said Director of the ILO Bureau for Employers’ Activities Deborah France-Massin. “This includes placing labour productivity growth as one of the strategic priorities in national development plans, in line with the UN 2030 Agenda for Sustainable Development.”

Labour productivity trends

The report finds that, following three decades of good growth performance after the discovery of oil in the early 1950s, labour productivity has declined since the 1980s in Arab economies in general, and in the Gulf Cooperation Council (GCC) economies in particular. The report found a more accelerated decline in productivity over the past two decades.

When compared to other regions, the Arab States region is now the worst performing globally in terms of productivity growth.

The report found that, between 2010 and 2019, productivity growth declined in GCC countries by 0.8 per cent, and in non-GCC countries by 1.5 per cent. In emerging and developing countries in other regions, by comparison, it rose by an average of 3.1 per cent during the same period, while in advanced economies it rose by 1 per cent, with the world average recording a 2.1 per cent increase.

The main reasons behind these downward trends in the Arab States region are the lack of economic diversification with a reliance on low productivity sectors, an inability to invest fiscal gains in promoting productivity growth, and a lack of investing in skilling the labour force to meet new labour market needs, explained Paolo Salvai, ILO Senior Employers’ Specialist for the Arab States, who led development of the report alongside ILO Employers’ Activities Officer Jose Luis Viveros Añorve.

“The shift in economic activity from agriculture to manufacturing is a major source of productivity increase in emerging economies. The report illustrates that most of the Arab countries went through a process of premature de-industrialization, and therefore currently lack a solid manufacturing sector,” Salvai explained.

“The economic strategies in most countries in the region have focussed on low value-added service sectors or on financial and construction sectors. This has hindered productivity growth, as services are less capital-intensive and less open to international competition, which is detrimental to economic and productivity growth and has led to increased informal labour” – labour that is not covered or is insufficiently covered by formal arrangements and protections, he added.

The report outlined the rates at which the manufacturing sector accounts for national GDP in the region. It is very low in Lebanon (accounting for 3.1 per cent of national GDP in 2020 compared to 8.3 per cent in 2008), Iraq (3 percent in 2020 and remaining constant over the past 20 years), and Kuwait (6 per cent in 2020, and similarly constant over the past 20 years).

The contribution of manufacturing to GDP is relatively low in Qatar and Oman (both 7 per cent in 2020), moderate in Saudi Arabia (13 per cent but growing), and relatively high in Jordan (17 per cent of the GDP in 2020 but declining, having accounted for 21.2 % of the GDP in 2008). In Syria, it stood at 15 per cent of GDP prior to the conflict which began in 2011, although no current data is available.

In comparison with countries in other regions, the contribution of manufacturing to GDP stood in 2020 at 27.4 per cent in South Korea, 25 per cent in Thailand, 15 per cent in Romania, 14.8 per cent in Italy, 12 per cent in Peru and 18 per cent in Germany.

Barriers to sustainable enterprise development

Small and medium sized enterprises (SMEs) employ 97 per cent of the region’s workers (in comparison to 70 per cent globally). The current business environment is detrimental to trade and discourages the internationalization and growth of SMEs, the report maintained.

Surveyed regional business leaders identified barriers to productivity growth arising from faulty business environments. Challenges included political instability, a lack of access to credit for investment and working capital, a lax taxation system, and a lack of access to electricity – with the latter forming one of the most important concerns in non-GCC states.

Business leaders also pointed to inadequate market size. With the region’s exports only reaching one third of their potential, the report estimates that fostering regional integration by removing trade barriers and creating single market areas could increase the region’s export potential dramatically.

The path to recovery

The COVID-19 pandemic has exacerbated existing challenges in the region including weak public institutions, economic and political instability, undiversified economies and high unemployment rates.

The report recommends a set of policies for countries in the region to overhaul their national development strategies and prioritize productivity growth, diversification, and structural change in the post-pandemic recovery period.

The most urgent priority now is to focus economic strategies on diversification in oil-dependent countries and on broader structural change in non-oil dependent countries, the report maintains. It recommends that this be achieved through a well-managed privatization process to move away from the region’s rentier economic systems which cater mainly to upper-income populations, and through designing and implementing industrial and productive development policies.

A second priority recommendation is to better align investment in skills and education with national industrial and productive development policies, and to ensure that education systems anticipate and prepare for future labour market needs.

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