Are developing countries accumulating sufficient total factor productivity to sustain their economic growth and job creation? Empirical evidence from the Middle East and North Africa region

• DOI: http://doi.org/10.1111/rode.12693
• Date: 01 August 2020
• Author: Mohamad Ahmad Abou Hamia
• Published date: 01 August 2020

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2020;24:1102–1127.

© 2020 John Wiley & Sons Ltd

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INTRODUCTION

In early 2011, millions of youth marched the Arab streets demanding political participation and de-

cent living conditions. There were major riots in Bahrain, Jordan, Morocco, Iran, Iraq, and Lebanon;

regime changes in Tunisia, Egypt, Sudan, and Algeria; vicious civil wars in Libya, Yemen, and Syria.

Received: 11 October 2018

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Revised: 26 May 2020

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Accepted: 27 May 2020

DOI: 10.1111/rode.12693

REGULAR ARTICLE

Are developing countries accumulating sufficient

total factor productivity to sustain their economic

growth and job creation? Empirical evidence from

the Middle East and North Africa region

Mohamad AhmadAbou Hamia

Bilateral Assistance and Capacity Building

for Central Banks, The Graduate Institute

of International and Development Studies,

Geneva, Switzerland

Correspondence

Mohamad Ahmad Abou Hamia, Bilateral

Assistance and Capacity Building for

Central Banks, The Graduate Institute of

International and Development Studies,

Chemin Eugène-Rigot 2, 1202 Geneva,

Switzerland.

Email: abouhamia@gmail.com

Abstract

This study contributes new evidence on why the Middle

East and North Africa (MENA) region has failed to create

decent jobs for decades. The growth accounting exercise re-

veals that the region suffered from an acute total factor pro-

ductivity (TFP) deficit in the 1990s; it improved remarkably

in the 2000s, before deteriorating significantly in the period

between 2010 and 2017. Throughout the three subperiods,

the region’s growth relied heavily on capital accumulation.

The severe deficit in TFP and the heavy reliance on physical

capital for decades impaired the region’s ability to sustain

economic growth and to create decent jobs in the long run.

The study recommends more government interventions in

knowledge accumulation as a critical precondition for em-

ployment generation in developing countries.

KEYWORDS

growth accounting exercise | job creation | MENA region | sustained

economic growth | total factor productivity,

J E L C L A S S I F I C A T I O N

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ABOU HAMIA

As a result, millions of refugees have been fleeing these countries to neighboring countries. Several

factors have caused the ongoing turmoil such as human rights violations, widespread corruption,

high poverty rates, and economic and gender inequalities. Besides, the Middle East and North Africa

(MENA) region has suffered from one of the highest youth unemployment rates in the world since the

1990s. The governments’ inabilities to create decent jobs for decades triggered the ongoing turmoil.

Since 2011, the primary concern among policymakers and international organizations has been to

create decent jobs to prevent further collapse of the remaining social, political, and economic institu-

tions in the region. Abou Hamia (2016) reveals that the MENA economies have been enduring jobless

growth, an economic worry that policymakers have given little attention to or ignored for decades.

The neoclassical growth theory specifies two kinds of growth with different sustainability implica-

tions in the long run. The extensive growth is an increase in the production of goods and services due

to increases in labor, capital, and land. On the contrary, intensive growth is an increase in the produc-

tion of goods and services due to increases in productivity or the total factor productivity (TFP). The

TFP represents the stock of knowledge utilized by labor and capital to produce goods and services in

the most efficient way. Economic growth cannot be sustained indefinitely by increasing labor, capital,

or land due to the law of diminishing returns. Nevertheless, an increase in TFP indefinitely induces

sustained economic growth in the long run due to the law of increasing returns. This study aims to

determine the kind and the nature of economic growth, extensive or intensive, in the MENA region.

I postulate that the MENA region has suffered from both a severe deficit in TFP and heavy reliance

on physical capital accumulation for decades. The accumulated physical capital, with insignificant or

negative contributions from TFP, impaired the region’s ability to sustain economic growth, which is a

precondition for employment creation in developing countries (ILO, 2012).

The role of TFP in sustaining economic growth and creating decent jobs is crucial to the MENA

region for several reasons. First, the MENA region has been suffering from one of the highest youth

unemployment rates in the world for decades. Despite that, the role of the TFP deficit in the region’s

inability to sustain both economic growth and job creation received little attention in the economic

literature. Second, creating jobs has topped policymakers’ agendas in the region since the start of

the ongoing turmoil in 2011. Yet, the youth unemployment rate in the region increased from 23% in

2010 to 27% in 2018,1 a clear indication of the region’s continued failure to design effective intensive

growth policies necessary to create decent jobs. Third, the MENA region remains one of the least in-

tegrated with the global economy (Rouis & Tabor, 2013). The economies in the region urgently need

to cover the current TFP deficit and to invest in knowledge accumulation to enhance their external

competitiveness, which in turn would support and sustain their economic growth and job creation in

the long run. Fourth, the heavy reliance on oil revenues and the lack of economic diversification left

the region’s economic growth vulnerable to external shocks and volatility in oil prices. Investing in

knowledge accumulation is critical to diversify domestic productions and economic activities in the

region. Finally, the collapse of the economic, social, and political institutions in several countries is

a clear indication of the failure of the current economic development paradigm in the region. The

MENA region (as well as other developing regions) immediately needs a new economic development

paradigm, where knowledge and innovation are the main drivers of economic activities.

Table1 shows the averages of the gross domestic product (GDP) growth rates, the youth unemploy-

ment rates, and the spending on research and development (R&D) from 1999 to 2018. The table presents

data for the sample used in this study, the five major developing regions,2 and the entire world. I expect

spending on R&D to induce TFP accumulation and sustained economic growth in the long run. Table1

shows that the GDP growth rates of MENA economies were above the world average rate. Despite that,

these growth rates failed to create enough jobs for youth, as the youth unemployment rates were above the

world average rate.3 The spending on R&D of these economies was below the world average, indicating