David Hedengren
Last updated: 5 September, 2012

How competitive is the Middle East?

The Middle East houses some of the world’s most competitive economies, notably Qatar, Saudi Arabia, the UAE and Israel. But the continued political turbulence in the region has an impact on individual countries’ competitiveness, and unemployment remains the main overarching challenge.

World Economic Forum (WEF) on Wednesday released its annual Global Competitiveness Report. Qatar reaffirmed its position as the most competitive economy in the Middle East and North Africa (MENA) region by moving up three places to the 11th position in the overall global ranking.

The oil rich Gulf state has improved its macroeconomic environment, the efficiency of its markets for goods and services, and its institutional framework – of which low levels of corruption, high efficiency of government institutions, and high levels of security are cornerstones.

A key challenge for Qatar is to diversify the economy, which will require raised productivity by continuing to promote a greater use of the latest technologies and by fostering more openness to foreign competition. This is a hurdle to increased competitiveness that is shared by other oil rich states in the region, including Saudi Arabia, the region’s second highest ranking country (18th place in the global list).

“More efficient use of talent will increase in importance as global talent shortages loom on the horizon and the country attempts to diversify its economy, which will require a more skilled and educated workforce. Although some progress has been recorded over the past years, the use of the latest technologies can be enhanced further, especially as this is an area where Saudi Arabia continues to lag behind other Gulf economies,” writes WEF in the report.

Another challenge for Saudi is to raise the bar with respect to health and education. The latter is a shared priority with the United Arab Emirates (UAE), which is placed third in the region and 24 in the overall global rankings. The UAE must not only take measures to improve the quality of teaching and the relevance of curricula, but also incentivizing the population to attend schools at the primary and secondary levels.

World-class capacity for innovation and the ease of access to venture capital have contributed to making Israel, placed fourth in the region and 26 globally, an innovation powerhouse. However, the poor quality of the education system is a threat to the country’s long-term competitiveness, and so is its fragile security situation.

Turkey moved up 16 places this year to attain the 43rd spot in the overall global ranking. The country’s economy grew by 8.4 percent in 2011 and benefits from considerable progress in a number of areas, including improved macroeconomic stability, a better functioning financial sector, an enhanced institutional framework and greater competition in local markets. Turkey’s vibrant business sector derives important efficiency gains from its large domestic market.

“Turkey must focus on building up its human resources base through better primary education and healthcare and higher education and training, increasing the efficiency of its labor market, and reinforcing the efficiency and transparency of its public institutions,” writes WEF in the report.

Influenced by the uncertainty experienced since the events of the Arab Spring, Egypt dropped 13 positions in this year’s ranking to 107. Government efficiency has deteriorated and so has the security situation. At the same time, Egypt has improved in individual areas, such as less favouritism being displayed by government officials and stronger corporate ethics, suggesting the potential for further positive developments in the future.

“Many economic policy challenges lie ahead for the new government to put the country on a sustainable and equitable growth path. For Egypt to more fully benefit from the considerable potential that lies in its large market size and proximity to key global markets, the country will have to raise its productive potential across the domestic economy,” concludes WEF.

Countries that embarked on partial reforms such as Jordan and Morocco climbed in the rankings. Jordan (placed 64) was considerably affected by the global financial and economic crisis in recent years. GDP growth slowed down to 2.3 percent annually in 2010 and has not returned to pre-crisis levels since (GDP growth was 8.2 percent in 2007). These growth rates are not sufficient to create the employment necessary to absorb the about 60,000 new entrants into the Jordanian labour market every year.

Unemployment will remain the key economic priority in the MENA region as a whole for the foreseeable future. It is a challenge shared by all Arab countries despite their individual differences in terms of competitiveness. Traditionally, the region has relied on government and state enterprises for employment creation, but population growth has made this impossible to sustain. The private sector has not yet been able to fill the gap, primarily due to a business environment that does not encourage private sector growth. As a result, the Middle East has the highest unemployment rate of the world’s regions (10.3 percent).

David Hedengren is Editor in Chief of Your Middle East. Contact him on david@yourmiddleeast.com