The Middle East’s output-per-worker, which has been abysmally low during 2002-15, is likely to be impacted in the future on rising sovereign deficits and borrowings, hence required dire measures to enhance productivity, as the region embarks on diversification, according to the Institute of Chartered Accountants of England and Wales (ICAEW).
“With governments set to run large deficits in the coming years and issue larger amounts of debt, there is a key risk that firms will be ‘crowded out’, struggling to raise the finance needed to fund investment. In turn, this will have a damaging impact on productivity performance in the years ahead,” it said in a report.
Stressing that the region’s productivity performance in recent years as not encouraging, it said during 2002-15, productivity growth typically contributed between 1–2 percentage points (pp) to annual GDP (gross domestic product) growth in Jordan, Egypt and Lebanon, close to zero in Iran, Saudi Arabia and Qatar, and made negative contributions in many other Middle Eastern economies against 1.5pp and 4pp contribution in Singapore and Vietnam per year.
In view of this, ICAEW suggested the Middle Eastern economies will have to make more productive use of their workforces in order to sustain economic growth, while at the same time create millions of jobs for new entrants to the labour market. Acknowledging that measuring productivity in the Middle East presents challenges from both a conceptual and data perspective; the accounting body asked most importantly, how much attention should one pay to productivity in extraction as opposed to the non-extractive sector.
The extraction sector is probably the highest value-added activity in the global economy, in terms of the value of output relative to labour inputs, it said, adding there is also a clear correlation across the Middle East between the share of an economy accounted for by extraction and output-per-worker.
However, the importance of extraction in Middle Eastern economies can skew productivity comparisons as productivity fall in extraction (if manpower is maintained despite a fall in output in mature oilfields) can lower productivity measured at the whole economy level. Also, as employment opportunities are generated in non-extractive sectors, this will lower the overall level of output per worker, even if workers in non-extractive sectors are becoming more productive.
Even if non-oil sectors individually have rising productivity, the pace of diversification away from the highly productive extractive sector may be sufficient to lower whole economy productivity, it said.
Highlighting that productivity performance matters in the areas of the economy where most Middle East employees work; specifically the non-extractive sector; ICAEW said unfortunately, more detailed comparisons of productivity performance using an extractive/rest of the economy split are only possible for a small subset of economies, since it requires data on output (typically available) and employment by sector (less so).
“Disappointingly, even after separating the extractive and non-extractive sectors, productivity performance in the region is not particularly impressive,” it said.
Services and construction are typically lower value-added than more capital intensive sectors such as extraction and utilities, and therefore likely to lower measured output-per-worker.
“But in order to support a more sustainable long-term path for economic growth in the era of cheap oil, such diversification is necessary,” it said, adding moreover, by creating demand for housing, public services and consumer-facing services, immigration itself is a driver of diversification.
Finding that increased female employment in turn boosts overall GDP growth, household incomes and tax receipts from non-oil sources; it said in three of the five Middle Eastern economies where output-per-worker has fallen during 2002-15, GDP-per-head has nevertheless increased, at a more-than-respectable 2% per annum in Saudi Arabia and Qatar.
“Overall, the performance of Middle Eastern economies in raising output-per-worker has been slower than other parts of the world economy when comparing simple average rates of growth,” it said.