Harnessing Innovation for Economic Growth in the Arab World

Stimson Spotlight

Harnessing Innovation for Economic Growth in the Arab World

With the Arab transitions now well into their second year, the region's stark economic challenges remain largely unaddressed. Job growth in particular stands out as an urgent and acute need, with a demand of 50-million new jobs in the next decade.

Innovation-a key driver of economic growth-could serve as a critical catalyst for job creation in Arab transition countries. The Arab world must nurture its capacity to innovate, generating, and implementing new ideas that build a strong foundation for growth and global competitiveness. Innovation is not new to Arab culture. Over the centuries, Arab civilization played a monumental role in developing new innovations in math and science.  Today, the same creative energy that initially propelled popular protests could be channeled toward start-ups, cutting-edge technological developments, and other business ventures that capitalize on the Arab world's youthful population and their yearning for change.

The revolts rocking the region highlight multiple failings of an obsolete social contract in which governments provided jobs, housing, and other needs in exchange for popular obeisance to their rule. The demand for new economic strategies is paramount:

  • The region can no longer rely on bloated public sectors to provide jobs.
  • At the same time, economic growth must be inclusive, benefiting previously neglected economic actors, including the informal sector and new labor force entrants, especially university graduates.
  • The region must avoid its previous experience of "crony capitalism," when privatization translated to preferential access and terms for a favored elite. Instead, Arab publics should become active partners in building 21st-century economies that realize the region's untapped potential and bridge it to the rest of the world.
  • Small and medium enterprises (SMEs)-a key source of jobs-face major obstacles, including significant bureaucratic red tape and poor credit access, which inhibit efforts to nurture Arab entrepreneurs. For example, only 20 percent of SMEs have access to financing in the Arab world, markedly lower than nearly every other region in the world.[1] The impact of these difficulties is clear: the number of registered businesses per capita in the Arab world is less than one-third that of Eastern Europe and Central Asia.[2]

The World Bank notes that, on average, half of long-term growth globally is due to innovation and technology enhancements. Harnessing the region's indigenous entrepreneurial spirit and promoting an environment conducive to innovation will be crucial. 

Two overlapping elements of Arab transition economies-large informal sectors and disproportionately young populations-illustrate both the challenges and opportunities inherent in the region's transitions.   The informal sector currently plays a key role in many Arab economies, accounting for at least 26 percent of GDP in Jordan, and as much as 44 percent in Morocco.  Half the region's entrepreneurs operate in the informal sector, according to the Institute for Liberty and Democracy.  Indeed, the young Tunisian fruit vendor whose self-immolation ignited the Arab uprisings is described by some as a "repressed entrepreneur," who attempted to make a modest living against a backdrop of petty corruption and stifling bureaucracy.[3]  

Representing nearly two-thirds of the population, Arab youth comprise another critical subset of the economy that can contribute positively to economic growth.  The Arab world's average youth unemployment rate is 25 percent, one of the highest in the world.  Yet, the region's disproportionately young population also embodies significant opportunity.  With appropriate social and education reforms, Arab youth can help transform the region's economies, contributing gains in productivity through their energy and ideas.

While the region's core economic challenges may lie at the nexus of its youthful population and the informal sector, this overlap also holds the key to unlocking the region's future economic potential.  Nurturing innovation and entrepreneurship among youth and the informal sector will also help to ensure that economic growth is inclusive, reaching these long-ignored elements of Arab economies.  Improving conditions for informal sector businesses by streamlining bureaucratic requirements, providing easier access to financing, and strengthening legal guarantees could help transport microenterprises into the formal economy. Harnessing the creative energy and ideas of the region's youth by providing entrepreneurship mentoring and other support via business incubators could further stimulate jobs by facilitating the growth of start-up companies.

Enhancing the business environment for more established SMEs would provide yet another boost to the private-sector economy.  Transforming more SMEs into "gazelles"-enterprises that grow an average of 20 percent or more over four years-would spur rapid job creation.  The World Bank estimates that "gazelles" can be responsible for 50-80 percent of new jobs.[4]

The Arab world is already teeming with ideas from high-tech "accelerators," to newly established venture capital funds and "green" initiatives to create new jobs. For example, the Arab Forum for Environment and Development notes that "greening" just one-fifth of the Arab world's construction stock, retrofitting buildings to enhance energy and water efficiency, would create 4-million jobs and pay for itself in two to seven years by trimming costly resource consumption.

Fostering the region's spirit of innovation and promoting entrepreneurship holds the key to transforming the Arab world's faltering economies by creating jobs and building a strong, diverse private sector.  Innovation can serve as the cornerstone for sustained and inclusive economic growth in the Arab world, helping to ensure the success of regional transitions.


[1] Magdi Amin, Ragui Assaad, Nazar al-Baharna, Kemal Dervis, Raj M. Desai, After the Spring: Economic Transitions in the Arab World, New York: Oxford University Press, May 2012, p. 111

[2] Adeel Malik and Bassem Awadallah, "The Economics of the Arab Spring," Center for the Study of African Economies, Oxford University, December 2011, p.16

[3]Hernando De Soto, "The Real Mohamed Bouazizi,: Foreign Policy.com, December 16, 2011

[4] Andrew Stone and Lina Tarek Badawy, "SME Innovators and Gazelles  in MENA - Education, Train, Certify, Compete!  MENA Knowledge and Learning Quick Notes Series, September 2011, Number 43, page 2.


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