Labor markets are rarely considered in discussions of political reform in the Middle East. Yet the unprecedented labor crisis confronting the Middle East and North Africa (MENA) region underscores the urgent need for both a new social contract—the basic laws and understandings that define the relationship between the state and labor—and for political reform.

Job creation is among the most pressing challenges facing Arab leaders; indeed, the ingredients for a massive social crisis are in place. Unemployment rates in MENA average 15 percent, and economic growth rates are too low to meet current labor demand. More than one-third of Morocco's youth are unemployed, while in Syria youth unemployment is a staggering 73 percent. Women in the Middle East are unemployed at twice the rate of men. Vast segments of the workforce are in the informal sector, with no access to the benefits of formal employment.

Despite the region's grim employment picture today, MENA governments must create 100 million new jobs over the next 15 years. This will require overcoming deeply embedded obstacles to economic reform, including the reform of labor markets. Yet urgent economic changes will not be possible without political reforms that give MENA governments the institutional capacity and legitimacy they need to establish social contracts capable of generating growth and creating jobs. Such contracts would comprise policies that promote the role of the private sector, support trade, and increase foreign investment, but also integrate workers into the formal sector, protect their rights and ensure that workers participate in the benefits of economic growth.

The Old Social Contract
Today MENA's labor markets reflect the populist social contracts that were established across the region in the post-independence period. These social compacts favor state intervention and economic planning over markets, and welfare over self-reliance. They include extensive provision of public services, and the management of labor through centralized, top-down trade union structures. They reflect a vision of the political arena as an expression of the "organic unity of the nation," with unity imposed through strict political controls. Over time, these arrangements have been termed an "authoritarian bargain:" citizens tolerate constraints on political freedom in exchange for state guarantees of employment and welfare.

At first, MENA's social contracts produced impressive gains. From 1965-1985 economic growth rates in MENA were among the highest in the world. By the early 1980s, however, the MENA social contract was becoming increasingly untenable. High levels of social spending, combined with a lack of flexibility in labor markets, declining worker productivity, and public policies that were unfavorable to the private sector, trade, and investment, drove Middle East economies into crisis. Unemployment levels rose, and governments faced growing pressure for economic reform.

Toward a New Social Contract?
In the 1980s and 1990s, most MENA governments responded to the economic crisis by implementing selective economic reforms. They introduced market-oriented policies in some areas, but considered labor market reform and privatization—which threatened to increase unemployment among organized public sector workers—too politically risky. Despite some positive effects, these selective reforms have not improved economic performance, or created sufficient numbers of new jobs.

Addressing the region's economic problems will require MENA governments to push the reform process beyond its current limits. Yet this can be accomplished most effectively by updating, rather than abandoning, the idea of a social contract. Labor market reform in MENA is unlikely to succeed without a renewed commitment to the goals of poverty reduction, income equality, and income security that are embodied in existing social contracts. Economic reform will not be credible unless governments ensure that economic outcomes are socially acceptable among MENA's citizens.

MENA governments must also implement more far-reaching political reforms. In the 1980s and 1990s, governments tried to delay meaningful political liberalization, arguing that economic growth must come first. But without democratization, labor market reform is unlikely to achieve legitimacy among the workers whose support is essential for its success. Improved governance, transparency, and accountability—all part and parcel of democratization—will reinforce efforts to implement a new social contract. These are essential if citizens are to make informed judgments about economic performance, as are credible elections that permit citizens to hold politicians accountable for their economic management.

Governments in the Middle East might well prefer the dysfunctional status quo to a vision that links the region's economic future to the reform of political institutions and practices. But the scale of MENA's economic problems exceeds the limits inherent in the narrow strategies of reform pursued to date. To make progress toward a social contract that protects workers, promotes employment, and creates the conditions for sustained economic growth, MENA governments must acknowledge that the renewal of political life is a prerequisite for successful economic reform.

Steven Heydemann is Director of the Center for Democracy and the Third Sector at Georgetown University and the editor of Networks of Privilege in the Middle East: The Politics of Economic Reform Revisited (forthcoming in 2004). The following was adapted from his contributions to a recently completed World Bank report, Unlocking the Employment Potential in the Middle East and North Africa: Toward a New Social Contract.