Can Money Create Jobs Without Better Governance? MENA Research Delivers a Surprising Answer

Government spending can help reduce youth unemployment, but stronger governance does not necessarily make that spending more effective. Research covering 20 Middle Eastern and North African economies challenges a widely held assumption about the relationship between public finances, institutional quality and job creation, revealing that fiscal expenditure has a statistically significant association with lower youth unemployment even when governance indicators show no measurable influence.

The study, titled "The Impact of Public Expenditure on Youth Unemployment: The Moderating Role of Governance in MENA Countries," was published in the journal Economies by Mustafa Radwan, Mohamed Maher, Elsayed Dawoud, Houcine Benlaria and Khaled Elorabi. Examining economic conditions between 1996 and 2023, the researchers investigated whether governance quality determines how effectively government expenditure translates into employment opportunities for young people.

Their findings point to a distinction in regional economic policymaking. While additional public expenditure is associated with declining youth unemployment, neither institutional quality nor its interaction with spending produces statistically significant results. The evidence places renewed attention on fiscal policy, productive economic activity and the persistent vulnerability of young workers to economic and political disruptions.

The spending paradox behind MENA's youth employment crisis

The Middle East and North Africa possesses considerable demographic and economic resources, yet continues to struggle with exceptionally high youth unemployment. The study describes a regional population exceeding 500 million, with approximately 61.5% younger than 35. Despite this demographic potential, MENA consistently records higher youth unemployment than other major world regions.

Public spending has remained substantial throughout the region. General government final consumption expenditure typically represented approximately 16–18% of GDP during 2022 and 2023. Government involvement extends across economic activity, infrastructure development and public services, creating expectations that fiscal expenditure should support employment generation.

Nevertheless, sustained government expenditure has not eliminated the region's persistent employment difficulties. The researchers identify this disconnect as a central economic puzzle: why does considerable public spending coexist with widespread unemployment among younger workers, and could institutional weaknesses explain the apparent contradiction?

Governance represents one possible explanation. Corruption, administrative inefficiency, political instability and weak accountability can interfere with the allocation of public resources. The study reports that MENA performed poorly across several governance indicators in 2023, including political stability, government effectiveness, corruption control, and voice and accountability.

Previous research offered conflicting explanations. Some investigations associated stronger governance with lower unemployment, while others identified weak or inconsistent effects. Evidence concerning whether governance specifically strengthens the employment benefits of public expenditure remained limited, particularly across MENA economies.

The researchers addressed this gap by examining government expenditure, youth unemployment and institutional quality within a unified analytical framework. Their objective was not simply to determine whether spending supports employment, but whether the strength of that relationship changes with governance conditions.

Fiscal spending cuts youth joblessness, but governance delivers an unexpected result

Drawing on World Bank development and governance datasets, the researchers analysed 20 MENA economies over 28 years. Their framework measured youth unemployment among people aged 15–24, government final consumption expenditure, economic growth, inflation and institutional quality.

Governance was represented through six dimensions: corruption control, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability. The researchers combined these measures into a composite institutional-quality index and tested its direct relationship with youth unemployment alongside its interaction with public spending.

To account for economic interdependence, country-level differences and unemployment persistence, the study employed common correlated effects mean group and dynamic common correlated effects estimation methods. Additional statistical procedures tested the consistency of the results under alternative specifications.

The most prominent finding concerns public spending. In the preferred dynamic model, a 1% increase in government expenditure is associated with an approximately 0.34-percentage-point reduction in the change in youth unemployment, holding other modeled factors constant. The relationship is statistically significant and remains consistent when governance interactions are included or excluded.

The researchers interpret the result as evidence supporting fiscal expenditure's capacity to stimulate economic activity and employment. Higher government spending can strengthen demand and encourage productive activity, contributing to opportunities for young people entering the labour market.

The governance results, however, depart from the study's initial expectations. Neither institutional quality nor its interaction with government expenditure demonstrates statistical significance. The researchers therefore find no evidence that improved governance systematically strengthens the expenditure–youth unemployment relationship across the economies examined.

Such a result challenges findings from some earlier investigations that identified stronger employment effects from government spending in better-governed environments. The authors suggest that fiscal policy may operate relatively independently of measured institutional quality in the short term, potentially reflecting the region's administrative and institutional conditions.

Statistical insignificance, however, should not be confused with proof that governance has no economic value. The analysis establishes that the specified governance measures did not produce a statistically detectable relationship within the study's framework. It does not demonstrate that institutional reforms are unnecessary or ineffective across other development outcomes.

Growth creates opportunities, while crises leave lasting employment pressures

The research also identifies economic growth as another significant factor associated with youth unemployment. Higher GDP growth corresponds with lower changes in youth unemployment, supporting the relationship between expanding production and employment opportunities.

Inflation also exhibits a statistically significant negative association with youth unemployment changes. The researchers interpret this outcome through the conventional short-run relationship between inflation and unemployment. Their analysis nevertheless focuses on observed economic relationships rather than evaluating whether higher inflation would constitute a desirable policy intervention.

Employment persistence emerges as another important characteristic. The dynamic models identify a statistically significant positive relationship between current changes in youth unemployment and changes recorded in the preceding period. The result indicates that labour-market disturbances do not necessarily disappear immediately and may continue influencing employment conditions.

Historical disruptions further demonstrate the region's vulnerability. The study incorporates the 2008 global financial crisis, the political upheaval associated with the 2011 Arab Spring and the COVID-19 pandemic to examine how major shocks affected youth unemployment.

All three episodes show statistically significant positive associations with changes in youth unemployment. The Arab Spring produced a larger estimated effect than the global financial crisis, while the pandemic generated the strongest association among the three disruptions.

The preferred model estimates positive coefficients of approximately 0.54 for the financial crisis, 0.99 for the Arab Spring and 1.94 for COVID-19. These results highlight how economic contraction, political instability and disruptions to production can intensify employment difficulties for younger workers.

The pandemic's particularly strong estimated association underscores the exposure of labour markets to widespread interruptions in economic activity. Alongside the findings on unemployment persistence, the crisis results reinforce the researchers' recommendation to develop more resilient labour markets and strengthen social protection mechanisms.

From bigger budgets to better jobs: The policy challenge ahead

The research presents a policy argument centred on the productive allocation of government resources. Rather than treating expenditure expansion as an objective in itself, the authors recommend prioritizing activities capable of supporting economic growth and generating opportunities for younger workers.

Manufacturing, agriculture, education, healthcare, infrastructure and small and medium enterprises feature prominently in their recommendations. These sectors are identified as potential channels through which government spending could support employment and wider economic development.

However, the analysis does not separately estimate employment returns from individual expenditure categories. Its findings concern aggregate government final consumption expenditure, meaning the relative effectiveness of manufacturing support, agricultural development or education spending remains an open empirical question.

Institutional reform also retains a place in the policy framework. Although governance did not significantly moderate the observed expenditure–employment relationship, the researchers recommend strengthening administrative capacity, transparency, accountability and government effectiveness to improve the longer-term efficiency of fiscal policy.

For governments confronting persistent youth unemployment, the findings suggest that employment-oriented expenditure, sustainable economic growth and institutional strengthening should be pursued without assuming that improvements in one area automatically guarantee results in another.

The study's methodological approach strengthens its contribution. By accounting for shared regional shocks and differences between national economies, the researchers address weaknesses in conventional statistical approaches. Additional robustness checks broadly confirm the negative expenditure relationship and insignificant governance interaction.

Important limitations remain. Aggregate country-level data can obscure differences between countries, industries and demographic groups. The analysis also finds no stable long-run relationship among the examined variables, directing its central estimates towards short-run dynamics rather than establishing permanent employment effects.

A more detailed examination of expenditure patterns, governance characteristics and labour-market conditions could provide deeper insights into the relationships identified. Extending the analysis to other developing regions could clarify whether the absence of a statistically significant governance interaction stems from regional characteristics or represents a more widespread phenomenon.