Chapter

Chapter 5. Reform for Sustainable, Job-Creating, Private Sector–led Growth

Author(s):
Harald Finger, and Daniela Gressani
Published Date:
April 2014
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The ACTs have contended for years with structural economic challenges. Many have moved over time from state-led economies to systems relying more on private sector–led growth. Nonetheless, competition in domestic markets and economic integration with the rest of the world remained limited, public sector employment stayed much larger than in other regions in the world, and the ACTs were unable to unleash the same economic dynamism that helped to raise productivity growth and lead the economic transformation in emerging markets and developing countries in other regions (Lipton, 2004, 2012). As a result, per capita growth was lagging behind other regions even before the onset of transitions in 2011 (Figure 5.1). In addition, there was a growing sense that the benefits of economic growth were largely captured by the well-connected, while large groups of people felt marginalized. Not enough jobs were created for a growing population, leading to high unemployment and low labor force participation (Figure 5.1) (IMF, 2010).

Figure 5.1.Lagging Growth and High Unemployment

Source: IMF World Economic Outlook; World Bank World Development Indicators; and United Nations International Labor Organization.

Current demographic trends in the ACTs require a heightened focus on growth and job creation. Demographic pressures suggest that unemployment will remain high in the oil-importing ACTs unless growth accelerates above 6 percent. Under current baseline projections for GDP growth of around 4¼ percent in these countries through 2018, fewer than 5 million jobs will be created, compared with about 7 million jobs needed to reduce the unemployment rate halfway to the average of emerging markets (that is, to about 8½ percent). To close this gap of 2¼ million jobs would require an average annual growth rate of 6¼ percent, considering the currently insufficient responsiveness of employment to growth. Because generating such high growth will be difficult, a focus on increasing the responsiveness of employment to growth is also needed. A strong commitment to creating an environment where the private sector can generate high, sustainable, and more job-creating growth will thus be required to improve labor market outcomes and unlock the ACTs’ economic potential.

As the political transitions are progressing, countries need to focus on laying out plans for structural economic reform that will provide a vision for revitalizing the economy. Strategies will vary with each country’s different starting points and goals; and many countries, including Jordan, Morocco, and Tunisia, can build on earlier successful economic reform programs. All need to aim for higher, sustained, private sector–led growth, which requires more private investment (Figure 5.2) and higher productivity. Governments should strive to engineer an environment conducive to private sector–led growth, while ensuring adequate regulation for its efficient functioning, so that the economy can move from rent-seeking to the creation of economic value and jobs. The ACTs themselves must drive these transition agendas, but it is crucial that the international community support them with adequate financing, improved access to key export markets, and policy advice.

Figure 5.2.More Investment is Needed to Support Growth

(National investment rate; percent of GDP)

Sources: National authorities; and IMF staff calculations.

1 Highest real GDP growth quartile among EMs.

Bold reform agendas are needed to propel private sector activity and foster a more dynamic, competitive, and inclusive economy. Taking into account different country circumstances, reforms will broadly need to focus on four areas: greater global and regional trade integration; business and investment climate reforms to simplify doing business and enhance governance; labor market and education system reform to ensure productive employment and generation of human capital; and efficient safety nets to protect the poor and vulnerable. These efforts need to be supported by a strong statistical base that allows for efficient policymaking and monitoring. With a wide field for potential reforms and limited implementation capacity, countries will need to prioritize their reform efforts. Full implementation will take a number of years, and early steps in areas with high payoffs are needed to build momentum and signal governments’ commitment to reform, thereby improving confidence (Yusuf, 2014). Country reform agendas will also need to consider sectoral priorities for targeted growth strategies, while being mindful of the perils of attempting to pick winners.

Boosting Trade

In recent decades, trade has not been a significant engine of growth for ACTs. Merchandise exports as a share of GDP are significantly below the average of emerging market and developing countries, and the gap has widened over time (Figure 5.3). As global growth has shifted toward emerging markets, longstanding close links with Europe—particularly among North African countries (Figure 5.4)—have meant that the region has benefitted relatively little from the high growth of emerging markets, particularly in Asia. Exports have also been inhibited in some cases by overvalued exchange rates (Chapter 3). Although countries (especially Morocco and Tunisia) have streamlined and lowered their tariffs, these remain high, and there are also significant non-tariff barriers (Figure 5.5). Partly because of high trade barriers between the ACTs, intraregional trade is very low (Figure 5.6). Vested interests from monopolistic or oligopolistic structures that provide rents to influential beneficiaries have often led to a political economy that has not been conducive to comprehensive trade liberalization.

Figure 5.3.Large Potential for Higher Exports

(Merchandise exports; percent of GDP)

Sources: National authorties; and IMF staff calculations.

1 Excluding Libya.

Figure 5.4.Strong Trade Links with Europe

(Exports to Europe, 2012)

Sources: National authorties; and IMF staff calculations.

Figure 5.5.Significant Trade Barriers

(Trade barriers, 2013)

Source: World Economic Forum, Global Competitiveness Report 2013–14.

1 Scaled from 1–7, with 7 being the least restrictive.

Figure 5.6.Intraregional Share of Exports and Stock of Foreign Direct Investment

(2011 or latest available, percent)

Sources: ASEAN; MERCOSUR; IsDB; UNCTAD; Arab Investment and Export Credit Guarantee Corporation; and national sources.

Progress toward transitioning into knowledge-intensive business services and other higher-value-added areas has remained limited. The share of more technologically advanced and higher-value-added capital goods in total exports is small and remains below the average for low-income countries. This mirrors trends in the broader MENA region, where, according to recent estimates, exports are only a third of their potential, and aggregate intra-industry trade, an indicator of trade in differentiated goods and participation in supply chains, is lower than in Africa and all other regions (Behar and Freund, 2011).

Deeper trade integration could provide a significant boost to the region’s economies. Empirical evidence suggests that raising the MENA region’s openness to the level of emerging Asian countries could increase GDP growth by as much as a full percentage point (IMF, 2010). Deeper trade integration would not only create growth and jobs through direct effects on exports; it could also catalyze productivity-enhancing inward FDI. Experience from Central Europe, for example, underscores that integration into international supply chains can generate significant greenfield investment. In addition, empirical studies show that larger markets are more successful in attracting FDI; this would be another benefit of regional integration (IMF, 2013a). The drive toward deeper trade integration can also help catalyze reform efforts in other areas (such as business regulation and labor market reform) that are important for successful trade integration. The move toward greater integration into the global economy could thus help provide discipline and incentives to enact broader reforms aimed at strengthening competitiveness.

Deeper trade integration will require better access to advanced economy markets. For instance, the EU’s high tariffs, quota restrictions, and farm subsidies remain a significant impediment to agricultural exports to the EU, and substantial non-tariff barriers to trade with the EU persist in the area of standards and conformity assessments. Existing agreements with the EU also do not provide for liberalization in trade in services. The EU could deepen its trade relationships with the ACTs through effective implementation of the proposed Deep and Comprehensive Free Trade Areas (DCFTA). As this process will take time, immediate steps should include providing better access for agricultural products (the EU has already adopted an agreement with Morocco to that end) and dismantling non-tariff barriers. The United States could deepen its existing trade agreements with Jordan and Morocco, and enter into free trade agreements with the remaining ACTs.

More trade integration with the EU and the United States will become especially important in the period ahead in light of the planned Transatlantic Trade and Investment Partnership (TTIP). The TTIP, a planned agreement between the United States and the EU, is expected to generate strong economic benefits overall but could have negative effects on ACT exports and jobs because of expected trade diversion to countries inside the TTIP (Felbermayr and others, 2013), unless accompanied by better access for ACTs to EU and U.S. markets.

To fully reap the benefits of integrating into global trade, a broader opening to trade will be required. Many countries, including Morocco and Tunisia, are strongly committed to further opening their trade regimes. All ACTs should strive to reduce their non-tariff barriers and, building on past efforts, consider further liberalizing their tariffs. They should also aim to diversify trade toward fast-growing emerging markets and higher-value-added goods. They could also better exploit the opportunities presented by global value chains, by removing import barriers for their exporting industries. Increased regional integration that would result from lowering non-tariff barriers and harmonizing policies would also help the ACTs’ prospects for integration into global value chains. The removal of import barriers will need to be implemented in a well-planned manner, as the risk of negative short-term effects on affected industries underscores the need for adequate social protection. Losses in budgetary revenues stemming from lower tariffs would also need to be compensated by increases in other revenues or expenditure cuts.

Trade facilitation policies also play an important role. Trade facilitation measures can include the simplification of customs requirements, rules and procedures, and upgrading logistics. These measures, which would also be supported by the EU in the context of DCFTAs, are gaining importance in a world of global value chains. Better logistics, in particular, have been shown to promote exports. By one estimate, an improvement in Egypt’s logistics quality to Tunisia’s level could increase Egypt’s exports by 12 percent (Behar, Manners, and Nelson, 2013). Morocco has shown a large improvement in this respect through investment in port infrastructure (including the expansion of Tanger-Med to become the largest port in Africa) and in thinning out obstructive procedures (Figure 5.7). ACTs could also provide training for small exporters and new entrants on navigating the variety and complexity of rules governing trade, including standards and certification procedures. Increased assistance from state overseas marketing agencies in identifying export market opportunities and gathering relevant market intelligence would be a considerable asset, especially for smaller companies.

Figure 5.7.Improvements from Trade Facilitation in Morocco

(Time to export and import; days)

Source: World Bank Doing Business indicators.

A number of other export-promotion policy options can be considered. These include export credits and insurance/guarantee schemes at below-market rates (within the boundaries of existing trade agreements), transparent tax concessions on earnings and profits, targeted subsidies for nontraditional exports, duty drawback provisions on imported inputs, and subsidies for freight and transshipment fees to export markets. While these can help support exports, they would need to be implemented in a transparent way in order to preempt possible governance issues.

Recalibrating Business Regulation

The ACTs are encumbered with a legacy of complex and burdensome business regulations. Egypt, for example, has catalogued 36,000 regulations affecting the private sector, many of which overlap, originating from—and implemented by—different parts of government (Amin and others, 2012). The results are often lengthy, expensive, and complicated procedures for starting and operating businesses: an average of 22 percent of firms in the ACTs perceive business licensing and permits as a major constraint to their activities, by far the highest share among the world’s regions, though the share is substantially lower in Morocco (Figure 5.8).1

Figure 5.8.Business Licensing and Permits are Major Constraints1

(Percent)

Source: World Bank Enterprise Surveys 2006–11.

1 Percent of firms identifying business licensing and permits as a major constraint.

In addition to constraining entrepreneurial activity and private investment, complex and burdensome regulation is also conducive to informality and corruption. The informal sector is larger than in other middle-income countries, with estimates ranging from 26 percent to 44 percent (IMF, 2011d). Opportunities for business growth and investment are more limited in the informal sector, and many workers have little or no social protection or employment benefits. Most countries in the region fare poorly on global governance rankings—increasingly so over the past decade (Figure 5.9). Corruption is a major concern, with more than half of firms in the MENA region having experienced bribe payment requests, a much higher share than in any other region in the world.2

Figure 5.9.Governance and Corruption are Increasingly Serious Concerns

(Percentile, 2000 and 2012)

Source: World Bank, Worldwide Governance Indicators.

Unclear rules and discretion in business regulation have also limited enterprise creation and turnover. Firms in the MENA region tend to be substantially older than in other emerging market and developing countries, and only the East Asia/Pacific region has fewer registered firms per capita (World Bank, 2009). High barriers to entry and protected markets constrain competition and, consequently, growth and employment.

There is a widespread perception in the region that the private sector is rent-seeking and corrupt. In addition, officials are often perceived as being selective in improving the investment climate for the benefit of a few well-connected firms, families, and institutions (World Bank, 2009).

Countries have already taken action. A drive for regulatory reform in the ACTs, that had begun prior to the transitions, has helped raise business entry rates, private investment and FDI; many ACTs are now relatively well-positioned in the World Bank’s Doing Business rankings, considering their levels of per capita income (Figure 5.10).3 There is, however, much room for improvement. Since the onset of the transitions, reform efforts have been mixed, with some countries falling back in the rankings, and others renewing efforts at reviewing regulations (Figure 5.11). Morocco, in part through the efforts of its Comité National de l’Environnement des Affairs (CNEA), was named the country with the most improved business regulations in the World Bank’s 2012 Doing Business rankings. Reforms since 2011 have included, for example, a reduction in the minimum capital requirement and fees for starting a business in Jordan and Morocco, and enhanced electronic filing options for tax documents in Morocco.

Figure 5.10.Doing Business Rankings Improve with Income

Sources: IMF World Economic Outlook; World Bank Doing Business 2014; and IMF staff calculations.

1 2013.

Note: Countries with PPP GDP pc above $25,000 have been excluded.

Figure 5.11.Doing Business Reform Efforts Have Been Set Back

(Number of Doing Business reforms)

Source: World Bank Doing Business 2008–14.

Sustained and intensified efforts are needed. There is an urgent need to accelerate the reform process, which is key to job creation in the medium term. In particular, it is essential to create systems of checks and balances in national and regional institutions to prevent the exercise of excessive discretion and nontransparent intervention. The experience of East Asia, for example, shows that countries that were effective in creating accountable, rules-based institutions were significantly more successful at generating economic growth than countries where institutions remained subject to arbitrary intervention by political leaders and public officials (World Bank, 2009). Moreover, policymakers will need to strengthen incentives for the large informal sector to integrate with the formal economy. However, despite such efforts, the informal economy will remain large over the medium term, and policymakers should also increasingly focus on raising productivity in the informal sector as such.

Institutional and regulatory reforms should aim at:

  • Reducing the scope for discretion, by, for example, reducing the number of administrative steps in interactions with businesses and orienting interactions toward electronic processes.

  • Improving transparency and access to information, to promote accountability of public institutions.

  • Strengthening the autonomy of institutions from the executive and political leaders, to help reduce undue interference.

  • Putting in place independent evaluation of the performance of institutions.

Strategies to reform business regulation should focus on removing the barriers to entry and exit. Entry requirements—such as sector-ministry approval, that give officials substantial discretion over which investors to favor or exclude—should be reviewed and based on clear and transparent rules. Similarly, high minimum capital requirements and restrictions on foreign ownership should be relaxed, unless they reflect a particular regulatory concern. In addition, the focus of reform efforts should be on removing difficulties to exit, including modern bankruptcy codes that decriminalize business failure.

Countries should place special emphasis on providing an enabling environment for SMEs and startups. Given the importance of SMEs’ contribution to output and employment in the ACTs, special focus on providing an enabling environment for them will be needed. For startups, in addition to an enhanced emphasis on access to finance (Chapter 4), countries should aim at building a broader ecosystem that helps young entrepreneurs progress and gain a foothold in the economy.

Improving Labor Markets and Education

Labor markets face substantial problems. The ACTs’ high rates of unemployment are compounded by significant demographic pressures as more of the young population enters the labor market (Ahmed, Guillaume, and Furceri, 2012) (Figure 5.12). Youth unemployment is high, ranging from 18 percent to 30 percent in Egypt, Jordan, Morocco, and Tunisia. In Egypt, the share of first-time job seekers finding employment in a formal job dropped from 80 percent in the 1970s to 30 percent in the mid-2000s, and those entering the labor force in a public sector job do so after having spent an average 2.3 years in unemployment (Amin and others, 2012).

Figure 5.12.Excess Labor Regulations and Education Mismatches1

(Percent)

Sources: International Labor Organization; national authorities; and IMF staff calculations.

1 Egypt, Jordan, Morocco, Tunisia, and Yemen.

Note: EE&CA = Eastern Europe and Central Asia; SSA = Sub-Saharan Africa.

Women face particular problems entering the formal labor market and securing employment. In Egypt, Jordan, Libya, Morocco, and Tunisia, only about a quarter of adult women are in the labor force compared to 70–80 percent labor participation rates among men (AfDB, 2012b).4 Recent analysis shows that, for the broader MENA region, if the gap in female labor participation during the last decade had been double instead of triple the average gap in emerging markets, the region could have gained $1 trillion in cumulative output, doubling GDP growth (IMF, 2013d).

The roots of the problems vary across countries, but a number of common critical factors have been identified in labor markets and education. These include: stifling labor market regulations; the dominance of the public sector as employer of first and last resort; and education systems that do not deliver an adequate skill mix.

  • Rigid labor market regulations discourage firms from hiring. Enterprise surveys show that 23 percent of firms in the MENA region perceive labor regulations as a major constraint, by far the highest share among the world’s regions (Figure 5.13). A survey of manufacturing firms in Egypt found that 24 percent would increase their hiring in the absence of restrictions, while only 3 percent would fire workers (AfDB, 2012b). Regulations affecting layoffs of workers are particularly restrictive in the region. In Tunisia, for example, rules and procedures for laying off workers for economic and technological reasons are complex and rarely used (AfDB, 2012a). As a result, economic activity is diverted to the informal sector, where workers do not enjoy the same level of protection. Empirical estimates show that labor market rigidities can explain nearly 30 percent of the size of the informal economy in the ACTs (IMF, 2011d).

  • The dominance of the public sector in the labor market (Figure 5.14) has introduced distortions by affecting the structure of unemployment and the supply of skills through the education system. The (implicit and explicit) employment guarantees in government hiring, and mismatched salary expectations resulting from generous civil service pay scales and benefits, have led to market segmentation and excess demand for public sector jobs (Figure 5.15).

  • The education system’s strong focus on formal qualifications for entry into the civil service has meant that job market entrants often do not have the right skills mix for the private sector. Enterprise surveys show that the share of firms in MENA identifying an inadequately educated workforce as a major constraint (39 percent) is the highest among the world’s regions (Figure 5.13). In Egypt, for example, a study found that 34 percent of jobs require a technical education, but only 11 percent of graduates have this level of qualification (Kandil, 2012). University education, meanwhile, is skewed away from technical subjects. Across North Africa, only 18 percent of university graduates are in the fields of science and engineering (AfDB, 2012b). In addition, while public spending on education as a percent of GDP has been higher in the MENA region than in comparable East Asian and Latin American countries, the return in terms of the quality of education have been disappointing: MENA country rankings in international educational achievement tests remain low (Amin and others, 2012). Primary education is also an area in need of improvement, underscored by low literacy rates, for example, in Egypt, Morocco, and Yemen, and undermining labor productivity.

Figure 5.13.Large Total and Youth Unemployment

(Rates by region, 2012; percent)

Source: World Bank Enterprise Surveys 2006–11.

1 Percent of firms identifying each item as a major constraint.

Figure 5.14.The Public Sector is a Large Employer in MENA

(Public sector employment as a share of total employment, 2008–11; percent)1

Sources: National authorities; International Labor Organization; IMF World Economic Outlook database; and IMF staff calculations.

1 AE: Advanced economies; CCA: Caucasus and Central Asia; CEE: Central and Eastern Europe; DA: Developing Asia; LAC: Latin America and the Caribbean.

Figure 5.15.Government is the Preferred Employer for Arab Youth

(Arab youth employment preferences; percent)

Solutions to these problems will vary among countries. Bearing in mind countries’ different problems and starting conditions, solutions should generally be centered on five areas: reviewing labor market regulation to reduce disincentives for hiring, while maintaining adequate worker protection; revisiting public sector hiring practices and compensation policies to reduce the public sector’s labor market dominance and bias; reforming the education system, aligning it better with the needs of private employers; pursuing active labor market policies to make quicker inroads in lowering unemployment; and placing particular emphasis on policies promoting youth and female employment.5 Many of these reforms are complex and will require considerable efforts at consensus-building and implementation.

  • Reviewing labor market regulation with a view to reducing distortions—particularly those that discourage hiring and skill building—while ensuring adequate social protection. Regulations should continue to provide appropriate protection against discrimination and arbitrary decisions by employers, thereby promoting efficiency by providing incentives for employers and employees to invest in firm-specific training. By contrast, undue protection, including cumbersome processes for layoffs and excessive severance payments, should be reduced or phased out, to relieve firms of excessive rigidities in a constantly changing economy, and the associated negative effects on labor demand and economic growth. Minimum wages should also be reviewed under a transparent mechanism, setting them low enough to support demand for low-skilled workers, but high enough to support the bargaining position of workers and limit discrimination.

  • Revisiting public sector hiring policies to ensure that hiring does not exceed the needs and/or means of the public sector. At the same time, compensation policies may need to be revised to reflect worker productivity and comparable salaries in the private sector. As the model of the state as employer of first and last resort is phased out, prospective job market entrants will have an incentive to position themselves increasingly toward the private job market.

  • Improving and reorienting the education system will also help address labor market mismatches. There is scope to align curricula better with the needs of the private sector, including through an increased focus on writing skills, critical thinking, and problem solving. This can be approached by partnering with the business community to reform the curricula, and further catalyzed by increasing school’s public accountability by giving citizens adequate mechanisms to influence education objectives, priorities, and resource allocation (World Bank, 2008b). In addition, relating the hiring of government employees more to individual productivity and skills than to credentials would create incentives to reorient the education system toward more productive and demanding curricula.

  • Focusing on short-term policies to improve labor market outcomes will be equally important, as many of the other reforms take time to implement and yield results. Such policies notably include active labor market policies, such as job intermediation and placement services, apprenticeship and training programs (including entrepreneurship training), employability training, and support for on-the-job training. Egypt, Jordan, and Tunisia, for example, have government-funded active labor market programs, though so far these reach only a limited number of beneficiaries.

  • Promoting employment of women and youth. Female employment can be supported by offering more flexible work schedules, accommodating needs such as reduced ability to travel and child care responsibilities, improving girls’ access to education, and by offering programs specifically for women (IMF, 2013d). Programs for youth can include training and counseling for labor market entry, and internship schemes to smooth the transition from school to work.

Creating More Efficient Safety Nets

Despite progress over the past two decades, poverty remains an important concern, particularly among children and in rural areas (Table 5.1) (World Bank, 2012c). Early childhood malnutrition rates are high, and children in poor households are more likely to drop out of school and thus bring limited skills to the job market. Rural poverty rates (Figure 5.16) are in some countries more than twice those of urban areas. Limited access to basic services, including health and education, restricts opportunities for many of the poor. In addition, in some countries, a significant share of the population is vulnerable to falling into poverty (Figure 5.17); with incomes just above the poverty line, these households cannot adjust their expenditures when necessary. Yet few have access to formal safety nets, and those without access face a higher risk of moving into poverty.

Table 5.1.Poverty Remains an Important Concern(Overall and child poverty rates; percent)
OverallChild (0–14)
Egypt 2013/201126.326.4
Jordan 201014.420.1
Morocco 201020.025.0
Yemen 200634.836.0
Sources: National authorites; UNICEF; and World Bank (2012c).

Figure 5.16.Rural Poverty is Significant

(Poverty rate of rural population; percent)

Figure 5.17.Many People are Vulnerable to Falling into Poverty

(Share of population living between $2–$2.5 a day; percent)

Spending on subsidies for food and fuel is a costly and inefficient means of social protection. The ACTs have been relying heavily on subsidies as their main tool for providing social protection. Generalized energy price subsidies, in particular, are large, and though they provide support for poor consumers, they disproportionately benefit the well-off. Energy subsidies are appealing to governments because they are easier to administer than other means of social protection; however, they weigh heavily on public finances in an environment of high deficits and debt, and crowd out resources for targeted social programs. In all ACTs, energy subsidies take a larger share of the resource envelope than, for example, public spending on education.

In contrast to subsidies, social safety net (SSN) programs are small. They account for only about one-tenth of spending on subsidies in the ACTs (Figure 5.18), and reach less than one-third of the population in the lowest income quintile (Figure 5.19), significantly below the world average.

Figure 5.18.Social Safety Nets are Small

(Spending on social safety nets and subsidies; percent of GDP)

Sources: World Bank (2012c); IMF Fiscal Affairs Department database; IMF staff reports, various publications; and IMF staff estimates.

Figure 5.19.Social Safety Net Coverage is Limited

(Percentage covered in bottom income quintile)

SSN spending is poorly targeted. The ACTs’ tendency to rely on geographical and categorical targeting does not work well in environments where poverty is less concentrated in certain regions or demographic groups. As a consequence, only a quarter of recipients of SSN benefits are in the lowest income quintile, far below the world average. Nonetheless, there are also notable improvements under way in the ACTs: Jordan and Yemen have introduced SSN programs with elements of means testing or proxy means testing—i.e., based on attributes that correlate with poverty—which are expected to yield better results.

There is limited awareness of SSNs among the groups that should benefit the most from them. People in the bottom income quintile are much less aware of SSN programs than people in the top quintile (Figure 5.20). According to surveys, almost a quarter of Egyptians are not aware of any SSN programs, while in Tunisia, people in the top and middle income quintiles are much more likely than the poor to personally know SSN beneficiaries.

Figure 5.20.Limited Awareness of Social Safety Nets in the Lowest Income Quintile

(Average number of SSN programs recognized by respondents, 2012)

As a result, SSNs have little impact on poverty and inequality. The small size, low coverage, poor targeting, and limited awareness among those in need mean that the impact of these programs on poverty and inequality is small. Except in Jordan, the impact of SSNs on reducing poverty is well below the world average.

A roadmap for reform

The strategy for reform should be centered on phasing out generalized subsidies and replacing them with more efficient SSNs. In light of their inefficiencies as means of social protection, there is a strong case for phasing out generalized subsidies. Scaled-up and appropriately targeted SSNs have the potential to deliver much more cost-effective social protection, freeing scarce resources for other priority expenditure and debt reduction.

International experience shows that subsidy reform is often difficult to implement. Countries attempting reform have often faced obstacles (IMF, 2013a): these include a lack of public information and understanding of the magnitude and ineffectiveness of subsidies; opposition from specific groups benefiting from subsidies (for example, transport sector, energy-intensive manufacturing); lack of public trust that governments will use the savings from subsidy reform efficiently for alternative means of social protection, other priority expenditure, or debt reduction; concerns regarding a possible net adverse impact on the poor; concerns about effects on inflation and volatility of prices, beyond energy products; loss of competitiveness, especially in energy-intensive sectors; and weak macroeconomic conditions at the outset of reforms exacerbating many of the above concerns.

In that light, it will be important to plan subsidy reform well. Country experience highlights six factors that heighten the chances for success (IMF, 2013b, 2014):

  • Targeted mitigating measures for the poor, which are discussed below;

  • A comprehensive energy sector reform plan, drawn up in consultation with stakeholders;

  • A comprehensive communications strategy, including consultation with stakeholders, provision of information on the costs of subsidies and benefits of reform, and heightened transparency in reporting subsidies in the budget;

  • Appropriately phased in and sequenced price increases that avoid sudden and sharp increases;

  • Improved efficiency of state-owned enterprises to reduce producer subsidies; and

  • Depoliticized price setting through price liberalization or rules-based price-setting mechanisms.

The substantial incidence of poverty, the limited scope and efficiency of existing SSNs, and the need to reform generalized price subsidies suggest a need to expand SSNs and make them more efficient, by:6

  • Increasing spending on SSNs and improving their coverage, creating new programs, and expanding existing ones that are effective.

  • Simplifying the SSN landscape by consolidating fragmented SSN programs into a few comprehensive programs specifically designed to reach different segments of the poor and vulnerable populations.

  • Investing in SSN infrastructure by creating unified registries of beneficiaries that can be used across multiple programs, and by using modern service delivery mechanisms such as smart cards, mobile payments, and over-the-counter payments in bank branches.

  • Prioritizing interventions that strengthen human capital, including conditional cash transfer programs and workfare programs.

  • Increasing the use of proxy means testing in targeting social assistance (where feasible in light of administrative capacity issues and possible political sensitivities), which has been shown to be more effective at targeting the poor and vulnerable than geographic or categorical criteria.

  • Focusing on strong governance and accountability in SSNs to improve their efficiency and minimize corruption.

  • Reaching out and informing the poor and vulnerable about the safety net programs available to them.

Several ACTs are already making progress in these areas. Morocco has started to consolidate its SSN programs and has scaled up its successful Tayssir program, a conditional cash transfer program for families with school-aged children. Yemen reformed its Social Welfare Fund by scaling it up, introducing a proxy means test formula, and strengthening capacity in service delivery. Jordan is moving in the direction of poverty-based targeting and, in the context of the 2012 fuel subsidy reform, implemented a cash transfer system to compensate a large part of the population.

Most ACTs are currently considering new programs or reforms in their existing SSNs. Egypt intends to expand priority social programs and implement targeted cash transfer programs. Morocco continues to expand the coverage of the Tayssir program and the RAMED program (basic health coverage for the poor). Tunisia also plans increased cash transfers to targeted households. Yemen plans to further increase its support to the poor through the Social Welfare Fund.

Further efforts are needed to improve social outcomes and support the economic transitions. While countries have begun to reform their safety nets, substantially more efforts are needed to improve and modernize them, and, by making them more efficient, free scarce resources for priority expenditures and deficit reduction.

Strengthening Economic Statistics

The global financial crisis has shown the importance of preemptively identifying sources of fiscal and financial sector risks to support macroeconomic stability and inclusive growth. The ACTs have made significant progress in strengthening their statistical systems, and Egypt, Jordan, Morocco, and Tunisia subscribe to the IMF’s Special Data Dissemination Standard (SDDS). Nonetheless, the ACTs need further development of national accounts, government finance, balance of payments, monetary, and financial statistics to improve their availability, coverage, periodicity, and timeliness. On the positive side, ACTs have begun adopting the methodologies of the IMF’s Government Finance Statistics Manual 2001; however, the official coverage of fiscal statistics could be expanded beyond central government statistics to the social security system, other extra-budgetary funds, and sub-national government accounts (Chapter 2). The coverage of state-owned enterprises and government financial institutions also remains limited, except in Morocco and Egypt. Balance of payments statistics could generally benefit from greater details on the financial accounts. Addressing the challenges in banking supervision information systems and database management would help increase accuracy and reduce the significant lags in reporting financial indicators. On national accounts, additional efforts are needed to develop national accounts from the expenditure approach, and to produce high-frequency data on employment, unemployment, and wages, as well as the coverage of informal activities.

World Bank Enterprise Surveys (http://www.enterprisesurveys.org).

Ibid.

World Bank Doing Business Indicators.

Data for male and female participation in the informal sector, such as traditional agriculture, are not available.

See also work on this issue in IMF Regional Economic Outlook for the Middle East and Central Asia (IMF 2010, 2011b, and 2011d).

See World Bank, 2012c for more details.

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