Most Arab countries have embarked on, or are in the process of formulating, medium-term economic reform policies with an important common objective: sustaining a high level of economic growth. This objective reflects policymakers’ increasing recognition that structural changes and financial stability are needed if their economies are to (1) provide sustainable employment opportunities for the un- and underemployed, as well as for the increasing number of nationals entering the labor force; (2) progress further in improving basic social indicators; and (3) benefit from the important changes taking place in the regional and international economies.
The Declaration of Principles of 1993 and the Interim Agreement of 1995 between the government of Israel and the Palestine Liberation Organization (PLO) presented the Palestinian people with new opportunities and significant challenges.1 There was widespread optimism that the economy would begin to grow and living standards improve in the West Bank and Gaza. A Palestinian administration—the Palestinian Authority (PA)—was expected to adopt policies favorable to local economic development, and public sector services and infrastructure would improve with the generous support of donor countries. The fundamental task of the PA was the provision of basic public services to improve living conditions and to enhance the economy’s human capital. Moreover, the PA needed to create an environment conducive to economic growth. This required embarking on an ambitious public investment program to meet the economy’s significant infrastructure needs, pursuing sound macroeconomic policies, and developing institutions in support of a market economy that would encourage private investment and foster growth. In sum, a favorable economic environment supported in part by the newly reemerging financial sector was expected to develop in a climate characterized by cooperative relations between Israel and the PA.
In the five-year period 1994–98, the Palestinian economy experienced challenges that would have been daunting even for more developed and robust economies.1 Population growth was among the highest in the world, creating substantial demand for basic social services. The policy and regulatory framework in which the private sector operated was significantly revamped. Some restrictions on the Palestinian economy became tighter, and closures, imposed by Israel for security concerns, led to a significant slowdown in economic activity.2 The cumulative effect of permits, closures, and changes to the policy and regulatory framework, together with uncertainty regarding final status, created an environment of extraordinary uncertainty for the private sector. Given the circumstances, however, the economy has shown a remarkable degree of resilience, helped by substantial improvements in infrastructure and donor aid on a very large scale. After a deep recession in 1995-96 associated with periods of severe closures, economic activity picked up, especially in 1998, and the rate of unemployment declined markedly from its peak two years earlier. For the period under review as a whole, however, economic growth did not keep pace with population growth, and per capita income declined substantially.
This paper discusses the experiences of Jordan, Algeria, and Tunisia with social safety nets. Since the beginning of their developmental efforts, these countries have accorded special attention to social development, adopting strategies that were designed to ameliorate the living standards of the population, particularly low-income groups, and improve the distribution of income. Toward this end, they established elaborate and extensive schemes to provide targeted social services and transfers in cash and kind to these groups and in untargeted services to society at large.
After the creation of the Palestinian Authority (PA) in 1994, the most important task in the fiscal area was to secure a solid revenue base within the constraints imposed by the Oslo Accords and to establish mechanisms that would allocate resources efficiently to meet the needs of the Palestinian people, particularly for basic public services. At the outset, significant uncertainty surrounded the availability of financial resources. However, the PA was authorized to levy taxes and other fees in the territories under its control to finance its operations. Moreover, in the Economic Protocol of 1994, Israel and the PA agreed on a revenue clearance system.1 In addition, in support of the Middle East peace process, the international community pledged generous financial assistance to the Palestinians ($3.7 billion) for the first five years after the peace accords. Over $2.5 billion was disbursed by donors during the period 1994-98, most of which was devoted to public investment and institution building.
Some of the economic benefits of the economic reform policies carried out by Egypt and several other Arab countries began to emerge a few years ago. However, these policies have also given rise to some adverse social effects, particularly for low-income groups. The comprehensiveness of reform implementation is the ultimate major determinant of economic benefits and transient disadvantages to society, namely, the aggravation of poverty and unemployment. It is even quite likely that inconsistent and slow reform could lead to the loss of expected benefits and to the emergence of negative effects.