Chapter 6 Improving Human Capital in the MENAP Region through Adequate and Efficient Social Spending

Anastasia Guscina

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Ms. Anastasia Guscina

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Keywords:: MENAP region; MENAP EMs; IMF staff calculation; social spending needs; LIC economy; Health care spending; Social protection spending; North Africa; Middle East

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Abstract

As discussed in IMF 2018, while many countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region have achieved significant improvements in basic socioeconomic indicators, they still lag peer countries (see also Chapter 1 of this book). The COVID-19 crisis threatens to undo these hard-won gains in making growth more inclusive, as its persistent effects could worsen poverty and inequality, deteriorate health outcomes and educational attainment, and widen the gender gap (IMF 2021). This risk is exacerbated by the fact that despite the prompt response to the pandemic, the levels of public social spending in the MENAP region remain relatively low.

Introduction

This chapter, based on the Mathai, Duenwald, and Guscina Departmental Paper, “Social Spending for Inclusive Growth in the Middle East and Central Asia,” (Mathai, Duenwald, and Guscina 2020) examines the role of social spending in improving socioeconomic outcomes in the MENAP region. It addresses two main questions: (1) How important is social spending as a determinant of social economic outcomes? and (2) What role can social spending play in making growth more inclusive in the MENAP region, in view of the still unfolding COVID-19 crisis?

This chapter shows that public spending on education, health, and social protection can have a meaningful impact on inclusive growth indicators. Some MENAP countries—particularly those where public social spending is relatively low—may need to focus on raising that spending. To finance critical social spending needs while protecting fiscal sustainability, may require reallocations within existing budget envelopes and/or expansion of those envelopes via increased revenue mobilization, as many countries in the region have done in recent years (IMF 2018).

Nearly all MENAP countries should also aim to increase the efficiency of social spending, particularly those with limited capacity to expand their fiscal space and those that fall significantly below the efficiency frontier. The gap in outcomes between MENAP countries and global comparators is larger than that in spending, suggesting that not only the amount but also the efficiency of social spending may need to be enhanced. Improving efficiency may require improving the targeting of social protection (while ensuring that intended beneficiaries are not mistakenly excluded), addressing existing gaps (for instance, eliminating gender gaps in access to education), promoting financial inclusion (which can facilitate the payment of benefits and reduce the scope for corruption), and perhaps most important—but also most challenging—strengthening institutions and improving transparency and accountability.

The region can build on its response to the pandemic. Most MENAP countries were able to quickly mobilize resources for additional health care and social protection outlays in response to the COVID-19 crisis. While the crisis is still ongoing, the experience so far already offers valuable lessons on how to reprioritize expenditure and improve spending efficiency, including through greater use of digital technologies. To prevent long-term deterioration in socioeconomic indicators, governments’ COVID-19 responses should proactively target vulnerable groups, including women, informal sector workers, and refugees.

Socioeconomic Indicators, Social Spending, and the Impact of the COVID-19 Pandemic in the MENAP Region

MENAP countries made impressive gains in health and education outcomes over the past two decades (Figure 6.1).¹ Economies in the MENAP region posted larger-than-average socioeconomic gains over the past few decades. Tunisia and Oman, for instance, are among the top 20 countries worldwide in terms of increasing secondary-school enrollment since 1990, and Morocco is in the top 20 countries for improvements in the Human Development Index (HDI). Improvements in educational outcomes reflect progress in closing the gender gap with peer countries, particularly for MENAP LIC economies, although a few high-income economies like Saudi Arabia also made significant progress in eliminating gender gaps in access to education.

However, the rate of progress in improving socioeconomic outcomes has slowed recently, and the region still lags its peers in many socioeconomic indicators (Chapter 1). Despite their higher income levels, the Gulf Cooperation Council’s (GCC’s) infant mortality rate is twice that of advanced economies (AEs). Infant mortality is also higher in low-income MENAP countries compared to their global counterparts. Similar trends are also visible in education, where MENAP emerging markets (EMs) lag their peers in secondary school enrollment rates (by 13.9 percentage points [pps]), expected years of schooling (by 1.4 years), and adult literacy rates (by 17 pps). The region also lags global peers in aggregate indicators of well-being. For example, despite much higher gross national income per capita, GCC countries have lower HDI scores than AEs globally. Emerging and low-income MENAP countries lag their comparators in both gross national income per capita as well as HDI scores. Inequality-adjusted HDI scores are also relatively low in emerging and low-income MENAP countries.

The ongoing COVID-19 crisis threatens to magnify preexisting inequalities and reduce social mobility, causing disparities to persist and even widen over time (Hill and Narayan 2020). Poorer individuals are likely to find it more difficult to practice social distancing, as they often live in more crowded neighborhoods and houses, have lower access to water and sanitation, rely more on public transport, and are less able to work from home (Papageorge and others 2020).² Refugees and informal sector workers are also more unlikely to receive help, as they are excluded from national safety nets. According to World Bank estimates, the crisis has pushed 10 million households in the MENA region into poverty, 3 million of which, into extreme poverty (Gerszon and others 2020). The crisis is also expected to have a disproportionate impact on women and the young:

Disruptions to education threaten the social mobility and future earning potential of today’s youth. Realized education losses in 2020 due to required school closures are estimated at 20 percent of the school year in AEs and between 40–50 percent in EMs and LICs (IMF 2021). Children from vulnerable families, who do not have access to remote learning technologies or supplemental tutoring, stand to lose even more (Figure 6.2; IMF 2021). Entering the job market during a recession may have a permanent effect on wages (Altonji, Kahn, and Speer 2016).
Job losses were predominately concentrated in the service sector, which tends to employ more women. More women also work in the informal sector, complicating their ability to claim unemployment benefits or access social protection schemes. The disproportionate burden of childcare and eldercare on women even in normal times has been further magnified by the pandemic, as schools closed and family members became ill (Figure 6.3). More women are on the front lines of fighting the pandemic as well, as 69 percent of health professionals are female (Grown and Sánchez-Páramo 2020). Given the uneven impact of the crisis on women, there is a high risk that gender inequality will widen, and progress achieved over the past two decades in the MENAP region will be reversed. The World Bank provides early evidence that global maternal and fetal outcomes have worsened during the COVID-19 crisis, largely in connection with more limited access to health services (de Paz Nieves, Gaddis, and Muller 2021).

Social Spending

While there is significant cross-country diversity in the region, social spending in the MENAP region is generally lower than in other parts of the world (Figure 6.4).³ On average, social spending in MENA countries was 9 percent of GDP in 2017, compared to a global average of 14 percent. The gap is largest for the high-income countries in the region (GCC countries), which spend about 17 pps of GDP less than the average for AEs, while the gap with peer countries is 6 pps for MENAP LICs and 3 pps for MENAP EM economies. The difference is also striking in terms of purchasing power parity (PPP) per capita spending. For example, EM countries in the MENAP region spend an average of $1,220 on social outlays compared to $1,978 spent by EMs globally.

Countries in the MENAP region generally spend less on health and education than global peers. MENAP LICs spend considerably less on education than any other group, at only 2.6 percent of GDP, compared to the global LIC average of 6.2 percent. The relatively low level of public health spending in MENAP EMs before COVID-19 (1.5 percent of GDP) compared to the EM average (3.3 percent of GDP) points to the unavailability of accessible and high-quality public medical services. Private health care spending is more than half of total health care spending in MENAP LICs, suggesting a significant barrier to health care for the poor and vulnerable (Figure 6.5).

The gap in social protection spending is particularly striking. In per capita terms, the GCC countries spent about a quarter of global high-income peers’ amounts. This can be partly explained by the much higher spending of GCC countries on subsidies and public wages (Figure 6.6).⁴ While these other types of spending may have a social protection element, these are likely to be inferior and distortive compared to well-targeted social protection spending.

The efficiency of social spending has generally been low in the region. Using nonparametric techniques to measure efficiency, including estimating an “efficiency frontier” (Figure 6.7) and “output efficiency scores” (Figure 6.8), suggests that MENAP countries get relatively less “bang for their buck” when it comes to social spending. For example, the efficiency frontier of health care spending (estimated by the IMF [2020] and obtained as the best outcome that countries achieve for any level of spending) shows that in the MENA region an average per capita health expenditure of PPP $546 translates into an average healthy life expectancy of about 61 years, while other countries can achieve a healthy life expectancy of 69 years by spending the same amount (Figure 6.7, panel 1). The vertical distance between each country and the frontier produces “efficiency scores,” which are taken as a synthetic measure of inefficiency. Figure 6.8, which reports education efficiency scores from the benchmarking study by Herrera and Ouedraogo (2018), confirms that spending on education in the MENAP region is, on average, less efficient than in relevant global peers.

Most countries in the region substantially increased social spending in response to the COVID-19 crisis. Although country heterogeneity is substantial, the fiscal cost of responding to the pandemic has generally been significant—on average, above 2.5 percent of GDP—although somewhat smaller than in global peers, reflecting limited fiscal space (Figure 6.9).⁵ An important part of the response was to support health care spending, but at least half of the countries in the MENAP region also announced plans for targeted support to low-income and vulnerable households and informal workers (mainly through cash transfers, often administered by utilizing mobile and digital payment technologies) (ILO 2020). While this meant to increase coverage (percent of eligible beneficiaries receiving assistance) and reach previously uncovered groups, adequacy (percent of household pretransfer income) has barely changed, implying that the increase in cash transfers per eligible household was quite small (IMF 2021).

Can Higher Levels of Public Social Spending Improve Inclusive Growth Indicators?

The extent to which social spending matters for socioeconomic outcomes remains a subject of discussion in the literature. Haile and Nino-Zarazua (2018) find a statistically significant impact of social spending on the inequality-adjusted HDI scores and on child mortality. Alper and Demiral (2016) find that social spending boosts growth, and Gupta, Verhoeven, and Tiongson (2003) find that health spending improves health outcomes. Baldacci and others (2008) conclude that education and health spending have a significant impact on education and health capital, but that improving governance and taming inflation could help to achieve the same outcomes. On the other hand, Filmer and Pritchett (1999) find no effect of public health spending on child mortality on account of inadequate institutional capacity and market failures. Likewise, Rajkumar and Swaroop (2008) show that public spending has virtually no impact on health and education outcomes in poorly governed countries, whereas they find a positive impact of public spending in countries with good governance. Most prior empirical work finds that social spending, especially when accompanied by good governance, is associated with better social outcomes and higher growth.

Recent IMF research explored whether a higher level of public social spending improves inclusive growth indicators. Mathai, Duenwald, and Guscina (2020) used a range of econometric methods applied to a global panel dataset of 191 countries during 1990–2017 to tackle the question of whether social spending matters for socioeconomic outcomes. They control for macroeconomic stability, trade openness, level of financial deepening, institutional quality, level of urbanization, fertility rates, and external and domestic conflict. For the health outcomes regression, they also used access to safe water and private health care expenditure as controls. To control for possible endogeneity,⁶ the paper used the previous year’s level of social spending, instrumental variable⁷ estimation, and the generalized method of moments for system of equations. This research finds:

There is a positive and statistically significant relationship between public social spending and socioeconomic outcomes. A 10 percent higher (in PPP dollars per capita) social protection spending (if sustained for three years) can close 20–40 percent of the HDI gap between MENAP countries and their global comparators.
Greater public spending on education is associated with higher secondary-school enrollment and expected years of schooling (a 1 percent increase in public spending on education is associated with a 0.3 percent increase in the secondary-school enrollment rate).
Greater public health expenditure is associated with greater life expectancy and lower infant mortality (a 1 percent increase in public health spending is associated with a 0.1 percent reduction in infant mortality rate). Greater access to health care, proxied by the number of hospital beds, reduces age-adjusted mortality rates. More generally, while the private sector may be more efficient at delivering services for individual households, public health care spending seems to matter more for improving aggregate welfare indicators—lowering poverty rates, improving life expectancy, and reducing child mortality.
Public spending on social protection has a greater impact on the HDI than education and health spending. This may reflect the fact that social protection schemes could have the most immediate effect of lifting people out of poverty, while health and education spending take more time to bear fruit. Government spending on education, especially on girls, matters not just for education outcomes, but for health outcomes as well.
The quality of institutions matters for translating social spending into socioeconomic outcomes (Figure 6.10). For example, if MENAP countries could boost their survey-based governance indicators to those of their peers, a 10 percent increase in social protection spending would close 45–60 percent of the gap.

Important gains in socioeconomic outcomes could be achieved by improving efficiency of spending. Public debt in MENAP EMs and LICs was high even before the pandemic and rose to 90 percent of GDP on average in 2020 (IMF 2020). This means that most governments in the region will need to focus on increasing the efficiency of their social spending. Mathai, Duenwald, and Guscina (2020) use parametric techniques (a stochastic frontier analysis) to assess how socioeconomic indicators in the region would improve if spending efficiency were to increase while keeping everything else unchanged.⁸ They find that:

Bringing the efficiency of spending in MENAP LICs to the same average (higher) level as in EMs would greatly increase socioeconomic indicators. For example, Mauritania could double the average years of schooling, while Afghanistan could achieve the same level of the HDI as Egypt (Figure 6.11, panel 2).
MENAP EMs could also achieve significant gains if they had the same average (higher) efficiency as AEs in the region. For example, life expectancy at birth could increase by three years in Kuwait (Figure 6.11, panel 1).

Increasing the efficiency of social spending in the region may require improving the quality of institutions (Figure 6.12). Stronger transparency and accountability over the use of public resources minimizes wasteful spending and promotes efficiency. Mathai, Duenwald, and Guscina (2020) find evidence of a strong correlation between social spending efficiency and indicators of institutional quality, such as government effectiveness, the control of corruption, and the rule of law. They estimate a series of models that regress indicators of efficiency of public health and public education spending on a range of indicators of institutional quality, along with other controls (financial deepening, size of the population, level of urbanization, inflation, total government spending). By doing so, they find that countries with stronger institutions achieve greater “bang for the buck” in their social spending.⁹ Moreover, the efficiency of social spending is positively associated with financial deepening; intuitively, better access to banking services allows households to smooth consumption when facing negative shocks, helps facilitate the delivery of social transfers, and reduces the opportunities for corruption.

More targeting is an essential component of greater efficiency. Standard metrics of either socioeconomic outcomes or efficiency may not fully capture the impact of social spending on the very poor. Previous work has shown that many socioeconomic programs in the region are not well targeted and do not sufficiently benefit the poor, youth, women, refugees, and the rural population (Purfield and others 2018). Except for Iraq and Jordan, coverage of the bottom quintile by the social safety net is relatively low in the region and the transfer amount in relation to income (measure of adequacy) is less generous (Figure 6.13). Using aggregate socioeconomic measures thus risks missing the potential improvements from making social spending more targeted to the lower segments of the income distribution, including through achieving universal access in health and education or improving the targeting of social transfers.

Promoting primary education and primary health care is also consistent with greater efficiency:

Public spending on education helps level the playing field between children from rich and poor households. An increase in government spending on primary education of 1 percent of GDP could reduce the gap in enrollment rates between the highest and lowest quintiles by 2.8 pps, or about 30 percent of the average enrollment gap (IMF 2021). The World Bank Human Capital Project demonstrates the benefit of investing in the early years to improve human capital. Returns to investment in early childhood education are especially large because cognitive skills are developed early in life (Attanasio 2015).
Likewise, government investment in primary health care achieves greater “bang for the buck.” Greater spending on primary health care enables early diagnosis and prevention of chronic illnesses and is a more efficient way to spend fiscal resources, especially when compared to costly subsidies for medical treatments abroad or emergency care (Tichenor and Sridhar 2017; Mathai, Duenwald, and Guscina 2020). Investing in the human resources for primary health care will also offer a gender dividend, given that many primary health care workers in the region tend to be female. The ongoing COVID-19 pandemic illustrated better survivability for people without chronic conditions and underscored the importance of preventive care, including vaccinations (Andrews and others 2021; IMF 2021).

The COVID-19 crisis has prompted many governments to come up with innovative and efficient solutions in administering social protection. While, as noted earlier, many governments significantly increased coverage in the wake of the COVID-19 crisis, others could not afford a significant increase in individual payment amounts, due to fiscal space constraints. In efforts to shelter the most vulnerable from the economic fallout of the crisis, Egypt, Mauritania, and Pakistan targeted financial support to vulnerable women through broader social assistance schemes, while Algeria gave priority for exceptional leave to pregnant women and women raising children (Gentilini and others 2020). Jordan has used mobile wallets to transmit transfers to recipients. Many countries have allowed customers to open bank accounts via a mobile app, which could then be used to receive government cash transfers and make purchases. Morocco has been able to administer cash transfers by reaching informal workers using mobile and digital payment technologies. These new technologies promise to provide new ways for countries in the region to deliver social assistance to its intended recipients.

Conclusions

This chapter highlights the importance of increasing both the size and efficiency of social spending to achieve more inclusive growth in the MENAP region. Despite impressive improvements in socioeconomic indicators over the last few decades, countries in the region still generally lag their global income peers in socioeconomic outcomes. Although this reflects a number of factors (including the high incidence of conflict and fragility in the region), lower levels of public spending on health, education, and social protection, as well as the relative inefficiency of such spending, also play a role.

The current crisis has further underscored the importance of social spending. The COVID-19 pandemic has brought to the fore the need for robust health care systems and frameworks for channeling targeted financial support to the vulnerable. Most countries in the region have quickly mobilized additional resources on health and social protection to deal with the unfolding pandemic. They have also demonstrated ingenuity at extending social safety nets through the utilization of digital payment technologies.

Prioritization of social spending will need to continue. While some COVID-19-related spending will likely be scaled back once the crisis abates, the need for adequate social spending more generally remains. Our estimates suggest that increases in social spending would result in sizable improvements in outcomes. Sustaining—and potentially increasing—education spending is also important to mitigate the impact of the crisis on learning outcomes, especially for children most at risk of being left behind. Scaling up public health diagnostic and care capabilities, especially in access to preventive care, including vaccinations, would help improve health outcomes and, to the extent that low infection rates prevent lockdowns, aid in economic recovery.

Efforts to create fiscal space for social spending are essential. Given the region’s gaps with peers in socioeconomic outcomes, there is a need in many countries to create more fiscal space—including through budget reprioritization and enhanced revenue mobilization—to permit increased allocations for social spending while ensuring fiscal sustainability. Before the current crisis, many countries in the region had already started to take measures to create fiscal space for social spending, including by undertaking fiscal reforms together with strengthening targeted outlays on social safety nets (Egypt, Tunisia, Jordan, Pakistan, Oman, Saudi Arabia), mobilizing and diversifying revenues (Bahrain, Morocco, Oman, Saudi Arabia, United Arab Emirates), strengthening tax administration, and rationalizing tax exemptions (Djibouti, Morocco). These efforts will need to continue following the crisis.

Greater efforts are needed to boost social spending sufficiency. Given the competing priorities for limited public resources, social spending should be used efficiently and targeted appropriately. This includes both countries that are able to generate fiscal space and countries that face a fixed spending envelope so that each dollar spent has a larger impact on socioeconomic outcomes. Efficiency can be raised by strengthening institutions, improving governance, and controlling corruption. Innovative approaches adopted by governments during the COVID-19 crisis in administering social protection programs should continue to fully capitalize on the benefits that digital solutions can offer in terms of spending efficiency and inclusion. Introducing social registries would allow governments to identify eligible individuals and quickly scale up assistance in cases of emergencies. Efforts to promote financial deepening and inclusion would also help strengthen spending efficiency, including by helping households withstand crises, simplifying payment delivery, and reducing opportunities for corruption.

Improving outcomes would also require identifying existing gaps that impede access to social services. This includes gender gaps that hinder access to education and health care and institutional factors that keep vulnerable groups outside the reach of formal social safety nets. It would involve redesigning educational curricula and reforming vocational training to prepare the MENA region’s youth for in-demand careers. It would also call for increased investments in primary health care, as early diagnosis and prevention of chronic illnesses is the least costly and most efficient way to improve health outcomes.

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In the chapter, we compare low-income countries in the MENAP region with other low-income countries (LICs), emerging markets in MENAP (EM-MENAP) with other emerging markets (EMs), and GCC countries with advanced economies (AEs). MENAP LICs include Afghanistan, Djibouti, Mauritania, Somalia, Sudan, West Bank and Gaza, and Yemen. MENAP EMs include Algeria, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Pakistan, Syria, and Tunisia. GCC countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE.

Over and above the pandemic, technological change is also expected to widen the divide between high-and low-skilled workers and further apply upward pressure on income inequality (IMF 2020).

Consistent with IMF (2019), social spending is defined as on-budget government spending on social protection (including both social assistance and insurance), education, and health.

A large public wage bill due to high and guaranteed public sector employment and/or a public-private wage premium can be seen as a form of social protection, albeit one that is poorly targeted, adds to budget rigidities, and—in the case of high wage premium—disincentivizes private sector employment (Tamirisa and Duenwald 2018). Likewise, some subsidies amount to a universal transfer to households that disproportionately benefit the rich, at least in absolute monetary terms, and results in resource misallocation.

Fiscal measures include above-the-line, on-budget measures in response to COVID-19 directly affecting the government budget balance or gross financing needs, including additional spending on health and social protection and foregone revenue from cutting tax rates on certain goods from taxes or postponing tax collections.

Some countries may choose to spend more on social objectives precisely because their outcomes are poor, and if this reverse causality is not accounted for, the estimates can be biased.

Instrumental variables—variables correlated with spending but credibly unaffected by outcomes—used in the paper include the log of population (smaller countries suffer from diseconomies of scale and have to spend more), share of agriculture in GDP (agrarian societies have a weaker revenue base and tend to spend less), and ethnic tensions index (suboptimal allocation of public spending).

A stochastic frontier analysis imposes a functional form on the input-output relationship (typically Cobb-Douglas) and an assumption about the distribution of the inefficiency term. This allows one to distinguish between inefficiency and statistical noise (See Mathai, Duenwald, and Guscina 2020, Annex 5).

This result is consistent with Rajkumar and Swaroop 2008; Albino-War and others 2014; and IMF 2018.

Abstract

Introduction

Socioeconomic Indicators, Social Spending, and the Impact of the COVID-19 Pandemic in the MENAP Region

Social Spending

Can Higher Levels of Public Social Spending Improve Inclusive Growth Indicators?

Conclusions

References

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Introduction

Socioeconomic Indicators, Social Spending, and the Impact of the COVID-19 Pandemic in the MENAP Region

Social Spending

Can Higher Levels of Public Social Spending Improve Inclusive Growth Indicators?

Conclusions

References

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