Despite the pre-pandemic gains in poverty reduction, literacy, and lifespans, many Middle East and North Africa (MENA) economies have struggled to ensure that the benefits of economic development and diversification could accrue equally to all segments of their population. Among the main issues that remain unresolved are the high share of inactive youth (who are not engaged in employment, education, or training); large gaps in economic opportunities for women; fragmented social protection systems; and underdeveloped private sectors with tight regulation and limited access to credit that stifle the creation of new firms and growth in output, employment, and incomes.

The COVID-19 pandemic not only risks wiping out some of the progress made in the region over the past decades, but could also exacerbate inequality in a durable way. There is evidence that the impact of the pandemic has been uneven across groups, with the recession having a disproportionate effect on the low-skilled, the young, women, and migrant workers (IMF 2021).

Many countries in the region have reacted to the pandemic by implementing rapid responses that have helped mitigate the social impact from the crisis. Still, an uneven recovery from the health crisis could lead to a permanent widening of existing gaps and, ultimately, weaker growth and a less inclusive society. In addition to crisis legacies and preexisting vulnerabilities, a few global trends could also weigh on the region’s prospects for strong and inclusive growth in the post-COVID-19 world. Climate change is already posing significant challenges to many MENA economies by causing more frequent and intense weather-related disasters. And the increased use of automation and artificial intelligence in production processes means that MENA labor markets will also look quite different in the future, with new challenges and opportunities that are still difficult to appreciate fully.

This shifting landscape motivates us to return to the theme of inclusive growth in MENA, a topic that we have followed with close attention over the past decade. In 2018, the IMF organized a regional conference in Marrakesh, Opportunities for All: Promoting Growth, Jobs, and Inclusiveness in the Arab World. The objective was to continue the discussion with policymakers, the private sector, and civil society in the MENA region on how to put an inclusive growth agenda into action.¹ That discussion had begun four years earlier, with the 2014 Amman regional conference, Building the Future: Jobs, Growth, and Fairness in the Arab World, and the meetings in Marrakesh were aimed at advancing the discussion on which specific policies were needed to unlock the region’s potential, exploit new sources of growth, promote entrepreneurship and innovation, embrace transparency and technology, and scale up opportunities for women and youth in the MENA region. The Marrakesh conference’s main message, summarized in Opportunity for All: Promoting Growth and Inclusiveness in the Middle East and North Africa (Purfeld and others 2018), was that MENA countries needed to change their economic models, and indeed build a new social contract, to create more jobs, lift growth, and ensure that the benefits of economic development accrue more broadly to their citizens.

The objective of this book is to reassess the inclusive growth agenda in the MENA region in light of the rapidly changing, pandemic-influenced world. The greater demand for protection against the negative effects of the health crisis is likely to run up against the more severe macroeconomic constraints faced by many economies in the region (including weaker fiscal positions and external competitiveness). Satisfying those demands in the face of a narrower fiscal space makes it unavoidable to reconsider the role of the state in the MENA region, from primary provider of goods and services to provider of opportunities. And while some of the old challenges for inclusiveness that were emphasized in the 2018 Opportunities for All conference remain to be addressed, new ones are looming, from the impact of the pandemic on the future of work to the implications of climate change on the economic and social fabric of MENA countries.

The approach followed in this book is the one emphasized in a recent, comprehensive IMF book on inclusive growth (Cerra and others 2022). In that work, the inclusiveness of economic models is described as a complex, multifaceted phenomenon that articulates around four different dimensions: (1) equality in the distribution of the outcome of growth, be it in income or wealth; (2) equality in the opportunities to access basic social services, like health care and education, but also financial products and services; (3) an equal possibility for all to participate in economic life, mainly by fulfilling their professional aspirations and having jobs that are commensurate to their education and talent; and finally, (4) an equal possibility for all to have their voice heard in society and politics (the empowerment dimensions of inclusiveness).

Chapter 1 of this book adopts this framework and assesses where the MENA region and its countries stand in each of the four dimensions of inclusive growth. To do so, it uses a series of indicators that are widely utilized in the literature to build inclusiveness indexes, a synthetic summary of the degree to which MENA countries follow inclusive growth models compared to peer economies. The results of the exercise confirm the premise of this book and set the ground for the following chapters: despite the gains in many socioeconomic indicators over the past few decades (Koshy and others 2021), on average and compared to other regions, the economic model followed by MENA countries hasn’t been able to benefit, include, and empower a significant share of their population. The gap with the rest of the world is particularly large in the participation and empowerment dimensions of inclusiveness. Within these dimensions, MENA countries appear to be lagging other regions, particularly in allowing women to participate in economic life, in fostering the development of an efficient private sector, and in improving the quality of governance. The gaps are largest in the region’s low-income countries, whereas Gulf Cooperation Council countries score relatively better than the rest of the world on indicators of financial and labor market inclusion. By contrast, the relative lag in the quality of governance is quite diffused, with only three countries in the MENA region above the rest-of-the-world average.

After taking stock of where the MENA region stands in the four dimensions of inclusiveness, and given the main gaps relative to other regions, the book turns to a question that represents a common theme across its chapters: What is the economic price that could be associated with the lack of inclusiveness? Can the lackluster GDP growth and the episodes of social instability experienced in the last few decades be a consequence of the poor inclusiveness of the MENA region’s economic model? As noted in Chapter 2, the empirical literature has struggled to identify (let alone quantify) the causal relationship between many dimensions of inclusiveness (particularly the inequality of income and wealth) and economic growth and stability. The issues of reverse causality, endogeneity, and data and model dependence are cited among the reasons it has been difficult to reach broad consensus on the relationship between a low-inclusive economic model and lower economic growth and stability.

Rather than searching for an empirical relationship between inclusiveness and economic growth in the MENA region, Chapter 2 looks at some of the mechanisms through which the lack of inclusiveness (associated with the existence of frictions that constrain participation in economic activity) could indeed result in lower economic growth. This is done in the context of a general equilibrium model, calibrated to reflect an average MENA economy, where individuals with different income, wealth, and skills do not have the same opportunity to work and invest due to the presence of barriers and friction that restrict their access to markets and to credit. The chapter shows that a reform package that simultaneously reduces product market distortions and improves access to credit could lead to a more efficient allocation of resources and significantly boost output, wages, and jobs (up to double their levels in steady state). Importantly for the MENA region, the simulations show that an increase in public investment (as in the “old” model of growth) that achieves the same increase in output would not be able to generate the same improvement in welfare (particularly wages and jobs) compared with reforms that remove market distortions and support a more dynamic economy with an expanded role for the private sector.

These results are particularly relevant for the MENA region, as product market distortions and limited access to financial services are two important barriers that prevent new firms from entering markets and existing ones from growing in scale. As emphasized in the Opportunity for All paper (Purfeld and others 2018), another key obstacle to private sector development in the region is the dominant position experienced by state-owned enterprises (SOEs) (Ramirez-Rigo and others 2021). Using firm-level data, Chapter 3 shows that the presence of SOEs has a negative impact on competition and private investment, in the MENA region even more than in other regions of the world, reflecting the relatively larger footprint of SOEs there. In particular, the chapter finds that on average in the MENA region, the larger SOE presence in an economic sector tends to lower investment by private firms in that same sector, controlling for firm-specific factors.

The presence of a relatively small private sector is one of the main reasons why growth hasn’t been able to generate enough jobs in the MENA region. But the lack of job opportunities for women and young people points to the presence of specific distortions that tend to segment labor markets and limit the possibility of participating in economic life for these two groups. Chapter 5 focuses on the reasons why female labor force participation is much lower in the MENA region than in the rest of the world. Its main finding is that gender disparities in basic and financial legal rights are likely to be the most powerful barriers to women’s participation in economic life in the MENA region, followed by restrictions in labor market codes and regulation. While to a certain extent those factors reflect well-established social norms that may prove difficult to change, removing barriers that prevent women’s participation in the labor force and entrepreneurship promises to have a substantial impact on output and welfare. Using a general equilibrium model with gender gaps calibrated to Egypt, Chapter 5 shows that if the indicator of basic legal rights for women were the same as the average for other emerging market economies, female labor force participation in Egypt would be 45 percent higher. In the long term, this would correspond to an increase in output by about 10 percent and a decline of the Gini index of income inequality by 2 percentage points.

When thinking about measures to boost job creation, policymakers should consider the possibility that MENA labor markets will experience the same profound transformations already visible in many advanced economies (and that the pandemic is likely to have accelerated), from the use of automation, digitalization, and remote work in production processes. Chapter 4 discusses how these trends can change the nature of work in the MENA region. It shows that the negative impact of automation on employment could be particularly felt by those economies with a high concentration of jobs in low-and medium-skill occupations. On a positive note, female employment is likely to be relatively less vulnerable to automation, and remote work may provide new employment opportunities to women and the young (especially in those MENA economies that have invested significantly in information and communication technology infrastructure, like the Gulf Cooperation Council countries) by reducing commuting costs and providing more flexible work schedules.

In the short term, the COVID-19 crisis has widened the gender gap and reduced education attainment and possibilities for young Arabs, as well as worsening poverty, inequality, and health outcomes (IMF 2021). This has called for many policy initiatives in the region to extend the coverage of social protection systems. Despite this prompt response, Chapter 6 argues that the levels of public social spending in the region remain relatively low, something that could help explain why the MENA region lags the rest of the world in many socioeconomic indicators, including the Human Development Index. The analysis cited in the chapter suggests that a sustained increase in social protection spending by 10 percent in MENA economies can reduce that gap by 20–40 percent. Expanding social protection systems may, however, prove difficult for MENA economies that have emerged from the pandemic with weaker fiscal positions. For these economies, improving the coverage and quality of social protection will require rationalizing other forms of public expenditure, as well as improving the efficiency and targeting of current social spending.

MENA policymakers have also been quick to react to the COVID-19 crisis with a range of measures that allowed both small and medium enterprises (SMEs) and households to maintain, and at times improve, their access to credit. This has indirectly enhanced financial inclusion, an area where the MENA region has accumulated a large gap relative to peer groups of countries, as discussed in Chapter 7. The analysis shown in that chapter suggests that in many MENA low-income countries, financial development is lower than what would be expected for a country with similar observed structural characteristics, and the level of financial inclusion is below what is predicted by indicators of their financial depth. This suggests that low financial inclusion in these economies may also reflect policy distortions, including restrictions on banking activities that limit competition and increase the borrowing costs for SMEs and households, and incomplete sharing of information that complicates requirements and costs of providing collateral. While the diffusion of fintech and new technologies can help overcome some of the constraints, significant and durable improvements in financial inclusion would require a holistic approach that encompasses a broad range of areas, such as institutional quality, macroeconomic stability, adequate financial policy, and better legal and regulatory frameworks.

The final chapter of the book deals with a dimension of the inclusive growth debate in the MENA region that has become increasingly difficult to ignore in the past few years, namely the social and economic impact of climate change. The MENA region is already feeling the brunt of climate change, as many of its countries have increasingly struggled with higher temperatures, lower and more erratic rainfall, and more frequent and severe climate-related disasters (Duenwald and others 2022). Continued climate change will pose a major threat to growth and inclusiveness in the region, as its economic effects tend to be felt disproportionately by the most vulnerable groups in these economies. The main conclusion from Chapter 8 is that MENA countries will need to include adaptation strategies in their inclusive growth agendas. Given the narrower fiscal space available, the private sector will also play a critical role in countries’ adaptation efforts, and public policies should aim to catalyze private investment in their adaptation and resilience strategies.

The chapters of this book provide new, analytical approaches to both long-standing and more recent challenges to inclusive growth in the MENA region, using a variety of methodologies. The common thread that links them, and the main policy message that emerges with clarity from the analysis, is that promoting inclusive growth will require substantial reforms to close the gap between the growth models of the past and what is required going forward, and to turn this challenge into an opportunity. While making growth more inclusive will require a comprehensive package of reforms, the priorities that emerge from this book are:

• Level the playing field between public and private firms. Developing the MENA region’s private sector will require eliminating the many barriers that prevent new firms from entering markets and existing small businesses and startups from growing in scale. This will require reforms that reduce the dominant role of SOEs in the region, lower burdensome government regulations, enhance financial inclusion (especially of SMEs), and improve general governance (see also Jarvis and others 2021).

• Revamp social protection systems. The decision of many governments in the MENA region to expand the reach of their social safety nets during the pandemic helped mitigate the impact of the health crisis on the most vulnerable. Going forward, the challenge is to make this expansion sustainable in the long term by building social protection systems that guarantee more equal access to basic services and more efficient, cost-effective, and targeted social assistance.

• Redesign tax systems. The MENA tax-revenue-to-GDP ratio is relatively low (Purfeld and others 2018), and there is scope to both raise more revenues to fund inclusive growth reforms and achieve more equitable forms of taxation that can directly reduce income and wealth inequality. A key priority is widening tax bases (including by introducing or reinforcing taxation on wealth and property) and improving the progressivity of income taxes (including by increasing the threshold for tax exemptions; raising higher marginal rates; and including non-wage earnings, such as income from interest, capital gains, and dividends). Using the extra revenues to fund cash transfers at the bottom of the income distribution would improve the overall progressivity of income taxation and reduce extreme poverty. Rethinking the nature and size of the (widespread) exemptions on corporate and value-added taxes may also contribute to improving progressivity and targeting. Consideration could also be given to tax policies that could facilitate the insertion into (formal) labor markets of women and the young, for example through lower employer taxes or social security contributions, while ensuring that at least part of social assistance is not lost when finding low-paid occupations. Introducing carbon taxes would help create fiscal space to increase adaptative investment for greater resilience against the effects of climate change.

• Promote digitalization as a tool to improve both inclusion and efficiency. Stepping up digitalization and investing in new technologies will foster change and inclusion through many channels. On one side, it will provide the young and women with the new job opportunities associated with remote working, online learning, digital finance, and e-commerce. On the other, it will help expand social protection systems by ensuring that additional resources will be directed to those who really need them and by allowing efficiency gains in the delivering of public services.

• Invest in talent and reduce barriers for female participation in economic life. Building human capital is not enough if part of it remains underutilized or gets marginalized. Many MENA economies have in common a relatively large pool of highly educated young women that does not find its way into effective participation in formal labor markets. Removing the legal and policy barriers that weaken the link between women’s education and employment outcomes would unlock an important untapped source of growth in the MENA region for the benefit of the population as a whole.

• Leverage mitigation and adaptation strategies to make green investment an engine of growth and job creation. Progress in decarbonization and transition to renew-able energy sources is not only necessary for sustainability reasons but could also be a powerful engine of growth and jobs. By increasing the resilience of MENA economies to climate-related shocks, adaptation strategies would boost growth and improve inclusiveness at the same time, as it is especially the most vulnerable who would benefit from the lower exposure to catastrophic events. How can the IMF help the MENA region meet these objectives? To a large extent, the policies highlighted here are n’t fundamentally different from the ones that were discussed during the Amman and Marrakesh conferences and emphasized in the Opportunity for All paper. What has changed is that the pandemic has made their implementation even more urgent, as persistent effects of the health crisis could again test the social and political stability in the region, which will only be assured in the long term through steady job creation and a new social contract that puts in place a fair and inclusive economic model. Given the weaker fiscal and external environment, structural reforms should be designed in the context of credible macroeconomic frameworks that (1) clearly identify the financing of the reforms, (2) take into account the complementarities between them, and (3) ensure that their implementation will not jeopardize macroeconomic stability. The IMF can be an important partner in this endeavor, as these assessments can be at the core of its funding, surveillance, and capacity development activities in the region during the next few years. Our hope is that this book could offer yet another contribution to a stronger partnership between the IMF and MENA economies, as they recover from the pandemic, while building an environment where the gains of economic development are shared across the entire population and lead to better standards of living for all.