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Chapter 4. Outcomes and Economic Effects

Author(s):
Natalia Tamirisa, and Christoph Duenwald
Published Date:
January 2018
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Public Service Delivery

Higher wage bills have on average not produced better service delivery, though public services are also affected by other considerations (Figures 4.1 and 4.2). MENAP oil importers on average have much higher multidimensional poverty—a measure that aggregates health, education, living standards, income, empowerment, quality of work, and threat from violence—than the regional average in CCA or Latin America (MCD Regional Economic Outlook, 2014). This suggests that in a context of lackluster growth, resource scarcity, conflicts, lack of accountability, and rapid population growth, even generous public employment and compensation policies have limited impact on social outcomes. Compared with their peers, MENAP oil importers have lower government effectiveness—a measure that captures, among other things, perceptions of public service quality. Government effectiveness in MENAP oil exporters exceeds the emerging market and developing economy average, yet this result is driven by high-income GCC countries. The CCA’s rankings are close to the emerging market and developing economy average because of extensive service infrastructure inherited from the Soviet era.

Figure 4.1.Government Effectiveness, 2015

(Index, from lowest 0 to highest 5)

Source: World Bank, World Governance Indicators.

Note: Government Effectiveness captures perceptions of the quality of public services, the quality of the civil service, and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. AE = advanced economies; CCA = Caucasus and Central Asia; EMDE = emerging market and developing economies; MENAP = Middle East and North Africa, Afghanistan, and Pakistan.

Figure 4.2.Population in Multidimensional Poverty

(Percent)

Source: United Nations Development Program.

Note: Regional averages are calculated by weighting countries relatively based on their total population. The data exclude Pakistan. EMDE = emerging market and developing economies; MENAP = Middle East and North Africa, Afghanistan, and Pakistan.

The quality of basic services is lagging. While enrollment in education has improved in recent decades, and pupil-to-teacher ratios compare favorably to peers, educational achievements—measured by international test scores—are lagging (Figure 4.3). Poor infrastructure, curriculums focused on public administration careers, absenteeism of students and teachers, and poor training of teachers lead to weak education outcomes in MENAP countries. Educational achievement is better in the CCA owing to a curriculum focus on sciences. Despite some progress, especially in closing the gender gap, much remains to be done (Heyneman 1997; World Bank 2008; Bouhlila 2015). Health outcomes (for example, life expectancy) vary in the region and suffer from poor service quality, variable quality providers, and absenteeism (Yazbeck, Rabie, and Pande 2017) (Figure 4.4). Citizens’ trust and satisfaction in public services are low throughout the MENAP region, with about half of MENA respondents in the 2013 Gallup World Poll expressing dissatisfaction with educational services and health care in their country. And infrastructure services are also relatively poor in many MENA countries: electricity blackouts are commonplace, and renewable water resources are dwindling at an alarming rate (World Bank 2015).

Figure 4.3.Mathematics Scores for the Region, 2015

(TIMSS: 8th-grade mathematics 50th percentile score)

Sources: International Association for the Evaluation of Educational Achievement; and World Bank.

Note: Trends in International Mathematics and Science Study (TIMSS) is a series of international assessments of the mathematics and science knowledge of 4th- and 8th-grade students around the world, administered every four years since 1995. At each grade level, the scale center point of 500 was set to correspond to the mean of the overall achievement distribution. Data labels in this figure use International Organization for Standardization (ISO) country codes.

Figure 4.4.Life Expectancy at Birth, 2014

(Years)

Source: World Bank.

Note: AE = advanced economies; CCA = Caucasus and Central Asia; EMDE = emerging market and developing economies; MENAP = Middle East and North Africa, Afghanistan, and Pakistan.

Weak governance, corruption, and lack of accountability are key factors behind inadequate public service delivery. For the MENA region, lack of accountability lies at the heart of the problem of poor public service delivery; when accountability is weak, services do not meet the needs of citizens, who then lose trust in government (Brixi, Lust, and Woolcock 2015). This disproportionately affects the poor, as they are unable to utilize private providers of such services (for example, private tutoring where public education is failing to deliver).

Fiscal Implications

Public wage bill increases have worsened fiscal balances (IMF 2016a; Figure 4.5). Cross-country panel data analysis shows that wage bill increases have been only partially financed by additional revenues. In resource-rich countries, these increases do not seem to be associated with current revenues, suggesting the use of resource wealth for wage bill financing.

Figure 4.5.Change in Wage Bills versus Fiscal Balances, 2014–16

(Percent of GDP)

Sources: IMF, World Economic Outlook; country authorities; and IMF staff estimates.

Note: Data labels in this figure use International Organization for Standardization (ISO) country codes.

Accounting for almost a third of total expenditure, wage bills have left less room for public investment and social transfers in the region (Figures 4.6 and 4.7). The latter spending categories are much smaller in MENAP than in global peers, although they are crucial for inclusive growth and poverty reduction. Evidence suggests that the impact of capital spending on growth is higher than current spending (including spending on wages)—often by a factor of 2 to 3—and more lasting.1 The role and ability of fiscal policy in promoting inclusive growth have therefore been limited by high wage bill spending in the region.

Figure 4.6.General Government Spending by Expense, 2016

(Percent of total expenditure, latest available data)

Sources: Country authorities; IMF, World Economic Outlook; and IMF staff estimates.

Note: EMs = emerging market economies; MENAP = Middle East and North Africa, Afghanistan, and Pakistan; OECD = Organization for Economic Cooperation and Development.

Figure 4.7.General Government Wage Bills, 2005–16

(Percent of expenditure, period average)

Sources: IMF, World Economic Outlook; and IMF staff estimates.

Note: CCA = Caucasus and Central Asia; EMDE = emerging market and developing economies; GCC = Gulf Cooperation Council; MENAP = Middle East and North Africa, Afghanistan, and Pakistan.

Labor Markets

Reliance on government employment has not improved labor market outcomes.

  • High public employment has not been associated with lower overall unemployment (Figures 4.8 and 4.9).2 In addition, there is evidence that countries with a higher share of the working-age population in public employment are also those with a lower share in private employment. The three main channels through which public employment can crowd out private sector employment and activity are, to different degrees, at play in the region: (1) In the product market, higher taxes, higher interest rates, and competition from state-owned enterprises may discourage private sector activity, thereby depressing labor demand. (2) In the labor market, higher compensation, more job security, or a higher probability of finding a public sector job can motivate people to seek or wait for public sector employment rather than take a job in the private sector. (3) In education, people seek qualifications suited to the public sector rather than skills needed for productive employment in the private sector, contributing to “wait” unemployment,3 whereby university graduates queue up for government positions (Figure 4.10).4 Only some GCC countries have been able to boost overall employment through public hiring, owing to their large resources and small populations.
  • High public employment has discouraged labor force participation (Figures 4.11 and 4.12). Higher public employment has been associated with lower labor force participation, globally and in the region, especially among women and youth. Theoretically the link between public employment and labor force participation is indeterminate. On the one hand, a higher number of job opportunities in the public sector, which are generally of good quality, may attract more entrants to the labor market. On the other hand, better-paying and protected public jobs, which often afford benefits for family members, may discourage participation among groups that would traditionally bring secondary incomes to the household, especially women and youth. The latter effect of intrahousehold transfers, probably in conjunction with other cultural factors, therefore seems to dominate overall (Algan, Cahuc, and Zylberberg 2002).
  • High public compensation gaps in many parts of MENAP may contribute to undermining private sector development and competitiveness. Along with the lack of private sector jobs, large wage gaps are one of the reasons job seekers may be diverted away from the private sector, which lowers its skill level, productivity, and competitiveness.5 The disconnect between public compensation and productivity fragments labor markets, discourages accumulation of skills, and cultivates dependence and resistance to reforms. Furthermore, large gaps between public and private sector compensation exacerbate actual and perceived social inequities, especially where more equitable social transfers are small or absent.

Figure 4.8.Public Sector Employment and Unemployment Rate, 2008–16

(Percent, period average)

Sources: Country authorities; national labor force surveys; and International Labour Organization’s data and model estimates.

Note: Data labels in this figure use International Organization for Standardization (ISO) country codes.

Figure 4.9.Public Employment versus Private Employment

(Percent of working age population, latest available data)

Sources: Country authorities; national labor force surveys; and International Labour Organization’s data and model estimates.

Note: Data labels in this figure use International Organization for Standardization (ISO) country codes. Coverage (114 countries) varies across periods. Red lines represent Emerging Market and Developing Economy (EMDE) averages. Jordan public sector includes only Public Administration and Defense Compulsory Social Security.

Figure 4.10.Share of Unemployed Youth by Job Search Duration

(Percent of unemployed youth)

Source: IMF staff calculations based on International Labour Organization’s School-to-Work Transitions data.

Note: Based on surveys conducted in Egypt, Jordan, Lebanon, Tunisia, and West Bank and Gaza.

Figure 4.11.Male Labor Force Participation versus Public Employment, 2005–16

(Period average)

Sources: Country authorities; national labor force surveys; and International Labor Organization’s data and model estimates.

Note: Data labels in this figure use International Organization for Standardization (ISO) country codes. Coverage (113 countries) varies across periods. Red lines represent Emerging Market and Developing Economy (EMDE) averages.

Figure 4.12.Female Labor Force Participation versus Public Employment, 2005–16

(Period average)

Sources: Country authorities; national labor force surveys; and International Labor Organization’s data and model estimates.

Note: Data labels in this figure use International Organization for Standardization (ISO) country codes. Coverage (113 countries) varies across periods. Red lines represent Emerging Market and Developing Economy (EMDE) averages.

Model-based analysis confirms the adverse effects of pursuing employment goals with public wage bill policies. In a model with job search and matching, higher public employment lowers the marginal product of labor in the public sector. Reducing the gap between public and private compensation can help ensure efficient labor allocation between sectors. If this does not happen because of rigidities, labor supply in the private sector declines, lowering overall employment and raising labor cost. Private employment and output end up below their optimal levels (Annex 4).

1Cerisola and others (2015) estimate the size and persistence of fiscal multipliers in MENAP. Their estimates range from 0.2 to 0.7 for current spending and from 0.6 to 1.4 for government investment spending. The impact of higher public investment on economic growth is larger and lasts longer than the impact of higher current spending.
2Especially in MENAP oil importers, where Crivelli, Furceri, and Toujas-Bernaté (2012) find very low employment-output elasticities. Even economic growth in these countries has been largely jobless.
3Recent evidence for Egypt, Jordan, Lebanon, Tunisia, and West Bank and Gaza shows 55 and 68 percent of young unemployed men and women (respectively) had been searching for a job for over one year in 2014/15; 72 percent of young female university graduates and 60 percent of young male graduates had been unemployed for over a year (ILO School-to-Work Transition data set).
5Pérez and Sánchez Fuentes (2010), Fernández-de Córdoba, Pérez, and Torres (2009), and Lamo, Pérez, and Schuknecht (2008) analyze the relationship between public and private wages. A 1 percent increase in the average real government wage is associated with a 0.4 percent increase in private wages within three years (IMF 2016a).

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