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    Middle East and Central Asia Department

    Copyright ©2018 International Monetary Fund

    Cataloging-in-Publication Data

    Joint Bank-Fund Library

    Names: Tamirisa, Natalia T. | Duenwald, Christoph . | International Monetary Fund.

    Title: Public wage bills in the Middle East and Central Asia.

    Other titles: Fiscal affairs departmental paper series.

    Description: [Washington, DC] : International Monetary Fund, 2017. | This departmental paper was prepared by staff consisting of a team led by Natalia Tamirisa and Christoph Duenwald. | Includes bibliographical references.

    Identifiers: ISBN 9781484336731 (paper)

    Subjects: LCSH: Wages—Law and legislation—Middle East. | Wages—Law and legislation—Asia, Central. | Fiscal policy—Middle East. | Fiscal policy—Asia, Central.

    Classification: LCC HD5061.9.P82 2017

    The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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    This Departmental Paper was prepared by IMF staff under the general guidance of Jihad Azour and supervised by Aasim Husain, consisting of a team led by Natalia Tamirisa and Christoph Duenwald and including Tokhir Mirzoev, Gaëlle Pierre, Gomez Agou, Boaz Nandwa (all Middle East and Central Asia Department), and Kamil Dybczak (Fiscal Affairs Department). Robert Blotevogel and Claire Gicquel (both MCD), Csaba Feher and Mauricio Soto (both FAD) developed the country case studies. Nicolas Mombrial contributed substantially to the draft, helping incorporate suggestions from the International Labour Organization (ILO), civil society organizations (CSOs), and labor unions.

    Tannous Kass-Hanna (MCD summer intern) prepared modeling simulations. Greg Basile, Mansour Almalik, and Jingyang Chen (all MCD) provided research assistance. The authors thank David Coady, Mercedes Garcia-Escribano, and other FAD staff; Ben Hunt; Keiko Honjo and Ben Carton (both Research Department); and staff members from MCD and other IMF departments for their very helpful comments and suggestions. The authors are also grateful to Maame Baiden for production assistance; Angham Al Shami, Sabina Bhatia, Christoph Rosenberg, Peter Kunzel, and other Communications Department colleagues for communications advice; and Cooper Allen and Joe Procopio (COM) for editing. Staff consulted with the ILO and the World Bank, as well as representatives of CSOs and labor unions, and reflected their feedback in the paper.

    Executive Summary

    The Middle East and Central Asia is facing daunting economic development challenges. The region is striving to promote inclusive growth, reduce youth unemployment, and reach the United Nations Sustainable Development Goals (SDGs). At the same time, several countries in the region are dealing with internal conflicts, large inflows of refugees, and heightened security risks. With high debt levels and a prolonged decline in oil prices and remittances, many countries increasingly lack the fiscal capabilities to effectively tackle these challenges.

    Countries need to find ways to finance policies that address the challenges. Stepped-up actions to raise revenues in a fair and equitable way should be part of these efforts. Pro-growth expenditure reforms are also needed, as energy subsidy reforms to generate resources for pro-poor expenditures have already been implemented in several countries.

    An additional option is to reform large public wage bills—the focus of this paper. Many countries in the region have large public wage bills, both relative to their own revenues and expenditures and compared with their global peers. This can be a result of high levels of public employment, unusually large compensation, or sometimes both. Despite their disproportionate size, large public wage bills have failed to improve the availability and quality of public services that are vital for addressing the aforementioned economic development challenges. Meanwhile, labor markets are distorted in countries where public sector compensation grossly exceeds that in the private sector.

    Public wage bill reforms can support countries’ efforts to grow their private sectors and create jobs—ultimately, the more sustainable source of employment for the millions of new graduates entering labor markets. By enabling higher investment in infrastructure and social protection and by removing labor market distortions, wage bill reforms can boost the private sector. While hiring and wage freezes or cuts can be useful in the short run, they may affect service delivery and be difficult to sustain and are no substitute for structural reforms of employment and compensation policies.

    This paper proposes some options for reforms, such as improving the management of public wage bills as well as their governance and transparency. Drawing on earlier IMF policy analysis at the global level and new regional data, this paper calls for (1) ensuring that wage bill policies are fiscally sustainable by identifying drivers of wage bills and anchoring their growth in medium-term fiscal plans; (2) focusing compensation and employment policies on providing quality public services effectively and equitably, by undertaking sectoral expenditure reviews and strengthening mechanisms for public service delivery; (3) strengthening institutions and data, including human resource management and control over bonuses and allowances, and linking compensation to performance; and (4) sequencing reforms and building synergies with other policies. To smooth the transition, wage bill reforms should include early social impact analyses and be accompanied by steps to strengthen social protection, diversify the economy, strengthen governance, and improve the business environment and job creation.

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