Abstract

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.

Patricia Alonso-Gamo and Mohamed A. El-Erian

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 Arab countries are not alone in this regard. A large number of industrial and developing countries are undergoing a similar process. These experiences, as well as increasing theoretical and cross-country analytical studies, have resulted in a considerable body of work to draw on in considering country-specific issues. This paper sets out the key issues in assessing the relationship between economic reforms, growth, employment, and social sector performance.

A Brief Review of the Main Analytical Issues

Two basic conclusions emerge from the large and growing literature in this area. First, there is a two-way relationship—albeit not an automatic one—between economic reforms on the one hand, and growth, employment, and social sector performance on the other. Second, there is no simple mapping among these various elements, and much depends on the nature of the policies and the initial economic, financial, and social conditions.

Overview

To be sustainable, economic reforms—defined to incorporate structural reforms and supportive macroeconomic stabilization—require broad public support. This is more likely to be forthcoming when the economy is growing, employment is being generated, and social welfare is improving. Economic reforms are more difficult to sustain in the context of high and rising unemployment, strained social delivery systems, and unequal distributions of income and wealth. These factors adversely affect the political viability of reforms, as well as the return to reforms. The social costs of reforms are amplified in the context of the extremely low living standards of the poorest segments of the population in developing countries.

At the same time, economic reforms are often critical for sustaining high economic growth and employment, as well as for improving social sector indicators. But reforms do not automatically benefit the poor. Indeed, the poor may be adversely affected by reform policies; nonetheless, these policies can and should be designed in ways that minimize those adverse effects.

Reform and growth do not have to be mutually exclusive. Specifically, timely short-term stabilization efforts need not conflict with the strengthening of long-term growth prospects. Empirical evidence shows that, with an early and well-coordinated effort, a coherent and internally consistent program that facilitates the attainment of financial stability and growth can be designed. Most costly are delays in reforms, because they exacerbate the severity of the initial decline in investment and output. Allowing financial imbalances to reach critical proportions eventually requires taking drastic measures that bring about, by necessity, an abrupt contraction in domestic absorption. Moreover, the uncertainty created by an unstable macroeconomic environment deters private sector investment, further postponing an eventual recovery.

The key for achieving sustainable growth, rising employment, and improved social sector performance is to find an appropriate mix and sequencing of policies. There is growing support for a set of key measures: simple, nondistortionary, and transparent tax policies; efficient and well-targeted expenditures that are directed particularly toward basic social services and safety nets; removal of labor market and investment rigidities; and, more broadly, an outward-oriented, private-sector-led strategy. These measures need to be underpinned by a supportive macroeconomic policy stance, institutional reforms, and capacity-building efforts. Foreign aid—especially important in the poorest countries—can play a supporting role if disbursed in a timely manner, on appropriate terms, and subject to appropriate conditionality and monitoring. Although the links between external financing and growth are complex, the timely availability of the foreign financing catalyzed by reform programs can lessen the need for short-term consumption cuts and facilitate efficient resource reallocations. (See Alesina, 1995.)

Impact of Economic Reform on Growth, Employment, and Social Sector Performance

It is now widely acknowledged that the steady implementation of structural reform policies is key for sustaining high growth and increasing employment opportunities. Such policies can also remove some of the reasons for highly unequal income distribution, an important influence on human resource development. These include rents created by entry barriers to private activity; price, interest rate, and credit allocation distortions; and an uneven access to the welfare system. More generally, structural reforms (particularly, price and trade liberalization, privatization, and labor market and tax reforms) tend to promote equitable economic growth over the medium and long term.

There is less consensus on the stabilization aspects of reform programs—usually consisting of a combination of fiscal contraction, monetary tightening, and exchange rate adjustments. Most analysts do agree on the importance of macroeconomic stability for long-term growth; indeed, there is as yet no example of a country having sustained high economic growth in the context of large domestic and external financial imbalances. However, there is disagreement on the short-term effects.

One view is that aggregate demand contraction, by necessity, adversely affects growth and employment and that the lowest-income groups suffer the most. This view is based on the implications of lower consumption outlays—reductions that might have been even greater in the absence of measures if the crisis had been allowed to deepen further. It also reflects recognition of temporary increases in unemployment that can occur owing to (1) production slowdowns in response to aggregate demand declines; (2) a sectoral reallocation of labor and capital between industries (for example, from non-traded to traded goods); (3) changes in the structure of demand for labor; and (4) fiscal and quasi-fiscal measures that lead to labor shedding and redundant workers (see Tanzi, 1995).

The short-term impact of adjustment appears to depend in a significant manner on initial conditions, particularly the openness and flexibility of the economy. The extent of adverse employment and social sector consequences is also influenced by the composition of the adjustment effort. For example, alternative configurations of budgetary corrective measures affect employment and the social sectors in different ways (see Bourguignon, Michel, and Miqueu, 1983, and Lipton and Ravallion, 1993). This is best illustrated by contrasting the implications of, on the one hand, increases in luxury consumption taxation and, on the other, cuts in public spending on infrastructure and the social sectors.1

It has also been argued that macroeconomic stabilization may benefit the poor, who are the most exposed to the adverse implications of inappropriate policies given their limited ability to protect themselves through asset and income diversification (Alesina, 1995). They are thus particularly vulnerable to inflation (Guitián, 1995). Inflation benefits holders of nominal debt and equity, who tend to be wealthy. The inflation tax burden falls on holders of money and other assets whose yields are fixed in nominal terms; because the poor generally lack access to indexed assets, they bear a disproportionate burden of such a tax.2 In addition, unanticipated inflation is costly to those locked in nominal contracts, reducing in most cases real wages and favoring the owners of capital. Empirical evidence appears to confirm that increases in the level and variability of inflation raise income inequality. Similarly, the variability of the exchange rate is negatively correlated with income inequality (Buliir and Guide, 1995).

Another interesting result emerges from the single-country study by Schultz (1969), which examines the effects of inflation on overall income distribution, and that by Blinder and Esaki (1978), which examines the effects of inflation on the relative share of income quintiles: the poorest quintile loses more than the others as a result of inflation. To the extent that adjustment policies can help countries achieve lower and more predictable levels of inflation, they would bring about, all other things being equal, a more equitable income distribution.

Growth, Inequality, and Employment

The relationship between growth and inequality—a key determinant of social sector performance—has been the subject of constant and renewed examination in the economic literature.3 Kuznets’s seminal 1955 article argued that, in the initial stages of development, growth would lead to increasing income inequality, although in the later stages it would have an equalizing effect—the famous U-shaped curve. Policies designed to reduce income inequality would affect growth adversely, because redistributive transfers and taxes create distortions and disincentives, and high-income groups tend to save a larger share of their income.

This hypothesis has been the object of strong theoretical criticism on several fronts. First, it has been argued that what really matters is whether this result can be avoided. The general consensus is that it can because income distribution seems to be determined more by the type of policies followed—including redistributive ones—than by the level of development. (See Kuznets, 1966 and Fields, 1989.) Second, there are indications that the relationship may not be a simple one. Schwartz and Ter-Minassian (1995) argue that, to improve income distribution or reduce poverty, qualitative aspects of growth are more important than growth itself. Third, other factors are as important as growth in determining income distribution (for example, literacy and past population growth). (See Bruno, Ravallion, and Squire, 1995.) Finally, an excessively unequal income distribution may in fact be detrimental to sustainable growth by hindering the efficient use of physical and human capital, reducing public and private savings, and eroding political and social cohesion.4

The recent empirical evaluations of the relationship between economic growth, income inequality, and poverty in developing countries, assessed by Bruno, Ravallion, and Squire (1995), find no discernible systematic link between equality and growth over time.5 Income inequality differs greatly across countries, but has remained fairly stable over time within countries. The empirical evidence on the extent to which following growth-oriented policies is important for distributional equity remains mixed. A consensus seems to have developed that growth is necessary for reducing poverty, but is not in itself sufficient to improve income distribution. Thus, a number of factors other than growth influence income inequality, and growth does not always lead to changes in income distribution, although it is usually associated with a reduction in absolute poverty.6 However, social policies directed toward the lowest income groups will in general help reduce both poverty and inequality.

On the other hand, growth may be positively influenced by income equality: policies that promote the accumulation of physical and human capital by the poor, such as public investment in basic education and health, can facilitate high growth and reduce inequality.

Different levels of income inequality may help explain the more successful experience (in terms of growth and macroeconomic stability) of East Asian economies relative to Latin American countries.

Finally, there is now a broad consensus on the positive relationship between social sector spending and growth and employment. (See, for example, Cassen, 1992.) It is widely recognized that increasing access to education simultaneously advances growth and equality. Indeed, countries with efficient spending on the social sectors, particularly health and education, have obtained high returns in terms of enhancing their human resource base, reducing poverty and infant mortality, and increasing life expectancy.

The Role of Government

In terms of economic orientation, a positive association has been established between an export-promoting (as opposed to import-substituting) trade strategy and enhanced allocative efficiency, employment, and growth. Developing countries that have followed export-promoting strategies (and have thus been able to benefit from a shift in trade and production toward labor-intensive goods) have generally registered increases in real wages and more equitable income distribution (Bhagwati, 1995, and Bourguignon and Morrisson, 1990). Such strategies have been shown to enhance equality in the long run. However, in the presence of extreme inequality at the outset, increased openness could exacerbate poverty and inequality in the short run. Openness must therefore be accompanied by other polices designed to increase opportunities for the poor; otherwise, the transition to an export-promoting regime could have a negative effect on poverty, particularly in an inflationary environment.

While the connections between growth and employment policies are generally accepted, there are differences in views on the extent to which governments can effectively pursue growth-oriented policies that specifically and directly address income distribution.

Whereas some argue that governments are not in a position to substantially influence income distribution,7 others are of the view that economic policies, including budgetary policies, can have potentially strong distributional effects (see Schwartz and Ter-Minassian, 1995).

Moreover, as emphasis is increasingly placed on market mechanisms, there has been a change in the perception of the role that the government can play. While governments are able to adopt policies that decisively influence macroeconomic stability, employment, poverty, and investment (including in human capital), they are also limited; although they can play a catalytic role in information diffusion, markets are more efficient (see Stiglitz, 1995). In developing countries, market failures are more pervasive, but the limitations of government are also more pronounced.

So which specific policies should countries pursue? As far as fiscal policy is concerned, tax policy does not appear an all-encompassing tool of income redistribution. The most sensible taxes are those that raise revenue in a neutral, simple, and transparent manner and that are also most likely to foster growth and raise resources to cover social spending. Expenditure composition can and should be improved to help the poor by promoting basic education, primary public health, and rural infrastructure and by reducing unproductive outlays. Well-directed and cost-effective social safety nets to protect vulnerable sectors of the population can bolster the sustainability of reform, with targeted expenditures being not only a means for income redistribution, but also an effective tool to allow those in the lowest-income groups to escape poverty. Institutional reforms, in particular setups conducive to fiscal restraint, are more complex and difficult to implement, but are indispensable for the long-run sustainability of the reforms (see Alesina and Perotti, 1995).

Monetary policy can play an important role in reducing the inflation tax, which, as noted earlier, has a greater impact on the poor. It can also improve the financial intermediation process. In many developing countries, distortionary credit-market constraints limit the ability of the poor to invest. In addition, credit-allocation policies that favor certain influential portions of the population, including nontransparent directed-credit schemes, can have a negative effect on growth—an impact similar to the rent activities generated by certain controls and multiple currency practices.

Key Characteristics of the Arab Countries

This section reviews developments in Arab countries’ growth, employment, and social sector performance at the aggregate level and points to salient country differences. Owing primarily to data limitations—particularly in the areas of income distribution and unemployment—it does not deal comprehensively with all the issues raised in the preceding section.

Economic Growth

The Arab countries grew at an average rate of 1 percent in 1980–95, well below the average of 5 percent recorded by developing countries (Table 1). This positive rate of real GDP growth was not sufficient to result in an improvement in per capita income. With an average population growth of almost 3 percent, the Arab countries’ per capita GDP fell during the period by 1.5 percent a year. In contrast, developing countries as a group grew annually by 3 percent in per capita terms while industrial countries grew by 2 percent.

Table 1.

Growth in Real GDP, Population, and GDP per Capita

(Annual average)

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Source: International Monetary Fund (1996).

There were significant differences in per capita economic growth performance within the Arab region, as well as between different time periods. Most oil economies tended to register negative growth rates during 1980–95 reflecting, among other things, the impact of the reduction in oil prices from the highs of 1979–80 and their high population growth rates. Egypt, Mauritania, Oman, and the Republic of Yemen registered the highest per capita growth rates, ranging from an estimated 1.3 percent to an estimated 1.7 percent. Their performance would have been higher were it not for the sharp drop in their growth rates in the 1990s, with all except Mauritania registering negative growth rates.

The divergent growth performance between countries that export oil and those that do not has narrowed the per capita income gap somewhat. Nevertheless, significant differences remain. For example, the average per capita income in the two richest countries (Kuwait and Qatar) is over 75 times that in the two poorest countries (Somalia and Sudan) (International Monetary Fund, 1996). Overall, the coefficient of variation is about four times as high as that of the members of the European Union. For the region as a whole, real per capita GDP in 1995 was an estimated 140 percent that of developing countries, compared with 270 percent in 1980. The Arab region also fell behind industrial countries, with the corresponding ratio declining from 10 percent in 1980 to 5 percent in 1995.

Employment and Related Indicators

The disappointing overall economic growth performance came at a time of increasing pressures on the labor markets in Arab countries. The region as a whole has experienced a high growth rate in its labor force notwithstanding continued low female participation rates (Table 2).8 Labor productivity has declined in the region as a whole (World Bank, 1995). Moreover, with over 50 percent of some countries’ population under the age of 15, the pressure on the labor market is likely to continue. This comes at a time of high un- and underemployment in some countries—particularly in the non-oil economies.9 Indeed, the World Bank (1995) estimates that because of a recent large increase, unemployment is more widespread in the Middle East and North Africa than in any other region in the world. This includes urban rates of over 30 percent in the Republic of Yemen and 50 percent in the Gaza Strip (El-Erian and others, 1996). Most of the oil economies do not have such severe unemployment problems. Nevertheless, they are facing the challenge of finding sustainable employment opportunities for the growing number of nationals entering the labor force.

Table 2.

Change in Total Labor Force

(In percent)

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Source: World Bank (1986).

Given the structure of the Arab economies, a substantial portion of the unemployment is concentrated in urban areas. Thus, at over 60 percent in 1993 (Table 3), the urban population share for Arab countries is similar to that of Latin America and industrial countries and substantially larger than that of developing countries as a group.

Table 3.

Urban Population

(In percent of total population)

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Source: World Bank (1986).

Social Sector Indicators

Despite high unemployment rates in certain countries, the Arab region compares, on the surface, relatively favorably with other regions in terms of traditional social sector indicators.10 Average life expectancy and infant mortality rates are close to international averages, and the region does better than comparable countries in terms of secondary school enrollment (Table 4). Moreover, countries in the region have made significant progress over recent years, particularly the oil economies. Life expectancy has increased by 12 years over a 25-year period, while infant mortality has fallen by almost one-third during that time (Shafik, 1994). Impressive gains have also been made in school enrollment and literacy.

Table 4.

Arab Countries: Social Indicators

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Source: World Bank (1986).

As in many other areas of analysis, these average indicators conceal important country differences. A few examples are sufficient to illustrate this point:11

  • Life expectancy ranges from over 70 years in some member countries of the Gulf Cooperation Council to under 55 years in Djibouti, Mauritania, Somalia, Sudan, and the Republic of Yemen.

  • Infant mortality rates (per 1,000 live births) range from under 20 in Bahrain to over 100 in Djibouti, Somalia, and the Republic of Yemen.

  • The illiteracy rate ranges from 20 percent in Jordan and Lebanon to over 70 percent in Somalia and Sudan.

  • Primary school enrollment is almost universal in Algeria, Bahrain, Egypt, Jordan, Lebanon, Oman, Qatar, Somalia, Syria, Tunisia, and the United Arab Emirates; it is half that rate in Djibouti and Mauritania.

A priori, one can expect these differences to correlate closely, although not perfectly, with countries’ per capita income. As shown in Table 5, the correlation varies. Thus, while the a priori expected sign of the correlation coefficient is obtained for the 12 indicators, the extent of correlation differs markedly and is far from dominant for a number of indicators. Among the set of calculated correlation coefficients, relatively high values emerged for life expectancy, infant mortality, secondary school enrollment, illiteracy, and access to safe water. In contrast, the coefficient for primary school enrollment was low at 0.16.

Table 5.

Correlation Coefficients Between Real per Capita GDP in 1993 and Social Indicators

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Source: IMF staff estimates

The experience of Arab countries also supports the view that economic growth does not necessarily imply a significant improvement in social sector performance. Thus, as detailed in Table 6, the region’s ranking in terms of growth performance is only weakly correlated with changes in indicators of social sector performance. Only one indicator is highly correlated (access to safe water), while others, although not all, carry the a priori expected sign but low coefficients.

Table 6.

Correlation Coefficients Between Growth in Real GDP and Growth in Social Indicators

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Source: IMF staff estimates.

These findings are consistent with recent analyses of the return to social sector spending in the region. For example, Shafik (1994) notes that, while the Arab countries spend more public resources on education than any other region, the outcome in terms of human resource development is disappointing.12 Fergany (1994) points to the need to look at the composition of education spending and not only at the level. This “paradox” also reflects inefficiencies in the delivery systems. These factors have been compounded by inadequate incentives to maximize the return from investments in human capital (particularly, labor market distortions) and, in some countries, an insufficient share directed to the less well off segments of the population. Finally, the important differences between male and female social indicators (particularly, literacy and education) in several Arab countries highlight another important factor. Thus, unlike several other developing country regions, the Arab countries have yet to exploit adequately the substantial private and social welfare gains associated with female education (Psacharopoulos, 1993).

The insufficient return to spending on social programs is also of concern to a number of developing countries. Studies presented at a recent Asian Development Bank seminar show that there is significant scope for increasing the cost effectiveness of certain activities, as well as for redirecting resources toward activities with higher rates of return (Mingat, 1995; Mundle, 1995; and Rao, 1995). The experience of the “high-performing Asian economies” (Japan, the Republic of Korea, Singapore, and Taiwan Province of China) is of particular interest in this regard. Placing emphasis in the initial stages on social spending on primary education and basic health services resulted in high private and social returns. Moreover, because of substantial private sector involvement, the impact of public spending was amplified.

The Overall Picture

Four main findings emerge from this brief review of growth, employment, and social sector trends in Arab countries:

  • First, the region’s per capita growth rate has been disappointing over the last 15 years—both in absolute terms and relative to other countries.

  • Second, low growth has compounded the problems of un- and underemployment in many economies; it also severely complicates the policy challenge facing countries in which a large portion of the population has yet to enter the labor force.

  • Third, while the region’s social indicators remain relatively favorable in aggregate, there is a need to improve the return on spending in the social sectors and to deal with the particularly difficult situation facing the poorer countries in the region.

  • Fourth, the results of simple statistical tests confirm the view that there is more to explaining social indicators than the level of per capita income and rate of growth. Indeed, the nature of the economic development process itself heavily influences social indicators—an element that is increasingly recognized in the region as countries place growing emphasis on their human resources.

A Country Example

Against this background of the Arab region as a whole, this section analyzes in greater detail the experience of Jordan—a country that is widely viewed as belonging to the set of Arab countries having sustained economic adjustment and reform efforts in recent years.13 Moreover, it has achieved considerable progress in solidifying the foundation for sustainable, high economic growth.

Jordan adopted a comprehensive macroeconomic adjustment and structural reform program to address the balance of payments problems that intensified in the late 1980s. Although the effort was interrupted by the regional crisis triggered by Iraq’s invasion of Kuwait, which exacerbated Jordan’s economic problems, the government persevered and has succeeded in attaining the program objectives. Jordan’s experience is all the more interesting in that the adjustment and reform efforts not only have led to a sharp reduction in financial imbalances, but also have delivered high economic growth and lower unemployment while protecting the most vulnerable groups of the population.

Need for Reform: Background

The regional recession of the mid-1980s—following the collapse of oil prices—had a marked adverse effect on Jordan, which had continued to rely heavily on remittances from its workers in the region and on official transfers from other Arab countries, while demand for its exports declined. Initially, domestic aggregate demand was sustained by larger recourse to foreign borrowing on commercial terms and increased monetization of budget deficits. By the end of 1988, the stock of external public debt rose to $8 billion (127 percent of GDP), and in 1989 the budget deficit increased to 21 percent of GDP, inflation accelerated to 25 percent, and real growth turned negative (with a decline in GDP of over 10 percent). Arrears started to accumulate from 1989, and the balance of payments became unsustainable, notwithstanding an intensification of trade and exchange restrictions.

In response to the serious economic and financial imbalances, Jordan embarked on a far-reaching macroeconomic adjustment and reform program, supported by recourse to exceptional external financing. The impact of the initial corrective measures was adversely affected by the 1990–91 regional crisis, with further losses of export markets, lower grants, and a massive return of Jordanians who had been working abroad.

Characteristics of the Reform Effort

Under Jordan’s macroeconomic adjustment and reform program, the overall fiscal deficit was reduced from 21 percent of GDP in 1989 to 5 percent of GDP in 1995, and tight monetary policy reined in the rate of credit expansion to levels well below that of nominal GDP. After an initial large depreciation, the exchange rate vis-à-vis the U.S. dollar remained broadly stable in nominal terms. This macroeconomic policy stance led to a sharp reduction in the external current account deficit—from 19 percent of GDP in 1990 to 5 percent of GDP in 1995. Inflation declined rapidly, from a peak of 25 percent in 1989 to about 3 percent in 1995. Real economic growth turned positive in 1990 and accelerated to 16 percent in 1992 (fueled by construction activity), and was maintained at about 6 percent a year in 1993–95. The unemployment rate also declined, from a peak of 21 percent in 1991 (associated with the repatriation of 300,000 Jordanians) to an estimated range of 13–15 percent. Why was Jordan’s reform effort effective in both reducing financial imbalances and generating growth?

  • First, the initial conditions were good, with a well-educated population, good social indicators, and a solid public infrastructure.

  • Second, the balance of payments problems were so acute that it was generally perceived that there was no option but to adopt a drastic reform program.

  • Third, the program contained a generally good mix and sequencing of policies that reduced financial imbalances, changed the orientation of the economy to make it more open, and created an environment more conducive to private sector activity.

  • Fourth, the program was associated with a quick turnaround in real economic growth and consistently high real rates thereafter, which expanded employment opportunities and thus improved its sociopolitical sustainability.

  • Fifth, the program incorporated a safety net that helped shield the most vulnerable groups from the negative impact of the adjustment measures.

  • Finally, the external debt restructurings, forgiveness, and buybacks, coupled with substantial new inflows of external financing, considerably eased the adjustment process. Also instrumental in easing the process were the favorable effects of large remittances and transfers of savings of the returnees, which were attracted by the regained financial stability.

The following elements of the adjustment and reform effort are of particular interest:

  • The large fiscal consolidation, the linchpin of the adjustment effort, was achieved through both revenue-enhancing measures and expenditure cuts. Indirect taxation reform included the introduction of a general sales tax. The direct income tax reform lowered tax rates and eliminated tax holidays and exemptions. While expenditure cuts reduced subsidies and limited increases in the public sector wage bill, the improved targeting of subsidies protected the neediest and released resources for increased welfare transfers to the poor. Public sector employment increased, however, largely in response to the needs of the increased population, thus contributing to lower unemployment. Social expenditures in health and education were maintained. Meanwhile, with sizable private provision of health and education services, public resources emphasized delivering basic services to the poor.

  • The tight monetary stance achieved a rapid decline in inflation that, consistent with our earlier discussion, lowered the high implicit tax on the poor. Moreover, with the public sector having negative recourse to net bank financing since 1992, there was room for expanded credit to the private sector. Finally, the reduction in the volume of preferential credit and the switch to indirect instruments of monetary control made credit allocation more efficient at a time when accompanying financial sector reforms contributed to mobilizing higher domestic private savings.

  • The trade liberalization effort reduced distortions and increased allocational efficiencies. Import tariffs (which had ranged up to 318 percent) were reduced both in terms of the maximum tariff (to 50 percent) and in terms of the average import-weighted tariff (to 16 percent); exemptions (which had been granted to more than half of imports) were largely eliminated; export bans were phased out; and import licensing and previously widespread nontariff barriers were also eliminated.

  • Concomitantly, most controlled prices were liberalized and subsidies cut down, while the administered prices of some utilities were increased to cover operating costs. Although these measures had a short-term negative impact on the poorest sectors of the population, they were partially offset by the maintenance of subsidies on some staple foods, such as bread.

  • Regulatory reforms eliminated discrimination against foreign investors and created an environment more conducive to private sector activity and employment generation.

Impact of Reforms on Social Welfare and Poverty

Associated with economic growth, poverty in Jordan declined steadily during 1980–86, and the share of the population below the poverty line declined from 24 percent in 1980 to less than 3 percent in 1986.14 The economic crisis abruptly lowered per capita real income and consumption15 and poverty increased, and the regional crisis aggravated the situation further. In the short run, the adjustment measures—particularly the containment of the public sector wage bill and other current expenditures, the exchange rate devaluation, and price increases—also contributed to lowering households’ income in real terms. Moreover, Jordan’s rapid population growth (including the return of nationals) exerted further pressure on the coverage and quality of the delivery of social services.

Data for the more recent period are still partial. It is clear, however, that the strong economic turnaround during 1992–95 helped reduce unemployment, contributing to poverty alleviation. Furthermore, the socioeconomic acceptability of the reforms was enhanced by an increasingly better-targeted social safety net.

Policies to Improve Social Welfare

Jordan’s development strategy has emphasized the social and human resource dimensions, resulting in social indicators that are above the average for the Arab countries. Expenditures on education and health have accounted for an important segment of total budgetary outlays, contributing to improvements in literacy, health, and other social indicators. Notwithstanding Jordan’s severe balance of payments difficulties, the quality and availability of education and health care services were maintained. With fewer resources available for social expenditure, the focus has been on increasing efficiency and targeting in order to protect the lower-income groups.

The budgetary expenses on social measures that were initially put in place proved too costly to maintain, leading to efforts to improve their targeting. Resource reallocations reduced the cost of the safety net program, while targeting improved. Thus, as a result of the introduction of coupons for most subsidized products and stricter eligibility requirements, the total budgetary cost of the government’s food subsidy program declined from a peak of 3.5 percent of GDP in 1990 to 1.4 percent of GDP in 1993. Following further price adjustments in 1994, the cost declined to about 1.0 percent of GDP in 1994, most of which was on account of the generalized subsidy on wheat. Further measures to cap the subsidy program at 0.7 percent of GDP were introduced in the context of the 1996 budget, while transfers to the National Aid Fund (NAF) are being increased. The generalized subsidy on wheat was removed in 1996, while cash transfers to compensate lower-income groups were introduced.

As noted earlier, poverty tends to be inversely related to the rise in the level of people’s education. Overall, Jordan maintains a comprehensive public education system that contributes to a reduction in illiteracy and to generally sound educational standards. The illiteracy rate has declined from 54 percent in 1965 to less than 20 percent, and the absolute number of illiterate adults decreased despite the high rates of population growth. Resources are mostly directed to basic education,16 and there is practically universal primary school enrollment.

Although Jordan does not have a formal public health insurance system, the coverage of the current health system is quite comprehensive.17 The government’s health insurance plans cover all military and civil employees and their dependents, including free treatment at public hospitals and low fees in primary health care facilities. The eligible poor and disabled benefit from premium-free services.

The Social Security Corporation (SSC) provides retirement pensions and medical expenses for work-related injuries. The SSC is financed by taxes on private employment, with contributions by enterprises and employees. Government pension plans cover public sector employees.

The NAF, established in 1987, increased the scope of its operations to provide direct income support from the government to extremely poor families. Despite continued fiscal adjustment, the government steadily increased the budgetary support to the NAF from JD 8 million in 1992 to JD 16 million in 1995 and further to JD 17 million in 1996 (25 percent of total targeted safety net transfers). This has allowed for a significant broadening of its operations, providing additional support and increasing the number of families covered under the program (by 8,000 to 31,000).18 Finally, there are several other welfare programs that provide income support: under the UN Relief and Works Agency’s program of “special hardship cases,” more than 30,000 individuals receive predominantly in-kind assistance; and the Zakat Fund supports 3,000 households on a regular basis.

Concluding Remarks

The relationship between economic reforms, growth, employment, and social sector performance is a complex one. Much depends on the initial economic and financial conditions, the mix and sequencing of reform policies, and the political time horizon. Nevertheless, some common findings emerge from the large and growing body of theoretical and empirical work in this area.

There are clearly two-way causal relationships—albeit not automatic ones—between reforms, growth, employment, and social sector performance. On the one hand, structural reforms, particularly when implemented in the context of an outward-oriented private-sector-led growth strategy, are key to improving supply responsiveness and employment growth potential. At the same time, and notwithstanding unfavorable short-term effects, lower financial imbalances positively affect growth over the medium and long term; they also have a favorable impact on income distribution because inflation has a particularly large adverse effect on the poor. Finally, a growing economy provides the scope for increasing efficient spending on the social sectors. On the other hand, favorable social indicators—particularly poverty-related ones—and a dynamic labor market enhance the environment for the implementation of sustainable reform policies. Moreover, improvements in social indicators positively affect countries’ growth potential. Thus, countries that give priority to improving human capabilities through basic health and education not only enhance social welfare directly, but are also more likely to see improving income distribution, lower poverty, and higher average incomes over the longer term.

Certain countries—particularly the poorest ones, but also those facing large financial imbalances—require external inflows to support their efforts to improve growth, employment, and social indicators. Official external aid needs to play an especially important role in this context, as sustained private capital flows can usually be attracted at a later stage of the reform process. The effectiveness of the assistance will depend on its use pattern, its timely availability, and its terms.

The two-way causal relationships imply a potential for virtuous or vicious circles. East Asia is an example of a region that has benefited from a virtuous circle, while some parts of sub-Saharan Africa may well be in a vicious circle. Arab countries appear to be somewhere in the middle. Thus, while in aggregate Arab countries compare relatively favorably with other regions in terms of traditional social indicators, economic performance in recent years has been well below potential, with adverse medium-term implications. The low economic growth rates have added to unemployment problems in certain countries that, in the future, will be compounded by the large number of new entrants into the labor market.

Not surprisingly, therefore, economic reforms are at the top of the policy agenda of the region. This paper demonstrates the importance of implementing a proper mix and sequencing of policies, supported by properly directed social safety net provisions. Jordan’s recent experience is illustrative in this regard. The country’s success in addressing large financial imbalances has not come at the cost of growth. Indeed, a solid growth performance and an associated change in the orientation of the economy have been important in reducing unemployment. This, together with well-targeted social safety nets, has further improved social indicators and strengthened the basis for sustained high economic growth and development.

Comment

Galal A. Amin

Apart from the introduction and the conclusion, this paper consists of three sections: one analytical or theoretical, one dedicated to the Arab countries as a whole, and one to the individual experience of Jordan. I have serious problems with each of the three sections, but most of my problems stem from my basic disagreement with the whole philosophy of the so-called structural adjustment and stabilization programs. I will try to express these problems in dealing, one after the other, with these three sections of the paper.

Analytical Issues

In a paper titled “Economic Reforms, Growth, Employment, and the Social Sectors,” presented to a symposium titled “The Social Impact of Economic Reform,” one is justified in expecting the discussion to concentrate on the impact of economic reforms on the poor. Simple common sense would lead one to think as follows: since almost all of the suggested reforms imply a smaller role for government, and since the government is supposed to intervene to protect the poor, there is at least a strong presumption that these measures of stabilization and adjustment could very well harm the poor. To discuss this impact one would expect the following questions to be raised:

  • How likely is it that the suggested measures for reducing the budget deficit, including cutting or eliminating subsidies for essential goods and reducing expenditure on social services, will harm the poor, since the poor are more likely to need this public expenditure than the rich?

  • How high is the devaluation of the exchange rate likely to raise the prices of essential goods and services?

  • How likely is it that raising interest rates will discourage investors who cannot afford to pay higher interest rates?

  • How much unemployment is trade liberalization likely to cause by displacing domestic production, and how likely is it that it will lead to higher-quality but more expensive imports displacing domestic goods that are of lower quality but more accessible to the poor?

  • How likely is privatization to increase unemployment, when a good part of government and public sector employees is economically dispensable?

  • How likely are the measures, designed to encourage a greater flow of private foreign investment, to have a negative impact on income distribution and employment by creating a new consumption pattern, applying more capital-intensive technology, displacing domestic competitors, and making the tax system less progressive?

It is a pity that in the analytical section of this paper, most of these questions are not raised or are mentioned in passing with hardly any discussion. An eclectic approach was followed in deciding which issues were to be discussed, emphasizing those aspects that could support the view that the poor are not going to suffer or that, if they do suffer, their suffering is only in the short run.

What do we get instead? Either we get a discussion of the relationship between economic growth in general and poverty, which is not really what we are interested in, or we get statements that are indeed related to our main concern—the impact of adjustment measures on the poor—but that are so cautiously worded that they turn out to be uninteresting tautologies or half-truths. I will try to show what I mean by those two criticisms. First, the paper spends quite a long time discussing the relationship between growth and the reduction of poverty before reaching the readily acceptable but not very interesting conclusion that it is not growth per se that determines what happens to the poor but rather the pattern of growth and the policies associated with it. Or, to put it differently, you can have any type of income distribution with any rate of growth.

We are not concerned with how growth affects the poor, but with how structural adjustment and stabilization measures do. I am inclined to think that the reason the authors give so much attention to this largely unfruitful question (which incidentally is to be noted in much of the IMF and World Bank literature on our subject) is to suggest that economic growth, even though it is not a sufficient condition for reducing poverty, is a necessary condition, which gives extra support to the advocation of structural adjustment and stabilization measures, since it is more likely that these measures raise the rates of growth than help the poor. Hence, if we find that the short-term impact of such measures on the poor is negative, it is concluded that they will have a positive impact in the long run since, by enhancing growth, they will help the poor.

But I am not happy with this line of thought for at least two reasons. First, the contrast to be made should really not be between growth and no growth, but between higher and lower rates of growth. Of course, if there is no growth at all, the poor (as well as the rich for that matter) must suffer in the long run. What about a modest rate of growth, not as high as 8 percent or 10 percent but only 4-5 percent, without the so-called economic reform measures? Is it not conceivable that the poor would not suffer either in the short run or in the long run? What I am suggesting is that to persist in showing that growth is a prerequisite for improving the condition of the poor is not only an uninteresting exercise because it states the obvious, but also a misleading one because the real choice, and the interesting one, is between high and low rates of growth. Put like this, it appears at once that a high rate of growth is by no means a necessary condition for improving the lot of the poor.

Second, how short is this short run that is always mentioned as the duration of the increased suffering of the poor? No precise length of time is given; we are supposed to rely on the assumed positive impact of economic growth in the final analysis. With high growth rates, we are told, come greater investment rates, which will lead to higher employment and higher incomes all around. This is of course based on the experience of Western countries over the last century and most of the present one. It is the famous finding of Kuznets and is the essence of the trickle-down theory. But this is hardly a source of comfort for Arab countries or the third world today, not only because of the familiar criticisms addressed to the trickle-down theory, but also because these conclusions are based on historical statistical correlations that can hardly be confidently taken as a guide to the future. So many things have happened at the same time that economic growth was taking place and that could explain the trickling down much more than growth itself, but there is no guarantee that such events will be repeated. Strong trade union movements, for example, as well as colonialism could be responsible for much of the trickling down, much more than economic growth itself, so that Arab countries that have neither strong trade unions nor colonies must wait much longer before any trickling down can take place.

Turning now to the few statements that do address the question of the impact of adjustment policies on the poor, we find that they tend to be selective and often half-truths. What is more, the experience of the industrial countries themselves over the past 20 years, with Thatcherism and Reaganism, suggests that the trickle-down effect could easily be reversed, so that growth could very well be accompanied by worsening income distribution and increasing poverty. Take for example the statement on the impact of adjustment policies on income distribution: “Such policies can also remove some of the reasons for highly unequal income distribution” (p. 9). One reason given is that adjustment policies would eliminate or reduce the “rent” created by entry barriers to private activity.

This statement is perfectly true as formulated, but also uninteresting and misleading because it is a half-truth. The statement is true because there is hardly any economic measure that is unlikely to have some positive impact on income distribution, including bribery and corruption. The issue, however, is whether the net impact on distribution is positive or negative, and there are many reasons for believing that the net impact of adjustment policies on distribution is negative, as I suggested at the beginning of my comments. Hence, I believe that the paper is utterly unjustified in saying that “more generally, structural reforms (particularly, price and trade liberalization, privatization, and labor market and tax reforms) tend to promote equitable economic growth over the medium and long term” (p. 9). Such a statement is based only on the belief that growth must ultimately benefit the poor, but we have just seen that this is not always true.

Another example of this tendency to state half-truths is what the paper says about inflation, the argument being that since the poor suffer most from inflation, and since stabilization policies reduce inflation, the poor must benefit from these measures. But there are so many ways to reduce the rate of inflation, each with a different impact on the poor. You can reduce inflation by making income taxes more progressive or by spending less on education and health or by introducing a sales tax on essential items. The poor may benefit from the first measure but many suffer from the other two.

In the section called “The Role of Government,” the paper makes the sweeping generalization that “developing countries that have followed export-promoting strategies (and have thus been able to benefit from a shift in trade and production toward labor-intensive goods) have generally registered increases in real wages and more equitable income distribution” (p. 13). This statement may be true as a description of some empirical finding that is not as general as the phase “generally registered” may imply. But more important, it would surely be wrong to take this as grounds for advocating trade liberalization as a means of achieving greater equity, as the paper is obviously trying to do. For one thing, export promotion may rely on exporting “more labor-intensive goods,” but these may be more labor intensive than what is being produced in the importing countries while not necessarily more labor intensive than what would have been produced in the exporting country if production were mainly for the domestic market.

Second, trade liberalization is not only export promotion, but also includes the liberalization of imports, which could have detrimental effects on income distribution if it leads, for example, to the decline of domestic industries competing with imports. The authors seem to have felt that the statement was perhaps too sweeping, so they add “openness must therefore be accompanied by other policies aimed at increasing opportunities for the poor” (p. 13), which amounts to saying that trade liberalization is a good thing for the poor provided that something else is done at the same time to help them. This brings to mind a remark by Voltaire that it is possible to kill a flock of sheep through witchcraft, provided that you give them plenty of poison at the same time.

The Arab Countries

In the section entitled “Key Characteristics of the Arab Countries,” our main concern, namely, the impact of adjustment policies on the poor, is again hardly touched upon. What we get instead is a discussion of the performance of Arab countries in economic growth on the one hand, and in social indicators on the other. The message that emerges from these two discussions is that the performance of Arab countries in economic growth over the past 15 years has been disappointing, but with regard to social indicators, the picture is “relatively favorable in the aggregate.” While I agree with the former conclusion, one can easily bring evidence against the second. In Egypt, for example, many social indicators have deteriorated markedly, both over time and compared with many other countries. Although the authors admit that unemployment is a problem, they blame it not on adjustment policies, but on low rates of growth.

In the 1991 World Bank report Poverty Alleviation in Egypt, it was estimated that 20–25 percent of the population classified as “poor” spent 75-80 percent of their income on food. This segment of the population is therefore particularly sensitive to rises in food prices. But the World Bank report goes on to state that “some recent evidence suggests that the majority of households have been reducing their food consumption in response to these food price increases” (p. 106). The same report says that real wages in the government in 1987 were nearly half their level in 1973 (p. 95), that government expenditure per student in real terms in 1991 was one-fifth of what it had been ten years earlier (p. 117), and, with regard to health, the report says that “it is not uncommon for patients admitted to surgery to be asked to furnish bandages, syringes, or even small surgical equipment. In some instances, those who can afford to bring these items may have priority over those who cannot” (p. 117).

I do not think it is difficult to find similar evidence of deterioration in social indicators in other Arab countries, for example, Algeria, Iraq, Lebanon, and Sudan, so that it does not seem right to say that the social indicators are “relatively favorable in the aggregate.” The only indicators that the paper uses to support this favorable conclusion are life expectancy and school enrollment, but we know how a country can achieve rapid progress in life expectancy through measures directed to reducing infant mortality without necessarily producing any significant improvement in general health or nutrition. One also knows how a significant improvement in school enrollment can go hand in hand with a big decline in the standards of education.

I am probably right in thinking that to draw a picture of disappointing growth rates, but a “relatively favorable” picture of social indicators, as this paper does, is meant to lend support to the main message of the paper: concentrate on growth and do not worry too much about social indicators. The paper sends the same message by emphasizing that the trouble with education and health in Arab countries is not that the government spends too little on them, but rather that what is spent is not cost-effective. The message, of course, is that the government should spend less on education and health but make it more cost-effective and that in these two sectors more should be left to the private sector.

No one can deny that, in the Arab countries, expenditure on education and health is far from cost-effective. Hardly anything in Arab countries is cost-effective, but what is wrong with trying to make our expenditure on education and health more cost-effective and increasing public expenditure on them at the same time or at least maintaining the same level of public expenditure on them? To put it differently, should not the authors of this report be afraid that Arab governments may get their message and reduce public expenditure on health and education without doing anything to improve their cost-effectiveness, as is most likely to happen within the prevailing political and social situation in most Arab countries?

The paper says that “because of substantial private sector involvement, the impact of public spending was amplified” (p. 24). But there is ample evidence that, with the growth of private activities in health and education (in Egypt at least), the standard of public services in these two sectors has suffered greatly as a result of the competition between them over human resources, a competition in which the public sector is bound to be the loser. But all this aside, there is hardly anything in this section of the report about the impact of adjustment and stabilization measures on the poor in Arab countries. The section starts by apologizing for not dealing “comprehensively with all the issues raised in the preceding section” and giving the excuse of “data limitations.” For my part, I do not think that the scarcity of good statistics should prevent us from discussing and taking a stand on such important issues. To put it bluntly, the poor cannot afford to wait for the collection of good statistics. But I also doubt whether the data limitations are really as severe as the authors allege. There are many Arab countries for which there are enough data to discuss the impact of stabilization and adjustment measures on the poor. In Egypt, for example, there are several good studies by Karima Korayem, Ibrahim El-Issawi, Mohaya Zeitoun, and Gouda Abdel Khalek, to mention only a few, who have assembled and analyzed ample data on this impact and most of whose work is available in English.

The Experience of Jordan

Of all the Arab countries that have had some experience with stabilization and adjustment measures, and they are many, the authors chose Jordan for a detailed study. I find this choice surprising for a number of reasons. To start with, Jordan’s experience with these policies is very recent, having started in 1989. This is too short a period to allow an assessment of their impact on the poor. But more important is the fact that, during this short period, Jordan has passed through exceptional economic and political circumstances that had important repercussions for many major economic variables, making it exceedingly difficult, if not impossible, to distinguish the impact of adjustment and stabilization policies from the impact of these economic and political events. What I am referring to is mainly the Middle East crisis, which led to the return of many Jordanians from abroad, and the development of Jordan’s relations with Israel. Not disconnected with these two developments is the fact that Jordan has recourse to what the paper describes as “exceptional external financing,” which was bound to make things easier for Jordan, but is obviously not itself an element in the “economic reform” program.

With the availability of exceptional external financing, one cannot, as the authors have done, attribute the stability of the exchange rate or the success in reducing the rate of inflation solely or mainly to the economic reform program. But other alleged “successes” are also doubtful. The paper refers to the success in reducing the external current account deficit from 18.9 percent of GDP in 1990 to 4.6 percent in 1995. But 1990 was an exceptional year and inadequate as a base year because the flow of labor remittances from abroad was interrupted. Similarly, the paper refers to the decline of the unemployment rate from 25 percent in 1991 to an estimated 13–15 percent “later” (without giving a particular date for the recent figure). But 1991 was also an unusual year as far as unemployment is concerned, because of the return of 300,000 Jordanians from abroad in that year, apart from about 2 million foreign workers who were in transit from Iraq and Kuwait via Jordan. These circumstances make it inappropriate to describe the decline in unemployment in later years as a success resulting from the economic reform program. In a recent paper on Jordan,1 unemployment appears to have risen from 10.3 percent in 1989 (a much more suitable year to start judging the impact of the economic reform program) to 15.8 percent in 1993 and is estimated “currently” (1995) at 15.3 percent. This is a rise, not a fall, in unemployment. The same source mentions that the rate of unemployment among male college and secondary school graduates was as high as 27.3 percent in 1993 (Abdel-Gaber, p. 8).

In light of this evidence, it appears to be impossible to describe the impact on unemployment of the economic policy implemented since 1989 as positive. This conclusion gains some strength from the fact that, since 1989, public sector employment has actually increased, which is not part of the new orientation but rather counter to it. The paper does not refer to the likely impact on unemployment when the full implementation of the “reform” program results in dispensing with a good number of government and public sector employees, who constitute no less than 50 percent of the total labor force in Jordan (Abdel-Gaber, p. 12). The Jordanian experience cannot therefore be taken as supporting the view that stabilization and adjustment policies are good for the poor. Even for growth, the evidence is weak. The high rate of growth that the paper mentions for 1992 (16 percent) could simply be due to the recovery from negative growth rates in the two previous years, while the rate of “about 6 percent” that the paper states has been “maintained since 1993” is really a rate of 5.6 percent realized in only two years—1993 and 1994 (Abdel-Gaber, p. 3). This is hardly a success story, and what is presented as a sustained high rate of growth and short-term hardships for the poor could very well turn out to be sustained hardships for the poor and a short-term high rate of growth.

The Semantics of Structural Adjustment

I would not like to end my comments without saying a word on what may be called the semantics of structural adjustment. What I have in mind is the growth of a special kind of language for tackling the issues of structural adjustment and stabilization measures and their impact on the poor. This language seems to originate in IMF and World Bank reports, but spreads rapidly into government reports, the mass media, and even into academic circles. I tend to regard this phenomenon with alarm, because if the language used is far from being neutral, there is little hope of objective judgment.

I think we all agree that the issue of how structural adjustment and stabilization measures affect the poor is far from being settled. It is certainly not a foregone conclusion that structural adjustment is bound to benefit the poor either in the short or in the long run. Had the issue been settled, we would not be here today, nor would we have heard of one conference after another, one World Bank and IMF report after another, addressing this very question. But if it is far from being settled, why then this insistence on calling these measures “economic reform”? The word “reform” suggests something good, and we are not at all sure that it is. Even the term “structural adjustment” contains a bias, for the word adjustment also implies something desirable, since it is generally considered to be better to adapt and adjust to new circumstances than to be rigid. The adjective “structural” adds extra grandeur to the act of adjustment. But when one thinks about it, what have all these suggested measures to do with adjustment, structural or not? What the suggested measures amount to, in the final analysis, is reducing or abolishing government interference with market forces, selling the public sector, and making greater concessions to private foreign investment. Where exactly is the adjustment here? And how structural is it? The Arabic word that is often used as the equivalent of structural adjustment, al tasheeh, is even less neutral; it simply means to put things right. And I would like to know who would dare argue that al tasheeh, is a bad thing—that it is wrong to put things right.

The term “stabilization” is also an appealing term, because stability is generally considered to be better than instability. But it is not obvious that there is less stability under tight government control than under the free play of market forces. When it comes to the poor, the distribution of income, and essential social services like education and health and the quality of people’s diet, we find that all such things are supposed to be covered by the ugly term “the social sector.” It is as if in real life we have a sector for manufacturing, a sector for agriculture, and a third sector that includes the very substance of life, and this is called the “social sector,” and sometimes “the social dimension.” This approach allows the advocates of structural adjustment to regard the harm done to the poor or the decline in many people’s standards of health, education, or nutrition as simply a cost to be deducted from the gain achieved in raising the rate of growth. We are all familiar with the remark attributed to a former president of Brazil during the so-called Brazilian miracle: “Brazil is doing well, but the people are not.” Similarly, with all these strange new terms, we can say that industry and agriculture are doing well, but that the social sector is not, or that we are doing very well indeed, except that a little more emphasis should be put on the social dimension.

Similar remarks can be made about such terms as “the safety net,” which we will hear a lot about in this symposium—even though the net could have very large holes indeed and may hence be very unsafe—or about describing the reduction in public expenditure on basic social services as making government expenditure “more focused,” even though there may be very little left of government expenditure to be focused on anything at all. All this is really nothing more than Orwellian “newspeak.”

I conclude by saying that once people begin to be regarded as a sector, and the most basic things in life are regarded as simply one dimension among many, when judgment is withheld on the most important issues because of a scarcity of data, and when the quality of education is judged by school enrollment, then we are not at all far from Edmund Burke’s prediction of two hundred years ago: “The age of chivalry is gone. That of sophisters, economists, and calculators, has succeeded; and the glory of Europe is extinguished forever.”

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  • World Bank, 1995, Will Arab Workers Prosper or Be Left Out in the Twenty-First Century? Regional Perspectives on World Development, Report No. 1020-3648 (Washington).

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Note: The authors are grateful for the comments received from Sena Eken and research assistance provided by Peter Kunzel. The views expressed in the paper are those of the authors and not necessarily those of the IMF.

1

According to Harberger (1995) and Chu and others (1995), the way cuts are implemented affects welfare the most.

2

In a recent paper, Sen (1995) argues that, while controlling inflation should be a key objective, the specification of the target matters because, beyond a certain point, the social costs may exceed the benefits.

3

For surveys of the literature, see Adelman and Robinson (1989), Park and Brat (1995), Alesina and Perotti (1994), and Schwartz and Ter-Minassian (1995).

4

For example, Alesina (1995) and Alesina and Rodrik (1994) argue that income inequalities foster discontent and unrest; the associated threats to property rights, volatility, and uncertainty would lead to capital flight and depress growth.

5

Using cross-sectional data from 63 surveys, covering 1981–92, they do not find in any case evidence of an inverted U. Using time-series data for 42 industrial and developing countries, their findings show that 32 of the countries do not reveal any systematic relationship between growth and inequality, and very few developing countries have followed a pattern that could be said to conform to Kuznets’s prediction of initially rising inequality. The apparent confirmation of the Kuznets hypothesis in previous studies (Oshima, 1970, and Chenery and others, 1974) would be attributable to biased estimates because their tests failed to deal with country-level effects. See Anand and Kanbur (1993).

6

On average, poverty will fall with growth, but no univocal relationship can be established between growth and inequality, a finding confirmed by various studies—for example, Fields, 1989; Squire, 1993; and Lipton and Ravallion, 1993.

7

For Harberger (1995), market forces and the individual resource endowments are the most important determinants of income distribution.

8

The annual change in the total labor force in the five-year period that ended in 1993 is estimated at some 3.2 percent, compared with 2.2 percent in developing countries for this period. The female labor force grew at an annual rate of 4.9 percent, albeit from a lower base.

9

Details of labor market issues may be found in Al-Qudsi, Assaad, and Shaban (1994).

10

However, when combining various human development indicators, the region’s international ranking is less favorable than that based on income indicators. See United Nations Development Program (1995).

11

Estimates are for the latest available comparable period and are drawn from the World Bank (1986). Additional information may be found in Heyneman (1993).

12

In 1990, for example, education outlays accounted for 5.2 percent of GDP in Arab countries, compared with 39 percent in developing countries as a group. This apparent paradox could be explained by the argument put forward by Birdsall and James (1993) that inefficiencies are extremely prevalent in expenditure categories that are supposed to benefit the poor, such as health and education; for example, if most expenditures are channeled to higher education and nonbasic health care, they can actually be regressive.

13

See, for example, Shafik and others (1995). A detailed analysis of recent developments and prospects in Jordan may be found in Maciejewski and Mansur (1996).

14

Based on the 1986 income and expenditure survey, the World Bank estimated that all Jordanian households were above the poverty line that year. Al-Saquor (1990), using a much higher level of per capita income to define the absolute poverty line, estimated that 3 percent of the population fell below the line in 1986.

15

Maciejewski and Mansur (1996) show that real expenditures per capita declined by 22 percent between 1986 and 1992—a decline of 36 percent for the lowest quintile and of 11 percent for the top quintile. Poverty became more widespread and deeper, and inequality greater. In 1991, 8.7 percent and 19.8 percent of the population were estimated to be below the severe poverty and poverty lines, respectively, compared with 0 percent in 1986. The poverty gap deteriorated, widening from 1.9 to 5.0 percent (World Bank, 1994). Based on Al-Saquor’s methodology, 15 percent of the population fell below the absolute poverty line in 1991.

16

In 1995, the expenditure of the Ministry of Education accounted for 10.8 percent of budgetary outlays while that of the Ministry for Higher Education accounted for only 0.6 percent of the total.

17

About 80 percent of the population has formal public or private insurance coverage, and the Ministry of Health acts as a last-resort safety net for people without coverage.

18

In 1994, the NAF provided direct income support to about 31,000 extremely poor households with 147,000 persons (3.5 percent of the population). In that year, the NAF budget amounted to JD 12.7 million, which was distributed among three major categories: cash transfers (87 percent), rehabilitation program (8 percent), and administration.

1

T. Abdel-Gaber, Key Long-Term Development Issues in Jordan, Economic Research Forum, Working Paper No. 9522 (Cairo, Egypt, 1995).