Abstract
The IMF Research Bulletin surveys recent key studies by IMF staff.
During the 2000s, inequality in Arab countries was low or moderate and, in many cases, declining. Yet there were revolutions in four countries and protests in several others. This so-called inequality puzzle can be explained by noting first that, despite favorable inequality measures, subjective well-being was relatively low and falling sharply, especially for the middle class and in the countries where the uprisings were most intense. Increased unhappiness was associated with dissatisfaction with the quality of public services, the shortage of formal sector jobs, and corruption. These sources of dissatisfaction suggest that the old social contract, under which the government provided jobs, free education and health care, and subsidized food and fuel in return for a subdued population, was broken. The Arab Spring and its aftermath indicate the need for a new social contract under which government promotes private sector jobs and accountability in service delivery and citizens participate actively in the economy and society.
For decades, the Middle East and North Africa (MENA) had been making steady progress in reducing extreme poverty and inequality. Not only did the region reach the United Nations Millennium Development Goals related to poverty and access to infrastructure services, but it made important strides in reducing hunger and child and maternal mortality and increasing school enrollment (Iqbal and Kiendrebeogo 2016). Inequality of opportunity declined in Egypt and some other countries in the region (Hassine 2011; Assaad and others 2015). Income inequality was either constant or declining in most MENA economies and remained moderate by international standards.
Standard development indicators did not capture the growing discontent. Once the uprisings occurred, however, issues of equity and inclusion caught the public eye. Income inequality was cited as one of the factors behind the Egyptian revolution (Hlasny and Verme 2013; Nimeh 2012; Ncube and Anyanwu 2012; Osborn 2011). The idea that income inequality is linked to revolution can be traced to ancient times (Muller 1985). Today, even though it is understood that tolerance for income inequality varies over time and across countries (Hirschman and Rothschild 1973), high income inequality is considered a threat to political stability and potentially harmful to investment, sustainable growth, and progress in human development (Ostry, Berg, Tsangarides 2014; Burger, Ianchovichina, and Rijkers 2015).
Economic Inequality
This paper attempts to solve the Arab inequality puzzle, defined as the apparent disconnect between relatively low and sometimes declining inequality in the Arab countries and the series of uprisings and revolts that spread through the region in 2010–11. It takes another look at the extent of economic inequality through a combination of analytical approaches and data sources and confirms that inequality was moderate and declining in the years before the Arab Spring (Hassine 2015). It may, however, have been underestimated in the data because top incomes were not included, as shown for Egypt (van der Weide, Lakner, and Ianchovichina 2016). Moreover, wealth concentration did not appear to be higher in the MENA region than elsewhere in the world (Johannesen 2015).
The evidence from this body of research suggests that anger over economic inequality could not have triggered the Arab Spring. This conclusion is consistent with the profile of developing MENA economies as high-redistribution economies. The post-independence, state-led economic model of most MENA countries contributed to poverty reduction and equity, but the model that guaranteed public sector jobs and adequate public services became unsustainable (Devarajan and Mottaghi 2015). Fiscal imbalances increased, reflecting disappointing growth in the 1980s and rising recurrent expenditures on public wages and subsidies. Substantial increases in commodity prices in the 2000s and fast-growing domestic demand drove up the fiscal cost of subsidies and spurred subsidy reforms (Devarajan and others 2014), but these were often incomplete or reversed under public pressure (World Bank 2011a,b).
Analysis of welfare dynamics during the years preceding the uprisings suggests that the real story was the middle-class squeeze and the erosion of middle-class consensus. The real incomes of the middle 40 percent of the population were declining or growing more slowly than those of the bottom 40 or the top 20 percent (Dang and Ianchovichina 2016).
Problems with objective measures
The middle class was also growing more frustrated with its quality of life, but standard monetary measures of tracking poverty and inequality gave few clues as to the factors behind the Arab Spring uprisings. These monetary measures do not capture aspects important to an individual’s welfare. Institutional and environmental quality, public safety, and control of corruption, for instance, strongly influence the quality of people’s lives and, therefore, their standard of living and welfare, but these are not captured well in the household expenditure data used to calculate traditional welfare measures.
Objective indicators may also give an incomplete picture of how the economy evolves. Unemployment statistics may improve as people drop out of the workforce. Inflation may be underestimated if the quality of the products in the reference basket is allowed to deteriorate or the mix of goods and services is not updated to reflect changes in preferences. Increased household expenditure in countries whose public services are deteriorating may not signal improvements in welfare if citizens must opt for private services over low-quality public service providers.
Expectations also play a role in the evaluation of welfare but are not reflected in welfare measures. Relative deprivation, defined as a discrepancy between expectations and actual well-being, has been identified as a predictor of political instability and collective violence (Gurr 1971).
Subjective Well-being
Alternative measures of welfare, based on subjective well-being data, provide a clue to the inequality puzzle. The “Cantril Ladder” scores in the Gallup World Poll are particularly suitable for measuring subjective well-being in the Arab countries. Reliance on the scores, rather than on monetary measures or indices that reflect the index maker’s opinion of what matters most, gives the people a voice and gives weight to their evaluation of their own lives. The responses factor in both monetary and nonmonetary elements of subjective well-being and therefore can be used to analyze the value people place on a comprehensive set of factors and circumstances that improve their lives or contribute to their unhappiness.
These subjective well-being measures indicate that Arab people, especially in the middle class, felt stuck and frustrated on the eve of the Arab Spring. Average levels of subjective well-being were relatively low and declined just before 2010 in Tunisia, Egypt, Syria, Yemen and Libya.
This deterioration reflected dissatisfaction with falling standards of living, related to high unemployment, poor quality of public services, and corruption linked to wasta (or the inability to get ahead without connections) (Arampatzi and others 2015).
A Broken Social Contract
These sources of public dissatisfaction, especially among the middle class, suggest that there was a breakdown in the old social contract between governments and citizens. The contract implicitly promised public sector jobs, free education and health care, and subsidized food and fuel for all. Perhaps in return for the state’s largesse, citizens kept their voices down and tolerated some level of elite capture in the private sector.
Starting in the 2000s, it became clear that this contract was unsustainable. The public sector could no longer be the employer of choice. But the private sector did not generate enough jobs to absorb the large number of young people entering the labor force and offered few good-quality jobs (Schiffbauer and others 2015). As a result, the MENA region had the highest unemployment rate in the developing world, especially for youth. Moreover, while education and health care were free, and energy and water subsidized, the quality of these services was so poor that many people resorted to the private sector for public services. People felt that they needed connections to those in power to obtain good jobs, and many complained that they could not get ahead no matter how hard they worked (Arampatzi and other 2015). Since the government was not keeping its part of the social contract, the citizens raised their voice in protest.
Need for New Social Contract
The events since the Arab Spring have been so turbulent that the underlying problems that caused it remain. Civil wars in four countries, terrorist attacks, and a precipitous drop in oil prices have slowed growth in the region to a trickle (Devarajan and Mottaghi 2016). Unemployment is higher today than it was in 2010, and dissatisfaction has risen further since 2010, particularly in the Arab Spring countries (Dang and Ianchovichina 2016). The quality of services has deteriorated and spawned the “You Stink” movement in response to the garbage crisis in Lebanon in summer 2015.
With improved understanding of what caused the dissatisfaction that led to the Arab Spring, it is possible to put forward ideas that can help solve the crisis. The region needs a new social contract that compels the government to promote, rather than hinder, private sector job creation and to design public services in a way that holds providers accountable to beneficiaries. Change will not happen overnight, nor does it apply to all countries today, but the contours of a new social contract could go a long way toward helping the people of the Middle East and North Africa realize the vision many of them bravely fought for during the Arab Spring of 2011.
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