The region’s governments have a unique opportunity for fundamental reforms to bring down barriers to employment and develop safety nets designed to lift people out of poverty
WASHINGTON, April 10, 2013 – More than half the working-age population of the Middle East and North Africa (MENA) region are neither employed nor in school, and both the share of women not working and the unemployment rate for young people are the highest in the world. When it comes to protecting the poorest citizens, most government-sponsored social safety nets offer inadequate protection and keep many in poverty generation after generation. Safety nets are crowded out by unaffordable general subsidies that often benefit the rich more than the poor and cause significant economic distortions that lower the demand for labor. Two new reports from the World Bank Group analyze these stark challenges to the health of MENA economies.
Jobs for Shared Prosperity: Time for action in MENA tackles the causes for the high levels of joblessness and offers proposals for creating more dynamic economies that generate jobs. Inclusion and Resilience: The Way Forward for Social Safety Nets in MENA demonstrates ways in which resources can be redirected toward safety nets that enable the poor to climb out of poverty and contribute to economic and social progress.
“The call for economic and social justice is intimately related to the need for more equal access to economic opportunities, jobs and more effective safety nets,” said Inger Andersen, World Bank Regional Vice President for the Middle East and North Africa. “By seizing this historical moment and fundamentally changing the rules of the game, the region can lay the foundations for inclusive growth, and provide the poor with the means to climb out of poverty.”
Labor markets in MENA currently provide only a few good jobs for a few protected workers who are predominantly older and male. Young people and women are left to bear the brunt of these inefficient labor markets. Sadly, MENA holds two world records: three out of every four working-age women in MENA are outside the labor force, and one quarter of the youth population is looking for work but cannot find it.
To solve this problem, the report identifies three areas of action. First, there needs to be a better business climate for the private sector to create the good jobs of the future. The region has the world’s oldest firms and managers demonstrating a lack of ‘creative destruction,’ the process whereby older less efficient firms are replaced by newer more productive ones, which has played such an important role in the fast growing economies of Eastern Europe and Asia. Lowering the barriers to both entry and exit of firms would create a dynamic private sector, which encourages investment and innovation, and ultimately increases the demand for labor.
Second, the report argues for reforms across the region’s educational systems so that young people are equipped with the skills required for productive jobs in a vibrant private sector. This requires better governance of the educational system and a focus on teaching 21 st century skills. Third, the labor market and social protection policies in the region keep a few workers, mainly older and male, well protected, while the majority find themselves without any protection. The region needs to move towards protecting incomes for all, so that people can change employment in search of more productive jobs without risking their livelihoods. The Arab uprisings have created a demand for reform and provide an excellent opportunity for governments to address these longstanding issues.
A complementary report on safety nets in the region expands on this last point and highlights the need for redirecting public funds away from subsidies towards safety nets.
“The old system that protected a privileged few while purchasing stability with universal subsidies is no longer viable or desirable,” said Steen Jorgensen, World Bank Director for MENA Human Development. “A new social contract that responds to the call for bread, freedom and justice is needed to unleash the region’s vast human potential and help the poor not just to survive, but thrive.”
As well as a source of frustration, the high level of joblessness translates into high levels of vulnerability. The region still has large numbers of people living below the poverty line, around a quarter of the population in many instances. Poorer children have higher levels of malnutrition, in both the region’s low and medium-income countries, which can cause irreparable harm, lowering learning capacity and increasing risk of school drop-out. The long range consequence is lowered adult productivity and generations trapped in a vicious cycle of poverty.
MENA countries commit a sizeable portion of their national budget to subsidies. While subsidies do have a positive impact on poverty, they benefit the rich more than the poor, and place a heavy burden on public finances. Fuel subsidies in particular have a negative impact on labor markets, making it cheaper to invest in and operate new machinery rather than hire new workers. Their high cost leaves little room for targeted social safety nets, such as direct cash transfers. The average MENA country commits 5.7 percent of its Gross Domestic Product (GDP) to subsidies, of which 80 percent goes toward universal subsidies on fuel. A comparison of other developing countries found that average spending on subsidies was 1.3 percent of GDP. Separately, MENA countries spend 0.7 percent of GDP on cash transfers and other targeted assistance to the poor, but this spending does not yield significant impacts on poverty and inequality, due to inadequate targeting and extremely low coverage. Indeed, in all but one of the MENA countries under study, two thirds of people in the poorest segment of society are not covered by any form of targeted assistance.
The Palestinian Territories were the first to conduct extensive reforms to unify their fragmented system of social safety nets and better target the poor with expanded cash transfers. Their unified system now reaches 97,000 households with targeted cash transfers, and has allowed them to mitigate the effects of past food and fuel crises by scaling up payments to the most vulnerable. Similar reforms are possible throughout the region, but the first vital step is building public trust. It sets the stage for the game-changing reforms that would drive competition, generate jobs, redirect precious public resources to the most needy, and allow the region’s great human potential to become the source of growth and shared prosperity. As with reforms to the business climate and labor markets, the Arab awakening opens the possibility to truly provide social justice, by getting cash into the hands of poor people and removing the general subsidies that benefit the rich and powerful.
