The World Bank Group Quarterly Publication - The World Bank Middle East Department - Lebanon FIRST/SECOND QUARTER 2009 57793 In this edition The Financial Crisis: Impact on the Middle East First / Second Quarter 2009 1 Editorial Team Syria Lebanon Iraq Iran Jordan EDITOR-IN-CHIEF EDITORIAL BOARD (in alphabetical order): Hedi Larbi Demba Ba Director-Middle East Department Ziad Badr Asaeel Barghuthi To Order World Bank Publications: Janet Dooley publications.worldbank.org/ecommerce Zeina El Khalil For Information on World Bank Programs: Jean Michel Happi www.worldbank.org May Ibrahim Contacts Pilar Maisterra In Beirut Stefano Mocci Mona Ziade Marian Mohamed Saleh The World Bank Bouri House Simon Stolp Abdallah Beyhum Street Sophie Warlop Beirut Central Distrct Najat Yamouri Phone: +961-1-987800 Email: mziade@worldbank.org Mona Ziade In Washington Najat Yamouri The World Bank MSN H10-1002 1818 H Street NW, Washington DC 20433 USA Phone : 202 458 1340 Email: nyamouri@worldbank.org First / Second Quarter 2009 2 Contents In this edition EDITORIALS 4-5 THE FINANCIAL CRISIS 6 LEBANON Moving Forward with Pension Reform in Lebanon 12 SYRIA Short and Medium-Term Growth Prospects 22 JORDAN Education Reforms for Knowledge Economy From ERfKE I to ERfKE II 28 IRAQ Iraqis, Word Bank Team Defy Risks to Collect Socio-Economic Data 32 First / Second Quarter 2009 3 New Look, Broader Content and More Engagement with the Audience T he Launch of this new-look Middle East publication marks signs point to the resolve of regional governments to reform and another milestone in the World Bank's evolving role in global development, geared largely towards the poor and the margin- knowledge sharing not just in the Middle East, but world-wide. alized (youth, women, handicapped, ethnic minorities, etc.). The This newsletter seeks to reach out to the widest possible au- Bank is pleased and committed to supporting these efforts as dience in our sub-region: Decision-makers, academia, private noted in some of the articles in this publication. sector and the public. It aims to provide the reader with an insight into our joint work with countries, highlight social and In Lebanon, work on one of the most important social reforms economic development issues and promote dissemination of is underway creation of a new defined contribution fully funded best international practices in economic development in a pension system to replace the ill-functioning End-of-Service In- rapidly changing global environment. demnity program. Irrespective of the outcome of the June 2009 parliamentary elections, there is hardly any political bloc that Dissemination of knowledge and information and advisory services could argue against this nationally shared objective. are a core business of the World Bank. They are even more critical in times of major challenges. In our sub-region, we are catering Syria, mindful of its ambitious reform agenda and the dwindling to five countries. Admittedly, Lebanon, Syria, Jordan, Iraq and Iran oil resources, is on a fast-track to diversify its economy and ef- constitute a set of diverse economies. On one hand, there are oil fect gradual transition towards a social market economy, with producers such as Iran and Iraq, and, to a lesser extent, Syria. On the Bank and donors offering an array of technical assistance the other, there are Lebanon and Jordan, which have no such natu- programs to support the Government reform efforts. ral endowment, but they have a wealth of other resources, includ- ing their human capital. Jordan is embarking on the second phase of developing its ed- ucation system, after the first phase had successfully instilled However, these countries have many geographic, demographic knowledge economy skills into the system. and cultural commonalities that can be cultivated. They also share similar development challenges: scarcity of water resourc- Moving to Iraq, where the portfolio is large, we have opted to es, sensitive environment and climate change, fast growing la- present in this issue the results of an unprecedented Household bor force and a need for creating a high number of quality jobs, Socio-Economic Survey, providing the Government with an im- necessary to maintaining social cohesion and reducing poverty portant tool to improve the living conditions of the poor and as a prerequisite for political stability. Working together, we can marginalized communities. build on the commonalities and support well-informed social and economic strategies and reform policies to cope with these As we move on, we will strive to improve the array of issues to challenges through high sustainable and equitable growth. provide timely and relevant knowledge to our audience, and help decision-makers develop well-informed policies. But this The newsletter's effort is to highlight the overarching themes. is possible only with the help of and feedback from our read- In this first issue, the editorial team solicited contributions from ers. We look forward to having your feedback on this "new veteran World Bank Middle East experts to expose the immediate look" newsletter including your suggestions, or development common challenge to the region, and the world at large: the themes and topics relevant to the region that you would like Financial Crisis which morphed into a severe economic crisis. It us to address in the upcoming issues. was a natural choice, given that the implications are no longer the concern of only governments, but a household topic affect- ing citizens, some directly, some indirectly. Hedi Larbi Director But while governments grapple with designing economic and fi- Middle East Department nancial policies to weather the storm, the world does go on and citizens still need to be adequately serviced. The financial melt- down must inspire accelerated and parallel economic and social development in our region, not slow it down. Fortunately, all the First / Second Quarter 2009 / Editorial 4 Decentralization, Outreach and Knowledge Guide the World Bank's Middle East Strategy F rom Morocco to Iran, the World Bank's Middle East and North regional publication we are now launching is one of these tools. Africa (MENA) department is changing to provide better and Our websites will also be revamped, and our Public Information quicker services to the clients. Centers modernized to support the expanding outreach to public and private institutions, civil society, and academics. It is our be- One of the most important changes underway is decentralization, lief that the public at large, when well-informed, can help realize which shifted staff and decision-making to the country offices. the needed change. The post of Regional Director for the Middle East was recently relocated from Washington to the region, when Hedi Larbi took In conclusion, I would like to invite the audience of this newslet- up residence in Beirut in January 2009, to direct and oversee the ter to share their thoughts and opinions with our editorial team, work programs in Lebanon, Syria, Jordan, Iraq and Iran. so we can improve our services to help our clients achieve their aspirations for less poverty, more and better jobs, and more sus- Additional competencies are being shifted to country offices to tainable economic and social development. increase our presence where our clients need us most. This al- lows us to enhance our ability to forge more effective partner- Daniela Gressani ships with clients and stakeholders, and to develop greater syn- Vice President ergies with regional and international development partners and Middle East and North Africa with donor countries. In turn, this approach allows us to provide greater support for the region's strategic priorities such as faster job creation, higher quality education, greater inclusion of youth, women and marginalized groups in the economy and society, better management of natural resources, and closer integration within the region and with the global economy. The region comprises a very diverse set of countries. Each of them has a long and rich history and strong individual features. Although generalizations do not do justice to their rich diversity, these five countries face common challenges, which offer op- portunities for cooperation and collective efforts. We need to tailor our support to their specific needs and at the same time take advantage of the common challenges to realize economies of scale in our programs. The global financial crisis is posing new risks for the region. The sharp decline in oil prices is reducing revenues for oil-exporting countries, and also has negative impact on the flow of remit- tances, tourism and foreign direct investment to oil-importing countries. Overall, the contraction of international trade threat- ens recent gains in export diversification. The Bank is committed to assisting the countries of the region in managing the consequences of the global crisis and at the same time addressing the underlying weaknesses of their economies ­ most notably in the environment for private sector development. In addition to financial instruments, we will continue to rely on knowledge and learning as the driving force for development. A key component of this work is communication. The quarterly Editorial / First / Second Quarter 2009 5 The Financial Crisis: Impact on the Middle East - by Auguste Tano Kouame*1 O verview: Impact of the Crisis on Lebanon The five countries in the Middle East discussed in this article have Lebanon's financial market developments have been favorable de- spite the global financial turmoil. Deposit inflows to Lebanese com- diverse economic structures2. Two main characteristics set them mercial banks increased by 3.7 percent (US$2.7 billion) between Au- apart. On the one hand, there are the oil exporters: Iraq and Iran gust 2008 and January 2009. Official foreign currency gross reserves and, to a certain extent Syria. Oil represents 80% or more of the almost doubled in 2008, increasing by 175 percent and reaching 60 exports of Iran and Iraq, and about 40% of Syria's exports in percent of GDP at end-2008, up from 39 percent at end-2007. De- 2008 (Figure 1). On the other hand, there are the diversified, non- cline in dollarization in response to lower dollar interest rates and oil exporting economies: Jordan and Lebanon. This delineation is broadly unchanged returns in Lebanese Pounds (7.3 percent) also contributed to sharp increase in reserves. useful in understanding the initial conditions with which Middle East 5 countries (henceforth ME-5 countries) entered the global Nevertheless, the global economic slowdown could have a more sub- financial crisis as well as how they are likely to be impacted. stantial medium-term impact on Lebanon as in many other countries. The real GDP growth projection for 2009 has recently been reduced by Financial Systems the Ministry of Finance from 5.0 percent to 3.0 percent. This reduction Figure 1. Oil Exports as share of Total Exports; 2007-2009 reflects the expected lower exports and remittances, and domestic pri- vate investment. However, the other macroeconomic variables such 120 2007 as inflation, the current account balance and reserves, are expected 2008 to improve in 2009. The key near-term policy challenge for Lebanon 100 2009 is managing the impact of the global economic slowdown. This is 80 particularly so given the reliance of Lebanon on external inflows (net 60 foreign inflows from services exports, capital, income, and remittances % reached 57 percent of GDP in 2008, up from 44 percent in 2007) and 40 the limited room for policy stimulus. 20 0 The Government is currently discussing pre-emptive measures to Iran Iraq Syria support the domestic activity. These measures are expected to focus on accelerating public investment projects and providing incentives Source: World Bank data to the private sector for supporting investments and production. In addition, the Central Bank of Lebanon has recently announced plans to avoid squeeze on lending to the economy through subsidized One common factor among ME-5 countries was that the initial loans in Lebanese Pounds and by reducing reserves requirements impact of the global financial crisis on their financial systems on deposits in Lebanese Pound in order to direct the excess liquidity was muted. Although Lebanon, Iran and Jordan's stock market toward lending to the economy. indices declined alongside other MENA countries, they declined less than in most other emerging market economies3. For exam- ple, their stock market indices lost on average about 40 percent have triggered redemption of stocks out of the domestic mar- over the past year compared to 50 percent for Gulf Cooperation kets, thus causing declines in stock indices. Market observers Council (GCC) countries. Apart from Lebanon, which has some maintain that this "flight to quality" effect was not, however, at cross-border banking transactions and sovereign and corporate play in Lebanon. Rather, the Lebanese banking system was per- presence on the global bond market, the ME-5 region is relative- ceived as a regional safe haven, and may have attracted more ly isolated from the global financial system. The decline in the investors during the global financial crisis. This phenomenon, if ME-5 stock markets stemmed primarily from contagion from correct, may explain why the Lebanon stock index declined by a declines in the GCC and elsewhere in the world. The outflows of lesser margin than most other indices in the MENA region. funds from domestic financial systems seeking safer haven may Initial Conditions * Lead Economist, Mena Region 1 While the impact of the crisis of ME-5 financial systems has been The author would like to thank Lili Mottaghi for research support, and Jennifer Keller for valuable comments limited so far, going forward, one cannot exclude a significant 2 The five Middle East countries are Iraq, Iran, Jordan, Lebanon and Syria impact on the real economy. How countries' real economies are 3 Iraq has no stock market and Syria created its own stock market only impacted and how they can mitigate the impact will depend in in March 2009 First / Second Quarter 2009 / The Middle East 6 The Middle East Impact of the Crisis on Syria Figure 2. Current Account Balance as % of GDP: ME-Countries; 2007-2009 Plummeting global output and trade combined with a severe 40 drought for the third consecutive year could have a significant im- 30 pact on Syria in 2009. A decrease in exports, tourism, remittances, and foreign direct investment may already be at play. Recent reports 20 and anecdotal evidence are showing signs of a slowdown in many 10 sectors, especially the textile industry. Export earnings are expected Jordan Lebanon 0 to decline substantially (by 16% according to the IMF, and by 34% -10 Iran Syria according to the EIU) in 2009, reflecting falling oil and agricultural prices, although most of the decline will be explained by falling oil 2007 -20 receipts. The global downturn is expected to decelerate the recent 2008 -30 2009 growth in tourism as well as in foreign direct investment, and to re- duce remittances from expatriate workers as job losses mount in the Source: World Bank data GCC countries and other "labor-importing" countries. There is some evidence that GCC investment flows in real estate projects have heavily on sovereign bonds and bank financing to fund its fiscal nearly ceased. The external demand shock has been compounded by deficit4. a domestic supply shock, namely, a severe drought that is entering its third year, with severe impact on agricultural output. High global demands on official sources ­ both bilateral and In addition, the global economic slump may worsen Syria's projected multilateral ­ from other countries might also constrain avail- budget deficit in 2009. The 2009 budget was approved in December able financing; this would particularly affect Jordan. In this con- 2008. The budget was calculated based on a price of US$51 for a strained environment, it will therefore be important to contain barrel of Syrian oil of good quality, and US$42 for a barrel of oil of the fiscal deficit and government contribution to the current poorer quality. The budget deficit for 2009 is projected at 266 billion account deficit in 2009, while still addressing urgent spending SYP (US$5.3 billion) ­ about 9 percent of GDP. Weekly non-OPEC needs to mitigate the impact of the crisis (see Figure 3). spot prices have averaged at US$40 per barrel during January and February 2009. Figure 3. Fiscal Balance as % of GDP: Middle East Countries; 2007-2009 part on initial conditions. In particular, fiscal and current ac- 6 count balances, as well as debt level, play an important role in 4 2 Syria Jordan Lebanon shaping countries' ability to mitigate the impact of the crisis. 0 -2 Iran Lebanon and Jordan entered the crisis with very high levels -4 -6 of fiscal and current account deficits in 2007 and 2008, with -8 2008 current account deficit to GDP ratios in excess of 14%, -10 and with fiscal deficit to GDP ratios in the 8-10% range (see -12 2007 -14 2008 Figures 2 and 3). A significant difference between Jordan and -16 2009 Lebanon at the onset of the global financial crisis is that Jor- Source: World Bank data dan has a lower debt level and has in fact paid down some of its debt to the Paris Club while Lebanon has one of the highest debt-to-GDP ratios in the world. Iran and Iraq entered the crisis with fiscal and current account surpluses, thanks to the high price of oil up to mid-2008, and Lebanon and Jordan, unlike the other three countries that have Syria had a small current account surplus but a fairly large fiscal energy resources, have grown to depend on various forms of deficit. With the sharp decline in oil prices since reaching a peak external financing to fund their large current account deficits. of US$147 per barrel in July 2008, Iran, Iraq and Syria have seen With higher spreads on sovereign bonds, poorer prospects for a tightening of their fiscal space virtually overnight. At the same FDI and remittances, meeting external financing needs will be all 4 the more challenging, particularly for Lebanon which depends FDI flows are projected to decline from about 25% of GDP in 2008 to about 9% of GDP in 2009 in Lebanon (source: IMF) The Middle East / First / Second Quarter 2009 7 Figure 4. Total External Debt as % of GDP, 2006-2008 Impact of the Crisis on Iraq 300 2007 The main channel of impact of the global financial crisis on Iraq's 2008 250 economy has been through depressed oil prices, affecting both ex- port and fiscal revenues. Iraq's low integration on the world market 200 has shielded it from a more direct impact of the global financial cri- 150 sis through the country's financial sector. Iraq's banking sector re- 100 mains underdeveloped and centered on the domestic market. Levels of direct foreign investment and private capital flows are still very 50 low. Nevertheless, the current contraction in world demand will have 0 a significant impact on Iraq in light of its extreme oil dependence (oil Iran Jordan Lebanon Syria accounts for almost all export and fiscal revenues). World demand Source: World Bank data for crude has already declined in the last six months and the expec- tation that demand will continue to decline, is weighing heavily on time, prospects for external financing for them are quite dim due crude prices. Public finances and balance of payments have already to a combination of the tight global financing environment and been adversely affected. The oil price for the 2009 budget was re- the history of limited financial transfers to these countries for adjusted twice (in November 2008 and January 2009) downwards. Iraq's fiscal position is projected to worsen with oil revenues expect- development needs. ed to contract by 26 percent according to IMF projections, reversing a strong fiscal position (overall fiscal surplus of 8.2 percent of GDP Beyond these macro economic considerations of the initial con- in 2008). A deficit of about 17 percent of GDP was forecast by the ditions, ME-5 entered the crisis with a challenging position from IMF for the year. The actual 2009 deficit figure may turn out to be a social and structural perspective due to a long standing social considerably higher than that since Iraq's crude is selling at below US$ 40 per barrel, while the revised 2009 budget is based on the as- contract and difficult to retract commitments. First, ME-5 coun- sumption of US$50 per barrel. The Government announced it would tries share the characteristics of high unemployment (Figure 5). allow for cuts in recurrent and capital spending in a supplementary Their unemployment rates are generally much higher than de- budget if oil prices continue their downward trend. veloping countries averages. In fact, with low female labor force participation and improving female education indicators, unem- Figure 5. Unemployment Rates, 2007: Middle East Countries ployment in ME-5 countries may be underestimated. Another characteristic of ME-5 is their high level of youth unemployment. Second, in some ME-5 countries, subsidies are high and seen as 30 part of the social contract (Iran, Syria), and other inefficiencies 25 in state owned enterprises creates a burden on public finances 20 Developing Country similar to subsidies (Lebanon, Iraq). Third, the political economy Percent 15 Average 2007 can make it difficult to implement reforms quickly to respond to a 10 fast changing global environment (Iran, Iraq, and Syria). 5 Potential Impact on the Real Economy 0 Jordan Iran Iraq Syria While the impact of the global financial crisis on ME-5 financial Note: data is not available for Lebanon systems has been limited, the impact on the real economy can be Source: IMF and World Bank data significant. ME-5 GDP growth rates are expected to be markedly lower than in 2008 although they remain higher than in many down in Lebanon and Jordan. With current projections calling emerging market economies and in most other MENA countries for crude oil to average US$47 per barrel, ME-5 oil exporters will (Table 1). Industrial production has declined in most ME-5 coun- see significantly lower oil revenues than in 2008. Remittances tries, with the steepest decline observed in Iraq and Jordan. and tourism receipts are likely to be significantly impacted in 2009. In fact, recent estimates for remittances project a decline Declining oil export values are the main drivers behind economic of 5% worldwide in 2009. Anecdotal evidence suggests that slowdown in Iraq, Iran and to a certain extent Syria; and declin- many Jordanian and Lebanese migrant workers in the Gulf have ing remittances and FDI are the main drivers of economic slow- lost their jobs. This will likely have an impact on remittances in First / Second Quarter 2009 / The Middle East 8 The Middle East Impact of the Crisis on Iran Figure 7. Remittances inflows % of GDP 30% 2007 2008 The Iranian economy's most significant challenge is the fall in oil 25% export revenues due to the reduction in global demand and subse- 20% quent fall in global oil prices. So far, through the end of Iranian year % of GDP 1388 (March 20, 2009), the magnitude of this impact was relatively 15% modest, due to exceptionally high oil prices and revenues in the first 10% half of the Iranian year. (March-August 2008). However, the 2009- 5% 2010 budget, which was approved last week by the Iranian Majlis (Parliament) and the Guardian Council noted major fiscal contrac- 0% tion. The contraction looks even larger in the final version of the Jordan Lebanon Syria bill, which does not include revenues from an increase in domestic Source: World Bank data energy prices proposed by the Government. Compared to the 2008- 2009 budget, revenues and expenditures of the Central Government tourism revenues, another lifeline for Lebanon and Jordan (see are expected to decrease in 2009-2010 by more than 10 percentage Figure 8), are likely to decline in 2009. points of GDP, from 28.7 percent to 18.4 percent. Current revenues (taxes) are budgeted to fall by 1.8 percent of GDP, showing signs Way Forward of an expected slow-down in economic activity; while disposal of The depth of the global crisis will require that the measures capital assets (oil revenues) is expected to fall by 5.6 percent of GDP; withdrawals from the Oil Stabilization Fund (OSF) are also expected envisaged by ME-5 policy makers be deepened, complemented to be lower, limited by the OSF's low current balance. As for expendi- with additional measures, or in some cases revisited to meet the tures, these are budgeted to fall by 8.6 percent of GDP in the current dual challenge of mitigating the impact of the global financial year, and capital expenditures are expected to fall by 1.7 percentage crisis on the economy and people in the short term while re- points of GDP. Figure 8. Tourism Receipt Billion USD 7 Table 1. GDP Growth; 2009 versus 2008 6 2004 GDP growth, % 2005 5 2006 2008 2009f 4 Iran 5.6 3.5 3 Jordan 5.5 4.2 2 Lebanon 5.5 4.0 1 Syria 3.7 2.5 0 Iran Jordan Lebanon Source: World Bank data MENA 5.8 3.9 Of which; GCC 6.1 4.3 moving bottlenecks to sustainable and inclusive growth in the Developing Countries 6.3 4.5 future. This entails, among other challenges, carefully crafting fiscal stimulus packages. Source: World Bank data In the next few months, ME-5 will probably step up efforts to design stimulus packages to mitigate the social and economic 2009, a lifeline for these two countries (see Figure 7). There are impact of the global economic crisis. As they do so, it would be concerns that some migrant workers losing their jobs abroad critical to: will return home, which could add to already high unemploy- ment. However, on the flip side, some ­ though not all ­ re- · Take a hard look at existing subsidy and safety net programs turning migrants may bring with them their savings and skills in order to better target them and free up resources for the acquired abroad ­ both of which could contribute to the home poor as well as those who are deeply affected by the crisis countries investment and productivity. With declining oil prices · Pay attention to addressing constraints and bottlenecks to and the fall in asset prices eating into private wealth in the Gulf, long term growth. Investment in removing such bottlenecks The Middle East / First / Second Quarter 2009 9 can help create jobs and boost consumption in the short term Impact of the Crisis on Jordan while enhancing potential growth in the post crisis era · Improve the domestic business environment so as to free Jordan's limited integration with global financial markets has buff- up entrepreneurial energies and stimulate private invest- ered it from recent global financial turmoil preventing major losses among banks or capital flight. The Central Bank of Jordan has taken ment for a strong post-crisis recovery. preemptive steps to maintain confidence and support the domestic money market, including full guarantee of all bank deposits at the The World Bank Group should stand ready to help mobilize financ- onset of the crisis. However, the ongoing turmoil is generating other ing or provide knowledge and advice as part of ME-5 countries' effects that will impact the domestic economy. The three most impor- effort to confront the global downturn and build a strong future. tant of these derived effects are declining global commodity prices, particularly oil (which would have a positive impact on trade deficit but a negative impact on transfers and capital account), declining private capital flows to developing countries (which were a major source of growth for Jordan in the recent past), and sharply lower global and regional growth outlook (which would affect exports and remittances). Based on potential impact of these effects, Jordan's growth rate is expected to slip to 3.0-4.0 percent during 2009 (after averaging over 7.0 percent during 2004­07, and remaining high at around 5.5 percent in 2008). While growth will decline, other mac- roeconomic variables such as inflation, the current account balance and reserves, will improve relative to 2008, largely because of lower oil prices and a lower volume of imports. The key near-term policy challenge for Jordan is managing the impact of the global economic slowdown, given limited room for policy stimulus. This is particularly so, due to deterioration in Jordan's fiscal position in 2008 as a result of bold budgetary compensation measures to mitigate the impact of the sharp rise in fuel and food prices. The Government is currently considering increasing public capital spending with funding out of expected savings from lower than projected subsidies due to lower fuel and food prices. Looking forward, there remain key risks related to financing of the current account deficit, which is estimated to remain high at around 11.0 percent of GDP in 2009. picasa web albums Temple of Bacchus, Baalbeck, Bekaa Valley, Lebanon First / Second Quarter 2009 / The Middle East 10 The Middle East travel.webshots.com Anjar, Lebanon The Middle East / First / Second Quarter 2009 11 Lebanon Moving Forward with Pension Reform in Lebanon - by Haneen Sayed* and David Robalino** A dding final touches to the current draft herited by survivors) not a lump sum2. Second, the capital val- pension law1 ue of the pension will be higher than the lump sum today ­ in part because contribution rates are higher but also because the Lebanon today has the unique opportunity to move forward new system opens the opportunity to revisit investment poli- with one of the most important social reforms in decades: the cies and the way the individual accounts are revalorized. Thus, creation of a new defined-contribution fully-funded (DC-FF) rates of return on savings are expected to be higher and will be pension system to replace the ill-functioning End-of-Service calculated in a transparent way. Third, there will be a transpar- Indemnity (EOSI) program. ent link between contributions and benefits. This will facilitate the mobility of the labor force (workers who switch jobs will In many countries, pension reform brings long-term benefits but keep their balance in their individual accounts), and also provide also short-term costs; there are winners but also losers. What is better incentives to enroll and contribute, and better options to unique in Lebanon is that the new pension system is likely to be expand coverage to the informal sector and the self-employed. good for all: current and future generations, employers and em- Fourth, the new system will be more predictable for all: retirees ployees, and also the Government. This is because of the many will be shielded from inflation risks3, employers will not face problems of the EOSI and the strengths of the new system ­ if sudden payments when employees retire, and there will not be well designed and implemented. unfunded liabilities for the Government and future generations -- other than those related to the financing of part of a mini- The EOSI has never been an adequate program to provide in- mum pension guarantee (see below). come support during old-age. Individuals who retire only have access to a lump sum that most of the time is rapidly consumed. But to secure these gains, some technical problems with the cur- This happens at the same time that retirees lose access to health rent draft Law need to be addressed in order to ensure that: (i) insurance! Moreover, the value of the lump sum tends to be the rules to calculate the pension at retirement are made explicit; below what workers could get in exchange for their contribu- (ii) all retirees have access to a minimum level of income during tions in a solvent bank. The EOSI cannot play the function of old-age; (iii) the transition to the new system is manageable from unemployment insurance either ­ contrary to what some have an institutional point of view; (iv) unfunded liabilities are not cre- suggested ­ because of stringent rules to access accumulated ated by breaking the link between contributions and benefits; (v) balances. In addition, the EOSI is an employer based program there are mechanisms in place to better shield individuals close to that cannot be expanded to the entire labor force -- in particu- retirement from the impact of rare but potentially large financial lar workers in the informal sector and the self-employed. shocks; and (vi) having proper controls over the institutions in charge of the management of workers' savings. The EOSI is not a good program for employers either. First, it im- poses unknown and substantial costs when individuals retire since This note briefly discusses each of these issues. the employer is responsible for covering any differences between the promised benefits and the balance accumulated in the indi- How will the pension be calculated in the new system? vidual accounts. Second, the design of the program reduces in- The new Lebanese pension system is a defined-contribution centives for individuals to switch jobs since when they do they fully-funded scheme. Active individuals contribute to the pen- implicitly loose acquired rights. As for the Government, and future sion system and their contributions are invested in financial generations, the lack of a transparent link between contributions assets. Each plan member thus has an account where savings and benefits can generate unfunded liabilities if employers default plus interests accumulate. on their obligations. These will need to be financed either through higher taxes and/or lower expenditures in other social programs. 1 The new pension system can address these problems. First, it This note refers to the draft of the Law that was approved on October will pay a pension for life upon retirement (it can also be in- 27, 2008 by the Joint Parliamentary Committees 2 The Draft Law also sets provisions to finance health insurance during * Human Development Coordinator for Lebanon, Syria and Jordan old-age 3 ** Senior Economist This assumes that the Law mandates the issuance of annuities indexed by inflation First / Second Quarter 2009 / Lebanon 12 Lebanon At the time of retirement, the capital in the individual ac- rate of return on investments). If the contribution rate increases count is transformed into an annuity (i.e., a pension for to 15 percent, the value of the pension would also increase to life). The formula used to do the transformation is very between 60 and 75 percent of the last salary. simple. In essence, the pension is equal to the accumu- lated capital divided by an annuity factor that depends on It is important to notice that the EOSI, by design, pays a rate of life expectancy at the age of retirement (and a discount return on contributions that are lower than the rates of return factor4 ). As an illustration, the annuity factor at age 60 that the new system can pay. Indeed, in the EOSI, the rate of re- is currently estimated at 14.36. At ages 65 and 70 the an- turn is more or less equal to the growth rate of wages, which is nuity factors drop to 12.23 and 10.13 respectively. This is usually below the "market" interest rate. As an example, with a because as the retirement age increases individuals are 12.25 contribution rate an individual who retires at age 65 after expected to receive pensions for a shorter period of time 40 years of contributions would receive a pension equivalent to and therefore the value of the pension can be higher. In only 40 percent of pre-retirement earnings. the new system annuity factors could be set either directly by the NSSF (if the NSSF bears the financial and longevity For the current Draft Pension Law there are two recommendations: risks associated with the payment of pensions) or through · To indicate how the pension will be calculated (i.e., make a competitive bidding among insurance companies (if the explicit the formula provided above). risks associated with the payment of pensions is trans- · At this stage, however, the Law should not define the an- ferred to insurance companies). nuity factors. These will require more precise calculations of life-expectancy at various ages, as well as setting the Table 1 provides some examples of the value of the pension proper discount rate. relative to the last salary for various retirement ages (60, 65 or · The Law should also leave open for the regulations the 70), years of contributions (30 or 40), contribution rates (12.2 design of the pay-out-phase, which among others will percent or 15 percent), and returns on investments (low and imply deciding whether the NSSF or insurance companies high). For example, with a contribution rate of 12.25 percent manage longevity risks. (the current level), individuals retiring at age 65 with 40 years of contributions would receive a pension equivalent to be- Should the Law set a minimum pension guarantee? tween 50 and 60 percent of their last salary (depending on the Any pension system has two main objectives. First, to allow in- dividuals who retire to replace a given share of pre-retirement Table 1: Pension Value Relative to Last Salary income (insurance function). Second, to prevent poverty during Number of years of contributions old-age and thus ensure that all individuals have a minimum level of income when they retire (adequacy function). Low return High return The second objective is as important as the first and thus the Contribu- Retirement 30 40 30 40 majority of countries offer minimum pension guarantees. These tion rate age take different forms (e.g. flat payments universal or targeted, or 12.25% 60 29.8% 41.9% 35.0% 52.2% top-ups to contributory pensions below a minimum) with benefit 65 35.0% 49.2% 41.1% 61.3% levels ranging between 10 and 60 percent of economy wide aver- age earnings (see Figure 1). In general, however, benefits above 25 70 42.3% 59.4% 49.7% 74.1% percent of average earnings are likely to be very costly, unsustain- 15% 60 36.5% 51.3% 42.9% 64.0% able and can damage incentives to contribute and to work. At the 65 42.9% 60.3% 50.4% 75.1% same time, it is important that this minimum pension does not 70 51.8% 72.8% 60.8% 90.7% disappear over time and to this end it should be linked to a real Notes: The low return and high return scenarios assume that the variable in the economy that captures standards of living. difference between the real rate of return on investments and the real growth rate of wages are 1 and 2 percent per year respectively. In the case of Lebanon the recommendation is to define in the Source: Authors' calculations. Law a minimum pension guarantee that would meet the fol- 4 The discount factor appears in the formula because it is used to calculate the expected present value of future pension payments Lebanon / First / Second Quarter 2009 13 Figure 1: Minimum Pension Guarantees Around the World Iran There are no rules for the allocation of costs among the three Colombia parties. It is important to emphasize, however, that because ini- Portugal Brazil tially the system will only cover part of the labor force ­ the for- Egypt mal sector where earnings tend to be higher -- transfers from Luxembourg Jordan the government that are too high can be regressive. Switzerland Algeria El Salvador Who "switches" to the new system? France Spain Decisions about switching rules are very important and need UK to be analyzed carefully. Indeed, they affect: (i) the transition Tunisia Turkey costs to the new system; (ii) administrative complexity; and (iii) Peru the time the new system has to setup the pay-out phase. The Croatia Mexico older the plan members who are allowed to switch, the more Poland costly the transition, the more complex its administration, and USA Hungary the shorter the period of time before the new system starts to Slovakia pay pensions5. Iraq Uruguay Costa Rica Transition arrangements have varied widely among countries Average Bulgaria Morocco that have implemented reforms. For instance, in Hungary, only Estonia 20 percent of those aged 40 and over switched to the new sys- 0% 10% 20% 30% 40% 50% 60% 70% tem. In the Dominican Republic close to 80 percent switched. Minimum Pension (Percent Average Earnings) Based on international experiences, the recommendations for Source: Robalino et al. (2005) and Whitehouse (2007). Lebanon are to: lowing criteria: · Make the new system mandatory for new entrants to the · It would be defined as a function of the average covered labor market and those younger than 35 or 40 years of age. wage in the NSSF (this is because in Lebanon there are no · Consider the possibility of allowing voluntary switching for official estimates of economy wide average earnings). A individuals older than the mandatory age but younger than 50. range between 15 to 20 percent would be appropriate. · Individuals older than 50 and those close to retirement · There would be an eligibility restriction of at least 20 years should not be mandated to switch to the new system. of contributions. · The eligibility age for the minimum pension would start at Should pension rights accrue even when contributions are age 65 and be indexed automatically with life-expectancy. This not paid? is critical to ensure the financial sustainability of the system. Trying to protect employees by allowing them to accrue pension · Ideally, the minimum pension would be a flat payment rights when contributions are not paid generates the wrong set (all plan members would be eligible) that is reduced as a of incentives. Indeed, employers would have less incentives to function of the contributory pension (e.g. 30 cents for each pay because they know that employees will receive pensions any increase of 1 dollar in the contributory pensions). way. Similarly, employees would have less incentives to monitor · The Law would also indicate how the annual cost of the payments since their pension would be unaffected. minimum pension is distributed between employees, em- ployers, and the Government. In other words, the Law would Accruing pension rights without contributions also generates not fix a contribution rate, since the cost of the minimum unfunded liabilities in the system and threatens its financial sus- pension and its evolution over time are unknown. Instead, tainability. Indeed, the NSSF would have to pay pensions even if the Law would define the share of total costs that will be contributions were not received. When these contributions can- financed by contributions from employees, employers and the Government. 5 Clearly, a gradual transition also implies having two systems running in parallel. But one is already there and the other will require addi- tional resources and information systems in any case First / Second Quarter 2009 / Lebanon 14 Lebanon not be collected the Government would need to intervene. two provisions; it simply should indicate that they will be Clearly, the Government has the obligation to ensure that em- introduced when the regulations for the pay-out-phase ployers respect labor market regulations, enroll their workers are prepared. in the social security, and pay mandatory contributions on · Allocate part of the contribution rate to a portfolio that time. This, however, is better done by ensuring the current pays a constant rate of return on contributions and that is Draft Law mandates: backed by non-tradable Government bonds6. The yield on · Having in place institutional arrangements to report mis- the bonds would be set in order to replicate the sustainable conduct and evasion. rate of return on contributions in a pay-as-you-go system · Imposing severe penalties on employers that evade. (e.g. the growth rate of the average covered wage). This · Developing institutional capacity to monitor and en- measure will ensure that only part of the retirement pack- force compliance. age is exposed to financial risks. How to protect retirees from financial crisis? How to ensure that workers savings are properly managed? The recent financial crisis has raised concerns about defined International experience indicates that sound governance and a contribution fully-funded pension systems, where pensions well structured approach to investment management can en- depend on the value of financial assets at retirement. Indeed, sure that the assets in a public pension fund remain secure and between September 2007 and September 2008 mandatory pen- achieve competitive long term returns. sion funds have had losses ranging between 8 and 30 percent of assets (see World bank 2008). Nonetheless, some of the con- In the case of Lebanon there is room to improve current gover- cerns are misplaced; if well designed, pension system based on nance and investment management arrangements. As it stands, DC-FF systems can be resilient to financial shocks. the Draft Law mandates the creation of an Investment Commit- tee reporting to the Board of the NSSF which is responsible for First, pensions are long-term investments and in the majority investment policies. This Committee is composed of five experts of countries where DC-FF systems have been introduced, gross and the Director of the NSSF. One of the members acts as the rates of return on assets have been positive. Second, over the Chairman. The Investment Committee is then responsible for ex- short-term, only a fraction of plan members are close to retire- ecuting investment policies. Following best practices, however, ment and therefore exposed to financial losses. For instance in the Board of the NSSF should not be responsible for designing Chile, the most mature DC-FF system, only 4 percent of plan or overseeing investment policies. Moreover, the Investment members would need to retire over the next 5 years. For them, Board should not be directly involved in the implementation of some form of time-bound guarantee on their principal could investment policies. be considered. Third, if the DC-FF system allows new retirees to gradually withdraw savings and differ annuitization, even The Law instead could consider the following alternative: those close to retirement can avoid financial losses. Finally, only · There would be an independent Public Investment Board few countries rely exclusively on DC-FF systems. In half of the (PIB) responsible for the overall management of the assets countries with DC-FF pillars, less than 50 percent of the pension of the new pension system. But its members would be re- wealth comes from financial assets. quired to fulfill qualifications of expertise and experience in the fields of finance, economics, and actuarial science. The In the case of Lebanon, to ensure that plan members are not Director of the NSSF would be part of the Board. And, in ad- over exposed to financial risks, the Law could incorporate the dition, there could be representatives from the Ministry of following provisions: Finance, and the Central Bank. · The Investment Board would be responsible and account- · Allow for deferred annuitization and phased withdrawal able for the strategic guidance and oversight of the man- at the time of retirement. This means that retirees are not agement of the assets of the pension fund. The Board would forced to transform their savings into a pension (i.e., pur- establish an overall investment strategy by defining long chase an annuity) when assets are undervalued. The Law 6 This is equivalent to allocating part of the contribution rate to a at this stage does not need to develop the details of these Notional Defined Contribution pillar like in the case of Poland, Sweden and soon Egypt Lebanon / First / Second Quarter 2009 15 term return targets, risk tolerance and risk management lar oversight and supervision of all of the activities of the procedures and an allocation among major investment Board, the Executive Officer, Custodians and Asset Manag- categories and instruments to implement the strategy. The ers, including the authority to obtain information and im- Board would then be responsible for monitoring the im- pose sanctions as required to achieve compliance with the plementation of the strategy and measuring performance requirements of the law and regulations. against the strategy. · The day to day operations of the PIB would be undertaken Conclusions and recommendations by an Executive Officer selected by the Board who would · The new pension system will benefit all Lebanese. Lebanon be supported by a team of technicians and administrative should not miss the opportunity to move forward with the re- form. However, certain technical problems with the current Law staff. The Executive Officer would then engage professional need to be corrected. asset managers to implement the strategic asset allocation · The new pension Law should specify the value of the mini- established by the Board and provide regular reports on mum pension guarantee as a percentage of average covered the performance of managers in relation to defined bench- earnings in the NSSF, and indicate how costs will be distributed marks. Asset Managers can be local or foreign companies. between employers, employees, and the Government. · Switching to the new system should be gradual and should In addition, the Law should ensure that: not involve individuals close to retirement. · A comprehensive regulatory and supervisory framework is · Employers need to be accountable for paying employees put in place to establish standards for the selection of the contributions: pension rights should not accrue if payments members and activities of the Public Investment Board and are not made. other parties in the pension system. The Law does not have · To reduce the exposure of plan members to financial risks, to develop the framework at this stage, but should indicate the new Pension Law should incorporate provisions for dif- fered annuitization. a time-frame to develop the necessary regulations accord- · The Government could also consider allocating part of the con- ing to international best practices. It should ensure that tribution rate to a portfolio that pays a fixed rate of return on members of the Board broadly represent the interests of contributions and is backed by non-tradable Government bonds. the members of the pension system, are free from conflicts · There is a need to improve current arrangements for invest- of interest in their actions and are held personally account- ment management. In particular, the Public Investment Board should be an independent institution whose members are se- able for their actions as members of the Board. lected on the basis of their professional qualifications and ex- · Assets of the funds are held by a third party custodian pertise in the management of pension funds. The PIB and any who may only follow proper instructions in their disposition asset manager involved in the implementation of investment and to be liable for any misuse of the assets. policies should be subject to regulation by the Central Bank. · Asset Managers meet a prescribed set of standards in- cluding minimum capital and experience levels, be engaged through standard written contracts at specified fee levels in an open competitive process, and be liable for the conse- quences of any deviations from the contracts. · The Executive Officer meet specific requirements for skill and expertise, fulfill regular reporting requirements to the Board, be free of any conflicts of interest and be required to follow the proper instructions of the Board. · There be a regular independent audit of the status of the pension funds and pubic disclosure of the results of the audit as well as regular disclosure of the investment perfor- mance of all fund managers and the fund as a whole. · A public body such as the Central Bank be provided with authority to establish, modify as necessary, and further im- plement regulations and have the responsibility for regu- First / Second Quarter 2009 / Lebanon 16 Gender-Based Differences Among Entrepreneurs and Workers in Lebanon - by Randa Akeel* A re there significant differences between the perceptions and d. Female entrepreneurs have a better perception of female labor market experiences of male and female entrepreneurs workers: 40 percent consider female employees as more skilled/ and workers in Lebanon? Are such differences important to the productive compared to 32 percent of male entrepreneurs. optimal deployment of females in the workforce? This report approaches these issues empirically through two surveys con- e. Female entrepreneurs listed financial and regulatory con- ducted in 20071. The first was a survey of 235 firms2 (109 fe- straints higher among investment climate challenges than did male owned and 126 male owned) and the second a survey of male counterparts. 64% percent of male entrepreneurs who 615 workers (342 females and 273 males). financed their capital or operations had access to a bank loan compared to only 48% of female entrepreneurs. Main Findings Entrepreneurs Workers a. Female entrepreneurs provide greater professional opportu- f. Female workers are better educated than male workers. Sixty nities for other females than do male entrepreneurs. On average five percent of female workers have completed college educa- 47 percent of the labor force in female owned enterprises was tion or above compared to 46 percent for males. In addition composed of women compared to 34 percent in male owned female workers tend to be single and younger. The average age enterprises. Seventy-three percent of female owned firms had of female workers is 31 while that of male workers is 35. Among Boards with 20-50% female members as compared to only 36 female workers 68 percent are single and 29 percent are mar- percent of male owned firms. ried. The corresponding numbers among male workers are 47 percent and 51 percent. b. Women entrepreneurs provide better treatment to workers and are especially sensitive to the needs of female employees. g. Female workers face more challenging working conditions. The survey data show that 50 percent of female-owned firms A female employee's request for leave for unexpected travel or offered family health insurance coverage to workers compared funeral attendance is five times more likely to be rejected com- to 37 percent of male-owned firms. Eighty percent of female pared to the same request by a male employee. The rejection employees were given maternity leave upon request in female- rate for sick leave requests by female workers is 11 times higher owned firms compared to 72 percent in male-owned firms. than that for male workers (Figure 1). c. In male owned firms more than 6 percent of female employees' Figure 1: Percentage of leave requests denied by gender requests for annual leave were rejected compared to less than 0.5 of the employee percent of such requests by male employees. However, in female 7 Female 6.0 owned firms only 0.53 of annual leaves submitted by women and 6 Male 0.1 percent submitted by male employees were denied. 5 4 4.0 3 3.7 2 1 1.2 0 0.3 0.4 % Other leave Annual leave Sick leave * Economist , MENA Region 1 The survey was held nationwide; however, most of the substantive re- sponses came from the Greater Beirut area where two thirds of business activities in Lebanon take place The data also shows that "leave discrimination" occurs most- 2 Although weights were developed to achieve population representa- ly for un-married females without small children. Leave re- tion, it should be noted that the firm samples do not provide a statistical jection rates for female and male workers with small children incidence of female entrepreneurship in the Lebanese private sector per se, however, given the small number of female entrepreneurs and employers in are practically non-existent and are almost the same (0.55 Lebanon as shown by other sources it can somewhat reflect the situation percent versus 0 percent respectively). on the ground. Annex 1 (of the main report) provides a detailed breakdown and explanation of the sampling and the data h. Younger women now tend to be more evenly spread across the main sectors of economic activity than older women (figure 2) For more information contact Randa Akeel Rakeel@worldbank.org. Lebanon / First / Second Quarter 2009 17 Figure 2: Female Employment by Sector be explored. Similarly loan guarantee programs for individual 100 6 4 1 0 loans such as those offered to students could be structured to 6 IT 8 4 5 19 Hotel & Restaurants support women wanting to pursue private sector related ini- 80 4 Construction tiatives. Business regulatory proceeding could be made easier 41 Services through one stop shops. 42 21 Commerce 60 41 Manufacturing The findings also show that some categories of female workers 40 17 17 20 (such as single women) find it more difficult to get leave for 60 various reasons. Married women (especially those with chil- 20 23 26 35 dren) appear to struggle in maintaining the same level of work 0 commitment compared to those not married, exhibiting high % 18-30 31-40 41-50 51-70 absenteeism and leave requests. In addition, the low level of i. Although income stability and high position are relevant to both married female workers in the sample suggests that more wom- female and male workers, non-wage conditions are especially en choose not to participate in the labor force when married. important for women. When asked to prioritize, female workers To support work for women with children government could stressed availability of flexible work, proximity to the home, no support initiatives for childcare such as extending the school child at home, availability of nurseries while male workers listed day, early childhood education and after school programs. In monetary factors such as fixed salary, benefits, and availability of addition, revisions to the labor law should focus on facilitating social security coverage. flexible and part-time employment regulations and conditions. j. Nearly 27 percent of the wage difference3 between male and In terms of areas for further research, a gender based analysis female employees is shown by statistical analysis to be plausibly of financing could highlight the ways by which women face attributable to discrimination. Wage gaps exist even within the these issues differently than men. In the Lebanese banking sys- same sector and occupation even after controlling for different tem, loans are highly collateralized and typically provided under levels of education4. However, the survey data show that the gen- an individual's name than to a company making it more difficult der wage gap does not exist for younger workers (under 30 years for women. In addition since the findings in this report pertain of age) while at the same time women are just as likely as men to formal sector firms. It would be useful to complement these to get promotions. with a gender ­based survey of the informal and micro enter- prise sectors as well. Conclusions The findings of this report show that compared to males, fe- male entrepreneurs tend to hire more women and to provide better working conditions to them (as well as to male workers). Thus making it easier for more women to become entrepreneurs should make a positive contribution both to female labor force participation and to working conditions in the country. Public policy should focus in particular on two key constraints that fe- male entrepreneurs face: access to finance and complex regula- tions. Examples include expanding loan guarantee schemes for small businesses such as the one offered by Kafalat in Lebanon to ease access to financing for SMEs. Setting up such a pro- gram that focuses on supporting female entrepreneurs could 3 Data is only for wages hence this does not refer to earnings 4 Differences in working hours: variables such as sex, age, and marital status affect the number of working hours. After controlling for these variables, there appeared no statistically significant difference in the number of working hours between female and male employees First / Second Quarter 2009 / Lebanon 18 Lebanon Partnership Program On August 2, 2007, the World Bank's Board of Executive Directors en- Lebanon to support the Government's reconstruction efforts follow- dorsed the World Bank's Interim strategy Note (ISN). The three pillars ing the recent hostilities. The money comes from the Bank's surplus, identified in the 2005 CAS continue to guide the Bank's program in and does not involve any additional debt burden for Lebanon. The Lebanon with a shift in focus on supporting early reform implemen- Trust Fund is being used to scale up existing projects and advance tation. The three pillars are: projects already under preparation. Part of the grant will go to the International Finance Corporation (IFC), the private sector arm of the (i) Governance for economic management and growth support; World Bank Group. The IFC, in close cooperation with the Govern- (ii) Development of human capital and the mitigation of the poverty ment, is preparing a program to rehabilitate Lebanon's private sector, effects of transition; and focusing, among other elements, on small and medium enterprises (iii) Resource and environmental management. and the removal of administrative barriers. The ISN presents a program for 12 to 15 months focusing on ana- At the request of the Government, the World Bank carried out an lytical assistance backed by financial resources to advance the imple- Economic and Social Impact Assessment, which in 2006 provided im- mentation of the medium term expenditure and social reform agenda. portant inputs into the preparation of the Government's reconstruc- The program includes two Development Policy Loans supporting the tion and reform program. The Government adopted this program on broader reform program with a particular focus on the energy and January 4 in advance of a Donor Conference which took place in Paris social protection sectors. on January 25 where the Bank pledged to offer up to $700 million over the next four years (2007-2011). Trust Fund for Lebanon During the September 2006 Annual Meetings, the World Bank's Board of Governors approved a grant of US$70 million for a Trust Fund for Approval Commitment Undisbursed Sector Board Closing Date Amount Amount Date in US$ M Ba'albeck Water and Wastewater Jun 02 43.5 18.2 Water Dec 09 Urban Transport Development Jun 02 134.7 80.6 Transport Dec 11 Cultural Heritage and Urban Development Apr 03 31.5 14.9 Urban Development Dec 09 Trust Fund First Municipal Infrastructure Nov 06 30 20.7 Public Sector Gov. Dec 09 Beka'a Emergency Water Mar 07 15 14.7 Water May 10 Emergency Power Sector Mar 07 5 2.9 Energy & Mining Jun 09 Emergency Social Protection Implementation Support Aug 07 1 0.1 Social Protection Mar 09 Second Emergency Social Protection Implementation Support Sep 08 6 5.6 Social Protection Mar 12 Emergency Financial Management Capacity Support Mar 09 4 - Economic Policy Sep 11 Lebanon / First / Second Quarter 2009 19 Lebanon Recent News and Events US$70 million Additional Financing Loan The World Bank and Parliament Team Up Agreement to the Transport Sector to Campaign for Power Sector Reforms and National Water and Sanitation Strategies The Ministry of Finance, the Council for Development and Re- construction and the World Bank signed on January 30, 2009 The Lebanese Parliament convened a two-day workshop on the an additional financing loan agreement in the amount of US$70 beleaguered water sector in Lebanon on February 27-28, 2009, million to the ongoing Urban Transport Development Project attracting a wide array of stakeholders from the public and pri- implemented by the CDR. vate sectors, as well as international donors. This seminar is part of the World Bank-Lebanese Parliament Seminar Series initiated in September 2008. The series aims to promote knowledge exchange and global best practices that could help shape development policies in Lebanon, as well as strengthen engagement with legislature, civil society and the private sector. This seminar was held under the patronage of Parliament Speaker Nabih Berri, was organized by the Parlia- ment's Public Works, Water and Energy committee with logisti- cal and technical support from the World Bank Water Sector and External Affairs teams. (L-R) Middle East Director Hedi Larbi, Minister of Finance Mohammed The water sector in Lebanon poses a serious challenge to the Chatah and CDR President Nabil Jisr at the signing ceremony Government's reform and development agenda. Although the country is blessed with resources, Lebanon has lagged behind The project seeks to improve traffic management, regulate the level of development in this sector which other Middle East on-street parking in selected zones, improve traffic flow along and North Africa have achieved over the years, largely because seven main corridors, improve transport planning, and organize of poor management, weak institutional capacity and financial public transport services. The project comprises five compo- constraints. The workshop concluded with an open discussion nents: (a) traffic management program; (b) parking improve- in which the diverse stakeholders agreed to submit written rec- ment program; (c) corridor improvement program; (d) technical ommendation to Parliament's specialized committee. The Com- assistance to the Ministry of Public Works and Transport for mittee will then discuss the recommendations, endorse them capacity building, transport planning, public transport regula- and submit to the Council of Ministers to promote the develop- tion, air quality management and transport feasibility studies; ment of a clear strategy for this ailing sector. and (e) project management. The additional financing will be used for three purposes. The first is to cover a financing gap in already committed contracts. The second is to cover the counterpart contribution to the proj- ect (the Bank would finance 100 percent of the contracts). The third is to finance activities appraised as part of the original project, but for which no other financier has been found. First / Second Quarter 2009 / Lebanon 20 Lebanon US$4 million World Bank Grant to the The World Bank and the Ministry of Ministry of Finance for Reforms Environment Launch a Country Environmental Analysis The Ministry of Finance signed on March 16, 2009 a US$4 mil- lion grant agreement with the World Bank to implement admin- The World Bank and the Ministry of Environment launched on istrative reforms at the Finance Ministry aimed at improving the March 12, 2009 the Country Environmental Analysis (CEA), an ac- management of funds and resources and making sure they are tivity aimed at assisting the Government in mainstreaming spe- fairly invested. cific environmental issues into relevant sector activities. In recent years, at the request of the Government, the World Bank undertook several surveys to assess the post-war cost of envi- ronmental degradation in Lebanon. The results were alarming. For example, the Cost of Environmental Degradation in 2000 was estimated at 565 million U.S. dollars per annum, or 3.4 percent of the GDP. After the 2006 hostilities, the Bank made another reas- sessment and the figure was in excess of 700 million dollars. From an economic perspective, these are unsustainable figures, hurting many potentially productive sectors, such as tourism, agriculture, water, and urban cities to name but a few. There also are serious social impacts on the health and the well-being of the Lebanese (L-R) Country Manager Demba Ba, Minister of Finance Mohammed citizens and their cultural heritage. Chatah, Director General of Ministry of Finance Alain Bifani The grant is a small part of a US$70 million trust fund that The CEA will go well beyond technical and diagnostics analy- the World Bank granted Lebanon following the July 2006 war sis by bringing in the "political economy" at play in two main to support a program of emergency assistance for economic areas: water and wastewater and solid waste. This will include and social recovery and allocated as follows: US$30 million the definition of strategic objectives and set mechanisms for to scale up the ongoing First Municipal Infrastructure Project, achieving them, as well as the preparation of a business plan US$15 million for an Emergency Water Supply Project for the and identification of additional investment needs to meet the Western Beka'a area, a US$5 million power sector technical as- requirements of these two critical sectors. sistance project, a US$1 million Emergency Social Protection Implementation Support Project to help accelerate and improve the quality of the Government's social sector reform package, and US$15 million in financial assistance from the International Finance Corporation, the private sector arm of the World Bank. Lebanon / First / Second Quarter 2009 21 Syria Short and Medium-Term Growth Prospects: Challenges and Opportunities - by Jorge Araujo*1 T he Syrian economy has undergone significant structural respond to the dramatic change underway in the composition changes over a relatively short period of time. These chang- of Syria's endowment of natural resources and the associated es largely respond to the Syrian Government's modernization decline in revenues from crude oil (see Box 1). efforts and to its decision to gradually transition towards a Syria's Twin Deficits social market economy, capable of generating productive jobs Declining oil production (and eventual depletion of oil reserves) is and allocating resources more efficiently, while preserving a already having a major fiscal and balance-of-payments impact. Af- strong focus on social welfare and human development. These ter peaking at 650,000 bpd in 1995, crude oil production has plum- modernization efforts are taking place in a geopolitical context meted to about 380,000 bpd in 2007. With declining output and in which Syria's international standing is changing rapidly and rising consumer demand for petroleum products, Syria's overall oil balance has turned negative in 2007. Oil production is expected to significantly. They also help address the challenge posed by the decline further over the coming years and eventually leading to decline in Syria's physical production of crude oil ­ once its depletion of recoverable reserves by 2030. main source of fiscal and export revenues. This article docu- ments these structural changes as well as the challenges and This phenomenon poses a dual problem for the Syrian authorities: opportunities facing the Syrian economy over the short and The need to offset the economic impact of falling oil production while searching for new revenue sources. Continuing implementa- medium terms. tion of policies aimed at fiscal consolidation and economic diversi- fication can prevent further deterioration of Syria's balance of pay- A. The Transition Thus Far: Economic Reforms and Struc- ments and fiscal stance over the medium. The chart below illustrates tural Changes the looming problem of the "twin deficits": Syria has embarked in a process of gradually moving away Syria's Twin Deficits (in percent of GDP) from a State-led growth model and towards a social market 12 economy. While economic reforms have been underway since 10 Oil Balance at least 2000, the gradual move away from a State-led growth 8 6 model was enshrined in the Government's Tenth Five-Year Plan 4 Balance of (TFYP), approved by the Parliament in 2005. The TFYP articulates 2 Payments the economic transition plan. Economic diversification and social 0 2003 2004 2005 2006 2007 2008 2009 -2 equity are the central themes of the TFYP, which covers a broad -4 Fiscal Balance array of economic reforms. -6 The reforms aim to strengthen both the real and finan- Syria's overall sound macroeconomic performance over cial sectors as well as to enhance the economy's ability to the past few years has complemented the progress made provide a robust supply response. Important progress toward on the structural front. Driven mostly by the non-oil sector, exchange rate unification has been achieved; the investment re- real GDP growth has averaged about 5 percent between 2004 gime is being liberalized; and trade liberalization has proceeded and 2008. In response, unemployment rates have consistently with a visible impact on the volume and composition of trade fallen over this period, from 12.3 percent in 2004 to 8.3 in 2006. flows. Furthermore, Syria's financial system is also undergoing a During the same period, inflation has tended to be confined to fundamental transition. While state banks still account for about one-digit levels2. 80 percent of the assets in the banking system, private banks have grown rapidly since first licensed in 2004. Seven conven- An important aspect of Syria's macroeconomic perfor- tional privately-owned banks as well as two Islamic banks ac- mance has been the effort towards fiscal consolidation count for approximately 17 percent of all banking assets. Private over the past few years. Public spending as a share of GDP insurance companies have been established in growing number showed a declining trend during the past few years, although since 2005, and the Damascus Stock Exchange has just been this has significantly affected capital expenditures (see chart 1). opened for business. These reform efforts are also critical to On the revenue side, preparatory work for the introduction of a * Lead Economist, MENA region 2 However, inflationary pressures largely brought about by rising inter- 1 With contributions by Hania Sahnoun, Chadi Bou Habib, Jamus Lim, national food and fuel prices in the first part of 2008 led to an estimated Stefano Mocci, and Fahrettin Yagci, which are gratefully acknowledged inflation of 14.5 percent for the year 2008 First / Second Quarter 2009 / Syria 22 Syria VAT is underway. On the expenditures side, the current and the The State-led development model is therefore giving way investment State budget have been unified under the Ministry to private sector-led growth in Syria. Propelled by improve- of Finance. In addition, the authorities launched in May 2008 a ments in the business environment and by the need to move away program to reduce fuel subsidies. Remaining energy subsidies from oil dependence, the private sector has assumed an increas- will be phased out and replaced by a targeted cash transfer pro- ingly important role. In fact, between 2000 and 2007, public sec- gram. The program would initially target the poorest 15 percent tor GDP grew at 1.1 percent per year, compared to the 7.2 percent of the population, and is expected to be launched by the Minis- growth of private sector GDP. In 2007, nearly two thirds of GDP try of Social Affairs and Labor in late 2009. was generated by the private sector. While relatively low com- pared to other countries in the region, credit to the private sector Chart 1: Government Expenditures, 2004-2008 (% of GDP) has grown from around 10 percent of GDP in 2003 to about 15 percent during the 2005-2008 period, with private banks becom- ing an increasingly important credit provider. Syria's move towards greater economic openness has been followed by a commensurate increase in external trade vol- umes and greater diversification. Total foreign trade ­ imports plus exports ­ increased by almost 25 percentage points of GDP, from 43.7 percent of GDP in 2000 to 67 percent of GDP in 2007 (see Chart 3). More importantly, Syria's export diversification pro- Partly as a result of the reform process, and partly as a cess has already begun, marking a shift away from oil dependence. natural reaction to the declining oil industry, the Syrian The share of fuel exports in total exports fell from 76.4 percent in economy has gone through major transformations during 2000 to 37.9 percent in 2007. In contrast, exports of consumer the first decade of the 21st century. Three areas should be goods rose from 8.9 percent of total exports in 2001 to 32.5 per- highlighted: (i) the increasing importance of non-oil activities; cent in 2006, while exports of intermediate goods rose from 1.8 (ii) the growing role of the private sector; and (iii) the expansion percent of total exports in 2001 to 12.4 percent in 2006. and diversification of foreign trade. Chart 3. Syria: External Trade Flows (% of GDP) The non-oil sector has become the engine of growth in the 80% Syrian economy. The shrinking oil sector has not prevented 70% 67.0 58.2 62.2 60.6 60% 52.0 healthy growth rates for the non-oil GDP, which on average grew 45.7 45.5 50% 43.7 more than 7 percent per year between 2004 and 2008. While ag- 40% Imports riculture remains the principal non-oil sector, the past few years 30% 20% Exports have witnessed a substantial growth in the finance and insurance 10% sector and, most notably, in wholesale and retail trade. Chart 2 0% 2000 2001 2002 2003 2004 2005 2006 2007 shows how Syria is fast becoming a "former" oil economy. Chart 2. The Non-Oil Sector as the Engine of Growth (in Bil- B. The Way Forward: Dealing with Short-Term Shocks and lions of Syrian Pounds) Deepening Ongoing Reforms 1400 Syria has been battered by short-term shocks coming from 1200 both the demand and the supply side. Plummeting global 1000 output and trade combined could have a significant impact 800 Non-Oil GDP on Syria in 2009. A decrease in exports, tourism, remittances, 600 Oil GDP and foreign direct investment is already be at play. The global 400 downturn is expected to decelerate the recent growth in tour- 200 0 ism as well as in foreign direct investment, and to reduce re- 2003 2004 2005 2006 2007 mittances from expatriate workers as job losses mount in the GCC countries and other "labor-importing" countries. There is Syria / First / Second Quarter 2009 23 some evidence that GCC investment flows in real estate projects fects" as the risk of default of their clients may increase as a result have nearly ceased. Recent gains from reduced unemployment of weakening demand. may be temporarily reversed by the downturn. The external de- · On the private sector development side, continuing with mand shock has been compounded by a domestic supply shock, reforms aimed at improving the investment climate are probably namely, a severe drought that is entering its third year, with se- the best response the government can give to depressed "ani- vere impact on agricultural output and potential upward pres- mal spirits" on the part of investors affected or influenced by the sure on domestic prices. global crisis. Continuing progress on major reform areas would impart the Syrian policymakers would also benefit from sector-level Syrian economy greater resilience to withstand the shock- assessments of constraints and opportunities to sustained, waves from crises, both present and future. To support the broad-based growth. For example, the agricultural sector--ac- reform process, a sequenced, time bound growth strategy should counting for about 25 percent of Syria's GDP ­ is internationally be developed to guide the next steps towards a social market competitive in some products (such as olive oil and certain nuts), economy. Critical areas requiring sustained efforts ­ many of while being highly protected and inefficient in others. Syria's in- which are already underway ­ include: frastructure also needs to be significantly modernized ­ together with putting in place the appropriate regulatory framework ­ in · On the social and human development side, continuing key areas such as transport, electricity and water and sanitation. progress in strengthening social protection mechanisms ­ while Developing the legal and institutional framework for Public Pri- phasing out inefficient and inequitable universal subsidy schemes vate Partnership (PPP) would help encourage private sector en- ­ is essential to mitigate the adverse impact of external demand gagement in infrastructure projects. Finally, strengthened water shock and drought on Syria's population. Unemployment insur- and wastewater management would have positive spillovers at ance and targeting mechanisms are among the key social policy the regional level, with direct benefits not only to Syria but also to reform priorities. Furthermore, investments in improving the Iraq as well as countries in the Mediterranean basin. quality and cost effectiveness of education and health care are required to sustain human capital accumulation, thereby increas- Therefore, the Government of Syria should not be swayed ing social welfare and labor productivity. by short-term setbacks associated with the global crisis. The · On the fiscal side, the limited space for additional fiscal ex- response to these short-term shocks should be designed with pansion requires renewed attention to (i) strengthening public longer-term goals in mind. While mitigating the impact of the financial management; (ii) rationalizing and increasing the effi- global crisis, the Government should sustain and accelerate the ciency and effectiveness of public spending, particularly through implementation of its program to build a stronger, diversified, the phasing out of fuel and other subsidies; and (iii) finding non- competitive and more resilient economy. oil sources of fiscal revenues, such as introducing a VAT, expected for 2010, simplifying the income tax regime and strengthening tax administration. ·On the trade side, export diversification in goods and services needs to be deepened, with a particular focus on (i) identifying rising sectors with strong export potential and competitive edge, including tourism and cultural heritage; (ii) improving the effi- cacy and efficiency of existing arrangements for free zones; and (iii) developing an appropriate export incentive system. ·On the financial sector side, it is key to implement the ac- tions identified as part of the Financial Sector Assessment (FSAP) recently conducted by the Bank and the IMF in cooperation with the Central Bank and the Ministry of Finance. This is all the more important as Syrian banks might be affected by "third round ef- First / Second Quarter 2009 / Syria 24 Fast Growing Cooperation with Syria: Advisory and Technical Assistance S yria has embarked on a comprehensive program of reform A Public Financial Management System (PFMS) already is aimed at transitioning towards a social market economy, with under preparation by the Ministry of Finance. The system aims the underlying theme of economic diversification to sustain high at improving fiscal control by linking policy and budget man- job-creating growth that is well distributed among its people. agement; supporting budget integration to increase the focus on service delivery/quality, and improving fiscal/budget report- To support this transition, Syria is engaged with the World ing to improve performance and transparency. Bank in a development program that comprises technical as- sistance and advisory services in the areas of economic growth The Ministry of Economy and Trade (MoET), with Bank support, and transition, human development and social protection, and is preparing a Review of Trade Policy Reforms to help the gov- sustainable development. ernment sequence and prioritize its trade policy reform efforts as part of a coherent strategic framework. The review is being Specifically, in support of the transition to a social market econ- conducted in two stages. The first, diagnostic stage, which is omy, the Syrian Government is preparing with the Bank's support underway, aims to assess the progress so far in reforming the a Country Economic Memorandum (CEM) focusing on non-oil trade regime and to identify the areas where further work is sources of growth. In collaboration with the Office of the Deputy needed in order to: (i) deepen trade policy reforms to achieve Prime Minister for Economic Affairs, the Bank will review Syria's greater economic efficiency and competitiveness; and (ii) ex- economic reform process to date and examine the main opportu- pand and diversify non-oil exports. In the second stage, in- nities for, and constraints to, broad-based economic growth. depth studies will be undertaken in some of the areas identified during the diagnostic stage - such as non-tariff barriers, export The Government has also launched with the Bank's assistance a processing zones, trade financing and export promotion - and a review of its fiscal, public financial management and governance time-bound action plan will be prepared for immediate imple- issues. Additionally, the Ministry of Finance is moving towards mentation by the MoET. a Medium Term Expenditure Framework and results-oriented budget. To this effect, the ministry and the Bank have initiated To support private sector development, the MoET, also with work on a Public Expenditure Review (PER), which will pro- Bank support, is conducting an update of its 2005 Investment vide analysis and tools, which the Ministry of Finance can use Climate Assessment through a new survey of private enter- to enhance fiscal discipline, strategic prioritization of resource prises to provide up-to-date information and advice to the allocation and effectiveness and efficiency of public spending. Government on priorities for investment climate reform. In this The PER will be complemented by a Country Procurement As- connection, the Bank and the government jointly organized, in sessment Report (CPAR), which will assess procurement and early March 2009, a workshop on Doing Business (DB) Indica- contract management practices following the implementation tors, to build the government's capacity in understanding the of the new procurement law. It will also present recommenda- methodology underpinning the DB survey, and identify poten- tions and an action plan proposed for Government implementa- tial reforms to improve the business environment. During the tion with a view to improve the procurement system in Syria. workshop, participants discussed and agreed on a reform action plan, which will be implemented by the authorities. The Government of Syria and the Bank are working closely on the preparation of a workshop on good governance. A Gov- Moreover, the Bank is also engaged in providing capacity build- ernance Symposium, under the auspices of the Deputy Prime ing to the Public/Private Partnerships (PPP) Unit in the Prime Minister for Economic Affairs, will be held in May 2009 and Minister's Office to enhance its ability in carrying out PPP will address, through targeted sessions, crucial issues such as transactions, establishing an appropriate institutional frame- civil service reform, corporate governance, the role of non- work, and sharing with counterparts lessons from international governmental actors, public financial management, control of experience. The World Bank has mobilized a grant from its Pub- corruption, and governance indicators. It is expected that, based lic-Private Infrastructure Advisory Facility (PPIAF) to cover the on event's policy and technical discussions, an Action Plan for cost of additional technical assistance agreed for the prepara- Further Improving Governance will be developed and proposed tion of PPP policy paper, review and finalization of a PPP law, for implementation by concerned institutions. and the establishment of an appropriate institutional frame- Syria / First / Second Quarter 2009 25 work for PPP in Syria. This will help Syria attract private sector An Electricity Sector Strategy Study is being prepared in col- investors in infrastructure projects currently under preparation laboration with the Ministry of Electricity. It aims to identify by the authorities. options to improve the financial and technical performance of the electricity sector, particularly on cost-effective ways to re- To enhance its capacity for economic survey processes and duce the electricity demand and supply gap. It will also provide analysis, the Syrian Central Bureau for Statistics is working with options for sectoral reforms and institutional changes needed the Bank through a Trust Fund for Statistical Capacity Build- to improve the efficiency and quality of service delivery and to ing to secure technical assistance on economic surveys. Three enable private participation in electricity sector investments. main areas have been identified: the design of questionnaires, support to the conduct of the surveys and capacity building on Finally, the Bank is working with the Ministry of Transport on the data processing and analysis. development of the sector. In this area, the work is specifically focusing on the role and importance of the transport sector in In the area of human development and social protection sup- the Syrian economy; the development of a framework for as- port, the Bank and the Ministry of Social Affairs and Labor have sessing the sector's investment priorities to improve efficiency been working for more than two years on enhancing Syria's and effectiveness of urban transport systems in major Syrian policy making and implementation capacity in social pro- cities; and ultimately draft a national transport action plan. tection. Specifically, this task aims to enhance the capacity of the Ministry of Social Affairs and Labor to analyze and improve implementation of social protection policies and programs. Ca- pacity development activities target two areas of social protec- tion, namely social safety nets and pension reform. In this con- nection, a Regional Conference on Employment and Growth under the MILES framework was held in Damascus in March 2009, to assist the governments of Syria, Lebanon and Jordan in developing to develop an integrated policy framework for con- tinued reform focusing on alleviating the binding constraints to growth and job creation in the sub-region. Complementing the ongoing work on Social Protection, a multi- year technical assistance program was recently launched on Reform Options for Social Insurance (Pensions and Unem- ployment Insurance). This will support the Ministry of Social Affairs and Labor, and the Prime Minister's Office, in designing and implementing options for pension and unemployment in- surance systems. This includes examining the fiscal feasibility and options for introducing viable forms of social insurance. Together with the Ministry of Education, the Bank is working on the development of a comprehensive Education Sector Strategy. The strategy will review issues in the pre-tertiary education system and provide recommendations for reform www.catalyst-me.com of the sector. The strategy will be complemented by analyti- cal work on public spending in education as part of the over- all PER exercise, assessing efficiency and equity of education expenditures (and outcomes). Financial crisis First / Second Quarter 2009 / Syria 26 Syria Recent News and Events Regional Conference on Growth and Job Creation in Syria, Jordan, and Lebanon The World Bank convened a regional conference titled "An In- tegrated Approach to Growth and Job Creation in Syria, Jordan, and Lebanon" in Damascus on March 22-24, 2009. The confer- ence was held under the auspices of Deputy Prime Minister for Economic Affairs of the Syrian Arab Republic Abdullah Dardari and in cooperation with the Ministry of Economy, and the Min- istry of Social Affairs and Labor. (L-R) Human Development Coordinator for Lebanon, Syria and Jordan, the World Bank Haneen Sayed, Deputy Prime Minister Dardari, Minister of Social Affairs Diala Hajj Aref, World Bank Mideast Director Hedi Larbi Participants included high level representatives from various ministries/agencies from each of the three countries. The con- ference exposed the participants to the MILES framework (Mac- roeconomy, Investment Climate, Labor, Education, and Social Protection) and to its five components in theory and practice. It also presented examples of integrated policies already taking place in the region (Jordan social insurance and labor reforms, for example). MILES provides a framework to integrate sector policies within a cross-sector program to promote the creation of good quality jobs. Implementation of MILES requires work at three operational levels: · Technical work and policy analysis within sectors to im- prove the effectiveness of current programs; · Policy coordination across sectors to avoid contradiction and exploit synergies; and · Assessing tradeoffs in the implementation of policies/ www.travelkris.com programs across sectors given fiscal, human resources, and institutional constraints. Tetrapylone, Palmyra, Syria Syria / First / Second Quarter 2009 27 Jordan Education Reforms for Knowledge Economy: From ERfKE I to ERfKE II - by Sophie W. Warlop.* and Haneen Sayed** "T he Hashemite Kingdom of Jordan has the quality com- Box 1: Education Indicators petitive human resource system to provide all people with long-life learning experiences relevant to their current and Jordan's education indicators have improved consistently since the future needs in order to respond to and stimulate sus- mid-nineties. The illiteracy rate is 8.9 percent, the third lowest illit- eracy rate in the Arab world; the primary gross enrolment ratio has tained economic development through an educated popu- increased from 71 percent in 1994 to the 98.2 percent in 2006; the lation and a skilled workforce". With these words from His transition rate to secondary school has increased from 63 percent to Majesty King Abdullah II, delivered at the "Vision Forum for the 97 percent over the same period; and the transition rate to higher Future of Education" held in September 2002, Jordan embarked education has varied between 79 percent and 85 percent of second- on an ambitious and comprehensive program for education re- ary school graduates over the past five years. Jordan also ensures a form called Education Reform for Knowledge Economy (ERfKE). high level of gender parity in access to basic services. As a result, it has achieved 90 percent parity in literacy, full parity in primary and Under the leadership of the Ministry of Education (MOE), this secondary enrollment, and increased life expectancy for both sexes. program has now entered its sixth year of implementation and In the years between 1999 and 2007, Jordan made significant gains is currently regarded as a model for education reform through- on international surveys of student achievement, with a particularly out the Arab region. The first ERfKE project is nearing comple- impressive gain of almost 30 points on the science portion of the tion and the second ERfKE project will be approved shortly. Trends in International Mathematics and Science Study (TIMSS) over that period. While these gains cannot be attributed solely to the im- pact of the investment in the ERfKE program, they nonetheless sug- Background gest that Jordan has established significant positive momentum in Education has long been a priority investment for Jordan. In 2003, student performance which continued investment should support. the Government of Jordan (GoJ) entered into an agreement with the World Bank and other partners to initiate and implement the first phase of a reform program entitled Education Reform for istry without impacting significantly on organizational change. the Knowledge Economy (ERfKE I) "to support the Government of Areas where progress was slower were those that involved sig- Jordan to transform the education system at the early childhood, nificant organizational change (decentralization, institutionaliza- basic and secondary levels to produce graduates with the skills tion of strategic planning), and those that required a change in necessary for the knowledge economy." ERfKE I was supported behavior of teachers and officials (new pedagogy and classroom by 12 donors, led by the World Bank, under the auspices of the practices, new management roles). This is a fairly predictable out- Ministry of Education (MoE) which ensures that the donors' op- come with a system reform of this magnitude ­ it is easier to erations converge towards the set development objective. bring about changes to documents, procedures and policies than it is to transform organizational structures or human behavior. The ERfKE I project, currently in its final year of implementation, has provided significant outputs needed for the next phase of From ERfKE I to ERfKE II: Getting Down to the School Level reform. These outputs include: (i) formulating a strategic devel- Jordan's education system today needs to continue to accel- opment plan for the sector with clear goals and objectives; (ii) erate the pace of reform of pre-primary, basic and secondary re-defining the learning outcomes for all subjects from grades education in order to support Jordan's aspirations for employ- 1 to 12; (iii) developing new curriculum, teacher guides, learn- ment creation, stimulation of economic diversification, income ing resource materials and learning assessment tools for all generation and reduction of poverty. subjects; (iv) delivering intensive teacher training; (v) equipping schools with ICT infrastructure and related e-learning resource While very significant strides have been made with regard to de- materials; (vi) building new schools; and (vii) initiating quantita- veloping and implementing systemic reforms of the curriculum, tive and qualitative development of the early childhood devel- learning materials, learning assessment, and introduction of in- opment sector (see Box 2). formation and communication technologies into both learning and management, there is not sufficient evidence yet of impact These outputs are significant. However, they remain in the realm of of many of the most important innovations at the level of the system changes directed by the centralized authority of the Min- school and the classroom. In addition, the institutional frame- * Program Analyst work and capacity to manage the reforms need to be further ** Human Development Coordinator for Lebanon, Syria and Jordan strengthened to sustain the gains made in ERfKE I, and embed First / Second Quarter 2009 / Jordan 28 Jordan Box 2: Key Achievements under ERfKE I ERfKE II will be guided by the following principles: (i) an im- perative to focus on the school as the locus of change while · Development and dissemination of National Education Strategy continuing to support the enhancement of institutional frame- (2006). work and capacity building at the central level; (ii) the need for · Re-definition student learning outcomes for all subjects Grades a focus on teachers as the key actors in change; (iii) the need 1-12 (emphasizing performance of skills and competencies based on relevant curriculum content). for the ministry to serve as a facilitator and driver of change · Design and development of new curriculum: textbooks, teacher as opposed to being an implementer of change, which was its guides, learning resource materials (including e-content) and learn- predominant role during the first phase of the reform; (iv) the ing assessment tools. need to direct capacity building at the decentralized level; and · Delivery of teacher training for all teachers (new curriculum, (v) the adoption of a participatory approach as opposed to a teaching strategies, ICT as a tool for learning. · Extensive upgrading of schools with ICT: infrastructure and access directive approach. to e-learning materials (2700+ connected to the high-speed (ADSL) The following sector issues will capture close attention during learning network). the next phase of the ERfKE reform. · Improvements in quality of physical learning environments (159 · System Management: The challenge in the next phase new schools, 466 classroom extensions, 177 KGs renovated and will be to move down to the school level in order to ensure equipped). that learning gains are achieved at the level of the school · Establishment of new ECE system (curriculum, training, resources) related to international standards for early childhood education and and the classroom. increased access. · Policy and Strategic Planning Capacity: The MoE man- · Initiation of a monitoring and evaluation culture and capacity for agement system needs a significantly strengthened policy assessment of the results of reform interventions. and strategic planning capacity, including an institutional- ized monitoring and evaluation function that will guide the development of a more decentralized system. the reforms into the system at every level down to the school · Quality: In international assessments (TIMSS & PISA), Jor- and classroom. Measures taken in governance and decentraliza- dan has performed well in comparison with other countries tion need to be consolidated by further clarifying the roles and in the Region, but well below many countries at comparable responsibilities of various actors and by enhancing the capacity of income and education expenditure levels, and at or below the field directorates to effectively support the decentralization the international averages. National assessments have re- process. Furthermore, taking into account the initiatives that are vealed that the majority of students still perform below on-going at the field directorate and the school level to modern- desired achievement levels. In addition up to 30 percent of ize the overall administration and establish a performance-based students drop out before completion of 12th Grade. management system, there is a need to increase accountability · Teacher Policy: There are significant challenges regarding in school management, to empower communities, and to create teacher recruitment, utilization, professional development and more effective partnerships with civil society. morale. There is still a relatively low level of actual use of the new methods and approaches in the classroom, and the new learning materials are often used in a conventional teaching approach. With the exception of early grade primary teach- ers, most teachers enter the classroom without any sustained training in pedagogical approaches or basic classroom skills. · Physical Facilities: A recent school utilization study indi- cates that the number of MoE students is expected to increase by 124,634 between 2008 and 2013. There will be a need to provide an additional 3,360 classrooms over this time period. The same study also reveals a dichotomy in the provision of educational infrastructure in the Kingdom. There exists con- currently considerable excess capacity and wide-scale over- crowding of schools ­ much of it linked to rented facilities. Jordan / First / Second Quarter 2009 29 · ECE (Early Childhood Education): Significant achieve- · Quality Physical Learning Environments. The objective ments in construction, teacher training, curriculum develop- of this component is improved provision of quality education ment, teacher professional development, parent involvement facilities in a cost effective and sustainable manner so that and standards setting have helped make this one of the more students have access to environmentally friendly and effi- dynamic elements of Jordan's education system. Yet signifi- ciently operated quality physical learning environments. A cant challenges remain: continued expansion of access to detailed planning analysis has assessed the current situation Kindergarten Year Two (KG2) for the roughly half of children regarding access to and utilization of physical facilities, and without access to KG2 classes competes with growing de- has revealed the need for further substantial investment in mand for greater public investment in Kindergarten Year 1 construction and rehabilitation to reduce overcrowding and level provision; poor urban communities and children in rural accommodating projected enrolment increases, while facili- areas compete for access to public provision; quantitative ex- tating more efficient utilization of underutilized schools. pansion competes with the need for consolidation of quality. · Technical, and Vocational Education and Training ERfKE II builds on the experience and achievements of ERfKE (TVET): Enrollment in secondary vocational education as a I and is guided by international best practice. Its strategic fo- share of total secondary enrolment declined from 18 percent cus reflects a deliberate emphasis on ensuring that the system in 2000 to 12 percent in 2005, suggesting a critical demand changes (curriculum and assessment reform, teacher develop- side problem, at a time of growing need for skills for the eco- ment, policy and strategy capacity) are manifested in changes nomic transformation articulated in the National Agenda. in learning outcomes in schools and classrooms. ERfKE II is ex- This suggests the need for significant realignment of MoE pected to garner similar donor support for the program that ER- vocational programs based on input from the employer com- fKE I has enjoyed. The success of ERfKE will be measured by in- munity and deeper analysis of labor market information. creases in national assessments scores aligned with knowledge economy skills; increase in enrollment rates at the KG2 level ERfKE II includes the following five components: (as well as modest increases at the secondary level); increase in · Establishment of a national school-based development schools implementing school improvement plans; application of system. The component will focus on the creation of an effec- national teacher standards; increase in employer satisfaction in tive, school-based development process as the main vehicle to skills and abilities of labor market entrants holding vocational deliver to all young people of the Kingdom a quality education education certificates; and the decrease in number of underuti- focused on developing the abilities, skills, attitudes and values lized and overcrowded schools. associated with a knowledge-based economy. In each school, a school self-evaluation process will lead directly to the pro- duction of the school's own school development plan. · Policy, Planning, Monitoring and Evaluation, and Or- ganizational Development to fully support and inform the adoption of a school centered approach to the delivery of education services. · Teaching and Learning Resources. The objective will be to review and develop teacher employment, utilization and professional development policies and practices, fine-tune a limited range of curriculum and student assessment ar- rangements made under ERfKE I, and ensure support for as- sociated new developments. Photo by moogdroog. · Special Focus Program Development. The objective of this component is to improve inclusive access to learning for all children in Jordan through special focus on three critical subsectors: early childhood education, special edu- cation and vocational education. Petra, Jordan First / Second Quarter 2009 / Jordan 30 Jordan Partnership Program The Joint World Bank-IFC country assis- · reforming social assistance and ex- grants focusing on renewable energy, en- tance strategy for 2006­10 is aligned with panding inclusion; and ergy efficiency, and environment. The Bank the government priorities, as expressed · restructuring public expenditures. and the Greater Amman Municipality also in particular in the National Agenda, of signed an Emissions Reduction Purchase poverty alleviation and the creation of Portfolio Agreement, the first municipal carbon fi- higher productivity jobs, while assisting The active portfolio includes seven active nance partnership in the Middle East. the country in its transition through the projects for a total of $303.5 million focus- medium-term economic shocks. The pro- ing on assisting Jordan achieve a regionally Overall performance of the portfolio is good, gram revolves around four clusters: balanced and equitable growth including both from the perspective of implementa- access to services, employment oppor- tion and development impact. This reflects · strengthening the investment en- tunities, and private investments outside the generally good project implementation vironment and building human re- Amman, enhancing social protection, re- capacity of Jordanian institutions, Jordan's sources for value-added, skill-inten- forming the general education and the vo- strong ownership of the program, and the sive, and knowledge-based economy; cational and training sectors. The portfolio quality of the dialogue between the Bank · supporting local development also includes a partial risk guarantee for and the government of Jordan. through increased access to services the construction of the Amman East power and economic opportunities; plant, four global environment facility Approval Commitment Undis-bursed Sector Board Closing Date Amount Amount Date in US$ M Investment Lending First Education Reform for Knowledge Economy Project May-03 120.00 7.05 Education Jun-09 Amman Development Corridor Jun-04 71.00 39.65 Transport Dec-11 Regional and Local Development Project Dec-06 20.00 18.61 Urban Development Dec-11 Cultural Heritage, Tourism and Urban Development Project Jan-07 56.00 49.00 Urban Development Sep-12 Employer Driven Skills Development Project Jun-08 7.50 6.98 Education Sep-13 Social Protection Enhancement Project Jun-08 4.00 3.99 Social Protection Aug-13 Amman Solid Waste Management Project Sep-08 25.00 25.00 Urban Development Jun-14 Guarantee Amman East Power Guarantee 45.00 45.00 Energy and Mining Global Environment Fund Conservation of Medicinal/Herbal Plants May-03 5.00 2.18 Environment Dec-09 Integrated Ecosystems/Rift Valley Jun-07 6.15 5.40 Environment Jul-13 Promotion of a Wind-Power Market Jun-08 6.00 6.00 Energy and Mining Dec-12 Energy Efficiency 1.00 1.00 Energy and Mining Jun-11 Montreal Protocol Ozone Depleting Substance (ODS) Phase-out II Oct-96 5.00 0.41 Environment Jun-10 Carbon Finance Amman - Ghabawi Landfill Gas to Energy Project Jan-09 15.00 15.00 Urban Development - Jordan / First / Second Quarter 2009 31 Iraq Iraqis, World Bank Defy Risks For Socio-Economic Data - by Susan R. Razzaz* O n January 12, 2009, Iraq's Ministry of Planning and the is descriptive, not analytic--dozens of demographic, social, World Bank released the first statistical results of the broad- and economic variables broken down by age, sex, urban/ru- est and most systematic household survey ever undertaken in ral, governorate, income and expenditure groups, and so forth Iraq. The yearlong study collected socioeconomic data from a (See illustrative highlights on the facing page.) The report also representative sample of the entire national population. Bagh- includes a technical description of the objectives and methodol- dad and each of Iraq's 18 governorates were included --120,000 ogy, the full questionnaire, supervision forms, and the training persons living in 18,000 individual households in all. manual that guided interviewers in the field. A Milestone in Reconstruction Data of this sort is particularly significant in light of the plan- Publication of the Tabulation Report from the Iraq Household ning and reconstruction challenge that Iraq faces. The country Socio-Economic Survey (IHSES) is a milestone in the recon- desperately needs to revitalize its economy and to diversify be- struction of Iraq. Despite its long history as a regional leader yond its current oil dependency. Tens of thousands of new jobs, in higher education and research, Iraq's human resources and especially for young people, need to be generated in the private institutional capacities were badly decimated during two long sector. The country's current food rations program, a relic from decades of upheaval and isolation. Tens of thousands of trained the embargo-era, is nearly universal in its coverage, but is also professionals--in critical technical fields such as statistics, eco- vastly inefficient. Reforms are needed to create a food program nomics, and computer science--lost not just their jobs. Many that is effective and well targeted in protecting the poor, and ef- fled the country, or indeed, lost their lives. ficient in the use of public resources. Iraq's formerly excellent education and health systems need to be rebuilt and modern- The most recent survey of income and expenditure was carried ized. After decades of neglect, the country's physical infrastruc- out not only 20 years but also several wars ago. In the interven- ture--especially in the regions that are poorest and most bat- ing years, similar field surveys covered some but not all parts tered by war--must be rebuilt and planned for the future. of the country. The more recent surveys included income and expenditure data but not related socioeconomic information IHSES data is now becoming integral to analysis, policy plan- on education, health, infrastructure, and so forth. Most of the ning, and public debate. A High Committee representing Parlia- questionnaires from the 2002 survey were lost, when the offices ment, the prime minister's office, planning and finance, key line of the Central Organization for Statistics and Information Tech- ministries, the Kurdistan Regional Government, and national nology (COSIT, the national statistics department) were looted in universities is currently drafting a national Poverty Reduction 2003. The Consumer Price Index (CPI) in use today is based on Strategy. On a particularly contentious issue such as how to woefully outdated 1993 data. transition from a universal food, ration system to a targeted safety net, policy makers must first know who is poor, where, The recent IHSES survey differs from previous surveys not only how food rations are currently used, and how various groups in its coverage but also in its technical soundness. Internation- would be affected under competing reform scenarios. Similarly, ally recognized methods and extensive quality control were ap- improving education requires first knowing whether children plied. The 360-question survey instrument--filled out for more are not attending schools, where; and if not, why not. (Are the than 120,000 individual respondents--generated roughly 44 schools too far away? Are children working? Is the cost of edu- million separate pieces of information. Yet with widely acces- cation too high? Is the return to education too low? ) sible software tools such as SPSS and Stata, this vast database is also notable for the relative ease with which it can be updated, The IHSES data set is particularly useful because it includes in- shared, and analyzed. come and expenditure information that permits analysis of the causes of poverty. Living conditions surveys do not provide this The IHSES Tabulation Report completes the first component of level of information. The database is also providing practical the Household Survey and information for calculating national accounts and for updating Policies for Poverty Reduction (HSPR) project, a technical sup- the outdated Consumer Price Index. The national poverty strat- port agreement signed with the Government of Iraq in 2006. egy, to be completed by July 2009, is based on the poverty line The 986-page report provides a first look at the new data. It and poverty analysis conducted using the IHSES study. * Senior Economist, MENA region First / Second Quarter 2009 / Iraq 32 Iraq An Emerging Statistical Snapshot of Iraq Today Labor force participation and unemployment. Labor force participa- tion rises with level of education. Among persons 15 or older, only 24.2% Adverse environmental conditions. The following percentages of of the illiterate participate in the labor force, compared with 92.6% people suffer from these conditions in their housing: stagnant water among those with higher degree. The overall unemployment rate was (56.4%); insects and rodents (49.9%); excess humidity (39.0%); near- 11.7% for both men and women, though higher among young adults by open sewage outlets (36.3%); nearby garbage and dirt (36.1%); (16.9% for 20-24 year-old men and 35.7% for 20-24 year old women. security risks (30.7%); insufficient light (28.2%); foul odors (28.2%); dust (28.1%); noise (22.0%); insufficient ventilation (15.1%); smoke Rations. 99.7% of households have at least one ration card. During and gases (13.8%). the period of the survey, 79.1% of households received wheat rations during the previous month, but only 58.1% received their ration of Water supply. 81.3% of individuals live in dwellings connected to rice. Wheat flour received as rations accounted for 55.4% of total public water networks--from 98.3% of housing units in Baghdad to wheat flour consumed in the previous month. just 45.6% in rural areas. However, only 12.5% of persons who are connected to the public network report that their supply of water is Assistance. 60.7% of Iraqi households received some form of as- stable. 29.2% report daily interruptions; 17.6 report weak water sup- sistance during the previous year, including 44.1% from government, ply; and 16.4% report interruptions more than once a week. In rural 14.2% from friends and relatives, 2.1% from international organiza- areas, 45.6% of households are connected to public networks; while tions, and 0.3% from private organizations. 26.1% use rivers and creeks; 9.5% use tanker trucks; 8.2% use open wells; and 4.7 use public taps. Risks from violence. During the past 12 months, 6.6% of house- holds were directly affected by violence due to the abnormal security Electricity. The public electrical grid is identified as the main source situation; 3.0% were affected by kidnappings and threats to life; and of electricity for 76.4% of individuals; however, it provides on average 2.9% were affected by other violence 30.7% of individuals live in of only 7.9 hours of power per day. The lowest rate is in Baghdad, housing where they are affected by security risks. with only 5.0 hours of power supply per day. Only 22.4% of persons are able to rely solely on the public network for electricity to their Sources of income. Overall, households receive 45.3% of their income housing unit. 75% of individuals supplement the public network with from wages and salaries, 25.0% from self-employment and employer one or two other power sources. On average, community generators income, 19.8% from property income, 5.2% from social security, and provide 6.4 hours and private generators provide 4.0 hours of ad- 9.9% from transfers. However, this varies geographically. For example, ditional power per day. wages and salaries account for 31.4% of household income in Al-Najaf but 56.7% in Basrah; self-employment and employer income" for 8.8% Human consequences of civil strife. 4.9% of all injuries during in Diala but 43.1% in Al-Najaf; and property income for 14.2% of the previous month were attributed directly to civil conflict. The per- household income in Al-Muthanna but 27.3% in Erbil. centage of disabilities caused by war, civil conflict, and land mines (14.1%) is approximately equal to disabilities caused by chronic dis- Distribution of expenditures. Overall, 35.6% of household expendi- ease (14.0%). However, the percentage attributed to war, civil armed ture goes to food--ranging from 24.1% in Erbil to 44.5% in Al-Anbar. conflict, landmines, chemical strikes, depleted uranium (14.3% taken 29.0% goes to housing, water, gas, electricity, and fuels. 10.4% of together) is slightly greater than the percentage of disabilities related expenditure goes to transportation--ranging from 4.2% in Diala to to nonwork-related diseases. 20.6% in Erbil. I was arrested twice. Once another researcher For me, the hardest part of interview was the I did help them as much as I could. Igave them was arrested with me, and they confiscated second part--asking about women's underwear. money from whatever I had. But afterward, our computer. I'm a man. not during my work. I couldn't do that during [Q: But what for? You're a government em- That made me feel shy. my work, not during my mission. Because the ployee doing your job, no?] ­ Interviewer, Baghdad other families that were included in the survey, Of course. I wasn't doing anything wrong. But they might think that we were there to give so what? What matters is that if they take you, We couldn't travel freely. Even me. I used to have assistance. So that's why I couldn't give them that's it. You might end up being there for one, to go to the ministry in Baghdad twice a month. anything while I was on the job. two, or three years; and you'll never know why. When I would tell people that I had gone there, ­ Interviewer, Al-Sulaimaniya [He thinks about this and then adds:] they would say, `How could you!?' If you are just arrested, you're lucky. If you're You know, it's just 60 kilometers. But that was not lucky, you just get killed. considered a huge trip. ­ Interviewer, Al-Anbar ­ Central supervisor, Fallouja Iraq / First / Second Quarter 2009 33 Iraq's increasing capacity to use data in policymaking represents a well-known taxi driver. Governorates coordinators frequently an even greater milestone than its capacity to collect data in converted their homes into temporary offices rather than risk the field. Across the board, government ministries and tech- going in to government offices. A work ethos evolved that nical agencies have suffered over the past two decades from seemed matter of fact in its heroism. In Al-Anbar, for example, budgetary neglect, loss of trained personnel, and politicization. interviews had to be suspended for a week while the local team Today, they are not only rebuilding, many are working together waited out a siege. Yet as soon as the siege was lifted, they in unaccustomed technical collaborations--for example, on the moved on, working longer hours to make up for their lost time. national poverty reduction strategy. Preparations began with the selection of interviewers--mostly Moving beyond data collection, COSIT has set up a new data young university graduates with backgrounds in statistics, analysis unit under the same technical assistance that produced economics, and social science. They were chosen through a the IHSES database. Approximately 1,500 person days of train- widely publicized competitive process, based on rigorous inter- ing were provided, including statisticians from the Kurdistan views, examination scores, and relevant experience. Success- Region Statistical Organisation (KRSO). With newly learned ful candidates received 23 days of intense training beginning skills in SPSS and Stata, the new units have been able to respond in the classroom with theory but moving rapidly to the field for quickly and professionally to information requests on the pov- hands-on practice. The more senior governorate coordinators erty reduction strategy, the census and other surveys conducted and regional supervisors participated in this training, but also by COSIT various statistical departments. went through a more advanced training themselves including a refresher about halfway through the fieldwork. Iraq Not a "Normal" Survey Environment The 156 fieldworkers were organized into 56 teams, each com- A census or national-level field survey represents no small un- prised of three interviewers, a local supervisor, and a data entry dertaking for any country under any circumstances. Yet even operator. The governorate and regional coordinators worked di- so, Iraq in 2006 and 2007 was as far from "normal" as any coun- rectly on the ground with the local teams. A decentralized opera- try could be. In September-October 2006, the month before the tional structure was critical to the "unusual" environment, because 350-person IHSES team went to the field, causalities from war supervisory presence and decision-making authority devolved to and civil violence were estimated at up to 3,000 per month. In the field enabled continuous adaptation to the rapid, often un- "hot" areas--Baghdad, Al-Anbar, Diala, and Salahuddin among predictable circumstances. Thus, the teams were able to maintain others--markets were shut down; government offices were steady momentum. Indeed, they worked 13 solid months with closed; and if roads were open at all, they were dotted with interruption, even where physical movement was often restricted. checkpoints and in some places explosive devices. Kidnappings, bombings, and terrorist attacks occurred daily. It was an un- The three-part, 354-item questionnaire consisted of 18 sections. likely moment at which to launch a nationwide field survey. A daily ledger was provided to each household to record all items of household consumption and expenditure. A time-use sheet Terms such as "difficult situation" and "need for innovative broken down by 15-minute increments was used to record activi- methods" hardly do justice to "accommodations" that, in many ties for every member of the household older than 10 years for a cases, were literally matters of life or death. First, interviewers full 7-day week. Seven separate one-to-two hour sessions were and local supervisors had to be hired locally. They needed not required with each household. The full questionnaire was filled only to be well known and neutral, but capable of negotiating out for 18,144 households, on average 6.9 persons each. the pervasive suspicion. Threats were made to many of them, sometimes because names alone reveal tribal or ethnic affilia- The three-part questionnaire recorded, first, standard socio- tions. In some cases, multiple identity cards had to be issued so demographic information, including household composition, that interviewers could move from one neighborhood to anoth- languages spoken, schooling, housing characteristics, health, er (a separate ID card in each sock, as one interviewer recently recreation and hobbies, past employment, and job searching. A recalled). Rather than use government vehicles, fieldworkers second part recorded all nonfood expenditures for the past 30 frequently rented old cars or arranged local transportation with days--every item from school fees to fuel to the cost of reuphol- First / Second Quarter 2009 / Iraq 34 Iraq stering a chair. The third part of the questionnaire recorded re- A subsequent research effort is being made to capture some of curring food and nonfood expenditures, as well as details on jobs this history. Interviewer stories make clear that every member during the past year; wage earnings from every source of em- of the IHSES field team experienced continuous stress at mini- ployment; nonwage activities (agriculture, family business, gifts, mum, and many/most experienced at least occasional brushes pensions, donations, and so on); income from property transfers; with life-threatening risk. If not their own experiences, virtually an inventory of durable goods (bicycles, refrigerators, televisions, all the interviewers describe hostile questioning, unpredictable and so forth); as well as loans, credit, and outside assistance. detentions, and encounters with local security forces, militias, and foreign troops. They describe some of their stories as hard Data entry was decentralized not only because physical trans- to believe about themselves in retrospect--sitting with families portation of questionnaires was dangerous in every sense, but, recording details on children's vaccinations and the number of most importantly, it makes it easier to follow up on potential kilometers to the nearest post office, with mortar shells explod- errors. As soon as data was entered, a specially tailored pro- ing and snipers firing from rooftops in the background. Indeed, gram was run to spot anomalies and to flag potential errors. interviewers describe not only not being able to complete in- With continuous back-and-forth feedback with the data team, terviews because the house no longer existed the following day, interviewers (and their local supervisors) were able to return to but then having to track down the former occupants. households, repeatedly if necessary, to ensure that every ques- tionnaire was accurate, usable, and complete. It would be easy--but far too easy--to credit the IHSES achieve- ment to comfortable explanations such as logistical geniuses, The Dual Meaning of "Ihses"-- unusually talented government officials, superb technical assis- Numbers and Feelings tance, brilliant supervision, and so forth. Perhaps. But not really. In English, the abbreviated acronym IHSES refers to the particu- Explanations have to do with motivations and human terrain lar 2006­07 household survey and by extension the database that is far harder (though in some respects far easier) to un- that it produced. In Arabic, however, the word "ihses" has an- derstand. These are the explanations relating to ihses in the other meaning, "feeling." It is perhaps "feeling," not a job to Arabic sense of feeling. Most remarkably perhaps, these feelings generate statistics, that explains the remarkable determination are by no means limited to stories of violence and personal trag- of the IHSES field teams. edy. To the contrary, beyond every account of suffering, there is another about kindness, generosity, and Iraqis' traditional hos- While it is true that many areas of Iraq were safe and rela- pitability no matter how grim the circumstances. tively calm during the survey, it is equally true that the local A tragedy occurred in the early morning hours of August 2, teams worked through continuous uncertainty, and sometimes 2007, that has come to symbolize the level of commitment that through murderous violence at extraordinary personal risks. At- broadly characterized IHSES. Operations Director Louay Haqqi tempts were made, to the extent that they could be, to keep the was brutally assassinated on his way to his office in Baghdad. teams safe. Sampling methods were adjusted to produce repre- sentative results from "hot zones." 1Yet reality is that violence For everyone, the shock, trauma, and feeling was intense. What and danger could not be skipped, and the central cities, other happened next was most extraordinary perhaps because it urban areas and rural areas of each governorate were visited. seemed so typical. The team stopped, it grieved, and it honored its Operations Director. Then, it returned to the field for four What explains the willingness of these young people (and their su- more months of work, completing the survey for which Louay pervisors and managers, who were not so young) to work under literally gave his life. continuous stress, insecurity, and fear day after day for 13 months? Certainly, the answer is not simply: A paycheck. To the contrary, banking and cash disbursement systems were nonexistent in many areas of the country. To everyone's frustration, financial managers 1 for the survey struggled to provide regular salary payments and See Tabulation Report, Volume 1, Section 4.F ("Exceptional Measures") reimbursements. Many of them had to pay their own expenses The IRAQ HOUSEHOLD SOCIO-ECONOMIC SURVEY Tabulation Report can out of pocket for months, yet the travel itself continued. be downloaded from www.worldbank.org/iq Iraq / First / Second Quarter 2009 35 Iraq Oil, Gas and Fiscal Implications Iraq's oil sector contributes around 65% of Iraq's GDP and over The structure of Iraq's oil and gas sector: 90% of public revenues, and is therefore central to Iraq's fiscal po- sition and critical to the health of the Iraqi economy. The current Iraq is estimated to hold 115 billion barrels of proven oil reserves, contraction in world demand for crude oil as a result of the global and possibly much more undiscovered oil in unexplored areas of the country. Iraq is also estimated to contain at least 110 trillion cubic financial crisis will have a significant impact on Iraq in light of feet of natural gas. About 70 percent of Iraq's natural gas reserves its extreme oil dependence. World demand for crude has already are associated (i.e., natural gas produced in conjunction with oil), declined in the last six months and the expectation that demand with the rest made up of non-associated gas (20 percent) and dome will continue to decline, is weighing heavily on crude prices. gas (10 percent). Since most of Iraq's natural gas is associated with oil, progress on increasing the country's oil output will directly af- The recent drop in world oil prices to around US$45/bbl, less fect the gas sector as well. Most associated gas is simply flared off. Some gas is used for reinjection for enhanced oil recovery and also than half of the 2008 average, has already adversely affected for power generation. Action to increase the amount of gas made Iraq's public finances and balance of payments. The oil price for available for power generation through gas capture and production the 2009 budget was readjusted downwards twice (in Novem- could provide Iraq with significant economic benefit. ber 2008 and January 2009). Iraq's fiscal position is projected to worsen with oil revenues expected to contract by 26 percent Following a major reorganization in 1987, the Iraq National Oil Company (INOC) became part of the Ministry of Oil (MoO). The MoO according to IMF projections, reversing a strong fiscal position is the functional head of the oil industry, and oversees a number (overall fiscal surplus of 8.2 percent of GDP in 2008). of functionally-defined state-run companies. These include an ex- ploration company, a drilling company, three production companies With oil prices at current levels Iraq will not have sufficient (North Oil, South Oil and Maysan), a pipeline company, three refin- public revenues to fund its 2009 budget. A deficit of about 17 eries, an oil products distribution company, two gas companies, a percent of GDP was forecast by the IMF for the year. The ac- gas filling company (supply and distribution of LPG for domestic use), an oil tanker company, an oil projects company (design and tual 2009 deficit figure may turn out to be considerably higher engineering of upstream and downstream projects), and the State than that since Iraq's crude is selling at below US$ 40 per barrel, Oil Marketing Organization (SOMO). while the revised 2009 budget is based on the assumption of US$50 per barrel. The Government announced it would allow Iraq exports crude oil through two main channels, the port of Basra for cuts in recurrent and capital spending in a supplementary in the south and the Kirkuk-Ceyhan pipeline to Turkey in the north. Oil is marketed on behalf of the Ministry of Oil by SOMO. The latter budget if oil prices continue their downward trend. Iraq has retains none of the sales revenues which are transferred directly to sufficient reserves to cover a deficit this year, but this may not the Development Fund for Iraq (DFI), and thereby to public revenues be the case in 2010. through the Ministry of Finance. Although Iraq's oil exports have risen steadily from 1.4 million bpd in 2005 to 1.8 million bpd in 2008, this is insufficient to International experts were also invited to give their views on offset the recent drop in world oil prices. The level of Iraq's oil Iraq's oil and gas policy development. Opinions were shared by exports has also been hampered by a recent decline in produc- notable Iraqi expatriates with experience in Iraq's oil and gas tion from a high of 2.53 million bpd in June of 2008 to a recent sector, alongside experts from Italy, Norway, US, France, Trinidad 2.16 million bpd. and Tobago and Japan. At the invitation of Iraq's Deputy Prime Minister, the World Bank also attended the Symposium. In response to Iraq's worsening fiscal position Iraq's government is now fully focused on the performance of its most significant In his opening remarks, the Prime Minister, H.E. Nuri Al-Maliki, economic sector. In late February of this year it convened a stated that the Country's overall security and prosperity were de- symposium to thoroughly review oil policy, and to discuss how pendent on its energy sector. He asked the Symposium to devel- to increase oil production and exports over the coming year. The op specific actions and recommendations to stop and reverse the symposium was chaired by Iraq's Prime Minister, and attended current decline in production, and to maximize exports to meet by the Deputy Prime Minister, the Ministers of Oil, Finance and the country's public revenue needs. The Prime Minister requested Planning, and a range of senior government officials. attention to development of Iraq's oil policy and to reform of its public institutions and legal and regulatory structure. First / Second Quarter 2009 / Iraq 36 The Symposium was one of the most substantial events on the oil and gas sector in Iraq in which the Bank has been in- volved and was evidence of a new sense of urgency within the Government to address oil and gas policy development and oil revenues. The challenges of rehabilitating and improving Iraq's oil and gas infrastructure and of reforming and building the sector's institutions are immense, and although they have been present for some time, until now they have been masked by booming revenues from high oil prices. The Symposium developed a number of key recommendations for sector policy; and emphasized the need for international assis- tance in the development of Iraq's oil and gas sector. The Govern- ment of Iraq is now looking to implementation of these recom- www.sigir.mil mendations to increase oil exports by up to 0.5 million bpd and at least partly address its worsening fiscal position. At the request of Iraq's Government the World Bank is now considering ways in Al Basrah Oil Terminal, Iraq which it might support the development of Iraq's energy sector. In addition to the support it provided to Iraq's Oil and Gas Sec- tor at this Symposium, the World Bank also continues to sup- port Iraq's energy sector through interventions in the electric- ity sector, where it has been engaged since 2004. The Bank is financing emergency power station rehabilitation of Hartha power station in southern Iraq, and Dokan and Derbandikhan hydropower stations in northern Iraq through two IDA credits totaling US$144 million. The Bank is also providing the electric- ity sector with advisory assistance through a US$6 million Iraq Trust Fund grant. Iraq / First / Second Quarter 2009 37 Iraq Partnership Program The Joint World Bank-IFC Interim Strat- Ap- Com- Undis- Sector Board Closing egy Note for 2009­11 benefited from proval mitment bursed Date a stocktaking of the Bank Group's en- Date Amount Amount gagement with Iraq to date as well as in US$ M extensive consultations with Govern- ITF ment of Iraq, the donor community, Completed and other stakeholders, including repre- Capacity Building I Feb 04 2.5 - Public Sector Governance Jun 05 sentatives from private sector and civil Textbook Provision May 04 38.8 - Education Dec 06 society organizations. Activities under this ISN fall under one or more of three Community Infrastructure Dec 04 20 1.4 Social Development Dec 08 thematic areas of engagement: Active School Reconstruction & Oct 04 60 28.4 Education Jun 09 · Continuing to support ongoing Rehabilitation reconstruction and socio-eco- Capacity Building II Nov 04 7 1.4 Public Sector Governance nomic recovery; Health Rehabilitation Nov 04 25 9.6 Health, Nutrition, Popula- Feb 10 · Improving governance and the tion management of public resources, Private Sector Development Nov 04 65 24.8 Fin & Priv Sector Devel- Mar 10 including human, natural and fi- opment nancial; Baghdad Water Supply & Dec 04 65 46.6 Water Jun 10 · Supporting policies and institu- Sanitation tions that promote broad-based, Water Supply, Sanitation & Dec 04 110 74.6 Water Dec 09 private-sector-led growth. Urban Reconstruction Community Infrastructure Apr 08 26 26.0 Social Development Jun 10 The International Reconstruction Fund (Supplemental Grant) Facility for Iraq (IRFFI) Disabilities Nov 05 19.5 14.8 Health, Nutrition, Popula- Sep 09 The International Reconstruction Fund tion Facility for Iraq aims to help donors chan- Social Protection Jun 06 8 6.2 Social Protection Feb 10 nel resources and coordinate support Household Survey and May 06 3.6 1.1 Poverty Reduction Sep 09 for reconstruction and development in Policies TA Iraq through two trust funds: The World Household Survey and Poli- May 06 5.5 0.1 Poverty Reduction Sep 09 Bank Iraq Trust Fund (ITF) and the UNDF cies Grant Iraq Trust Fund. The ITF finances recon- Marshlands School Con- Oct 06 6 1.9 Education Jun 09 struction and capacity building projects, struction within the framework of Iraq's National Environmental Management Dec 06 5 4.6 Environment Aug 10 Development Strategy and International Emergency Electricity Mar 07 6 5.5 Energy & Mining Sep 10 Compact with Iraq. Regional Health Emergency Jun 08 8.7 8.3 Jun 10 Response Portfolio IDA The Iraq portfolio includes three closed proj- Third Emergency Education Nov 05 100 105.1 Education Jun 09 ects in capacity building, textbook provision, Emergency Road Recon- Jun 06 135 132.2 Transport Jun 10 and community infrastructure development, struction and twenty active projects. Fifteen of these Dokan and Derbandikhan Dec 06 40 41.2 Energy & Mining Dec 10 are financed by the ITF and five are financed Hydropower by the International Development Associa- Emergency Electricity Mar 07 124 126.7 Energy & Mining Jun 11 tion (IDA) and are concentrated in sectors Emergency Water Supply Jun 08 109.5 101.3 Water Dec 13 such as water, road rehabilitation, health, energy, education and social protection. First / Second Quarter 2009 / Iraq 38