90152 May 2014 – Number 125 X1` On Shared Prosperity in the Middle East and North Africa Elena Ianchovichina1 Figure 2: Income growth of the Bottom 40% Income growth Introduction: The Middle East and North Africa 4.0 (MENA) Region has made steady progress in terms 3.5 of the World Bank’s twin goals of eliminating 3.0 extreme poverty and boosting shared prosperity. 2.5 % During the 2000s, the percentage of people living on 2.0 less than $1.25 a day declined in all regional 1.5 economies, except Yemen, and in 2010 was low on 1.0 0.5 average (Figure 1). The incomes of the bottom 40% 0.0 have been growing at higher rates than average Egypt, Arab Iraq Jordan Tunisia Palestinian incomes in almost all MENA countries for which Rep. territories Bottom 40% Total Population information is available (Figure 2). In fact, in terms of the income growth among the bottom 40%, the Ratio of bottom 40 growth to average growth 1.8 MENA region has done better than most other regions, except Latin America and the Caribbean 1.5 1.4 (Figure 2). Income inequality has not worsened and 1.2 has been low by international standards. 1.0 0.9 Figure 1: Poverty Rates in MENA LAC MENA SA ECA EAS SSA Source: World Bank, Global Shared Prosperity Database; Note: Different periods for different countries: Egypt (2005-08); Iraq (2007-12); Jordan (2006-10); Tunisia (2005-10); Palestinian territories (2004-09). Yet, there were revolutions in several MENA countries and widespread discontent. Why? Source: Household Survey Data, PovCalNet. Causes of Social Discontent: First, unemployment rates in MENA are among the highest in the world, and are especially high for young people and women (Figure 3). Importantly, good jobs are hard to find as 1 majority of jobs are informal. According to Gallup The author works in the Chief Economist’s Office (MNACE) of the Middle East and North Africa Region of the World Bank. This survey data, more than 80% of the people in the Quick Note was cleared by Shanta Devarajan, Chief Economist of the MENA region of the World Bank. region believe that “wasta” or connections are Figure 4: Poor Quality Services critical to getting a good job. Figure 3: Lack of Jobs Source: TIMSS 2011 for all countries except Egypt and Kuwait which were from TIMSS 2007. Source: Household Survey Data. Figure 5: Subsidies and Politically Connected Firms The second reason is the poor quality of public services. Despite nearly full school enrolment, students are not learning as much as they should when they are attending classes. MENA students lag behind their peers in developing countries on standardized 8th grade math tests. One of the reasons for the poor education outcomes is the shortage of qualified math teachers. More than half of the students in the region attend schools with a severe shortage of qualified staff. The situation is particularly dire in Tunisia, Syria, and Morocco, but it is a problem even in the GCC economies. In addition, teachers and doctors are frequently absent from schools and health clinics. In Yemen, for instance, teachers are absent 20% of the time and doctors are absent nearly 40% of the time (Figure 4). Teacher and doctor absenteeism is a problem not only in low-income Yemen, but also in middle-income Egypt and Source: Diwan et al. (2013). Morocco. Fourth, and more fundamentally, economic growth Third, we believe people are likely to be dissatisfied has been low in per capita terms (Figure 6). It averaged that expensive energy subsidies have burdened fiscal between 2 and 3% during the last decade when budgets and benefitted the rich. The top 20% of other middle-income economies grew at much households consume a large share of energy higher rates. Growth has been slow despite policies subsidies. Not only are energy subsidies benefiting to encourage industrial development. Industrial affluent households, they are also benefiting policies have not worked in the region because they politically connected firms. In Egypt, for example, have been subject to capture by those in power and firms with political connections are those with connections. disproportionately present in high energy-intensive industries (Figure 5). The regressive and inefficient subsidies reduce the fiscal space available for spending priorities on health, education, and infrastructure investments. May 2014 · Number 125 2 Figure 6: Average, annual per capita income Tourism and some manufacturing activities have growth rates (%) been particularly hurt, as political instability tends 9 to discourage foreign visitors and investors, 8 especially those making foreign direct investments 7 in labor intensive, tradable activities (Burger et al., 6 2013). So unemployment rates have increased above 5 those observed prior to the Arab Spring. Several 4 countries have experienced macroeconomic stress % 3 (Figure 8). Investment has plummeted and fiscal and 2 external balances worsened. 1 0 MENA GCC EAS ECA LAC SA SSA Developing Boosting Shared Prosperity in MENA – the How: -1 countries -2 So what can be done to boost real shared prosperity in the Middle East and North Africa? Two things 1990-99 2000-08 must be done. First, leveling the playing field is a Source: World Bank. priority because everyone must have a fair opportunity for success. Regulations should not In Tunisia, for example, the Ben Ali family not only favor the privileged. Expensive general subsidies owned companies in a diverse set of industries from should be replaced with targeted cash transfers to banks to pharmaceutical companies, hotels, and support vulnerable households and investments dealerships, to name a few, but they used their should be made to improve the quality of human influence to pass regulations that restricted entry to capital and institutions. Second, citizens should hold the industries in which they were present (Rijkers et the state accountable, rather than the other way al. 2014). As a result of this regulatory capture and around. Getting there will not be easy. One distorted business climate, the private sector in important step will be to start measuring those MENA lacks dynamism. In Egypt, for example, things that matter for real shared prosperity, for firms stay small as they age because they have few example, progress towards eliminating “wasta” opportunities to invest and grow into medium-sized (privileged jobs), regulatory capture, and provider and large firms (Figure 7). absenteeism. By collecting information and sharing it with the public, citizens will be empowered to act Figure 7: Private Sector Lacks Dynamism and improve their chances of achieving real shared prosperity in the Middle East and North Africa. Figure 8: Macroeconomic Stress Employment share 4.50 25 4.00 20 3.50 15 3.00 10 2.50 2.00 5 1.50 Age of firm 0 1.00 -5 0.50 -10 0.00 -15 Size of firm by employee -20 Source: Diwan et al. (2013). The Post 2011 Situation: Since 2011, the situation in 2011 2012e 2013p the region has gotten worse. Unemployment rates Source: World Bank. have gone up because growth has slowed down and even collapsed in some of the transition economies. May 2014 · Number 125 3 References Burger, M., Ianchovichina, E., and Rijkers, B. (2013) “Risky Contact MNA K&L: Business: Political Instability and Greenfield Foreign Gerard A. Byam, Director, Strategy and Operations. Direct Investment in the Arab World,” World Bank Policy MENA Region, The World Bank. Research Working Paper No. 6716, Washington DC. Preeti Ahuja, Manager, MNADE Regional Quick Notes Team: Diwan, I., Keefer, P., and Schiffbauer, M. (2013) “The Omer Karasapan, and Mark Volk Effect of Cronyism on Private Sector Growth in Egypt,” Tel #: (202) 473 8177 The MNA Quick Notes are intended to summarize lessons mimeo. learned from MNA and other Bank Knowledge and Learning activities. The Notes do not necessarily reflect the Rijkers, B., Freund, C., and Nucifora, A. (2014) “All in the views of the World Bank, its board or its member countries. Family: State Capture in Tunisia,” World Bank Policy Research Working Paper No. 6810, Washington DC. May 2014 · Number 125 4