Making Sure Middle East Growth Is Inclusive
IMF Blog, May 10, 2012
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- Authors: policies that protect the most vulnerable., the absence of transparent, fair rules of the game will inevitably undermine the development process.
- Published: May 10, 2012
Summary of the challenge
- The uprisings across the Middle East and North Africa in 2011 showed that rapid economic growth is not sustainable unless it is inclusive, creates enough jobs for the growing labor force, and is accompanied by policies that protect the most vulnerable.
- Lack of transparent and fair rules undermines the development process.
- There is a need for an “Economic Spring” to complement the “Arab Spring” and greater attention to socioeconomic issues in policy decisions.
Labor market and human development concerns
- Youth unemployment:
- At over 25 percent, the youth unemployment rate in the region’s oil-importing countries exceeds that of any other region in the world.
- Youth unemployment reaches up to 30 percent in Tunisia and 32 percent in Morocco.
- Education and unemployment:
- Unemployment tends to increase with schooling, exceeding 15 percent for those with tertiary education in Egypt, Jordan, and Tunisia.
- Poverty and human development:
- Poverty rates are described as unacceptably high and human development indicators lag behind those of many other regions according to reports by the World Bank and the United Nations Development Program.
How to make growth inclusive — policy recommendations
- Medium-term economic strategies should focus on providing economic opportunities to all, including by providing equal and improved access to credit.
- Align education systems to prepare graduates for the needs of the modern labor market.
- Reform labor markets to eliminate rigidities and boost job creation.
- Promote transparency and reduce red tape to foster a business-friendly environment and advance the role of the private sector.
- Bring the informal sector into the formal economy to spur economic activity and promote more inclusive growth.
- Replace wasteful universal subsidy regimes with targeted social safety nets that protect the poor.
- Use resources freed from subsidy reform for investment in infrastructure, education, and health.
- Maintain sound macroeconomic policies to ensure economic and financial stability, keeping inflation and fiscal and external imbalances in check.
Subsidies: scale, problems, and targeting
- IMF estimate: subsidies cost about $210 billion, about 7 percent of the region’s GDP.
- Country examples:
- Budgeted food and fuel subsidies account for about 16 percent of GDP in Egypt.
- Budgeted food and fuel subsidies account for about 12 percent of GDP in Jordan.
- Distributional inefficiency:
- Only 20 percent of those subsidies reach the poor while the remaining 80 percent benefit the non-needy.
- Socially wasteful consequences of price subsidies include smuggling, black markets, and corruption.
- Reported abuses in Egypt:
- Use of bread as animal and fish feed.
- Subsidized wheat sold in the black market to bakery shops making fancy cakes while the poor queue for bread and do not get enough.
- Smuggling of gasoline and diesel; black market and shortages in subsidized bhutan gas cylinders.
The IMF’s role and support modalities
- The IMF helps on three main fronts: policy advice, capacity building, and financing.
- Policy advice:
- Integrating the concept of inclusive growth more systematically into IMF policy advice.
- Promoting measures to increase spending on, and improve the targeting of, social safety net programs to mitigate the impact of the great recession.
- Identified five areas critical to achieving more socially inclusive growth: job creation, better-targeted social safety nets, stronger governance and business environments, better access to finance, and greater trade access and integration.
- Capacity building:
- Technical assistance and training to build strong institutions, particularly in public finance management and banking supervision.
- Develop equitable fiscal policies.
- Construct good data to create a solid basis for policy decisions.
- Support for a regionally consolidated statistical body (ARABSTAT) to promote production and dissemination of data and improve data quality to meet international standards.
- Financing:
- Creation of new lending facilities and tools with streamlined conditionality.
- Mobilizing other official financing to fill short-term fiscal and external gaps in a number of countries.
- Program conditionality in most countries has included a commitment by the government to strengthen the use of resources for social safety nets.
- New instruments:
- Rapid Financing Instrument (RFI): provides rapid financial assistance to all member countries facing an urgent balance of payments need.
- Precautionary and Liquidity Line (PLL): provides financing to meet actual or potential balance of payments needs of countries with sound policies; intended as insurance or to help resolve crises under wide-ranging situations.
Key statistics and figures
- Youth unemployment: over 25 percent (region’s oil-importing countries).
- Tunisia youth unemployment: up to 30 percent.
- Morocco youth unemployment: 32 percent.
- Tertiary-educated unemployment: exceeding 15 percent in Egypt, Jordan, and Tunisia.
- IMF estimate of subsidies: $210 billion, about 7 percent of the region’s GDP.
- Egypt budgeted food and fuel subsidies: about 16 percent of GDP.
- Jordan budgeted food and fuel subsidies: about 12 percent of GDP.
- Subsidy distribution: only 20 percent of subsidies reach the poor; 80 percent benefit the non-needy.
- Job creation need: 50–70 million jobs needed for people joining the labor force over the next decade.
Source: Making Sure Middle East Growth Is Inclusive, May 10, 2012.