NS 4053 Spring Term 2017 Cammett Chapter 2

NS 4053 Spring Term 2017 Cammett: Chapter 2 Economic Performance and Social Outcomes

Overview I • Demographic Overview • In 2010 population of the MENA region 507 million • Eight percent of the population of all developing countries • Three countries in region • Turkey • Iran and • Egypt • Have populations exceeding 70 million • Also eleven countries in region with populations less than 10 million • Seven countries (Algeria, Morocco, Iraq, Saudi Arabia, Sudan, Syria, and Yemen) populations between 20 and 40 million 2

Overview II • Now more than four times as many people in MENA as there were in the 1950 s • Region’s population growing at 2. 2% per annum • Means it will double in 32 years • Within just three generations, the region’s population will have increased twelvefold. • Only the population of sub-Saharan Africa is growing more rapidly • Because of the rate of population growth most of the people in the region are young – one half under 24 • Large and growing percentage live in cities 3

Overview III • Income Overview • In 2010 the region’s GDP was $3. 5 trillion – slightly more than Germany’s • Countries in the resource-rich-labor poor (RRLP) group had the largest GDP – about size of Mexico’s GDP • The resource rich labor abundant (RRLA) about the size of Malaysia and Thailand combined) • Resource –poor labor abundant (RPLA) about the size of Iran • Turkey ($730 billion) has the highest GDP in the region • Next Saudi Arabia ($527 billion) • MENA has huge diversity in per capita income – more than any other major region 4

Measurement Issues I • Economic growth and size usually measured by gross domestic product GDP • Reflects the output and income of a country • Several criticisms 1. For countries that sell oil – just selling off an asset, so not sustainable 2. Measurement problems go beyond negative environmental externalities – informal economy 3. Use of official exchange rate undervalues services and gives a measure lower than the true size of the economy 4. GDP per capita offers no evidence on distribution or happiness – often hard to infer increased GDP equates to increasing social welfare 5

Measurement Issues II • Other GDP Issues • Data often poor quality • Base year problem 6

Patterns of Long-Term Growth I • Region’s growth 1960 -2010 fairly average by world standards • Growth averaged 4. 9% per year • Higher than average for middle income countries (4. 7%) • Also more than low income country average (3. 4%) • However much lower than East Asia (7. 3%) • However several reasons why growth performance much less positive 1. High population growth means per capita growth not that high 2. Economic performance varies significantly across countries 3. High variability in growth patterns 7

Patterns of Long-Term Growth II • In terms of differential rates of growth • RRLP did the best at 5. 6% per annum • Fastest of any region except East Asia • Not surprising because of oil • RPLA group comes in second at 5. 26% • Around the middle income average • RRLA rich in oil and people comes in distant third at 4. 4% per annum • Group seems to have been hit the hardest by the oil curse • Countries in this group athat were once believed to have the greatest potential (Iraq, Iran, Algeria) got mired in internal and external conflicts • Syria has now entered this phase 8

Patterns of Long-Term Growth III • Variability of growth stems from • Dependence on volatile oil revenues • Effects of structural adjustment period in the 1980 s • Two effects interacted in several ways • Oil prices two main periods of boom – 1973 -79 and 19982014 • 1980 s and parts of 1990 s were marked by collapse of oil prices which forced policy adjustments and lower growth • Oil importers benefited from high oil prices even though they had to pay more for imported oil • Labor remittances and aid from oil producers went up and down with oil prices 9

Economic Rent I • Issue of Economic Rent • Rent is difference between market price of a good or factor of production and its opportunity cost • Owners of certain assets or providers of certain services enjoy strategic position in markets that allow them to set prices above opportunity costs • When oil prices quadrupled in 1970 s new market price reflected neither increases in cost of production or new investment 10

Economic Rent II • Host of ills attributed to rents. Access to rents has • Allowed several states to avoid improving the efficiency with which their economies produce – especially traded goods • Rents have allowed governments to avoid heavily taxing their own citizens • Breaks link between government and the people they tax, out of such links, governmental accountability • External rents not confided to petroleum • Several Middle Eastern countries had access to “strategic rents” during cold war era • Enjoyed a particular geostrategic value and could count on financial flows and aid – Israel, Jordan, Egypt 11

Economic Rent III • Not all economic rents external • Notion of “rent seeking behavior” – search for strategic privilege in domestic markets • Such privilege usually bestowed by public authorities through issuance of licenses, franchises, protection • When privileged are protected from competition in specific markets products generated without improvements in efficiency • Also called a regulatory rent • Used by governments to strengthen elite coalition when other rents collapse. 12

Three Phases of Development I • Economic growth in MENA region determined in part by its development strategy • First, a rising period under import substitution and state activism • Ultimately led to economic contradictions • Second, a period of structural adjustment • Decade of low growth • Third – more liberal period focused on export-led growth • Saw larger but still relatively modest growth rates • The three phases were • Determined, • Delayed or • Exacerbated • By the oil cycle 13

Three Phases of Development II • Import-substitution and State-Led Industrialization Period: The 1960 s and 1970 s • Early phase of development • Post independence growth in MENA region among highest in the world • In 1960 s, 1970 s and early 1980 s growth increased from relatively low levels in the 1950 s • Region benefited from early phase of the state-led development model 14

Three Phases of Development III • Period was the height of movement that had started in the 1950 s with the • Rise of nationalist states and the middle class • Investments in human development and • Dynamic growth policies fashioned on the Tuirkish Attaturk model • Economic growth rapid at 3 -4% per capita annually • Reflected high rates of investment as well as increased productivity linked to human cpital • Oil producers did particularly well after the rise in oil prices after 1973 • Significant improvements in quality of life indicators 15

Import Substitution I • During 1950 s sand 1960 s import substituting industrialization (ISI) typically led by a highly interventionist state • Logic compelling • ISI designed to move traditional economies to an industrial footing by producing manufactured poducts for the local market • Receive protection before firms have infant industries have to face rigors of international markets • Idea to escape agrarian trap – area of comparative advantage but dead end • As industrialization gathered steam and raised domestic income, new markets would grow and new industries would achieve economies of scale that would make them 16 competitive globally.

Import Substitution II • Process supposed to be cumulative • First industries will produce backward linkages • Stimulates new enterprises in • Capital goods • Basic metals • Machine tools • Turkey was first among Middle East states to pursue and ISI strategy • During the 1930 s Turkish state began to launch industries in textiles, cement and basic industries • In Iran Reza Khan was moving in similar direction • With Algeria’s independence in 1962 the strategy was implemented as was the case in Egypt 17

Import Substitution III • With rare exceptions major states pursed the strategy to varying degrees and with different ideological underpinnings • ISI made good sense for the larger economies with important domestic markets that could sustain large industrial units • Made less sense for the small economies. • Most determined to follow Tukey were • Egypt • Iran • Tunisia • Algeria • Syria • Iraq and • Israel 18

Import Substitution IV • ISI strategies typically rely on publicly owned enterprises because • Initial investments usually very large and beyond capacity of local entrepreneurial groups • Public enterprises also confer instruments of social control on regimes that are eager to consolidate power • In spite of these efforts ISI experienced widespread setbacks in the Middle East and elsewhere • Stemmed from • Degree of protection granted infant industries and • Proportion of public resources devoted to them at the expense of the agricultural sector 19

Import Substitution V • Agricultural sectors were taxed to provide investable surplus for the new industries • Foreign exchange earned from agricultural exports went to pay for the technologies, capital. goods and raw materials required by the industrial sector. • When agricultural transfers caused slower agricultural growth, • Rural populations could not generate the demand to keep the new industries operating at full capacity • Idle capacity and production costs rose • Because industries were protected against cheaper imports they had no incentive to keep costs down • Because industries generally capital-intensive did not provide large number of jobs, they were unable to provide jobs for rural workers leaving depressed agricultural sector for urban areas 20

Import Substitution VI • Net result often high cost production • For domestic markets in which retail prices needed to be subsidized by the government • That could not be exported to pay for the imported raw materials and equipment • Thus the new industries contributed to growing twin deficits – fiscal and balance of payments • Culminated in a series of financial crisis that ended the ISI experiments in the 1970 s and early 1980 s 21

Import Substitution VII • Poorer among Arab countries with large rural populations could have adopted a strategy more focused on agricultural sector • Most relevant in 1950 s and 1960 s when most of region’s population in agriculture • Still applies in countries with sizable arable land • Morocco • Sudan • Yemen • Improving the productivity of land and/or labor could have been a workable way to develop agriculture as a means to industrialize 22

Import Substitution VIII • Process might create a virtuous circle: • Because of small domestic markets, much of crops would have been exported • As incomes of farmers rose, demand for local industrial goods would increase • Agricultural profits would have financed this initial capital deepening • Leading to a process of self-sustaining growth • Unfortunately reliance on agro-exports commonly associated in the 1950 s with colonialism 23

Import Substitution IX • Period of fast growth in the 1960 s could not be sustained • As elsewhere in the world (particularly Latin America) the strategy faltered after an initial period of fast growth • Labor productivity remained low • Region could not take advantage of fast growth in global trade as Asia did • For most of the RPLA countries increase in oil prices after 1973 created major problems • Financed oil imports by borrowing, but in the 1980 s ran into debt problems • In countries with abundant oil (Algeria, Iran and Saudi Arabia) oil revenues and external borrowings allowed adjustment to be delayed until the 1990 s • But the mid-1980 s collapse of oil prices ended ISI in the region 24

Lost Decade I • Adjustment, the Lost Decades, and Export-Led Growth: The 1980 s and the 1990 s • First countries to start adjustment were • Morocco and Tunisia • Jordan followed in late 1980 s • Egypt and Saudi Arabia began process in 1990 s. • Public spending slalshed to reestablish macroeconomic balances • External debts were partially canceled by Western countries and institutions to support adjustment in • Morocco • Egypt and • Jordan 25

Lost Decade II • Macro-balances were restored over time and economic growth restarted by the mid 1990 s • Transition costs were large • They have marked the political economy of the region ever since playing an important role in the genesis of the Arab Spring • Growth fell sharply in the 1980 s and even into the 1990 s for some countries • Region’s “lost decade” was longer than it was in other areas of the world. 26

Lost Decade III • Significant differences among MENA countries • In 1980 s GDP per capita • -1. 0% in the RPLA countries • -6. 0 for the RRLA countries (devastation from Iran Iraq War) • -2. 0% for the wealthy RRLP countries • Countries also slashed public expenditures, thus weakening the welfare state and reducing social mobility • Most of the region started to move in the direction of export led growth and private initiative • Foreign donor and creditor community pushed for taking this direction • Also belief that the private sector could adjust more rapidly than public sector to reducing costs, improving 27 qulity and competing in external markets

Export-Led Growth I • New development model inspired by success of • South Korea • Taiwan, • India, and • China • Countries that had managed to become the manufacturing hub of the world • Even countries with small domestic markets industrialization could take place by exporting • With time skills developed, physical capital deepened and countries would move up quality ladder and improve their incomes by switching into ever more sophisticated products 28

Export-Led Growth II • Strategy requirements • Factors production – labor and capital need to be moved from inefficient and uncompetitive sectors that are more efficient and can compete abroad • Washington Consensus – done best by market mechanisms • Trade needs to be liberalized • Public enterprises to be privatized • Financial sector opened up, and • National currencies sharply devalued to encourage exports 29

Export-Led Growth III • Difficult in region with bad habits from ISI • Governments had to consider constituencies new strategy would alienate, some part of state apparatus itself • Owners and manages of IS industries might try to sabotage new experiment • Could find allies among the workers who risked being laid off as enterprises forced to cut costs • Urban constituents might see a sharp rise in cost of living • Problem – negative effects of new strategy would be felt immediately, but economic pay-off might take years to arrive 30

Export-Led Growth IV • Despite risks some ME countries moved in direction of export promotion and private enterprise • In late 1960 s Morocco and Tunisia negotiated preferential trade agreements with the European Economic Community (forerunner of the EU). • Both hoped to attract light industry from Europe • Accelerated these efforts in mid 1980 s but hurt by entry of former Communist countries into the European maket. • Also new competition from China 31

Export-Led Growth V • For more than three decades Turkey has aspired to full membership in what is now the EU • Trying to restructure economy (after Ataturk’s ISI strategy) to compete in European markets • Process took urgency in 1970 s • with oil price increases and • Closing European labor markets to migrant Turkish workers • Export led growth started during turbulent period – • Political instability • Mounting domestic deficits • Balance of payments crisis and • High inflation • Ending in a financial crisis in 2001 32

Export-Led Growth VI • • Emergence of Justice and Development Party (AKP) Produced a period of macroeconomic stability Consolidated reforms of the past and Led to a highly successful export drive for Turkish manufacturers 33

Export-Led Growth VII • Israel’s economy has always been dependent on aid and trade • Has negotiated preferential trade agreements with EEC and has had great success in • marketing fruits and vegetables in the Europe, and • Later manufactured metal products and high-tech electronics • Equally important is Israel’s major role in international arms trade • Despite these successes, in early 1980 s Israel had • Large deficits • High labor costs with limited competitiveness • Largest per-capita debt in the world and • Inflation rate second only to Bolivia’s 34

Export-Led Growth VIII • After 1985 Israel successfully pursued • Economic reforms at home, and • Export promotion abroad • By early 2000 s Israel had become a global hub for hightech industries. 35

Export-Led Growth IX • In oil exporting countries official strategy straight forward • Acquire revenue from mineral exports • Create an industrial base for sustained development after the natural resource was exhausted • But oil-based growth creates its own types of economic challenges in addition to political challenges • Export revenues accrue to the state • Oil exports lead to a change of relative prices that discourages economic diversification and • Oil revenues depend on oil prices which are highly variable • These three characteristics combine to forn the “Dutch Disease” • 36

Export-Led Growth X • Hardest sector hit by Dutch Disease has been agriculture • Good policy can avoid many Dutch Disease problems • Expenditures can be smoothed by placing revenues in an oil fund and • Oil revenues can be used to strengthen sectors that become weakened • For example infrastructure can be subsidized to increase the productivity of the traded sectors • Seriousness of Dutch Disease and the cure have varied considerably from one country to another. 37

Export-Led Growth XI • Two groups of oil producers • Those with other resources and • Those entirely dominated by mineral resources • First group includes, Algeria, Iraq, Iran and Syria • Second set the Gulf states • State-led industrialization may seem a reasonable approach for the first group • Harder to imaging the Gulf States when oil runs out • However the first group has largely failed to become industrialized 38

Export-Led Growth XII • The Gulf countries have done much better. • Funds were used to expand infrastructure • A portion of revenues were invested in wealth funds • These countries invested in highly capital and energy intensive petrochemical complexes and other energy intensive industries • Instead of creating a future without oil they opted for increasing the value added in the final output of petroleum or energy intensive industries and • Finally, they started to diversify away form oil • Today, Saudi Arabia the largest exporter of industrial products in the whole region and • The UAE has been able to develop a service sector that is globally competitive. 39

Recent Growth: 2000 to 2010 I • Structural adjustment and macro-stability did yield some benefits • Once macroeconomic situation stabilized by around 2000, private sector put in charge of economic growth • Growth picked up for most countries in the region • Between 2000 and 2010 several countries grew by more than 3% per annum on a per-capita basis • Turkey, • Egypt • Iran • Jordan • Lebanon, • Morocco, • Sudan and • Tunisia 40

Recent Growth: 2000 to 2010 II • Pro market reforms which accelerated in the 1990 s in most of the region started to transform the region into private-sector driven economice • Because the new arrangements did not lead to competitive and dynamic markets, growth remained modest • Moreover quality of economic growth deteriorated • Much less inclusive than in the past • Private sector became increasingly informal, monopolies and privileges rather than competitive markets became the rule • Little trickle-down • Income inequality rose 41

Recent Growth: 2000 to 2010 III • Central question of why the Arab region underperformed given what looked on paper to be impeccable market reforms – has been debated for years. Different views: • Economists: reforms did not go far enough • Political scientists: strategy of economic reforms first and political reforms later • Meant that as markets were liberalized rules that governed the markets were applied in a way that benefitted “networks of privilege” – firms with personal and social ties to political elites. • Firms had myopic short term interests that stifled competition and innovation 42

Recent Growth: 2000 to 2010 IV • Supporting this view -- evolution of private sector in to a highly dualistic structure • With a few large firms on top • A large informal economy, and • Very few dynamic firms in the middle • World Bank study found countries that did as much to reform their economies as the MENA countries growth should have been one to two percent higher than actual growth rate • With reduced competition much capital was pushed to the few large firms that could be trusted by politicians, rather than toward firms that could use capital more efficiently 43

Recent Growth: 2000 to 2010 V • The patterns of growth that emerged after most of the countries in the region undertook structural adjustment programs reflect low dynamism of the private sector • The result • Manufacturing remained low, and • Exports rose only moderately. • Region went through several phases: • From high but inefficient investment to • To more efficient but lower investment 44

Recent Growth: 2000 to 2010 VI • From 1960 s through 1980 s MENA countries invested as high a proportion of GDP as other developing countries • Between 1970 and 1990 s investment rates in three types of countries between 25 and 27% of GDP • Nearly half was made by public sectors in the region • Much went to public enterprises, and initially they had good returns in terms of growth • In some countries however returns were low especially when combined with import substitution • Large and inefficient investments mainly the problem of oil rich countries • Saudi Arabia in 1980 s • Iran in the 1970 s and 1980 s and • Algeria, Syria and Iraq from the 1960 s through the 1980 s 45

Recent Growth: 2000 to 2010 VII • Algerian case interesting • For a generation Algeria invested over one third of its output – one of the highest investment rates in history • By late 1970 s however generating additional dollar of output required twice as much investment as South Korea • Opportunity costs • Algeria could have invested in more productive endeavors and • It missed out on the fast export-oriented global economy of the 1980 s which benefited East Asia 46

Recent Growth: 2000 to 2010 VIII • By the 1990 s, countries with money-losing public enterprises could no longer bail them out • Rollback of the state hit pubic investment hardest • By end of the 1990 s reforms had led to situation where return on investment was much improved • Other factors also improved and contributed to growth especially higher skill levels • Foreign direct investment (FDI) also remained relatively low • Both domestic and foreign private investment favored sectors such as mining and real estate rather than labor intensive sectors 47

Recent Growth: 2000 to 2010 IX • Structural Change: Services Rather Than Manufacturing • Development takes place when: • Incomes rise • Labor moves from low to high productivity sectors and • Productivity increases within sectors • Key development: Inability of the economies of the region to achieve a virtuous circle of high efficiency investment and growth. • Both reflected and caused by stunted pattern of structural changes • Agriculture fell but manufacturing did not rise • Low productivity services rose by default 48

Recent Growth: 2000 to 2010 X • Manufacturing in MENA geographically concentrated • Turkey, • Egypt, • Iran, • Israel • Saudi Arabia • Many country’s industries process agricultural outputs or produce textiles • Because of the labor-intensity and relatively well established technology of such industries many countries turn to them • The more industrialized countries produce significant quantities of machinery, chemicals • Most diversified are Israel and Turkey 49

Recent Growth: 2000 to 2010 XI • Mostly the residual category of “services” that picks up most of the slack accounting for one-third to more than one half of output • The share of services has increased by over 50% in most countries over past two decades – even higher in the GCC • Often takes place in the informal sector where firms • Have low capitalization • Sell in easily entered markets and • Offer low-paying and • Insecure jobs 50

Recent Growth: 2000 to 2010 XII • World Bank has found that typical MENA country in 2010 produced one-third of its GDP informally. Informal shares: • Morocco 44% • Egypt 33% • Syria 34% • Tunisia and Lebanon 30% and • Jordan 26% • These shares higher than in many other developing countries • In the U. S. only 9% 51

Recent Growth: 2000 to 2010 XIII • Export Performance • Question of growth sustainability in region now built on • non-tradables and • oil • Rather than manufacturing exports and which has made little movement up the quality ladder. • Region has three countries that export mainly manufactured goods: • Turkey • Israel, and • Tunisia • With Morocco and Jordan improving their performance 52

Recent Growth: 2000 to 2010 XIV • In RRLA and RRLP countries • Very small share of exports are manufactured • However Saudi Arabia’s manufactures while a small share still tops other countries in the region • Still Saudi performance largely reflects energy subsidies • For the region inhibiting factors include • Dutch Disease • Coming in after East Asian countries had already captured many markets 53

Inheritance from the Past I • • The Effects of Fiscal Retrenchment Last twenty years have seen slow transition in the region • From state-led to market-driven growth • • Outside the RRLP countries from very large to smaller and more impoverished state. Fiscal policy central for developmental outcomes • The size and structure of state expenditures have a direct and indirect effects on capital formation, infrastructure, skills and human development – all critical for growth • Taxation and subsidies affect incentives to invest and use resources effectively • Developments in the civil service affect the labor market • Size and financing of deficits determine macro-stability as well as availability of finance for the private sector • Redistribution policies have an important impact on social peace 54

Inheritance from the Past II • Pattern of government expenditures • For region as a whole and for the three sub-groups • Government expenditures shot up in the 1970 s with the oil boom • Fell significantly in the 1980 s • Stabilized in the 1990 s at much lower levels • While state expenditures exceeded those in other global regions, MENA exhibited a downward trend in the past two decades • However oil exporting countries started to increase expenditures again in the more recent oil boom 55

Inheritance from the Past III • Government expenditures decreased dramatically in the RPLA countries • Peaked in early 1980 s at about 50% of GDP • By early 1990 s down to about 30% • Adjustment tended to be slow and gradual because it was supported by the international financial institutions • Had a dramatic impact on some key services offered by the state • Since the 1980 s public welfare institutions have declined steadly • In Egypt highest level of expenditure was 61. 5% of GDP in 1982 and lowest 25. 1% in 1998 56

Inheritance from the Past IV • Public investment particularly hard hit in all three groups of countries. • From about 14 -15% of GDP during 1980 s and early 1990 s to 6 -7% • Collapse most marked in • Algeria, • Syria, • Jordan, and • Tunisia 57

Inheritance from the Past V • Lower investment resulted. Particularly in • Infrastructure, and • Schools • Has had an increasingly negative effect on economic growth – especially in marginalized regions • That were allowed to fall behind, and • From where most of the 2011 uprisings started. • Civil service wage bill was squeezed also but much less than public investment • When the hiring in the public sector was reduced and some cases frozen, a devastating blow to educated entrants to the job market • The overall wage bill fell faster than public sector employment as a result civil service remains underpaid – feeds petty corruption. 58

Inheritance from the Past VI • Government spending on health and education has been least affected except in RRLA countries where fell from 6. 5% to 3. 8% GDP • Result a slowdown in the HDI in Arab region to a larger extent than in other parts of the developing world • After taking off in the 1970 s the rate of increase in HDI in Arab region slowed markedly • Subsidies on consumer goods slashed the most during the adjustment episode of the 1980 s • Often food subsidies to the poor. • In RPLA countries they were cut from 9. 7% of GDP to 1. 1% • In RRLA countries subsidies started at higher levels and remained high – one way oil countries transferred some oil income to their citizens. 59

Inheritance from the Past VII • With increase in energy prices in the 2000 s • Attempt by many governments to lure the rich and middle classes to continuing support • Subsidies on energy products rose further • Shrunk already squeezed fiscal space • By 2011 energy subsidies much higher in Middle East than elsewhere • About 8% regional GDP – 22% of total government revenue 60

Inheritance from the Past VIII • Phenomenon not restricted to oil exporters in 2011 energy subsidies. In 2011 energy subsidies represented • Egypt 41% of government revenues • Yemen 24% and • Jordan 22% • Such subsidies very regressive as oil products tend to be consumed in much larger quantities by the rich • Seer size of these subsidies squeezes pro-poor expenditures out of the budget • In many countries they now represent an expense several times higher than total spending on health and education. • Once in place, difficult to reduce because of political backlash 61

Inheritance from the Past IX • Fiscal regimes also seem to have become more pro-rich over time • Tax rates have remained relatively low in countries with large hydrocarbon reserves • In countries with low per capita natural resources tax revenues actually fell after structural adjustment, reflecting • Lower of corporate taxes and • Rise of untaxed informal markets • Direct taxes now constitute a relatively small share of fiscal receipts • Indirect taxes became a more important after the reforms in 1990 s • Inherently regressive because applied to consumers across board regardless of income 62

Inheritance from the Past X • Spending on security much harder to measure • Typically military expenditures were also cut, but in many countries spending on security and police rose as repression increased • In large part to quell rise in protests and social demands • In several countries the military went off budget to protect its interests • Egypt estimated that the military economy ranges between 10 and 30 percent of GDP • Army operates its own factories housing schemes, and consumer goods distribution 63

Social Outcomes I • Modest improvement in economic growth experienced since mid-1990 s has not been “jobless” as often claimed. • However most jobs in low productivity areas • Informal sector rather than in areas that could use the skills of the more educated workforce • Unemployment figures grab headlines • Broader issue is the massive underemployment of skilled workers • Unemployment largely effected educated youth that cannot afford long searches for jobs in line with their expectations • Also group whose anger most instrumental in political unrest 64

Social Outcomes II • Much has been made of youth bulge • Fear that if too many young people are entering labor market at times of low growth many will end up unemployed thus increasing risk of social unrest • Good news • Region has reached beginning of the end of demographic pressures that prevailed in past • Bad news • Region failed to take advantage of the demographic dividend • Instead with the bulge peaking during “lost decades” what could have been a dividend turned into a curse. • Leaving behind a population with low productivity jobs and high unemployment rates • Larger problem underemployment –productivity has not increased in line with skills due to insufficient capital. 65

Social Outcomes III • In sum region has extensive untapped human resources • Underemployment of skilled workers • High levels of unemployment and • Very low labor force participation rates of women • Although output growth has been relatively high in last two decades compared with the 1980 s and 1990 s growth has not been translated in workers’ income • Sugget that recent years poverty stagnated and inequality increased • Possibly contributing to frustrations underpinning the Arab uprisings 66

Social Outcomes IV • Evolution of Poverty • MENA governments proclaim their desire to reduce poverty and promote equality • Problems in evaluating progress in these area • Data on poverty and expenditure distribution are scarce and low quality • Need to rely on sample surveys but these only available for a few countries • Algeria, Egypt, Iran, Jordan, Morocco, Tunisia, Yemen and Palestine • Moreover except for Palestine surveys not conducted regularly 67

Social Outcomes V • Also data tends to be expenditures not income • Surveys also biased towards equality because of low response level of the upper end of the income distribution • Therefore statements concerning poverty and income distribution need to be taken very skeptically 68

Social Outcomes VI • Poverty relative concept and choice of poverty line can give a dramatically different picture • At $2 a day about 22% of MENA region population under poverty line – about the same as for Latin America until the last decade • At $3 a day the rate jumps to 46% which is considerably above Lain America • In general poverty in MENA region concentrated among the uneducated and socially vulnerable (such as widows), and in less favored rural areas 69

Social Outcomes VIII • The poor have • Low skill levels • Limited access to health services and • Are excluded from social security coverage • Patterns roughly similar to those found throughout the developing world • Low levels of extreme poverty can be explained by • International migration and remittances and • Government employment • Evidence that poverty increased during the adjustment period of the 1990 s 70

Social Outcomes VIII • Reasonable to conclude that • Progress has recently stalled, • Many millions of residents of region remain below the absolute poverty line with little hope of escape • A sizeable portion of population in many countries has been unable to progress socially in way previous generations did – through hard work and education • Many seem to have been left in a poverty trap by the rollback of the state 71

Social Outcomes IX • Inequality • In addition to persistent poverty a possible rise in inequality has also been cited as a major factor behind the Arab uprisings • Data on income distribution (Gini index) even more incomplete than poverty – often contradictory • Consumption inequality tends to be low in the region compared to other developing areas • Result of socialism of the past 72

Social Outcomes X • Inequality highest in • Morocco • Jordan • Tunisia, and • Yemen • Gini coefficient around 40% • Lowest in • Egypt and • Syria • Gini coefficient around 30% • Apparently inequality rose everywhere after the reforms of the 1990 s, from a low base 73

Social Outcomes XI • Inequality also varies considerably between regions of several countries • Tunisia • Syria • Yemen • Egypt • One theory is that inequality between the middle class and the rich has widened considerably since the 1990 s and this is the cause of the frustrations leading to demonstrations • Higher incomes associated with higher levels of education, but family connections may play a significant role in admissions • Again leading to frustrations 74

Social Outcomes XII • Recent studies show high degree of inequality of opportunity in • Education achievement • Jobs • Given body of evidence for increased inequality of opportunity across region rising perceptions of inequality are plausible explanations for the uprisings 75

Social Outcomes XIII • Surveys: statement “incomes should be made more equal” increased support for policy increased: • From 27% in 2001 in Morocco to 71% in 2011 • Egypt rose from 13% in 2001 to 69% 2012 • Algeria 23% in 2002 to 44% in 2014 • Shift in perception most marked among the middle class • Suggests it is the increased inequality • between the middle class and the rich • as opposed to that between the middle class and the poor • That has been behind popular frustrations 76

Conclusions/Summary I • Uprisings led to a negative economic shock in the “transitioning” countries • Tourism took a hit • Capital flight accelerated • Exports declined and • Investment collapsed in Tunisia, Egypt, and Yemen. • Economic growth declined after 2011 and unemployment increased. • Initially governments reacted with expansionary policies to smooth the downturn • However outside the GCC such policies could not be sustained long 77

Conclusions/Summary II • Expansionary policies largely supported by • increased domestic debt • International aid did not rise despite repeated promises • IMF programs are being developed in these countries but citizen groups may not allow the passage of minimal reform programs that could contain deficits • Main economic challenges difficult to resolve in the best of circumstances • Biggest challenge is economic stabilization • How best to build a package of measures that reduce expenditures, raise revenues and command some level of popular support 78

Conclusions/Summary III • A more stabile political environment offers possibility of initiating significant reforms • Second key area should be the modernization of the state and rehabilitation of public services especialy • Health • Education and • Social protection • Need to redirect expenditures toward social services and away from subsidies that benefit the better off • Improving service delivery and fighting petty corruption will require increased public sector wages 79

Conclusions/Summary IV • The third big area is the growth agenda • Priority issues such as • Improving competition, • Democratizing credit, and • Reducing the constraints faced by the informal sector • Do not have easy solutions • Will require more popular participation in the policymaking process 80