Structural Transformation is Key for Poverty Reduction in Arab Countries - Economic Research Forum (ERF)

Structural Transformation is Key for Poverty Reduction in Arab Countries

Structural Transformation is Key for Poverty Reduction in Arab Countries

By Khalid Abu-Ismail, Chief of the Economic Development and Poverty Section at UN-ESCWA.

The long-term development vision for the Arab region should address the core challenge of poverty reduction, especially in middle and lower-middle income countries. Such a vision must also build on an understanding of the order of magnitude and evolution of poverty in Arab countries. The Arab poverty story, however, depends crucially on our choice of poverty measure. For example, if we rely on international poverty lines based on PPP exchange rates, it would seems that the Arab poor and middle class generally benefited from the liberal economic and social reform policies adopted by most Arab countries since the late 1980s. Accordingly, we may be inclined to accept the view that the Arab Spring was driven by a failure in governance rather than a failure in economic and social policies per se. The basic premise of poor governance being correct, I would argue that on the contrary, the consequences were quite different, namely the Arab poor and middle class were negatively affected by these economic reform policies. The basis for this position is not to rely on international poverty lines, given their problems related to PPP adjusting for exchange rates and inflation. Based on national poverty lines for a large number of Arab countries, the (non-GCC) regional poverty rate may have actually increased slightly from 1990 to 2010.

Likewise, data on the distribution of expenditure derived from household survey (such as the Gini and the share of the bottom 40%) will show inequality is low and slightly declining in Arab countries since 1990s. However, discrepancies between household expenditure surveys and household final consumption expenditures from national accounts suggest that inequality is much higher than we think and that it may have risen particularly during the decade leading up the Arab uprisings. The estimate by Alvaredo and Picketty (2014) that the share of top 1 per cent income receivers  might exceed 25 per cent of the region’s income (compared to 20 per cent in the United States) supports this conclusion.

One would like to corroborate this alterative assessment of the poverty and inequality narrative up to 2010 with progress in other aspects of development, which would also give a better sense of the broader Arab development challenges. Although economic growth has been relatively high over the past three decades, per capita growth was modest and there has been a region-wide increase in informal sector activities and vulnerable employment. In parallel, there has been a notable rise in undernourishment (since 1990).

Regional conflicts since 2010 have no doubt exacerbated these challenges. For example, according to the ESCWA Arab middle class report, the middle class size may have declined from 45 per cent in 2000 to 37 per cent in 2013 while the share of the poor and vulnerable groups estimated to have increased by an equivalent rate (from 39.5 per cent in 2000 to 52.9 per cent). The size of the middle class today is likely to be even lower given regional instability since 2013.

What should Arab countries do to make growth pro-poor and in the long-run pro-middle class? If growth is pro-poor, the income of the poor is growing at a faster rate than for the rest of the population. This implies, over time, poverty reduction and an expanding middle class. How can growth be pro-poor? This necessarily implies more effective social and fiscal policies. One concrete example is to redirect the fuel subsidies that mainly benefit the affluent groups to better targeted expenditures such as income transfers and employment schemes for the poor. Concurrently with poverty reduction, we should also aim to increase the welfare of the middle class so they do not slip into poverty. In the Arab context, this can be done by generating decent employment for the millions of young job seeking Arabs (an estimated 60-100 million jobs are required in the region by 2030). To this end, the pattern of growing informalisation of the labor market and/or the concentration of economic activities in low value-added sectors must be reversed by enacting economic policies that increase demand and real wages of the skilled middle class. Employment-led structural transformation can be induced through public investment programs and regional integration.

Is there fiscal space for financing a decent-work led economic transformation? Internal fiscal space exists in resource-rich labor-poor countries but not in resource-poor labor-rich countries. However, the natural complementarities between Arab countries can contribute significantly to improving productivity of the former and alleviating the fiscal constraint in the latter with economic regional integration. There is also much more that can be done to mobilize resources and financial flows, which are amongst other things, attracted by a good institutional environment. This brings us a full circle around, back to governance failure and the need for governance reform, which at the end of the day, costs little in extra finances.

The solution to the region’s poverty an inequality problems lies in providing decent employment, which past economic policies have failed to do. No doubt major reforms in governance practices are also needed. However, they are not sufficient unless accompanied with ambitious long-term programme of economic transformation and regional integration. Finally, the reconstruction of war-torn economies provides an entry point for revising policies along these lines.

About the Author

Khalid Abu-Ismail is the chief of the Economic Development and Poverty Section at UN-ESCWA. He held senior positions at USAID, Egypt’s Cabinet’s Decision Support Center and the UNDP, where he led and co-led several UN flagship publications, including Arab Development Outlook: Vision 2030 (ESCWA, 2015), Arab Development Challenges Report (UNDP, 2009 and 2012), The Arab MDG Report (UN and LAS, 2013) and many others. His research interests include macroeconomic (fiscal) policies, employment, food security, poverty (money metric and multi-dimensional) and inequality. He holds an MA and PhD in Development Economics from the New School for Social Research in New York, and a PhD in Development Planning and Environment from the University of Dundee in Scotland.