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It is time for the Arab world to invest in people not subsidies

Hana Brixi's picture
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             This blog has been co-authored by Hana Brixi and Yasser El-Gammal.

This post is part of a blog series that we hope will provide some food for thought on the critical questions outlined in the report on social safety nets.

Governments in the Arab world have historically relied on subsidies to lower the cost of fuel and food as the principal means for protecting the poor and sharing wealth. Or so they claim. The fundamental problem with subsidies is that they benefit the rich far more than the poor. They are as expensive as they are inefficient, failing to deliver any economic or social value equal to the money spent on them. Subsidies also have negative side effects, distorting consumption and economic activity in unproductive ways. A number of international examples have shown that there are far more effective and less expensive methods for protecting the poor. It is why many countries around the world have abolished subsidies in favor of more efficient instruments, such as targeted cash transfers, and improved social service delivery.

World BankGovernments are well aware that subsidies consume an unjustifiably high share of public finances.The region has the highest levels of subsidies in the world, representing on average a full 5.8 percent of Gross Domestic Product.The bulk of this spending goes towards fuel subsidies, which have the most unequal impact of them all, with the rich reaping the vast majority of its benefits. Governments are also aware that there are fairer, more efficient and less costly ways of protecting the poor and contributing to economic, human and social development. Furthermore, they are  aware of how  reforms can be implemented. There are a number of examples of how the many challenges of the reform process can be managed from countries as diverse as Iran, Indonesia and Brazil.

Why then has a comprehensive reform of the various subsidy systems not yet taken place across the region?

Some governments have made attempts at reform but have struggled to communicate the downside of subsidies and have not, on the whole, presented a convincing case that they can and should be replaced by more effective programs. There was the additional challenge of gaining the trust of citizens that the resources saved from subsidy reform would indeed be redirected toward the poor.  These reform efforts also tended to be launched during particularly difficult economic times, when the public was especially sensitive to any type of price increase.  Without a sense of the broader economic and policy context of reforms, citizens were naturally suspicious of  price increases associated with the removal of subsidies. This was especially the case in circumstances where there was no evidence of any expansion of social safety nets to compensate for the effect of higher prices.

Each subsidy comes with its own very specific reform challenges. This is particularly true of those related to natural resources, which run up against the perception that they are entitlements no one should pay for. It reflects how an Egyptian farmer of modest means might feel about paying for water from the Nile.Or the prevailing view in the oil rich Gulf countries, where gasoline is heavily subsidized.

Perhaps most importantly, though, the wealthier segments of society, who reap the greatest benefits from subsidies, have stood against reform processes. With certain social advantages, such as better access to the media, the rich and the middle class have dominated the debate on subsidies in the region.

REFORM CAN BE DONE, IT MUST BE DONE AND THIS IS HOW IT CAN BE ACHIEVED

Given the many challenges, is there any hope for subsidy reform? There certainly is. Reforms can be implemented inthe Arab world as they have successfully in other parts of the world.  The region is readier for it now than ever. It is a time of profound change and there are a number of good practices which can serve as guides, and many governments have few other options for managing their tight fiscal pressures in the current, global financial situation. Reform is never an easy process, but for it to happen peacefully and successfully there are a few things the governments need to do: 
  • Prior to reducing subsidies, governments will need to gain the trust of citizens that the alternative Social Safety Net programs will work. In order to build this trust it will be crucial to showcase the effectiveness of these alternative mechanisms in protecting the poor.
  • It will also be necessary to compensate the middle class and ensure their support throughout the reform process.
  • Related to the ”showcasing,” it will be important to launch a solid communication campaign to inform citizens of why reforms are needed, what they will entail and how they will play out.
  • A gradual approach should be adopted, focusing on the most regressive subsidies first (such as gasoline subsidies which consume the majority of the fiscal resources and almost entirely accrue to the higher-income groups) while leaving less regressive subsidies (such as food subsidies) for later.
     

It will never be as easy and straight forward as sitting in the Prime Minister or President's office and signing a decree for subsidy reform. But the pain of the reform process is manageable, and the results are well worth the effort. These are indeed the reforms that Arab countries can least afford to overlook during this era of change. They are essential to ensure fiscal stability and improve the return on the investment of precious public resources. It must happen today rather than tomorrow in order tofulfill popular aspirations for greater social and economic inclusion.

Read all the posts in the social safety net blog series:
Who should pay for the poorest in Lebanon?
NOW is the time to bring MENA's poor Into the net

It is time for the Arab world to invest in people not subsidies
Fighting poverty in the Arab world: with Soap Operas?
Can a game teach us how to better invest in the poor in Jordan?

Comments

Submitted by Ali A on
I did not know so much money was used for subsidies and rich took most. Very unfair but the ususal. You write its difficult to reform and I also wonder how can you do with the gas subsidies? Everyone can use gas subsidies and if they increase the price of gas everybody rich, middle class and poor will reach and protest. I understand your point and I agree, we must help the poor in a better way. Thank you for answering me.

Submitted by Nahla on
I think this is great that you highlight this big problem. Thanks. It is very sad that some more welloff parts of society is putting their foot in front of reform. My own family and our friends back home belong to this part of society that does not want the subsidies to stop. We tell ourselves and eacother that we have the right to this. Sad but true.

As you said in the blog people dont trust the government so we think, well lets make sure we can grab as much as we can because it will for sure not go to the poor anyway so we might just take it ourselves. You point out that the government need to first prove that there are alternatives AND that the money will go to the poor. True, true true.

And then the poor peoples voice need to get into the media. I am from the middle east but I live outside now, what can I do from the outside to help change these perceptions?

Submitted by Ronny Hayek on
When I came across this piece in the Huffington Post I felt glad that the topic is finally in the news. When I linked it back to the World Bank blogs, I felt surprised (although in a positive way). I could not agree more, it is a shame that such a huge amount is spent on subsidies that do not reach the poor the way they should.

Hana, in your answer to Ali you wrote that the programs need to be launched with credibility and visibility in order to have them substitute subsidies. But the difficult thing will remain - even if the poor then come to realize that there are better options for them, the richer will likely not be willing to give up the free ride benefits they have been getting. That will probably be the main challenge, don't you think? When it comes down to it this is not only an issue of government capacity but rather plain and simple: rich vs poor - which cannot easily be changed.

Thank you.
Ronny

Submitted by Samar on
You speak of more efficient instruments: cash transfers and improved social service delivery. You also mention some international examples of countries that have reformed.

Are there any countries in the Arab world that, (although they may not have managed to reform), have managed to introduce cash transfers and improve their social service delivery already? I think it is important that the Arab countries see that another - not so efficient system in a neighboring country - have managed to take steps along the way. The fact that they managed in Iran is inspiring though, they may suffer from some similar issues (?).

Engaging piece.

Submitted by Daran on
You decribe how reform can be done in a few steps, but with the government mistrust (plus also some paranoia) I think these kind of reform will be almost impossible. Is the world bank doing any work with governments on subsidies reform in the Middle East?

Submitted by Yasser El Gamma... on
Dear Samar,

Thank you for your question. Most countries in the Arab world have some form of cash transfers. Their targeting however is not very good. The Palestenian Territories have one of the best targeted cash transfer program in the world and we are helping to disseminate their experience within the region.

Dear Ronny,

Glad that you have been positively surprised by our blogs. Your concern relates to the fact that governments are sensitive towards the vocal groups, mainly the rich and middle class. Fortunately, in the Middle East and North Africa Region the voice of the people is being increasingly articulated and heard. The rising power of citizens' voice reduces the scope for rich and middle class capture. Moreover, in the long term, it is in the interest of the rich as well as the poor that public resources be used effectively for human development and poverty reduction instead of subsidies. This is because human development will eventually elevate productivity and will benefit the rich as well as the poor in the form of a stronger economic growth and shared prosperity. The need to make people, regardless of their income, consider their interests in the longer term underlines the importance of transparency and communication as highlighted in the blog.

Dear Daran,

Thank you for your comment. Subsidies reforms are possible as the experience in a number of countries around the world has proven. In the Middle East and North Africa Region, several countries, are exploring the options for such reforms. The World Bank has been supporting their effort in this direction by mainly facilitating the sharing of experiences with other countries that has successful experiences in fuel subsidies reform.

Submitted by Nahla on
Dear Hana I thank you for your answer and ideas. I will think more about what you said and how I can help out myself. Maybe as you say write in my home country and share information about the programs you mentioned worked in for example Palestine. So people can understand it is possible to help the poor. I will first read more myself and learn more. Thank you again.

Submitted by Ali A on
Thanks for the answer. I just hope the people then really can get to see the good effects of any new programs so that they can understand and become convince. It's a tight window to first show the new program works before people become angry with less gas subsidy. Ali.

Submitted by Mateen on
Reforming is necessary for the Arab Countries, because there are several problems creating in the Arab Countries. The overall situation of the World is changing due to shortage of natural sources, the subsidy may be stopped. Major subsidies like on gas and petroleum and on raw material should be stopped to increase the country economy. The stoppage subsidy is not easy process, because overall structure will be changed and disturb but to rise up of economy in these Arab Countries are very necessary and important.

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