This blog has been co-authored by Joana Silva, Victoria Levin, Matteo Morgandi and Amina Semlali.
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Overcoming poverty is not a task of charity… poverty is not natural. It is man-made and it can be overcome and eradicated by the actions of human beings.” Many years later these words by Nelson Mandela still resonate with us in our work on social protection of the poor in the Arab world, where a growing middle class exists alongside severe poverty. More than a quarter of the children in the lowest economic strata in Egypt, Morocco and Syria are chronically malnourished. At the same time, the subsidies that governments rely on to lower the cost of fuel to protect the poor are mainly captured by the rich. It does not have to be that way - there are solutions.
The changing tides in the Arab world inspired us, a team of young economists, to gather as much knowledge as we could on how governments could address these challenges - particularly by listening to citizens to get a better understanding of how they perceive the situation. In the World Bank report “Inclusion and Resilience: The way forward for safety nets in the MENA region” we underline the urgency of a comprehensive reform of welfare systems in the Arab world, the unique historical opportunity for achieving it and how to move forward with the process.
Using household surveys in the region, the team analyzed data that demonstrated that in, for example, Egypt and Jordan, more than half of the fuel subsidy benefits are captured by the richest 20 percent of the population. This fact is not widely known in the region, nor is it common knowledge that relying on subsidies comes at a very high cost. The average Arab country spends 5.7 percent of Gross Domestic Product (GDP) on food and fuel subsidies - as opposed to 1.3 percent of GDP in the average benchmark country. The high fiscal cost of fuel subsidies crowds out public investments in more effective types of programs that could better focus on the poor (such programs have allowed countries like Brazil to make important strides in poverty reduction, at a fraction of the cost). Although the benefits of fuel subsidies are disproportionately targeted to the rich, many people are currently relying on them to stay out of poverty.
(Click to Enlarge)
“The rich reap the main subsidy benefits in the Arab world - yet opposition to subsidy reform extends from the rich to the middle class and the poor.”
Opposition to subsidy reform can be seen around the world and the Arab world is no exception. Even though the rich capture most fuel subsidy benefits, the poor and the middle class also oppose reform, thinking that subsidies are their best option. In fact, our new nationally-representative World Bank/Gallup opinion poll (MENA SPEAKS) conducted in Egypt, Jordan, Lebanon, and Tunisia confirmed citizens’ resistance to subsidy reform. We wanted to dig deeper and identify which specific subsidies people were least attached to, under what circumstances they would consider the reform of diesel subsidies and what would help to change their minds. Among the four countries surveyed, residents in Jordan and Egypt were the most likely to oppose reforming any of the existing subsidies. Six out of ten Egyptians (60%) and nearly half of all Jordanians (47%) surveyed refused to pick out a subsidized product they would be willing to stop subsidizing, even if the government could not afford to maintain all existing subsidies. In contrast, a little more than a quarter of Tunisians (27%) and only five percent of Lebanese refused to select a subsidy to reform.The results also offered strong evidence that the sequencing of reforms matters, along with the design of the compensation package to address the effects of reform. Specifically:
Experiences from other countries show that the pivotal reform ingredients are trust and transparency. Citizens need to know that compensation will be delivered to the intended beneficiaries if subsidy reform is undertaken; this confidence increases the willingness of citizens to forgo their own welfare for the benefit of the poor. This was highlighted in a behavioral experiment Jordan Gives that was implemented as part of the report, with a nationally-representative sample of the Jordanian middle class. The experiment demonstrated that the majority were willing to give up their private entitlement (specifically, a fuel voucher, that is akin to a fuel subsidy) if they knew that the poor would benefit from this decision. The ability to actually witness the delivery of benefits to the poor bolstered the willingness of participants to give up their fuel vouchers, especially among young people and those with low confidence in the effectiveness of safety nets.
Moreover, making the delivery of benefits more transparent enhanced the support for cash-based rather than in-kind transfers. The former may be perceived as more prone to elite capture in the context of low trust in how government services are delivered, but cash transfers may have a greater impact for the livelihood of the poor. As one young lady who participated in the experiment said: “My own family does not want the subsidies to stop. We tell ourselves that we have the right to this…People lack trust in the government so we think, well let’s make sure we grab as much as we can because it will for sure not go to the poor anyway. The government needs to first prove that there are alternatives (to subsidies) AND that the money will go to the poor.”
The Way Forward
There is no single solution, but the data gathered for the report has important implications for a variety of circumstances. Perhaps the most important is that with many people in the region currently depending on subsidies to stay out of poverty, expansion of targeted social safety nets needs to be an integral part of any subsidy reform. Expanded safety nets would protect the most vulnerable from the effects of reducing subsidies and would improve the chances of successful implementation of the subsidy reform itself. This has already proven to be the case in the experience of countries as diverse as Indonesia, Turkey and Mexico.
The Arab world is indeed ready for social safety net renewal, and the report outlines the agenda and various approaches to reforms. This would include rebalancing financing and priorities of social safety net systems away from untargeted subsidies and towards more effective and efficient targeted programs. The report emphasizes the importance of sequencing, such as starting with internal subsidy reforms (e.g. improving the targeting of existing subsidies, narrowing their coverage, and reducing leakages in the distribution chain). It highlights the importance of starting with less sensitive subsidies (which, as shown by the new data, are often fuel subsidies) and, simultaneously, implementing effective safety nets to gain citizens’ trust in the government’s capacity to deliver fair and reliable compensation. Finally, and perhaps more importantly, by reaching out to people with MENA SPEAKS and Jordan Gives, the report shows how crucial it is to engage citizens in a dialogue about compensation packages and promoting awareness through information campaigns. With public engagement and support, it is possible to structure credible compensation strategies that protect the poor from the possible adverse effects of subsidy reform and make the reform more sustainable. People in the Arab world want protection and services, not just subsides, and the reforms needed to deliver on these demands are possible under the right conditions.
“
Overcoming poverty is not a task of charity… poverty is not natural. It is man-made and it can be overcome and eradicated by the actions of human beings.” Many years later these words by Nelson Mandela still resonate with us in our work on social protection of the poor in the Arab world, where a growing middle class exists alongside severe poverty. More than a quarter of the children in the lowest economic strata in Egypt, Morocco and Syria are chronically malnourished. At the same time, the subsidies that governments rely on to lower the cost of fuel to protect the poor are mainly captured by the rich. It does not have to be that way - there are solutions.
The changing tides in the Arab world inspired us, a team of young economists, to gather as much knowledge as we could on how governments could address these challenges - particularly by listening to citizens to get a better understanding of how they perceive the situation. In the World Bank report “Inclusion and Resilience: The way forward for safety nets in the MENA region” we underline the urgency of a comprehensive reform of welfare systems in the Arab world, the unique historical opportunity for achieving it and how to move forward with the process.
Using household surveys in the region, the team analyzed data that demonstrated that in, for example, Egypt and Jordan, more than half of the fuel subsidy benefits are captured by the richest 20 percent of the population. This fact is not widely known in the region, nor is it common knowledge that relying on subsidies comes at a very high cost. The average Arab country spends 5.7 percent of Gross Domestic Product (GDP) on food and fuel subsidies - as opposed to 1.3 percent of GDP in the average benchmark country. The high fiscal cost of fuel subsidies crowds out public investments in more effective types of programs that could better focus on the poor (such programs have allowed countries like Brazil to make important strides in poverty reduction, at a fraction of the cost). Although the benefits of fuel subsidies are disproportionately targeted to the rich, many people are currently relying on them to stay out of poverty.
(Click to Enlarge)
“The rich reap the main subsidy benefits in the Arab world - yet opposition to subsidy reform extends from the rich to the middle class and the poor.”
Opposition to subsidy reform can be seen around the world and the Arab world is no exception. Even though the rich capture most fuel subsidy benefits, the poor and the middle class also oppose reform, thinking that subsidies are their best option. In fact, our new nationally-representative World Bank/Gallup opinion poll (MENA SPEAKS) conducted in Egypt, Jordan, Lebanon, and Tunisia confirmed citizens’ resistance to subsidy reform. We wanted to dig deeper and identify which specific subsidies people were least attached to, under what circumstances they would consider the reform of diesel subsidies and what would help to change their minds. Among the four countries surveyed, residents in Jordan and Egypt were the most likely to oppose reforming any of the existing subsidies. Six out of ten Egyptians (60%) and nearly half of all Jordanians (47%) surveyed refused to pick out a subsidized product they would be willing to stop subsidizing, even if the government could not afford to maintain all existing subsidies. In contrast, a little more than a quarter of Tunisians (27%) and only five percent of Lebanese refused to select a subsidy to reform.The results also offered strong evidence that the sequencing of reforms matters, along with the design of the compensation package to address the effects of reform. Specifically:
- Citizens are more willing to reform fuel subsidies rather than food subsidies, if the need arises. Perhaps relatedly, most citizens were aware of food subsidies but less than half of all respondents were aware of any fuel subsidy in their country.
- Citizens prefer compensation for subsidy reform to be in cash targeted to the poor, and in most countries, they would like to combine this with increased spending on social services such as healthcare and education. Note: Citizens were offered four compensation options: distribution of money to the poor only; distribution of money to all families except the wealthy; distribution of money to all families including the wealthy, and distribution of money to the poor combined with spending on education and healthcare.
- If given the option of accompanying subsidy reform with their preferred compensation strategy out of the four options provided, the majority of respondents in Egypt and Tunisia indicated that they would be willing to support removing diesel subsidies.
- If cash transfers targeted to the poor were part of diesel subsidy reform, more than 66% of Tunisians and 59% of Egyptians who initially opposed removing any existing subsidy would become supporters of diesel subsidy reform.
Experiences from other countries show that the pivotal reform ingredients are trust and transparency. Citizens need to know that compensation will be delivered to the intended beneficiaries if subsidy reform is undertaken; this confidence increases the willingness of citizens to forgo their own welfare for the benefit of the poor. This was highlighted in a behavioral experiment Jordan Gives that was implemented as part of the report, with a nationally-representative sample of the Jordanian middle class. The experiment demonstrated that the majority were willing to give up their private entitlement (specifically, a fuel voucher, that is akin to a fuel subsidy) if they knew that the poor would benefit from this decision. The ability to actually witness the delivery of benefits to the poor bolstered the willingness of participants to give up their fuel vouchers, especially among young people and those with low confidence in the effectiveness of safety nets.
Moreover, making the delivery of benefits more transparent enhanced the support for cash-based rather than in-kind transfers. The former may be perceived as more prone to elite capture in the context of low trust in how government services are delivered, but cash transfers may have a greater impact for the livelihood of the poor. As one young lady who participated in the experiment said: “My own family does not want the subsidies to stop. We tell ourselves that we have the right to this…People lack trust in the government so we think, well let’s make sure we grab as much as we can because it will for sure not go to the poor anyway. The government needs to first prove that there are alternatives (to subsidies) AND that the money will go to the poor.”
The Way Forward
There is no single solution, but the data gathered for the report has important implications for a variety of circumstances. Perhaps the most important is that with many people in the region currently depending on subsidies to stay out of poverty, expansion of targeted social safety nets needs to be an integral part of any subsidy reform. Expanded safety nets would protect the most vulnerable from the effects of reducing subsidies and would improve the chances of successful implementation of the subsidy reform itself. This has already proven to be the case in the experience of countries as diverse as Indonesia, Turkey and Mexico.
The Arab world is indeed ready for social safety net renewal, and the report outlines the agenda and various approaches to reforms. This would include rebalancing financing and priorities of social safety net systems away from untargeted subsidies and towards more effective and efficient targeted programs. The report emphasizes the importance of sequencing, such as starting with internal subsidy reforms (e.g. improving the targeting of existing subsidies, narrowing their coverage, and reducing leakages in the distribution chain). It highlights the importance of starting with less sensitive subsidies (which, as shown by the new data, are often fuel subsidies) and, simultaneously, implementing effective safety nets to gain citizens’ trust in the government’s capacity to deliver fair and reliable compensation. Finally, and perhaps more importantly, by reaching out to people with MENA SPEAKS and Jordan Gives, the report shows how crucial it is to engage citizens in a dialogue about compensation packages and promoting awareness through information campaigns. With public engagement and support, it is possible to structure credible compensation strategies that protect the poor from the possible adverse effects of subsidy reform and make the reform more sustainable. People in the Arab world want protection and services, not just subsides, and the reforms needed to deliver on these demands are possible under the right conditions.
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