In the MENA region, building back does not need to cost much

The COVID-19 pandemic brought unprecedented disruptions to the Middle East and North Africa (MENA) region. Our new report “Distributional Impacts of COVID-19 in the Middle East and North Africa Region” demonstrates how the pandemic reduced earnings, increased poverty and inequality, and compounded pre-existing fragilities. The report explores how COVID-19 affected the welfare of individuals and households in the MENA, and what key issues policy makers should focus on to enable a quick and sustained economic recovery.

In addition to a substantial rise in poverty, food insecurity, and inequality, the report notes the emergence of a group of “new poor,” and marks changes in the labor market, how hard people work, and how many people work. There is a risk that recoveries will lead to further increases in inequality, given that the informal sector – in which many less well-off people work – tends to recover more slowly.

Looking forward, the report emphasizes that the first priority for recovery remains vaccinations. These are needed to protect people from disease and to avoid new lockdowns. Unfortunately, in many countries in the region, vaccinations levels remain disturbingly low. 

In addition to vaccinations, certain economic strategies need to be adopted to ensure a resilient recovery. But how can countries build back better in a setting in which the pandemic has limited already-meager fiscal spaces and contributed to even higher levels of public debt?

Pre-pandemic MENA was the only region in the world with rising levels of poverty. Any economic model that yields such outcomes has run its course.  Building back better should therefore not mean an attempt to return to pre-COVID conditions; it should strive for an economic reset instead.

Before COVID-19, economic insiders in the region were protected from the rigors of competition while economic outsiders were relegated to inactivity or the informal economy, and sustained with food and fuel subsidies. This exclusionary economic model is what needs to be changed. The region has to tap the growth potential of all its citizens and needs to build inclusive economic institutions in which many more people can participate.

Doing so does not have to be costly. The changes needed depend less on investments. Rather, the need to be affordable changes in policies and institutions. Countries need to:

1. Improve the business environment and deregulate the economy: MENA regions continue to be crippled by heavy regulations and a business environment not conducive to private sector activities and initiatives.  This is evident from many international benchmarking exercises that assess competitiveness, regulations, and business/investment climates. Several MENA countries with very small populations do relatively well. Therefore, there is scope for larger MENA countries to initiate further improvements in their business and investment climates. 
2. Enhance competition: MENA countries need to demonopolize their markets. Incumbent firms— whether private sector or state-owned- continue to be favored. The associated lack of contestability leads to cronyism and rent-seeking activity—and discourages domestic and foreign investments.
3. Open up to trade: Despite sluggish growth in global trade since the 2008 financial crisis, trade and global value chains can continue to boost growth, create better jobs, and reduce poverty. MENA is well positioned, post COVID, to benefit from Europe’s purchasing power, its interest in in-sourcing, and its appetite for climate friendly imports.  Opening up to trade is another way to enhance competition, benefit from technology transfers, and attract foreign direct investment.
4. Raise the productivity of those in the informal sector:  Informal workers and firms reside at the bottom of the economic pyramid where they do tough jobs with limited security or health insurance.  As said by World Bank Vice-President for the MENA region Ferid Belhaj, an economic reset includes improving the business environment for those in the informal sector by focusing on policies that increase their productivity by creating a predictable business environment and access to finance, while increasing the (net) benefits of formalization.
5. Address subsidies, particularly for energy: Energy subsidies are costly and lead to an overuse of energy and other inefficiencies. Redistribution should be done through the tax system and via social protection mechanisms which are designed for it, not through energy pricing.
6. Address barriers preventing women from participating in the economy: Women make up half the work force but are rarely employed in the region.  The 2020 Mashreq Gender Report offers suggestions for policies that reduce barriers for female economic participation such as updated inheritance laws, flexible work hours, affordable child care, and promoting remote (digital) work opportunities. Safe public transport and action against gender-based violence at the work place and at home, are important, too.

To build back better decision makers in MENA should adopt policies to increase growth.  Doing so is inclusive, as it contributes to increased economic participation. It is also affordable as policies don’t cost much to design and implement.