What can the Middle East and North Africa learn from the United States to address rising poverty?

Prior to the onset of COVID-19, the Middle East and North Africa (MENA) region was afflicted by a broad set of challenges: low gross domestic product (GDP) growth; high unemployment, especially among youth and women; a weak investment climate; and rising levels of debt. Fiscal imbalances were driving many economies to reform their subsidy programs – often for energy, water, and food – and to develop expanded and better targeted social safety nets. In early 2020, these reforms were in progress. But when the pandemic hit, neither the fiscal space nor the safety nets were in place to soften the blow felt by the people in the region.

The April 2021 MENA Economic Update examined the economic devastation caused by COVID-19. The report estimates that the economies in the region contracted by 3.8% in 2020 and  puts the accumulated cost of the pandemic, in terms of GDP losses by the end of 2021, at $227 billion. A new report, to be launched in the fall, analyzes the impact of COVID-19 on poverty in MENA. By relying on data from phone interviews complemented with microsimulation techniques, the report presents a comprehensive picture of how COVID-19 affected the welfare of individuals and households.

The results are revealing. Reported are large declines in employment, major losses of income, an unequal recovery, and limited access to social safety nets. The simulation exercises translate these findings into estimates on the likely impact on poverty. The size of the impact varies by country, but is always negative and substantial. In Tunisia, for instance, national poverty which was around 15% in 2015 is projected to increase to 22 to 27% in 2021. In Palestine, where initial levels of poverty were already high, the report projects additional increases to reach 35% and 59% for the West Bank and Gaza, respectively.

By far the most devastating welfare impacts are in economies that were already in distress. Iran, which is battling inflation as well as a pandemic, is projected to experience more than a doubling of its poverty to 35%. In Lebanon, outdated survey data and an economy in freefall make it hard to project poverty levels with any degree of precision. According to the upcoming report, an increase in poverty by 38 percentage points is projected relative to the pre-pandemic level in Lebanon. And for vulnerable groups, like refugees, the picture is even worse: an increase of 52 percentage points is estimated.

In the wake of such a major economic shock, increases in poverty may seem inevitable. Yet recent evidence from the United States suggests otherwise. Though the economic shock from the pandemic was as devastating in the USA as it was in MENA (e.g. the peak unemployment rate, recorded in April 2020, was 14.7% the highest monthly rate ever recorded) the number of poor Americans is expected to have fallen by nearly 20 million from 2018 levels, a decline of almost 45%. The USA had never cut poverty by so much in such a short period of time. How did the country do it?

The three programs that cut poverty most in the USA were stimulus checks, increased food stamps, and expanded unemployment insurance. The country was able to roll out these programs because it had the fiscal space to do so and because as it could count on the presence of extensive registries and databases that allowed the government to target beneficiaries.

In MENA, high levels of informality and incomplete registries made the roll-out of enhanced safety nets challenging, the forthcoming report shows. Even if the registries had been in place, the fiscal space to expand safety nets to levels necessary to prevent increases in poverty would have been found lacking.

If these challenges remain unaddressed, the people in the region will remain extremely vulnerable to future shocks, post-COVID-19. And unfortunately new shocks will likely happen with greater frequency because of climate change.

There are other lessons to take from the USA. First, their COVID-19 related measures are time-bound and are expected to end once the economy recovers. Whereas approaches frequently employed in MENA economies are not. For instance, additional public sector jobs, high public wages, and permanent, untargeted subsidy schemes are less suited as safety nets because they are hard to reverse, distortionary, and fiscally draining. These kinds of measures help reduce poverty for some time but are unaffordable in the end  -- as Tunisia can attest.

As long as COVID-19 is around, the focus has to be on rolling out vaccination programs and restarting the economy. But after that, attention will need to go to ensuring sound macro-economic balances and developing well designed social safety nets.