Six steps to create a healthy economic future in the Arab world
Arab countries suffer under a legacy of public policies that have crippled their growth and development. In the coming decade, most countries in our region will reach a point where they cannot continue along the same path and will need to implement far-reaching public policy reforms. Six broad classes of reform must be undertaken as soon as possible.
Facilitating the growth of the private sector should be at the top of the policy agenda. This will require new legal frameworks for private-sector firms to give entrepreneurs a clear understanding of the regulatory context and the flexibility they need to establish successful start-up businesses. This requires a delicate balance — ensuring that regulations and enforcement are transparent and protect the interests of the population at large, while eliminating major rigidities in the law that restrict private enterprise.
Regulation of labor is a second area that is particularly important given the need for jobs in the region. To stimulate job creation, labor laws must give private employers the freedom to determine wages and to dismiss workers on the basis of poor performance or economic necessity. This flexibility will encourage start-up firms to take the risk of hiring new employees by alleviating concerns about their ability to dismiss them should they face a downturn in the business cycle.
This means passing labor laws that allow for temporary, renewable employment contracts rather than permanent contracts. It also means not mandating severance packages and minimum wages and limiting mandated payments by employers into social safety nets. At the same time, workers will need certain protections.
Much of the Arab labor force depends on government or other public-sector positions. The attractiveness of public employment — in terms of wages, non-wage benefits and job security — not only leads young people to queue for public positions but also shapes their investment in education. To encourage growth in the private sector, governments should make it a core priority to reduce the size of the civil service, reduce wages and otherwise reduce the disproportionate attractiveness of public-sector work.
The third priority must be reducing or eliminating subsidies. Most Arab governments heavily subsidize electricity, fuel and basic food items, and meeting these costs is increasingly difficult. While such subsidies are important for many families, they do the economy a fundamental disservice. They introduce market inefficiencies that lead to black-market profiteering by distributors. They crowd out essential opportunities to build the private sector. Moreover, because they are not targeted only to those truly in need but are available to all, they lead to waste, subsidizing the rich and diluting the benefits to the poor who need them most.
Fourth, many Arab governments must rethink how they distribute oil revenues. Oil will continue to provide many Arab governments with the bulk of their revenues and be a fundamental component of GDP for the foreseeable future. The challenge to policymakers is determining how this wealth can be shared with the population sustainably while limiting the skewing effects experienced in the past.
Most education systems in the Arab region do not give youths the basic skills to enter the 21st-century labor market and to be competitive in an emerging private-sector economy.
Rather than spending on direct subsidies, policymakers should consider shifting oil revenues toward enablers of future income, in particular, education and health care. As it stands now, most education systems in the Arab region do not give youths the basic skills to enter the 21st-century labor market and to be competitive in an emerging private-sector economy. Oil revenues could provide the basis for significant investment to improve educational opportunities. Similarly, by investing in comprehensive health insurance, governments could encourage private investment in the health sector while ensuring coverage for all citizens. On the whole, oil revenues would be better spent on making sure that people are healthy enough to work and prepared with the skills to succeed in the workforce than on providing them with public-sector jobs and subsidies.
The Alaskan model provides an interesting way for citizens to benefit directly from oil revenues without encouraging dependence on public-sector work or subsidies. Each year, a dividend based on this oil fund portfolio’s performance is sent to each Alaskan household. Establishing such a dividend payment in Arab countries would ensure that everyone feels that he or she benefits from the oil wealth. Moreover, it would provide a supplemental income source to spend on basic household consumption or invest in business.
Fifth, Arab governments need to make a serious effort to decentralize delivery of government services. Decentralization would help to alleviate the concerns of regions beyond the capital about their future and ensure that their voices were heard with regard to the delivery of services they depend on for daily life.
Finally, reorganizing the social safety net is essential to the future. Arab governments must address the skewed incentives that have led to high unemployment rates, which will help new businesses to grow. But efforts to shrink the public sector and to introduce greater flexibility in the hiring and firing decisions of private firms will necessarily expose workers to risk. Consequently, a new social safety net is needed.
Policymakers should consider developing an unemployment insurance scheme, wherein workers and employers would both make regular, affordable contributions towards insurance that would provide partial salary replacement should the worker become unemployed. Other programs must supply the basic needs of poorer families, whether through cash transfers, in-kind transfers, supplementary food programs, or fee waivers for such services as health care, education and utilities. Such benefits should be targeted as closely as possible to economic need, rather than being available to the population at large.
These six issues are but a brief overview of the policy decisions that Arab governments must make in defining the economic future of their countries. They reflect elements of a comprehensive strategy for reform over the next decade or two. Moving forward on this transition will be possible only with each government’s commitment to clear and transparent communication with the population, predictable and consistent reforms, and decisions based on careful study and reliable data.
Beyond all these policy reforms, regional economic policy synchronization, cooperation and integration are absolutely essential for the future of the population of the Arab countries as a whole if real and sustained development is the goal.
- Hafed Al-Ghwell is a former advisor to the board of directors at the World Bank Group. Twitter: @HafedAlGhwell