Arab governments walk a tightrope over subsidy reform

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Arab governments walk a tightrope over subsidy reform

This summer, Jordanians from all walks of life coalesced on streets to protest tax hikes and cuts to subsidies. (AFP) 

 

There is a copious amount of literature that discusses and attempts to analyze the dynamics of the social contracts that exist in Arab world countries. Some of these analyses point to the outsize role that large public sectors and big governments play in the overall economy, from hiring new graduates to civil service to doling out subsidies and even actively operating business entities supported by public finances. For a time, this system worked, and in most Arab world countries, the public sector is the primary employer, leading to overstaffed public institutions with relatively overcompensated workers (when compared to similar roles in the private sector). 

Alongside bloated governments are a slew of generous subsidies and other types of financial assistance that keep the prices of fuel, gas, electricity, water, foodstuffs and telecommunications artificially low. Although some MENA governments have embarked on subsidy reforms and reining in public spending, there was little to no political will to do so previously, despite obvious economic payoffs.

The pursuit of any such reforms would have upended this unusual dynamic that has become a characteristic of Arab world countries. In fact, citizens have come to accept subsidies as a “right of citizenship” instead of a remnant of a bygone era that needed government intervention to trigger development and buy political silence. Nonetheless, eliminating them would have contributed greatly to establishing private-sector-led, growth-oriented economies with minimal government involvement beyond oversight and regulation enforcement. Thus, it would have been a laughable proposal and tantamount to political suicide, prior to 2010, for any Arab world government to actively push for subsidy reform. To the elite and well-connected, the immediate benefits of outsize public sector involvement through generous subsidies and trade barriers leaves little logic for urging reforms that would encourage competition and increase costs. For the academics and attuned, criticisms of wasteful spending, unsustainable hiring and oversize government would have also ran aground of restrictions to press freedom and undue influence on academic thought typical of autocratic governments – another hallmark of the Arab world.

In the end, this strange phenomenon becomes permanently interwoven into the national psyche of most Arab world countries, despite its fundamental problems that have long ballooned national debt and caused a large percentage of GDPs to go towards public sector wages and subsidies. It has come to be expected that it is the government's role to continue providing jobs, keep taxes low, maintain subsidies and pursue protectionism over free trade. In other, quieter corners of the corridors of power, it also means in matters of legislation, public policy and its administration, officials can dispense with competence, efficiency, inclusivity, accountability and transparency. Instead, cronyism, nepotism, corruption, extrajudicial influence, scapegoating and the distraction of political theater take center stage while the economy and public finances continue to languish. 

Now, however, present governments are under intense fiscal pressures to "rationalize" shrinking public budgets. For instance, even with record high youth unemployment in the region, most recent graduates still prefer a public sector job given the generous wages and benefits, low risk of dismissal as well as relatively low demand for efficiency and productivity. 

Although some MENA governments have embarked on subsidy reforms and reining in public spending, there was little to no political will to do so previously.

Hafed Al-Ghwell

 

This year, Egypt, Jordan, Tunisia, Saudi Arabia and other countries have rose to the challenge of pursuing reforms aimed at eliminating subsidies and wasteful spending. However, the quixotic politics and economic dynamics of the Arab world still make the pursuit of austerity, particularly, the elimination of subsidies, a political time bomb. 

For instance, this summer, Jordanians from all walks of life coalesced on streets to protest tax hikes and cuts to subsidies as the country seeks to reduce debt that now stands at 96 percent of GDP. The protests would eventually lead to the ouster of Hani Mulki as prime minister and the appointment of Omar Razzaz, who has withdrawn the controversial tax bill and promised inclusive consensus-building. Unfortunately, Razzaz is likely to face intense scrutiny over the final product of his discussions with stakeholders given his failure so far to completely overhaul the cabinet as the public had expected.

The reality in the Arab world is that there is no political incentive to pursue permanent change, especially when faced with threats of mass protests and civil disobedience, which make implementing reforms even more difficult. For now, however, it is increasingly evident that the average citizen recognizes the need for reform; the only question is how much and how deep. Deep and wide-reaching reform pleases the IMF and international creditors, but they would meet stiff resistance locally. 

In short, this tension between sound economic policy and the very likely public backlash is reaching a critical point in almost all Arab countries and continues to tighten, unless some courageous political will can break this impasse and convince the already battered Arab populations that tough choices much be made now, before things get much, much worst. 

Shallow, cosmetic and piecemeal changes may be palatable locally and politically wise but economically imprudent, especially when the future gets bleaker with each new release of financial and economic data.

  • Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advance International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell

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