The new horizons after transition consist on “dignity”
The IMF, the subsidies and the social contributions and benefits in the Arab countries
Samir AITA
Civil Society Policy Forum, World Bank Group Spring Meetings 2017
The full paper Aita IMF Transition VF
Classical non-exceptional policy recommendations at a “critical juncture”
The IMF and the World Bank group had recognized that the events of the “Arab Spring” had created a particular situation in the Arab countries, which constitutes the occasion for an “economic transformation”. However, they consider the political situation, i.e. the presence of long-standing dictatorships, as the main driver that led to the change, and not the socio-economic situation that the World Bank Group policy recommendations have contributed to create. This bias leads to neglect that one of the main aspirations of the uprisings was seeking “dignity”.
In 2014, the IMF published a major position report[1] for selected Arab countries (the ACTs[2]). It pointed out that these countries are at “a critical juncture”, even those among the selection that did not experience political transformations. It expressed the need for these countries of prudent economic management and “bold reforms” to enable a private sector led growth. Low growth, high youth unemployment and lack of dynamism of the private sector for a sustained job-creation growth were diagnosed as the major consequences of the policies before the transition. These challenges “have become more acute since the onset of transitions in 2011”, as the situation has worsenedas the ACTs havefaced an “economic downturn” resulting from “transition related disruptions”.
While recognizing that the situation of the ACTs is exceptional, the IMF policy recommendations, in the report and the subsequent Article IV consultations, are nothing but exceptional. Moreover, it does not appear clear why such recommendations could be efficient now, while they were not before. The report explains that “before”, “where reforms were initiated, their top-down approach has often meant that the resulting economic benefits went largely to the well-connected without generating tangible benefits for most people – in particular, without creating formal sector jobs or improving living standards”. Here also it is not clear what kind of alternative bottom-up approach the IMF is advocating? And how the former vested interests would simply disappear or not simply be replaced by other vested interests?
The situation is worsening 6 years after start of transition
ANND has assessed with its experts and civil society network the results of the new policies implemented so far in Egypt, Jordan, Lebanon, Morocco and Tunisia; all among the selected ACTs. The comparison between the situation of these countries offer interesting insights. In all countries, the promotion of fiscal austerity, removing subsidies and reducing the share of public wages, as well as further trade liberalization, linked with the IMF new credit lines, have exacerbated socioeconomic challenges. This is while the total debt has reached unsustainable levels in most countries, even taking into account some levels of grants from Gulf countries.
In Egypt, economy slowed down with the terrorist attacks and the disturbance of tourism and trade. In Jordan, the country is facing the shocks of a disturbed trade flows due to the neighboring Syrian conflict, and of a sudden increase of its labor force of 20%, due to the Syrian migration crisis, in addition to the already existing 12% other migrant workers. The same occurs in Lebanon with political cronyism and instability, and where the Syrian refugees add 18% to the labor force, with the already existing 6% of Palestinians and 13% of other foreign workers (female home workers mostly). The assessment for Tunisia draws the same conclusions: economic policy space is shrinking especially with the increasing weight of debt service and government wages, especially after the excessive hiring in the government during transition[3]. The situation in all ACT countries has become more exceptional and the juncture more crucial.
Is the reduction of government expenditures sustainable?
The above-mentioned IMF report shows that government expenditure in ADCs is (as % of GDP, except for the case of Libya) in the range of that of Emerging Market and Developing Countries (EMDCs) average. However, it is much below the OECD levels[4], over 40%.
In OECD countries, the share of government wages in expenditure is in the range of 20% of total and that of social benefits and transfers of 30 to 40%. IMF assesses the share of wages in ACTs higher comparatively, except for Jordan, and the level of subsidies and social transfers similar, except for Morocco, which has almost eliminated subsidies[5].
The question of reducing the share of public wages on expenditure poses intricate issues if one considers the structure of employment in ACTs, especially from the perspective of revenues of taxation on revenues. In fact, except in Tunisia, informal employment[6] is well above 55% of total employment. It is also well above 70% if agriculture and public employment are excluded[7]. The situation deteriorated during the 2000’s and even further since the recent political transformations and their consequences. Almost no direct taxes could be collected from informal employment. In countries like Jordan and Egypt, government and public sector employees support then a larger share of direct taxes on revenues than formal employees in the private formal sector do. This is while the case of Tunisia offers the unique example in Arab countries where formal employment can sustain proper public policies.
Otherwise, the share of public employment is the largest in Jordan while the weight of wages on expenditures is the lowest, and vice-versa for Morocco. The impact of wage reduction on taxation revenues needs then to be further assessed, while the share of public debt’ service is increasing.
Egypt[8] Tunisia[9]
In addition, the structure and the level of subsidies and social transfers needs to be further assessed, as their general level in percentage of GDP is comparable to OECD countries.
Taxation or total social contributions?
The above-mentioned IMF report assessed that total tax revenues in ADCs vary significantly comparatively to the EMDCs average between 18 and 18% of GDP. They are higher in Morocco and Tunisia and much lower in Egypt and other countries. In all cases, they depict structural deficit between revenues and taxation. This is while total tax revenues in OECD countries is predominantly above 30% of GDP.
The structure of these tax revenues in ADCs had not been fully assessed in the report. While it is clear that the share in revenues of direct income taxation, outside of the revenues from natural resources (oil, phosphate, Suez Canal, etc.), is low (around 3% of GDP in Egypt). Comparatively OECD countries show also low share of taxes on payrolls, lower than taxation on properties and wealth, and much higher shares on income and profits, and on goods and services (such as through VAT). More importantly, the share of social security contributions is high in all OECD countries, of the size of the shares of income and VAT taxes, while it does not seem to be accounted for in the total tax revenues of ACTs[10] in IMF documents. Consequently, health services seem to be considered on the spending side and not on the revenue side, per example from the social security system! This is while, again except in Tunisia, the government and public sector employees in the Arab countries are the main contributors to the existing meagre social security system.
The IMF insists on implementing VAT as the main mean to overcome the structural deficit of the budget, remaining almost silent on social security contributions. It advocates that the subsidies to be removed are to be replaced by spending “protecting vulnerable groups through well targeted social assistance”, meaning the “poor and the vulnerable”. And it is silent on wealth and property taxes.
Civil society organizations (CSO’s) in the Arab countries criticize this limited vision. Social security including health services, retirement compensations, maternity leaves, etc, are economic and social rights guaranteed in universal human rights. The governments before transition had failed precisely on this issue, except in Tunisia[11]. And the Arab countries with their “youth bulge” have the basic demographic conditions for a successful implementation of a social security system, as the youth (15-25 years) constitutes a large share of the population (above 30% of those 15-64 years). In addition, VAT taxation has no clear counterpart in the public mind, and nothing preserves from its misuse. This is while social security benefits are clear, and they bring “dignity”.
The social dialogue need then to put the focus on social security as a major issue during transitions, to include social contributions in the assessment of taxation and budget expenditure. The issue is even more than a dialogue, but properly a collective bargaining, not only between CSO’s, private sector and government, but also with IMF, as it is through its credit lines to ACTs avoiding State collapse during transitions, a main contributor to budget equilibrium and a main receiver of public spending for debt principal and interest.
[1] IMF: Toward New Horizons, Arab Economic Transformation Amid Political Transition; 2014.
[2] ACTs: Arab countries in Transition. They include Egypt, Libya, Tunisia and Yemen who had experienced political transformations (“regime change” in the wording of the IMF), as well as Jordan and Morocco.
[3] The IMF does not highlight this fact. The increase of public employment has occurred also in Iraq after the invasion of 2003.Public employment rocketed there from 20% of total employment in 2003 to 35% in 2006, and further to 40%.
[4] OECD National Accounts at a Glance 2015.
[5] See also IMF Article IV Morocco 2015.
[6] Informal employment is defined as employment with no associated social benefits. See ANND: Informal Employment in the Arab countries, Realities and Rights; Arab Watch Report, to appear May 2017.
[7] By the way, this assessment contradicts the misleading World Bank view on the repartition of employment between public and private sector, see World Bank : Why MENA needs a New Social Contract?, where the ratio of public to private employment is given above 1 for MENA countries.
[8] IMF Article IV consultation Egypt 2014.
[9] IMF Article IV consultation Tunisia 2015.
[10] Either in the above-mentioned report, nor in the IMF Article IV consultations.
[11] ANND: Social Protection, the Other Face of the Crisis of the State; Arab Watch Report 2014.