Egyptians and the citizens of other Arab countries have long been used to the state being responsible for everything — healthcare, education and employment, as well as providing subsidised food and fuel. But today this formula has run its course, according to a recent World Bank publication. According to the April 2015 issue of the bank's MENA Economic Monitor, the clearest sign that this “social contract” was not working were the 2011 Arab Spring revolutions, with people across the region taking to the streets to demand bread, freedom and social justice. The report says that for many years and until the early 2000s, the old social contract delivered. Economic growth averaged four to five per cent a year, poverty rates were low and declining, and inequality was lower than in comparable countries elsewhere. But towards the end of the first decade of the 21st century, things were looking less positive, with high subsidies and public-sector wages weighing down government budgets and causing growing fiscal deficits, according to the report. The response of governments in the region was to slow down public-sector employment. However, this meant rising unemployment as the formal private sector did not grow fast enough to absorb the large numbers of educated young people entering the labour force. On the services front, although governments continued to provide healthcare and education, the report says that these lacked “quality and equity.” Because of such low-quality services, those who could afford it resorted to private providers, undermining equity. In response to such developments, the report proposes a new social contract in which the state would not be responsible for delivering services or providing employment, but would create the environment that would enable the creation of jobs and provision of quality services for all instead. On the employment side, the report says the state needs to revisit existing policies and practices to promote competition and facilitate a dynamic private sector that can grow and create productive jobs. The report says that in the MENA region “not enough young firms are created. And not enough firms ‘die' to make room for new firms to enter the market. Most small enterprises stay small or die.” It attributes this to “macroeconomic and regulatory uncertainty, political instability, and corruption.” According to the report, “macroeconomic and political instability skew foreign investment away from firms in manufacturing, which could create jobs and transfer technology, and towards real estate and extractive industry investments.” Furthermore, it cites research showing that “regulatory uncertainty and corruption impede firm and therefore job growth” in the region. In Tunisia, under ousted former president Zein Al-Abidine Ben Ali, and in Egypt, under ousted former president Hosni Mubarak, well-connected firms received preferential treatment such as the speedy release of construction permits and fewer visits by tax officials, the report says. The report finds that energy subsidies disproportionally benefit larger, older, capital-intensive and energy-intensive firms. “That these subsidies also benefited politically connected firms may explain why they have been so difficult to remove,” it says. All this has meant that many young people have not been able to find either a public-sector or a private-sector job. “Those who can afford to will wait for a public-sector job to open up, because the combination of salary, benefits and security makes it attractive. Those who cannot afford to wait for an opening in the public sector join the informal sector, working at low wages with little security,” the report says. Regarding poor public services in healthcare, education and sanitation, the report attributes these to a lack of accountability between service providers and the public, especially the poor. It says that students often resort to private tutoring because the public schools do not teach them what they need to learn, meaning that poorer students who cannot afford such tutoring lose out. The same applies to the healthcare sector. “When accountability is weak, services do not meet the needs of citizens who, in turn, begin to lose trust in government,” the report says. Another problem of the services sector is the negative effect of subsidies on quality. According to the report, “Subsidies increase demand and, with lags in supply generation, shortages set in. Moreover, if a utility does not receive transfers from the government, it underspends on maintenance, deteriorating further.” The report adds that subsidies make it difficult for consumers to hold service providers, such as utilities, accountable. Those who can afford it resort to private providers. To overcome this situation, the report recommends a market-based system where the consumer is able to hold providers accountable. If a teacher is absent in such a system, he or she will not get paid. This helps to ensure that poorer people can get access to the type of quality services typically enjoyed by the non-poor. In order to make sure that the poor are able to pay for such services, the report suggests that the state “provide targeted cash transfers instead of providing free or subsidised low-quality public services, with everybody paying market prices.” Public expenditure would be used to finance the cash transfers as well as infrastructure. The report acknowledges that these changes should be implemented gradually and that each country in the region will need to find the procedure that suits it best. “Getting there will not be easy. Many vested interests in the status quo will resist the changes,” the report says. It adds, “Citizen trust is limited. Reform champions will have to build coalitions for change.” Growth in the MENA region is expected to slow down in 2015 and range between 3.1 and 3.3 per cent, according to the World Bank, and continue on the same path in 2016. The main reasons for the region's sluggish growth include prolonged conflicts and political instability in Syria, Iraq, Libya and Yemen; low oil prices affecting growth in oil-exporting countries; and the slow pace of reforms that is standing in the way of a resumption of investment.
