Economic Growth, Inequality and Poverty in the Arab Region

Transcription

1 2015 Regional Coor ordination Mechanism (RCM) Issues Brief for the Arab Sustainable Development Report Economic Growth, Inequality and Poverty in the Arab Region

2 Authors: Niranjan Sarangi First Economic Affairs Officer, Economic Development and Poverty Section, Economic Development and Integration Division, Economic and Social Commission for Western Asia (ESCWA) Khalid Abu-Ismail Chief, Economic Development and Poverty Section, Economic Development and Integration Division, Economic and Social Commission for Western Asia (ESCWA). Reviewed by: UNDP United Nations Development Programme ILO International Labour Organization UNEP United Nations Environment Programme UNHABITAT United Nations Human Settlements Programme ESCWA Economic and Social Commission for Western Asia Acknowledgements: The authors are thankful to Fouad Ghorra, Economic Development and Poverty Section, for his useful inputs and research support. The authors are also thankful to Nathalie Milbach-Bouche (UNDP Regional Centre in Cairo) and Melanie Hutchinson (UNEP/ROWA) for their useful feedback in earlier version of the draft. Disclaimer: This issues brief was prepared as a background document for the forthcoming Arab Sustainable Development Report. The views expressed are those of the authors and do not necessarily reflect the views of the United Nations. Document issued as received, without formal editing. 1 P a g e

3 Economic growth, Inequality and Poverty: Analysis of proposed SDGs and targets from an Arab perspective 1. Introduction Economic literature on explaining linkages between economic growth, income distribution, and poverty reduction provide various perspectives. 1 Some argue that economic growth is the prime driver of poverty reduction 2 while others argue that growth alone doesn t necessarily translate to reduce poverty; the role of income distribution is also crucial. 3 The relative importance of growth and distribution policies for poverty reduction has been studied by several country specific as well as cross-country experiences. 4 Further, Son and Kakwani (2004) demonstrated that initial level economic development and income inequality can significantly influence the extent to which economic growth reduces poverty. 5 While each study has its own logic, and they tend to vary in their approach as well as finding in terms of growth and inequality elasticity of poverty, there is sort of an increasing recognition that a combination of both economic growth and redistribution policies are important strategies for poverty alleviation. Therefore, not only the quantity of growth but pattern of growth, particularly the one which takes into consideration equity concerns, is crucial for making a significant impact on reducing poverty. In case of Arab countries, the pattern of growth is an important entry point for discussion. The region has done fairly well in average quantity of growth over last four decades but economic growth has been led by oil revenues appropriated to a few and has not significantly improved incomes of the poor nor it generated enough jobs to a rapidly rising educated labour force. The chronic high unemployment rates and perceptions regarding divergence between growth and individual wellbeing are associated with demand for social justice by the people in many countries, known as the Arab uprisings. 6 In this context, the importance of eradicating poverty in all forms and in everywhere (Goal 1), promoting sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all (Goal 8) and reducing inequality (Goal 10), as outlined in the outcome document of the Open Working Group (OWG), rightly capture the heart of the socioeconomic challenges that the region is facing today. The importance of job-centred or labour-intensive growth has been advocated by a number of studies as an effective poverty reduction strategy. 7 For example, Squire (1993) recognizes that economic growth that fosters the productive use of labour, the main asset owned by the poor, can generate rapid reductions in poverty. Extending this argument, Islam (2004) suggested that conceptually the linkage between output growth, employment and poverty can be analysed at macro as well as micro level through the average productivity of the employed work force and the nature of economic activities. He argued that high rates of economic growth results in higher per capita income and reduction in poverty in a situation where growth process leads to improved productivity of various sectors and occupations, a shift in the structure of employment towards occupations with higher levels of productivity, and increases in real wages, earnings from self-employment, and earnings from wage employment. 8 This process is presented as an illustration (figure 1), which shows the flow in an economy. The flow chart shows that economic growth can enhance productive capacity that leads to generation of jobs with rising productivity. The workers can benefit by increase in their real wages achieved through higher productivity, 2 P a g e

4 which enhances their social expenditure as well as skill development that in turn further increases productive capacity and contributes to economic growth. FIGURE 1 LINKAGES BETWEEN ECONOMIC GROWTH, EMPLOYMENT AND INCOME Source: Adopted from Islam The strong focus on employment intensity of economic growth makes the framework unique and it fits well into the discussion of the issues and challenges that are relevant for the Arab region in the present situation. It can also be understood that the interlinkages provide implicitly the sustainability of economic growth and leads ways to higher levels of equilibrium of the economic system. Taking into consideration this interlinked relationship, the issue brief paper: Assesses economic growth, poverty reduction, income inequality and employment in the Arab region at the macro level; Analyses the proposed sustainable development goals (SDGs) and targets from an Arab regional perspective and charts ways forward briefly. Noteworthy to mention that the framework doesn t analyse environmental sustainability explicitly, but it can be easily factored in by adoption of a growth pattern that relied upon cleaner and efficient energy. Therefore, the framework is applicable to include environmental sustainability as well although the latter issue is beyond the scope of this discussion brief paper. 3 P a g e

5 2. Economic growth and structural transformation Economic growth has remained relatively high but volatile In the 1970s, the Arab region witnessed an impressive economic growth of 8 per cent a year. In the following decades, growth was much lower, ranging from 1.4 per cent in the 1980s to 4.0 per cent in the 1990s, increasing to 5.1 per cent in the 2000s (figure 2). Although economic growth has been relatively high over the decades, the region has thus been unable to effectively translate economic growth into greater income of the overall population. Income or gross domestic product (GDP) per capita has not increased at the same pace as overall GDP growth in the Arab region; income per capita has increased only by an average of 1.4 per cent during the period over 30 years (figure 3). Does that imply that high population growth offset the growth of GDP in the Arab region which resulted in low per capita income? Evidence does indicate a relatively high population growth rate in the Arab region, being above 2 per cent even in the 2000s, 9 but the rate is not so high that can explain such a large gap between growth in overall GDP and growth in per capita income. In addition, another reason is that growth in Arab countries is volatile and mainly driven by natural resources, such as oil and gas, hampering a structural transformation of the economy that could reduce e poverty and inequality and create jobs. Instead, oil revenue has encouraged the import of manufactured goods at the expense of the productive capacities of local manufacturers and domestic industrial protection Arab World East Asia & Pacific -0.8 Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Saharan Africa FIGURE 2 DECADAL AVERAGE OF GDP GROWTH (%), 1970S SOURCE: AUTHORS CALCULATIONS BASED ON WORLD BANK (2014B). 4 P a g e

6 Arab World East Asia & Pacific Europe & Central Asia Latin America & Caribbean South Asia -0.9 Sub-Saharan Africa FIGURE 3 DECADAL AVERAGE OF GDP PER CAPITA GROWTH (%), 1970S Source: Authors calculations based on World Bank (2014b). Growth remained volatile in most Arab countries Arab growth processes are characterized by relatively high volatility, especially those of low income and oil-rich countries. According to the analysis by Von Arnim et al (2011), among the Arab countries, only Egypt, Jordan, Libya, Morocco, Oman and Tunisia are characterized by low volatility and sustained growth over the period : Egypt (with an average annual real GDP per capita growth rate of about 3.2 per cent and a coefficient of variation of 0.86), Jordan (2.5 per cent and 2.6), Libya (2.7 per cent and 1.8), Morocco (2.4 per cent and 1.7), Oman (2.6 per cent and 2.6), Tunisia (3.0 per cent and 1.1). However, four of these six countries Egypt, Jordan, Tunisia, and Libya -- are facing negative consequences of conflicts and political instability directly or indirectly, which has severely affected their achievements on economic and social development indicators. Structural transformation remained a challenge Arab countries can be divided on the basis of their resource endowments those oil-rich or net exporters of oil and gas; b) those non oil-rich or net importers of oil and gas. The figures 4a and 4b show the economic structure of Arab oil-rich and non oil-rich countries respectively since the1990s. Quite clearly, oil, gas and mining dominated among all sectors and contributed more than half of the GDP of the oil-rich countries in The share of oil and gas has reduced slightly by 2012, but it is still the dominant sector. The share of manufacturing in GDP was only 6.63 per cent in 1990, which slightly improved to 8.82 in The share of service sector has seen an increase during the period, whereas agriculture s share remained negligible throughout. However, within service sector other services, which tend to be low value-added informal jobs, continue to have larger share than high value added services. The economic structure of non oil-rich countries remained more diversified than the oil rich countries (figure 4b), but there as well the share of manufacturing in GDP remained low. Of the six countries characterized by low volatility and sustained growth (as mentioned above), only Jordan, Oman and Tunisia implemented 5 P a g e

7 noticeable structural transformations. In the period from 1970 to 2012, the manufacturing sector in Jordan grew from 10 per cent of GDP to 18 per cent, in Oman from 0.4 per cent to almost 10 per cent, and in Tunisia from 9 per cent to almost 17 per cent. Egypt suffered from an incomplete manufacturing transformation; although the share of the manufacturing subsector was about 22 per cent of GDP in 1970, which could have classified it as an industrialized country, it declined to about 16 per cent of GDP in Von Arnim et al (2010) argued that these results indicate an almost no regional structural transformation over time which contrasts sharply with that of other developing regions. In summary, the economic structure of the Arab region can be explained as the following: stagnating shares of GDP of agriculture and manufacturing sectors, 10 a rapidly expanding service sector but mainly concentrated in low value-added activities, and a still dominant oil sector. Therefore, owing to the lack of structural transformation, productivity gains have been the slowest in the world. A. Arab oil-rich countries B. Arab non oil-rich countries 100% 90% 80% 70% 60% 50% 40% 30% 20% Other services Transport Services Wholesale, retail trade, restaurants and hotels Construction Services Manufacturing Oil, Gas and Mining 100% 90% 80% 70% 60% 50% 40% 30% 20% Other services Transport Services Wholesale, retail trade, restaurants and hotels Construction Services Manufacturing Oil, Gas and Mining 10% 0% Agriculture 10% 0% Agriculture FIGURE 4 ECONOMIC STRUCTURE (SECTORAL SHARES IN GDP) OF ARAB COUNTRIES Source: Authors calculations based on World Bank (2014b). 3. Productivity and employment Low productivity growth Productivity, measured by the ratio of GDP to labour or output per worker, growth rate in the Arab countries registered the lowest as compared with various other regions of the world, including Sub Saharan Africa, during (figure 5). The growth rate did not exceed the threshold of 1 per cent between 1991 and P a g e

8 Arab region South Asia European Union East Asia and Pacific Sub Saharan Africa World -0.7 FIGURE 5 PRODUCTIVITY GROWTH RATE (%) Source: ESCWA (2013). An analysis of productivity gains at the level of the Arab states shows the role of oil revenues in reducing the economic productivity, where all the Arab Petroleum Exporting Countries (UAE, Saudi Arabia, Qatar, Libya and Algeria) except for the State of Kuwait recorded negative rates of overall productivity. In addition to these countries, Iraq s concentration on oil revenues and its lack of political stability and security contributed in facing a negative growth of productivity factors. While some Arab countries were able to make relative development in their economies through industrialization recorded levels of growth in total factor productivity such as Egypt, Tunisia and Oman, in addition to Lebanon, which came out of a civil war that destroyed its infrastructure. High unemployment rates High unemployment rates, lack of decent employment opportunities and low real wages are some of the key labour market characteristics of the Arab region. In general, the majority of investment in Arab economies is directed towards the capital-intensive oil sector, low value-added services and construction and real estate sectors, which generate demand for low skilled employment. The result is a mismatch between labour supply and labour demand, where there is an over-supply of skilled labour relative to the demand. A high unemployment rate has always been the norm in the Arab region (figure 6). Among the causes of high unemployment in the region, increasing population growth and weak labour demand from the formal private sector are important drivers. Several parts of the region being affected by crises, unemployment rate has gone up during 2012 and 2013, particularly in the North Africa region. Further, when adult unemployment is high, youth unemployment is much higher. While the world average stood at 13 per cent in 2013, the youth unemployment rate in the Middle East and North Africa region was at 28.3 per cent and 30.2 respectively (ILO 2014). Youth female unemployment stood at 46.1 per cent in the Middle East and North Africa region as against youth male unemployment at 23.6 per cent and 23.8 per cent respectively (figure 7). Importantly, 7 P a g e

9 youth unemployment rate has increased in 2013 as compared to In general, high youth employment rates reflect high birth rates, a youth bulge and excessively rigid labour markets in some countries World East Asia South-East Asia & the Pacific Latin America & the Caribbean FIGURE 6 UNEMPLOYMENT RATE (%) ACROSS REGIONS, Middle East North Africa Sub-Saharan Africa Source: ILO ( 2014). Male Female World East Asia South-East Asia & Pacific Latin America & Caribbean [VALUE] Middle East North Africa Sub-Saharan Africa FIGURE 7 FEMALE AND MALE UNEMPLOYMENT RATE (%) ACROSS REGIONS, Source: ILO (2014). Note: Data for 2013 are ILO estimates; Prior to 2013 are national data. In many Arab countries, the better educated youth are more likely to be unemployed than their less skilled counterparts. 11 In recent years, over 30 per cent of qualified young people were unemployed in the Arab region, representing over 40 per cent of the total unemployment rate. 12 In Tunisia, 33.6 per cent of those with university degrees were unemployed. Unemployment in the Arab region is persistent in both low and high 8 P a g e

10 income households. 13 This correlates with the high unemployment rates of more educated workers who predominantly come from better off families, lending further support to the idea that Arab economies fail to generate decent jobs for the population as a whole. The gender component to youth unemployment warrants more concern. From 1992 to 2013, the female youth unemployment rate increased from 36.5 per cent to 46.1 per cent in the Middle East and from 30 per cent to 46.1 per cent in North Africa. The female youth unemployment rate is considerably higher than the Arab youth unemployment rate, although in many Arab countries women represent the majority of skilled university graduates. It may be noted that female labour force participation has seen an increasing trend during the last two decades although the rate is still very low as compared to the World average. But high unemployment rate of the female youth shows that the labour market has been unresponsive to higher participation of females seeking jobs. Lack of decent employment opportunities During the decade or so preceding the uprisings, the Arab region achieved fairly high rates of economic growth and relatively fast employment creation. 14 But the impact on people s quality of life was less evident: employment generation was not accompanied by the creation of decent jobs, that is, jobs that met the expectations of the increasingly educated job seekers and the aspirations of the middle classes. 15 Therefore, although the region s employment growth was the highest in the world at 3.3 per cent a year on average between 1998 and 2009, compared to an annual growth of 1 per cent in East Asia and developed countries and just over 2 per cent in Latin America and South Asia, the jobs that were created were largely in the low valueadded sectors that are typically associated with informal sector activities. 16 Analysis of youth employment in economic sectors does indicate such a trend in selected countries in the region. Particularly among the middle class households, the non-agricultural sector is the main source of occupation for the majority of employed youth, but a significant number of them are absorbed in other services (figure 8). For example, 35.5 per cent of youth occupations in Egypt in 2011 were in other services, 22.6 per cent in Syria in 2007, 58.2 per cent in Jordan in 2010 and 30.7 per cent in Tunisia in The structure of economies across countries explains the diversity of youth occupation sectoral profiles, which implies that countries with higher diversity in economic structure have a higher share of non-agricultural jobs, compared to those with relatively greater reliance on agriculture. Between 2000 and 2011, there was a major shift from agricultural to non-agricultural occupations among young people, a trend that is distinctly noticeable across Egypt, Jordan, the Syrian Arab Republic and Tunisia (figure 8). The share of industrial jobs increased in some countries, such as in Egypt and Tunisia, although they are at low levels, while trade and transport sector occupations increased in the Syrian Arab Republic but not in Jordan. Importantly, construction jobs and other services that are mostly low value-added in nature, increased in all the four countries. This shift from agricultural to non-agricultural occupations could be the result of education expansion in the region, especially higher education. The greater diversification of occupations in Tunisia can be attributed to its successful shift from an agricultural to a non-agricultural economy in the post-reform era that began in the 1990s. However, a lack of industrial development and modern high value-added service sector development in most Arab countries has increased service sector jobs, mostly in the other services category that tend to be informal in nature. 9 P a g e

11 100% 90% 80% 70% 60% 50% 40% 30% 20% 41.5% 3.9% 7.7% 9.6% 4.2% 19.5% 4.6% 15.7% 9.0% 14.4% 35.5% 3.1% 7.0% 11.5% 17.5% 28.3% 10.4% 19.6% 16.6% 9.0% 17.2% 4.0% 14.5% 18.3% 20.5% 22.6% 19.4% 0.5% 5.3% 10.2% 0.1% 17.4% 15.2% 19.3% 16.1% 30.7% 1.9% 18.3% 2.2% 30.4% 41.2% 6.9% 24.4% 5.2% 58.2% 5.4% 15.0% 6.7% 42.7% 5.5% 21.8% 9.0% Other Services Transport Trade Construction Industry Agriculture 10% 0% 33.1% 36.8% 25.4% 16.1% % 17.3% 12.8% 25.6% 19.2% 53.4% 16.5% 3.0% 1.1% 3.6% Sudan Egypt Iraq Syria Tunisia Jordan Lebanon LDC MIC UMIC FIGURE 8 DISTRIBUTION OF MIDDLE CLASS YOUTH EMPLOYMENT ACROSS ECONOMIC SECTORS Source: ESCWA (2014a). Stagnant or declining real wages Given that productivity is among the lowest in the region, wages are also low and real wage is declining or constant in most Arab countries. 17 Wages as a percentage of GDP (derived from national accounts) in the Arab region have been declining, from 31 per cent in 2000 to 27 per cent in 2009 (figure 9). Egypt witnessed the most dramatic decline, where the wage share dropped from 29 per cent to 25 per cent of GDP between 2000 and Economic growth has thus benefitted employers and capital holders instead of workers, given that real wages have not increased significantly since the 1970s (figure 10). In fact, the Arab region is the only region where real wages have declined, dropping by 2.7 per cent between 2006 and P a g e

12 FIGURE 9 WAGES AS A PERCENTAGE OF GDP, 2000 AND Bahrain Egypt Jordan Kuwait Morocco Oman Qatar Tunisia United Arab Emirates Average Note: Regional average is population weighted. Source: ILO (2012b). Real wage growth GDP growth ARE BHR DZA EGY JOR KWT MAR OMN QAT SAU SYR TUN WBG Average FIGURE 10 GROWTH RATES OF WAGE SHARE AND GDP, 1990S-2000S Note: Regional average is population weighted. Source: Authors calculations based on ILO (2012b) and the World Bank (2014b). 4. Poverty and inequality Rising poverty since 2010 Poverty is one of the major challenges faced by Arab countries during the past three decades and that will continue being one of the major impediments to development in the Arab region. Since poverty is the cause of a major social vulnerability, it creates a threat to the overall stability and creates a situation of anxiety to the needy families in order to secure daily subsistence and secure the future in light of the widening gap between 11 P a g e

13 the rich and the poor. Especially due to declining performance of social safety nets on one hand and the scarcity of available job opportunities on the other hand. In this respect, the regional Arab Millennium Development Goals Report, issued in 2013, questioned the notion of low poverty that is obtained for the Arab region by applying the extreme poverty line of $PPP 1.25 per day. It argued that a large share of population is concentrated just above the poverty line which $1.25 a day is not able to capture. Indeed, by shifting the poverty line from $1.25 to $2 and $2.75, the poverty rates for the region increases from 4 per cent to 19 per cent and 40 per cent respectively (Figure 11). 19 Such a spectacular increase in poverty rate is a distinct feature of the Arab region compared to other regions of the world. The rate of undernourishment, which can be seen as a manifestation of poverty, in the Arab region is high and increasing, albeit the only region in the world to witness increasing undernourishment. 20 Clearly, there is a disconnect between income poverty rate (measured by a fixed line using $1.25) and undernourishment rate, which may be partly due to measurement of income poverty although undernourishment rate is influenced by several other factors in addition to income poverty. Poverty rate % Change in poverty % % % % % AC EAP ECA LAC SAS SSA DR $1.25 $2 $2.75 % Change from $1.25 to $2.00 % Change from $2.25 to $2.75 FIGURE 11 POVERTY RATES BASED ON PPP$ POVERTY LINES ACROSS DIFFERENT REGIONS Note: AC- Arab countries, EAP-East Asia and the Pacific, ECA-Europe and Central Asia, LAC-Latin America and Caribbean, SAS-South Asia, SSA-Sub-Saharan Africa, DR-Developing Region Source: Authors calculations based on World Bank (2014a). The incidence of poverty, measured by national poverty lines such as the lower and upper poverty lines, 21 show a quite different but more realistic picture of the size of poor and the vulnerable in the Arab countries. Using data prior to the crises since 2011, the poor and the vulnerable groups each constituted 21.3 per cent and 19.5 per cent, respectively, of population in the Arab region. 22 This regional average is calculated by taking into account population of nine countries for which detail household full sample survey is available with the authors, and the population of these nine countries account for 60 per cent of the total Arab population in P a g e

14 The figure 12A shows incidence of poverty according to latest household surveys that are available from national sources. However, these data reflect pre-crises situation in several countries including Syria and Yemen that are affected by crises. Estimated latest poverty rates, by taking into account impact of crises, are significantly high in countries that are affected by crises. For example, in Syria, armed conflict is estimated to have increased poverty from 12.3 per cent in 2007 to 43 per cent in 2013, and in Yemen, the prolonged recession has resulted in increasing poverty from 34.8 per cent in 2006 to 54.4 per cent in 2011 (Figure 12B). 24 Both countries also witnessed a rise in vulnerable population size. Poverty in Egypt has increased in the last decade, in particular rural residents suffered. After a reduction in poverty between 1995 and 2000, Egypt has experienced a continuous increase in the poverty incidence according to national poverty lines since year Poverty stood at 16.7 per cent in 2000, but in 2005 it had increased to 19.6 per cent, and 25.2 per cent in 2011, despite Egypt experienced high growth rates in both GDP and GDP per capita. It may be explained by the fact that economic growth has not been shared among larger sections of population, rather it was concentrated in a few sectors with very little participation of the poor (Abu-Ismail and Sarangi 2013; 2015). A. Incidence of poverty B.. Trends in poverty and vulnerability rates 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Egypt 2000 Egypt 2011 Tunisia 2005 Tunisia 2010 Jordan 2002 Jordan 2010 Syria 2007 Syria 2013 Yemen 2006 Yemen 2011 poor vulnerable Note: The rates are based on latest household survey Note: Rates are estimated in recent years for Syria and years for respective countries. Yemen as compared to latest household survey years. FIGURE 12 POVERTY RATES IN THE ARAB COUNTRIES, ACCORDING TO THE NATIONAL POVERTY LINES (%) Source: Authors calculations based on data from Household Budget Surveys of respective countries. Poverty in Egypt has increased in the last decade, in particular rural residents suffered. After a reduction in poverty between 1995 and 2000, Egypt has experienced a continuous increase in the poverty incidence according to national poverty lines since year Poverty stood at 16.7 per cent in 2000, but in 2005 it had increased to 19.6 per cent, and 25.2 per cent in At the sub-national level, rural residents were the net 13 P a g e

15 losers as poverty incidence increased most rapidly. Between 2005 and 2009, urban poverty increased by 0.9 percentage points, while rural poverty increased by 2.1 percentage points to reach 28.9 per cent in The increase in poverty in the last decade is puzzling as Egypt experienced high growth rates in both GDP and GDP per capita. Between 2000 and 2005, annual average growth rate was 4.1 per cent and average growth in GDP per capita was 2 per cent. Despite this relatively strong growth in GDP and GDP per capita, poverty increased dramatically in this period. The increase in poverty between 2005 and 2009 is perhaps even more perplexing as Egypt achieved even faster growth in this time period. Annual GDP growth averaged 6.2 per cent and GDP per capita growth averages 4 per cent per year. However, the wealth that was created in this period produced gains for some groups, and losses for others and the opportunities that were created were not shared equally. Growth was coupled with high inflation, especially for goods and services consumed by the poor, which reduced the living standard of the poor. In addition, the economic growth in Egypt was also concentrated in a few sectors with very little participation of the poor such as manufacturing, transport and communications. These factors contributed to the strong increases in poverty despite increases in GDP per capita. 25 Worsening income inequalities Income inequality suffers from several measurement challenges in the region, but mainly due to household expenditure surveys being not an effective instrument in capturing the expenditure of the wealthy people. 26 Based on survey data, a general notion is that income inequality, Gini index, is relatively moderate (varies between ) in the Arab region and has changed little over the last two decades. A recent study of Egyptian household survey data by Hlasney and Verme (2013) 27 suggested low and stagnant inequality in Egypt. Therefore, they related the reasons behind the Egyptian revolution to perceptions of inequality rather than actual experienced inequality. Alvaredo and Picketty (2014) cited severe data limitations 28 in availability of income tax records and challenges in survey data in order for computing a reliable inequality index that reflect the nature of growth and perceptions of wellbeing among people across countries in the region. They, however, suggested that increased inequality across countries in this region is a serious concern. A recent report on wealth, produced by Credit Suisse (2014), indicates that wealth gini is 0.80 in Egypt and the latter is among the countries in the world that witnessed fastest rise in wealth inequality in recent years along with China and Hong Kong, China (SAR). This finding suggests that the household expenditure surveys are not able to capture the expenditure of the top wealthy in Egypt and therefore a moderate income gini may be expected. Another indicative of the missing wealthy in the household expenditure surveys can be substantiated by the fact that the difference between the private final consumption expenditure per capita from national accounts data and the one actually experienced by households from the surveys has been increasing over time. Had there not been cases of rising wealthy, the difference between the two measures would have been similar over time. We examine this from the two sources of data. First, we noted that high level of disparity exists between household final expenditure per capita from national accounts and household consumption expenditure per capita from survey. For example, in Egypt (2011), the per capita household final expenditure was 2.6 times higher than that reported by the survey based per capita consumption expenditure (figure 13). Similarly high levels of divergence were noted in Jordan, Oman and Tunisia. It may be noted that the gap between the two measures may not be a surprise but a high level of gap certainly raises alarm regarding significant missing items 14 P a g e

16 in the expenditure surveys. Importantly, the gap between the two measures increased over time for all countries in the sample. Empirical exercises from several countries, as well as conceptual analysis, provides a basis to argue that the widening divergence between the two measures indicates increased inequality over time, 29 even when taking into account that household expenditure surveys might miss some consumption items and that national household final expenditure includes some components that household consumption surveys do not cover Yemen Egypt Syria Jordan Oman Tunisia FIGURE 13 TRENDS IN THE RATIO BETWEEN HOUSEHOLD FINAL EXPENDITURE PER CAPITA (FROM NATIONAL ACCOUNTS) AND HOUSEHOLD CONSUMPTION EXPENDITURE PER CAPITA (FROM SURVEY) Source: ESCWA (2014a). Extending this exercise, we estimated the disparity between the average expenditure of the rich on the basis of household final expenditure per capita from national accounts and the average consumption expenditure of population classes from surveys. The exercise essentially combines the information on expenditure from both sources to estimate the mean consumption of the rich who are at the top end of the hypothetical distribution of national accounts, and they are often not captured by the household surveys. To calculate the average expenditure of the rich, the underlying assumption was that the distribution of mean household final expenditure per capita across economic classes in the national accounts was the same as that of household survey-based consumption expenditure per capita. Conceptually, the survey based consumption mean observes a lower variation across the distribution than that of the distribution of private expenditure in the national accounts. Therefore, assuming the same variation of mean in both distributions, the average expenditure of the rich will tend to be at the lower side of estimation than otherwise. The ratio between per capita expenditure of the rich to the per capita expenditure of different population classes from the survey based consumption data is presented in figure 14. The results are sharp and striking, as would be expected from the countries in the region. For example, the rich in Egypt have 16 times higher per capita expenditure than the poor, 11 times more than that of the vulnerable class, 7 times more than that of the middle class and 2.5 times than that of the affluent consumption class. Similar high level of divergence is 15 P a g e

17 noted in Tunisia as well. The ratio between average expenditure of the rich and middle class ranges between 3 in Jordan, Syria and Yemen to 7 in Egypt. The ratio earns a progressively higher value for the vulnerable and the poor, and a lower value for the affluent class across the countries. Over the decade, the ratio between average expenditure of the rich and other consumption based population classes have increased significantly in all countries except for Tunisia. For example, in Yemen, the ratio between average expenditure of the rich to average expenditure of middle class has doubled during 1998 and 2006; in Egypt that increased from 5.7 to 7.4 during ; in Jordan that increased from 2.9 to 3.4 during and so on. In Tunisia, that ratio shows relatively stable gap around 4, during Rich pfce/ Poor pce Rich pfce/ vulnerable pce Rich pfce/ Middle class pce Rich pfce /Affluent pce Yemen Egypt Syria Jordan Oman Tunisia FIGURE 14 THE RATIO BETWEEN AVERAGE EXPENDITURE OF RICH AND AVERAGE EXPENDITURE OF OTHER ECONOMIC CLASSES Note: Pfce stands for per capita final consumption expenditure from national accounts, and Pce for per capita expenditure Source: ESCWA (2014a). This disparity analysis helps strengthen the argument that inequality in Arab countries widened in the 2000s. In other words, the share of national income commanded by the middle class, the poor and the vulnerable declined over time. 30 Summing up In summary, the lack of structural transformation of Arab economies and low productivity is an expected outcome of decades of rentier patterns of economic growth that relied mainly on oil and gas. Oil revenues have supported a service-led pattern of economic development at the expense of the productive sectors, rendering the region the least industrialized among developing regions. Many of the region s economies are turning into increasingly import-oriented, service-based economies. Since the services fall at the low end of the valueadded chain, however, they contribute little to the expansion of local knowledge and skills, and lock countries into inferior positions on global markets. Consequently, insufficient decent jobs have been created owing to poor demand, especially from the formal private sector. Inevitably, this caused an increase in informal sector jobs generally associated with low paid, low quality and low productivity jobs. 16 P a g e

18 Formal sector workers in the region represent only 19 per cent of the working age population (compared to 27 per cent in Latin American and 40 per cent in Eastern Europe); the informal sector is an enormous part of the region s economy and comprises the majority of working heads of middle class families. 31 That led to a large section of people having deprived of access to social protection insurance, such as health care and pensions. Their real wages are lower than those of formal sector employeeas and their working conditions are far worse. Without contracts, they have no job security and are hired and fired at the sole discretion of their employers. This shows that a large section of population, including high skilled educated youth, are caught in a trap who are operating in the informal sector are having difficult times. 32 Despite that the region has achieved relatively high growth rate, the latter has not been able to translate into improving human wellbeing to a larger section of population. Crises and political instability have further affected many countries in the region, especially the poor and the vulnerable sections, the result being increasing inequality and high impoverishment in terms of income as well as other aspects of human wellbeing Analysis of proposed SDGs and targets from an Arab perspective The issues related with poverty, economic growth and inequality are reflected as goals and targets in the outcome document of Open Working Group (OWG). 34 These goals and targets are broadly in conformity with the proposed goals and targets of the Arab regional priorities for the formulation of the SDGs. 35 As discussed in the beginning of the issue brief, the goals related to poverty, economic growth and inequality are: eradicating poverty in all forms and in everywhere (Goal 1), promoting sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all (Goal 8) and reducing inequality (Goal 10). 36 The focus of analysis in this issue brief is interlinked economic issues with regard to Goal 1, those components of Goal 8 that aim to promote sustained, inclusive economic growth, and Goal In line with the targets of Goal 1, ending extreme poverty by 2030, measured by $1.25, is a key priority for the Arab region. Instead of a fixed international poverty line, assigning different poverty lines to different country groupings on the basis of their standard of living, such as level of expenditure per capita can provide better information about the poverty situation. 38 Keeping in view the discrepancies in poverty rate according to the $1.25 definition, poverty reduction by national definitions is therefore a high priority. While using national definitions, emphasis must be put on harmonized poverty measurement methodologies as well as data generation for poverty measurement in a pan-arab regional framework, so that the poverty rates are comparable across countries. 39 In line with the target components on Goal 8, greater emphasis must be put on making the economic growth processes more inclusive, which must promote participation and benefit sharing of growth equitably across all sections of society. The focus of economic policy need to be centered around generation of decent jobs so that benefits of growth can be shared among all. Redistributive policies include a variety of measures, such as reforming tax system, social transfers and social expenditure, and national laws and regulations. 40 Provision of social protection is an important strategy for augmenting household/individual income. It is important for supporting mobility of the poor to higher income bracket as well as to help sustain the middle class of today. Social protection systems exist by varying degrees in the Arab region. But the primary limitation is its limited coverage. For instance, contributing social insurance schemes reaches less than 40 per cent of the working population. Others include social assistance in the form of cash transfers/ subsidies for energy and food, zakat funds. However, these are neither having universal coverage not they are comprehensive in their scope to help against different shocks. In light of this, a comprehensive social protection system 41 is much needed, which can 17 P a g e

19 protect the poor and the vulnerable, including the persons with disabilities, against natural and human-induced shocks, disaster risks and economic insecurities. Importantly, social protection reforms should be fully integrated with labour market policies to ensure efficiency and impact. For example, public works programmes with wages lower than unemployment benefits are not likely to be effective. 42 The region needs an integrated economic policy model taking into consideration economic growth with environmental sustainability principles. Economic growth in the region is primarily driven by the extraction of fossils such as oil and natural gas, and has been highly energy intensive. The vulnerability of food, water and energy resources threatens long-term development in the region and further exacerbates poverty. In this respect, Arab countries require a new model for development based on sustainable production and consumption patterns. The nexus between food security and environmental sustainability is becoming clearer than ever. For example, intensive fishing and marine pollution exert a mounting pressure on countries in the Arab region, which should maintain their fish stocks and keep them within safe biological limit. Overfishing threatens the income source of coastal communities as well as national economies that are mainly dependent on fishing; it also renders the communities that depend on fish as their main source of protein vulnerable. 43 A more diversified economic structure need to be considered to generate higher productive capacity with a focus on generating decent jobs and promoting inclusive and quality development. Policy considerations to expand manufacturing and exports of non-oil commodities are key priorities for structural transformation, generating higher productive capacities and jobs. Complementary policy reforms in areas such as trade; investment; science and technology; enterprises (micro-, small- and medium-sized); human-resource training and upgrading; and regional development are critical considerations for achieving inclusive economic development and boosting economic growth. A more disaggregated assessment of development achievements by taking into account subnational and other forms of inequalities. Inequalities in various forms, related to income or in other respects, continue to undermine development achievements and growth, and threaten stability. Many gaps cannot be quickly addressed, since they are deeply rooted in countries histories, politics and governance systems. They are visible through the lack of access to services, resources, power, voice and agency, and they include inequalities in wealth and income, assets, opportunities and access to natural resources, among others. For instance, when data are broken down, such as by rich and poor, urban and rural areas, age, disability, ethnic group, female and male, etc., MDG indicators often reveal that some groups are lagging far behind others although national aggregates present a different story. 44 In order for doing the above, fiscal space for development expenditure needs to be harnessed, which include the amount and distribution of internal sources of finance (taxes, natural resources), as well as deficit financing and external sources of financing such as ODA. The current macroeconomic and fiscal situation of the Arab countries, especially those in political transition is daunting. After three years of political transitions undergoing in the Arab region, economic growth has plummeted, fiscal accounts have deteriorated, and debt levels have increased. The political transition had significant impact on the economic activity in the region. All the countries of the region were affected in varying degrees, either directly or indirectly. The countries that took the strongest brunt were those directly affected by the political crisis such as Tunisia, Libya, Morocco, Yemen, and Syria. 18 P a g e

20 The fiscal outlook for the Arab countries is bleak especially for the countries facing political upheavals. Some countries increased their spending during the Arab uprisings in order to satisfy the demands of the protestors in terms of wage increases, subsidies, and increased social assistance. Once these additional spending are put in place, these are difficult to reverse because of political considerations, and so adds an extra burden to the government budget. During the political upheavals, government revenue had fallen. For example, in Egypt, government revenue fell from 25.1 per cent of GDP to 22 per cent, while it fell from 26 per cent to 24.6 per cent in Yemen. Apart from the oil-rich countries in the region, government expenditure is higher than government revenue by some 3 percentage point. This led to a deteriorating government fiscal balance and rising public debt, particularly high in the countries suffering from direct or indirect impact of political instability. This led to rising public debt, largely financed domestically. For example, gross public debt in Lebanon and Egypt reached at 140 per cent and 90 per cent of GDP respectively in In sum, there is significant variation between fiscal space for the non oil-rich countries which is very low against that for the oilrich countries who are better off. However, the recent oil price plunge is expected to affect the fiscal situation of the oil-rich countries as well, the impacts are yet to be assessed. Another source of finance is Overseas Development Assistance (ODA) to developing countries under the framework of the MDG 8. The DAC countries total ODA coming to the Arab countries declined significantly during the 1990s, but showed a positive trend during the 2000s. Total DAC ODA to the non oil-rich countries of the Arab region 46 in 2012 was 6.4 US$ billion. Taking into account non-dac ODA, the total amount of ODA flow to the region s non oil-rich countries was 8.9 US$ billion. In terms of per capita, the region s non oil-rich countries population receive only 37 US$ per capita in Total ODA to the region has remained highly skewed to a few countries, especially Iraq, a country that received over one third of the total ODA for the region between 2000 and 2012 (ESCWA 2014). Egypt, Palestine and the Sudan also received significant amounts, while other countries had a relatively limited access to ODA. Further, ODA in the Arab region is marked by high volatility in general. Sudden spikes are almost always conflict related and/or due to donor political stances. Examples include Egypt in 1990, Iraq after 2002, and Lebanon and the State of Palestine after In 2012, the increase of the aid to the Syrian Arab Republic, Jordan and Lebanon could be related to the crises in Syrian Arab Republic and the increase of the number of refugees in its neighboring countries. In addition, around one-third of ODA to the Arab LDCs entails humanitarian assistance, in particular in Somalia and Sudan, where the share is 63 per cent and 40 per cent, respectively. In general, the determinants of ODA are the level of development challenges (for example, poverty or humanitarian crises), and other political economy factors such as bilateral relations between partner countries. While in some countries ODA might represent a sizeable share of the foreign capital flowing in, it is unlikely to compensate for the level of challenges. Nevertheless, ODA has remained far short of commitment of 0.7 per cent of GNI. 47 Overall, most countries in the Arab region had limited fiscally capacity even before the Arab Spring and they are in a worse off position now. While innovative ways are required to increase domestic fiscal space for financing the priorities areas identified above, but they will not be enough. International cooperation is essential for building up fiscal space through supporting policies that promote international aid, FDI, trade, role of private sector and remittances. Further, economic transformation and equitable growth will hinge on revising governance models. Reforms should be centered on moving away from old regime patronage models 19 P a g e