Economic Research Forum (ERF)

An agenda for reducing income inequality in the Arab countries

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What can be done to reduce income inequality in Arab countries? This column explores issues of measurement as well as potential policy measures. It concludes by calling for a new multipurpose pan-Arab survey that would allow for an evidence-based decision-making process on the impact of proposed policies on poverty and inequality.

In a nutshell

There is a growing consensus that societies seeking social and economic justice or equity in living standards should promote equality of opportunity.

The best way to reduce inequality of opportunity is to address inequality of outcomes, particularly in the distribution of income.

A forthcoming report on fiscal policy by the UN Economic and Social Commission for Western Asia suggests concrete redistribution measures.

In most Arab countries, household statistics used to construct inequality indicators are scarce, sometimes of poor quality, lack comparability (even within the same country over time) and are difficult to access. In a comprehensive review of poverty and inequality data in 2010, one study concluded that it is almost impossible to judge the extent of income inequality in Arab countries (Bibi and Nabli, 2010).

The situation today is arguably better in term of accessibility. Thanks in part to ERF efforts, more researchers have gained access to household expenditure and labour market surveys than at any point in the past (except for the Gulf Cooperation Council countries). The same is true for the demographic and health surveys that are useful for estimating inequality in social outcomes and which are generally less restrictive.

As a result, since 2010, there has been a noticeable increase in research investigating poverty and inequality (of both outcome and opportunity) in the region. Notwithstanding this recent spur in research, there appear to be two competing and somewhat contradictory narratives on inequality in the region, at least when the discussion is focused on longer-term trends.

Competing narratives on inequality in the Arab region

One position, based on empirical findings from the household surveys, claims that income (or expenditure) inequality has been generally low and declining in Arab countries since 1990. The two main pieces of evidence used to substantiate this claim are first, faster growth in real expenditure of the bottom 40% of the population than that of the overall population; and second, low and declining inequality as measured by the Gini coefficient (Devarajan and Ianchovichina, 2017; World Bank, 2015, 2016).

Furthermore, a number of recent ERF studies have suggested that inequality of opportunity is also generally low in Arab countries. For example, one study measures inequality of opportunity in wages and consumption for Egypt at different points between 1988 and 2012. The authors argue that measures of inequality of wage income have increased over time but the share attributable to circumstances has declined steadily throughout the whole period (Assaad et al, 2017).

A second narrative is that the inequality of outcomes revealed by household surveys does not match the visible reality of a large and growing gap in wealth and income between rich and poor. It also does not tally with the story coming from national accounts since many of the countries that report a moderate Gini (such as Egypt, Jordan, Syria before 2010 and Morocco) record large and rising discrepancies in average expenditure between household expenditure surveys and household final consumption expenditures from national accounts.

This suggests that inequality is not only much higher but is also likely to have risen significantly over the past two decades (Sarangi et al, 2014). The reason why this may be true is that it is often very difficult to include the richest of the rich or the poorest of the poor in household surveys. Hence, if the top 1% are receiving the lion’s share of the growth process, this could explain such a discrepancy. For example, Alvaredo and Piketty (2014) show that the share of top 1% income receivers might exceed 25% of the region’s income (compared to 20% in the United States).

Research on multidimensional poverty also indicates the existence of staggering inequalities in health, education and living conditions within and between Arab countries. For example, the forthcoming Arab Poverty Report shows more than a ten-fold difference in the incidence of acute poverty between rural and urban areas in some countries. That difference could go up to fifty-fold between the poorest and richest quintiles by wealth.

In summary, there is clearly an important and emerging body of work on inequality in Arab countries. But we are still missing agreement on the stylised facts, let alone the underlying root causes or a coherent political economy narrative.

The risk is an excessive focus on inequality of opportunity at the expense of inequality of outcomes. Inequality of outcomes (distribution of income, wealth, infant mortality, etc) does not account for individual responsibility for such outcomes.

Indeed, there is a growing consensus that societies seeking social and economic justice or equity in living standards should promote equality of opportunity by compensating the inequality arising from ‘circumstances’ beyond individuals’ control, while at the same time, letting them bear the consequences of actions or ‘effort’ for which they can be held responsible.

But as noted by Atkinson (2015), the best way to reduce inequality of opportunity is to address inequality of outcomes, particularly in the distribution of income.

What can be done to reduce income inequality?

A forthcoming report on fiscal policy by the United Nations Economic and Social Commission for Western Asia (ESCWA) suggests some concrete redistribution policy actions:

  • First, tax policy should be more progressive. For example, in many Arab countries, the burden of direct taxes tends to be more on the middle class than that of the top decile who find ways and means to avoid paying appropriate taxes (Sarangi et al, 2015).
  • Second, fuel subsidies that mainly benefit the affluent groups should be redirected to income transfers and employment schemes for the poor (and not only to reduce budget deficits).
  • Third, and concurrently with poverty reduction, we should aim to increase the welfare of the middle class. This can be done by reversing the patterns of growing labour market informality and/or the concentration of economic activities in low value-added sectors or in central urban areas.
  • Above all, much of the domestic fiscal constraint can be eased by having a good institutional environment and, most importantly, by having fiscal transparency, which ultimately costs little in extra public finances.
  • Finally, as argued in an ESCWA study (Sarangi et al, 2014), Arab countries need a new multipurpose pan-Arab survey. That would allow for an evidence-based decision-making process on the impact of these proposed policies on poverty and inequality.

Over time, not only will these policies reduce income inequality, but they will also create a level playing field for everyone, thus curb the rise in inequality of opportunity.

Further reading

Alvaredo F, and T Piketty (2014) ‘Measuring Top Incomes and Inequality in the Middle East: Data Limitations and Illustration with the Case of Egypt’, ERF Working Paper No. 832.

Assaad, R, C Krafft, J Roemer and D Salehi‐Isfahani (2017) ‘Inequality of Opportunity in Wages and Consumption in Egypt’, Review of Income and Wealth.

Atkinson, AB (2015) Inequality: What Can Be Done?, Harvard University Press.

Bibi, S, and MK Nabli (2010) ‘Equity and Inequality in the Arab Region’, ERF Policy Research Report No. 33.

Devarajan, S, and E Ianchovichina (2017) ‘A Broken Social Contract, Not High Inequality, Led to the Arab Spring’, Review of Income and Wealth.

Sarangi, N, K Abu-Ismail and NR Bhanumurthy (2015) ‘Effectiveness of Fiscal Policy in Jordan: Impact on Growth, Poverty and Inequality’, ESCWA Working Paper.

Sarangi, N, K Abu-Ismail, H El-Laithy and R Ramadan (2014) ‘Towards Better Measurement of Poverty and Inequality in Arab Countries: A Proposed Pan-Arab Multipurpose Survey, ESCWA Working Paper.

World Bank (2015) Inequality, Uprisings, and Conflict in the Arab World.

World Bank (2016) Taking on Inequality.

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