Economic Research Forum (ERF)

Rethinking inequality in Arab countries: the latest research evidence

In an effort to explain and find policy responses to the Arab Spring, there has been considerable focus on inequality. This column summarises the findings of a major research project on the issue.

In a nutshell

According to global estimates, Arab countries have low within-country income inequality – but inequality is much higher once the income of the top earners (who are often excluded from household surveys) is taken into account.

Between-country inequalities in income in the region are staggering – and while the low human development Arab countries had the fastest rate of income growth from 1990 to 2010, progress has been reversed since then.

There have been declining inequalities in outcomes in several Arab countries, especially for education – but these are not associated with decreasing inequality in opportunities.

The issue of inequality has received much attention in Arab countries since 2010 when social researchers and policy-makers scrambled to find explanations and policy responses for the Arab Spring. Realising the importance of addressing this issue, and the need to move beyond income measures of inequality, the Economic and Social Commission for Western Asia (ESCWA) and the Economic Research Forum (ERF) partnered to undertake the largest research project on the issue to date.

A new report on the findings delivers the following key messages:

Message 1: There have been human capital gains but also widening between-country inequalities due to conflict

For non-income dimensions of wellbeing, such as health, education and living conditions, the report shows that the Arab region has achieved gains in most basic human development indicators, including stunting, infant mortality, primary and secondary education and access to water and sanitation.

For example, since 2000, infant mortality per 1,000 live births has declined from 34.1 to 20.1, and adult literacy rates have increased from 64% to 74% of the population. Up until 2010, these gains were achieved at a faster pace in countries in the low and medium human development groups (as ranked by the Human Development Index, HDI), which reduced the gaps between the region’s richest and poorest countries.

Since 2010, this trend may be reversing in many basic health and education indicators due to conflicts, especially in Syria and Yemen. For example, between 2010 and 2017, average years of schooling declined from 3.9 to 3.8 years for the countries in the low HDI group (which includes Syria and Yemen as well as Mauritania and Sudan), while the average for the region continued to increase from 6.2 to 6.9 years.

There is a strong gender aspect to the impact of conflict, especially in education. In Yemen, more than 90% of primary school age children were enrolled in 2006, with virtually no gender disparities until the age of 12. The most recent data show a substantial decline in overall enrolment rates for children of all ages, but especially for girls.

Message 2: There are declining within-country inequalities in health and education, but levels of inequality in education remain high and educational quality is a major challenge

The gains in health and education achieved in Arab countries since 2000 were accompanied, generally, with decreasing within-country inequalities, whether between rich and poor, rural or urban areas or genders.

For example, the probability of being deprived in school attendance for the poorest wealth quintile households in Jordan declined from 27% to 21%, from 44% to 19% in Egypt and from 53% to 35% in Morocco. In least developed countries (LDCs) such as Sudan and Yemen, it also declined from 70% to 43% and from 73% to 65%, respectively. Thus, for every 10 of the poorest children in LDCs, nearly half are still unlikely to be attending school.

Of these gains, reduced inequality in secondary education attainment between rich and poor was particularly notable, falling from sixfold to threefold from the early 2000s to the mid-2010s. Egypt led the region on reducing secondary completion inequalities with an average annual reduction rate of 9.2% in the gap between the richest and poorest fifth of the population. Mauritania led the region on reducing primary completion with an average annual reduction rate of 9.1%.

Notwithstanding the general progress, in some countries health and education gaps between the rich and poor increased, as in the cases of secondary completion in Iraq and stunting in Yemen. In addition, the gap between the rich and poor in education is among the highest worldwide. The HDI inequality in education index for the region is 32.6%, much higher than the world average of 22%.

Arab countries lose two to four years of schooling when quality and learning are factored in. Moreover, in several instances, the relatively resource-poor countries fare better than the resource-rich countries that have higher per capita incomes. This underlines that in the Arab region, higher incomes may provide access to education, but do not necessarily guarantee learning outcomes.

Message 3: There is high and rising inequality of opportunities

The report shows high and increasing levels of inequality in opportunities in secondary education, where factors such as family wealth and parents’ education explain over 60% of the observed inequality outcomes. In addition, these levels have increased since 2000.

Inequality in health opportunities was generally lower. In the case of stunting and infant mortality, these circumstances accounted for 5-25% of observed inequality outcomes. But as with inequality of educational opportunities, these levels did not decline from the early 2000s.

This shows an Arab inequality paradox, where declining inequalities in outcomes, especially for education, are not associated with decreasing inequality in opportunities.

Message 4: Low growth in household income is squeezing the middle class and leading to rising income inequality

Increases in the national income are not systematically transmitted into higher household incomes. Despite reasonably high growth at the aggregate level, in many countries, household per capita incomes have lagged behind, leading to rising poverty according to national measures: from 20% in 2010 to more than 25% in 2018, due to conflicts and economic downturns. This has also put pressure on the size of the middle class region-wide, which may have declined to below 40% in non-GCC (Gulf Cooperation Council) countries from close to 50% in 2010.

According to global estimates, Arab countries have low income inequality. But inequality is much higher once the income of the top earners (who are often excluded from household surveys) is taken into account. Thus, the region’s top 10% are estimated to earn more than 60% of total national income, which is the highest worldwide inequality level.

Between-country inequalities in income are also quite staggering. The 42 richest Arabs on the Forbes 2017 list have a wealth of $123.4 billion, exceeding the GDP of Arab LDCs in that year.

More concerning, the income per capita of the LDC group has seen a significant decline. In the low human development Arab countries, which had the fastest rate of income growth from 1990 to 2010, progress was reversed since then (declining from $4,170 in 2010 to $2,835 in 2017). Meanwhile, the average for the region increased from $13,777 to $15,870 over the same period.

Message 5: Higher educational achievements have not been translated into better employment opportunities, especially for youth and women

Social and economic inequalities in Arab countries ensue from structural and institutional deficits. Arab economies tend to be disproportionately concentrated in low value-added unproductive sectors. This is manifested in informal labour markets, low productivity and poor employment outcomes, especially for women and youth. Average informality levels in five non-GCC Arab countries exceed the world average, with 68.6% of total employment, including agriculture, being informal.

Labour productivity growth in the region was largely negative over the period 2014-2017, and remained close to zero in 2018, due to several factors including sluggish growth, increased conflict across the region, slow adoption of technologies and low investment in worker skills and training.

The region suffers from very low youth labour force participation rates, which had dropped to 29.1% in 2018. Various factors contributed to this decline, including an increase in the educational attainment of youth, especially women, which may delay their entry into labour markets; an increase in youth emigration as they seek better job prospects oversees; and an increase in discouraged workers among youth, who give up looking for a job after prolonged periods of unemployment. Youth disadvantage is manifested in high unemployment rates of 26% in 2018.

The labour force participation rates of women in the Arab region are approximately 21% in 2018, one of the lowest worldwide. Women’s unemployment rate (18.7%) is more than twice that of men (7.7%).

Message 6: Fiscal space needs to be enlarged for quality public services

Tax policy should be more progressive. Progressive taxes on income, wealth or property are likely to increase revenues by 5% of GDP in some countries, while promoting fairness between rich and poor.

Countries should also enhance transparency, improve tax collection processes and fight tax evasion. Compulsory tax reporting for all can significantly improve compliance. It makes no sense to protect the privacy of earnings and wealth of the top 1%, especially at a time when combating illicit financing is a top regional priority.

The revenues from directly taxing the very rich through income, property and/or wealth gains taxation policies and from phasing out fuel subsidies that mainly benefit the affluent groups should be redirected to a recommitment by the states to provide quality public services. This would enhance the prospects for reducing inequality and significantly reduce social tensions.

Message 7: Decent jobs are needed, especially for the middle class

The orientation of economic policies needs to change. Rentier-inducing economic policies that macroeconomic stability the priority at the expense of productivity and non-oil commodity exports should be replaced by ones that target decent employment and structural transformations. Arab countries should aim to reverse the patterns of growing labour market informality and the concentration of economic activities in low value-added sectors or in central urban areas.

To encourage higher-productivity sectors, Arab policy-makers need to enact both monetary and fiscal policies that help to diversify economies away from the capital-intensive and natural resource sectors, increase productivity and generate employment by prioritising industrial development, facilitated by technology transfer and innovation. But this requires major reforms not only in strategic outlook and orientation of public and private investment but also in economic governance and the system of incentives and disincentives.

Promoting small and medium enterprises is another an entry point to boosting personal initiative, promoting entrepreneurship and generating employment. Backing micro enterprises, whether through policies or microfinance, plays a significant role in decreasing inequalities, as it provides direct support to the most financially disadvantaged. Investments in infrastructure would also ensure better access to services and incentivise private sector development.

Addressing informality and generating employment for young entrants to the labour force is vital to reduce inequality. Employment guarantee schemes can help to close the wage gap between the formal and informal sectors, and this would facilitate formalising the latter.

Message 8: A good institutional environment is essential

Arab countries need to restore credibility and trust in state institutions. Reforms should begin by empowering public institutions to improve their service delivery. This can be done, first and foremost, by cementing the rule of law and promoting good governance.

Transparency in resource mobilisation and spending is also essential, and monitoring and accountability should follow.

Arab countries need to promote social dialogue as a central apparatus for enhancing communication between government and people and providing institutionalised mechanisms for conflict resolution.

Promoting Arab regional integration offers an opportunity for driving economic growth, and would contribute to poverty eradication, support job creation and help to narrow inequality gaps in income, health, education and employment. More relaxed intra-regional movement of labour, goods and capital would enhance intra-regional trade and investment.

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