Chapter 13
Economic and Social Welfare

Learning objectives:

  1. The need for a comprehensive social safety net.
  2. The essential elements of safety nets.
  3. Ethical principles and institutional measures.
  4. The distinguishing features of the Islamic perspective on economic and social welfare.
  5. The role of government in providing safety nets.

While over the last few decades the international community has adopted the position that broad-based economic growth is necessary for stemming the effects of systemic poverty, a growing consensus has emerged that social safety nets and social protection are also essential elements of any comprehensive framework for poverty alleviation. Not only are provisions that provide basic services, such as healthcare and education, important in their own right, but they are also critical drivers for economic growth and development and an equitable distribution of income and wealth. An adequate social safety net is a central feature of the Islamic economic system and is even more imperative in countries that generate a significant percentage of their current revenues from society's depleting oil and gas reserves. A recent paper confirms that although growth has reduced poverty in Asia, it has been accompanied by increasing inequality (less inclusive than some suggest). The authors go on to suggest a number of policies to support more inclusive growth (reduce poverty more and decrease inequality):

In terms of fiscal policy, these include higher spending on health and education and enhanced social safety nets (e.g., increases in pension coverage and conditional cash transfers). Greater attention must also be paid to labor market reforms that would increase the voice of labor, hence boosting its share in total income (e.g., minimum wages and reducing duality in labor contracts). Finally, building a more inclusive financial system and improved governance should also be part of the policy package.1

In the early 1980s, the general prescriptions for growth in developing countries were economic reforms, focusing on developing a prudent combination of policies to enhance stabilization and adjustment while little attention was placed on the potential social costs of reforms. In time, however, more attention was afforded to relieving specific constraints that were binding, including specific provisions for social welfare and protection. Over the years, it has also been recognized that safety nets alone cannot effectively serve as an instrument for alleviating poverty without sound macroeconomic policies that enhance sustainable growth. Economic growth, income redistribution, and social safety nets are all needed in combination to alleviate poverty and afford everyone a fair chance to pursue their dreams. While restructuring efforts may create economic efficiency gains over the long term, they often also lead to social dislocation, particularly over the short term. As Muslim countries adopt much-needed economic reforms to promote fiscal discipline, build effective institutions, and promote economic justice in an effort to stimulate long-term growth, the development of a comprehensive structure to protect the vulnerable from declining deeper into poverty and improving the income distribution becomes even more pressing.

In a recent and much-heralded piece of economic scholarship, Thomas Piketty has argued that income and wealth distribution have deteriorated globally because of a fundamental shift in economic and financial fundamentals.2 The rate of return to capital has exceeded economic growth. This shift has favored the owners of capital relative to labor, in turn widening the wealth and income distribution globally. He has called for heavy and progressive taxation of wealth to address this growing inequality because economic growth will not by itself address this growing chasm.

For social protection policies to be effective in Muslim countries, they should be complementary to the principles of economic justice as enunciated in Islam. In this chapter, we explore the critical aspects of Islamic safety net arrangements, strategies for poverty alleviation, and equitable income distribution. In this context, we also explore the current role of social safety net policies in some Muslim countries. We conclude by discussing how countries can allocate their resources more efficiently to minimize social dislocation and ensure equity in accordance with Islamic principles. In order to understand the core principles underlying economic welfare and poverty alleviation, it is necessary to have a thorough understanding of available tools for income distribution and redistribution in Islam. (See discussion in Chapter 12.)

Social Safety Net Provisions

Many observers contend that Islam played such a critical role in the development of the Arab societies that it allowed them to flourish and to have a transformative effect throughout the world.3 Although conventional economics addresses the issue of the allocation and distribution of resources, it lacks the spiritual or moral foundation to achieve social goals. The Quran assumes conventional economic principles, such as the laws of supply and demand, based on individual enterprise and reward but set within a moral framework to ensure equal opportunities and support for all.4

We begin by providing a brief description of the foundation of an Islamic social safety net system. To fully implement Islamic economics requires more than a simple paradigm shift away from classical economics. Rather, Islam conceptualizes human behavior with regard to the distribution of resources and the requisites for human welfare somewhat differently from what is done in Western economic theory. For example, classical economics assumes that (1) individuals are rational actors in the economy, (2) resources are scarce, and (3) personal demands or wants are unlimited. However, the underlying factors determining the extent of poverty are unlimited wants, resource scarcity, and, to some degree, the distribution of output.

Similar to classical economic theory, Islam recognizes that individuals are rational actors; however, in Islam, the underlying cause of poverty is seen differently. Scarcity is not afforded an overriding importance in explaining poverty in Islam. Islam asserts unambiguously that poverty is neither caused by scarcity and paucity of natural resources, nor is it due to the lack of proper synchronization between the mode of production and the relation of distribution, but as a result of waste, opulence, extravagance, and nonpayment of what rightfully belongs to the less able segments of the society. This position is illustrated by the prophetic saying “Nothing makes a poor man starve except that with which a rich person avails in luxury.” That is to say, the right to advance one's own personal utility cannot impinge on the rights of others. Corruption (the stealing of what belongs to society, such as oil), maldistribution of wealth and income, and the accompanying waste are seen as the root causes of poverty, deprivation, and need. Put somewhat differently, the principle is to protect against the eventual degeneration and disintegration of the community that result from placing narrow self-interests above ethical values. The Quran (28:58–59; 9:24) cautions individuals against allowing ephemeral worldly desires to subsume Allah's desires for humankind.5

Thus in sharp contrast to classical economics, resource constraints are in fact not seen as the binding constraints to prosperity and economic welfare in Islam. Rather, Allah (swt) granted humankind enough to meet everyone's basic needs (the Almighty did not create the world haphazardly); however, as a result of an unjust social and economic order, there is an inequitable distribution of these resources between the artificial boundaries of the state and people within countries, with waste and poverty seen as the twin results. God's entrustment of these resources to humankind as a whole can be duly discharged only when everyone has enough to satisfy at least their basic needs.6 This point is particularly relevant to the major oil exporters, as the states' survival and ability to provide their people with basic services has been up to now dependent on revenues from oil—a depleting natural resource entrusted to all (current and future generations). Accordingly, poverty in rich oil-exporting countries is a result of corruption, misallocation of resources, and resultant waste (Quran 4:130–131; 15:19–20; 27:16; 16:71; 34:39).

Islamic teachings limit humankind's material wants if they adversely affect society's well-being: No one should be denied their basic needs or sustenance and live in poverty and deprivation. While vulnerability (disability, sickness, etc.) is a product of the human condition and prevalent in all societies, its attendant impact, resulting in poverty, is fundamentally a consequence of people's deference to Allah's (swt) guidance.7 In this regard, Islam calls on its believers to be content with their material lot in life while also giving to charity if the capacity exists and not engaging in wasteful consumption. Although Islam envisages an established safety net system, it is not meant to replace the essential element of hard work. The Prophet (sawa) repeatedly stressed Allah's (swt) disapproval toward those who depended on charity although they could earn enough to fulfill their livelihood through their own labor.8

The Islamic method to alleviate poverty and to realize an equitable distribution of income is fundamental to achieving the Islamic vision of a just social and economic order.9 Injustice is believed to ultimately impede the realization of human welfare, exacerbate social unrest and malaise, and retard development.10 Justice demands that all, regardless of race, color, sex, nationality, and even religion, share the benefits of development equitably; and distributive justice is recognized as central to the Islamic vision of an economic system (Quran 4:135; 5:8; 16:90).11

The principle of justice also demands an economic system that ensures equal access to basic needs that promote human well-being (including shelter, food, healthcare, and education) for all, thus creating a level playing field. For instance, equal access to education is essential to promoting equality of opportunity, as it minimizes social stratification and employment segmentation. Where provisions have been developed to ensure the individual's access to basic needs and equal opportunity, it is also under the state's authority to redistribute wealth. While Islam recognizes that some have been endowed with more worldly goods than others, it also creates mechanisms for redistribution, such as zakat (compulsory alms tax), calling on believers to engage in economic justice.

Concept of Safety Net and Welfare

According to the Quran, poverty and denial of assistance to the needy is forbidden. The Quran goes on to explain that material inequalities are not a manifestation of spiritual inequalities. Rather, such inequalities should be overcome through human effort and are thus meant to foster brotherhood, again stressing the importance of zakat (Quran 43:32). Islam also stresses the principle of economic prudence. With respect to the use of public funds and personal wealth, waste is forbidden. Islam views extravagant expenditures and conspicuous consumption with acute opprobrium (Quran 17: 26–27).

Islam enjoins the ethical principles with institutional measures to create a framework for poverty alleviation to ensure that basic needs can be met. The measures to alleviate poverty and achieve an equitable distribution of wealth and resource are threefold and include:

  1. The development of ethical and moral values, such as justice, equality, honesty, and the like.
  2. Economic tools and instruments, such as zakat, sadaqa, and inheritance and property laws.
  3. The development of the institutional capacity and political will to ensure that these principles and norms are adequately upheld.12

Similar to many publicly organized social safety net systems, the purpose of zakat is to guarantee a minimum standard of living by helping the poor meet the costs of basic needs, protecting the vulnerable against shock, and fostering an equitable income distribution. Its primary objective is to serve the cause of social justice and a moral purpose; it is not a mechanism for charity. According to Islam, the role of the state includes the administration of a social security system in which the religiously decreed zakat assumes a central position. The Islamic system levies a zakat on all Muslims who meet a minimum level of wealth to help finance eight categories of welfare that are mentioned in the Quran (9:60), including poverty alleviation, the emancipation of slaves, pilgrimage, and assistance to those serving Islam.

In much of the literature on safety nets in the Muslim world, Islamic institutions such as zakat are considered to be part of the informal safety net or on the fringes of a welfare system. While the zakat system is a fundamental element and the cornerstone of social safety nets, its effective implementation has been less than optimal. Recent evidence indicates that donors prefer to give sadaqa directly to private individuals or charities.13 An Islamic safety net system constitutes a number of other institutional arrangements that facilitate voluntary spending for the needy. Waqf is another mechanism whereby an individual donates a certain asset, such as land and buildings, for a designated specific purpose under a legal deed. It has been useful in transferring wealth from private ownership to collective ownership to be used for social advancement. Loss of confidence between zakat payers and zakat institutions should lead Muslim countries to seek alternatives that are permissible in Islam, such as state taxation of income.

Empirical Evidence on Social Welfare from Select Muslim Countries

Some historical background will provide a context for the establishment of current social welfare policies in Muslim countries in the Middle East and North African countries. The years 1950s to 1970s marked a formative period for many of these countries. Not only had most gained independence from colonial rule (with the prominent exception of Iran), but for the major oil exporters in particular, this period also marked a dramatic increase in oil export proceeds. These two events gave rise to the development of an implicit social contract in which citizens exchanged political liberties for economic and social stability. Elements of the social contract essentially endorsed state paternalism and included a preference for equity and redistribution in social and economic policy and a preference for protectionism and state control of markets. The social contract was later consolidated through adoption of an elaborate social welfare framework, financed by oil revenues for oil-rich countries or by assuming large external debt for those that did not have oil. The Islamic ethos of equity, equality, and justice had long disappeared from the landscape, and ruling class hierarchies, gender inequality, and other modalities of social stratification prevailed while rulers used economic benefits in the form of subsidies to buy domestic support and hold on to power.

The entrenchment of these open-handed welfare policies has posed challenges to development and economic reform in the region. Despite the bloated and in some cases unsustainable safety net system, meaningful reforms would inevitably be met with fierce political opposition as citizens see safety net provisions as part of the social contract. The wealthier countries (whose wealth is generated from depleting oil and gas exports) are often criticized for offering generous universal cash transfers and subsidies, particularly in times of budgetary surpluses resulting from higher oil prices. Safety net mechanisms should be developed for the purposes of ensuring a reasonable level of equity and for alleviating poverty and not for buying political support to hold on to power.

Research on the topic is difficult at best due to lack of data, collected or made public, on poverty and income distribution for many countries in the Middle East and North Africa (MENA) region. However, where data does exist, we can get a sense of the progress made in poverty alleviation. Despite the abundance of natural resources, nearly all countries in the MENA region are faced with the challenges of addressing significant levels of poverty. The exceptions are perhaps the wealthier, less populated oil-exporting countries in the Persian Gulf (Kuwait, Qatar, and the United Arab Emirates [UAE]).

For the region as a whole, about 2% of MENA's population lived on the less than US$1-per-day poverty line and nearly 25% live below the US$2 poverty line. Given the region's overall level of development, income poverty in MENA is actually low compared to the rest of the developing world. (See Table 13.1 for regional comparisons.) Poverty levels do vary significantly between the oil-rich countries and the resource-poor countries, signaling large regional disparities. For instance, while 2% of Iranians live on less than US$1 per day, in Yemen nearly 16% fall under that absolute poverty threshold.14 Iraq is a special case with extensive poverty that is likely to be higher than the MENA average.

Table 13.1 Regional Poverty Comparisons

Source: World Bank, World Development Indicators (2011).

Poverty Head Count Ratio at $1 a Day (PPP) (% of population) Poverty Head Count Ratio at $2 a Day (PPP) (% of population)
1981 1990 2002 2008 1981 1990 2002 2008
East Asia and Pacific 57.7 29.6 11.6 12.46 84.8 69.9 40.7 33.24
Europe and Central Asia 0.7 0.5 2.1 0.66 4.7 4.9 16.1 2.2
Latin America and Caribbean 9.7 11.3 8.9 5.53 26.9 28.4 23.4 12.38
Middle East and North Africa 5.1 2.3 1.6 N/A 28.9 21.4 19.8 N/A
Sub-Saharan Africa 41.6 44.6 44 N/A 73.3 75 74.9 N/A

Focusing on Iran, statistics indicate that within the last decade, about 7% of Iranians fell below the US$2-per-day poverty line. However, national poverty rates often obscure pervasive distortions in relative depravation and inequalities in human development. For instance, the statistics on national poverty measures (calculated based on food intake of less than 2,200 calories per day) reveals a more alarming picture of deprivation than the US$1-per-day indicator: Nearly 15% in urban areas and 17% of Iran's rural population. Moreover, while 10.4% of Iran's urban population lives below the absolute poverty line (minimum requirement for food, clothing, healthcare, and shelter), 22.6% of rural inhabitants live in absolute poverty.15 Although Iran has made remarkable improvements in poverty alleviation and in key human development indicators, these gains have been achieved primarily through charitable handouts and subsidies rather than through empowerment and employment. Moreover, such gains could not have been achieved without a large dependence on oil revenues.

An indicator of income distribution is the Gini index or coefficient (with 0 indicating perfect equality and 100 indicating perfect inequality, or one person enjoying all the income). Iran's Gini index provides a striking view of its skewed income distribution, with an index higher than even other countries in the MENA region (except Morocco and Tunisia, which have less access to a steady revenue base from oil; see Figure 13.1). Moreover, Iran's income distribution figures further indicate widespread disparities with a 10.5 to 1 ratio between the income/consumption of the richest and the poorest 20% of the population. The fact that the wealthiest 20% of the population in the richest provinces consume nearly 32 times what the poorest 20% consume in the poorest provinces shows the regional challenges Iran faces in addressing income inequalities.16 This disparity goes beyond income and consumption standards and, as expected, permeates into access to basic services. For instance, in Sistan and Baluchistan Province (perhaps the poorest province in Iran), only 55% of the population has access to safe water; the national average is 83%. The gaps between national and provincial literacy, nutrition, and birth registration indicators are similarly wide. Yemen is a particularly interesting case in the region. In contrast to Iran, it is one of the poorest countries and has limited natural resources (on a per capita basis); however, its Gini index reveals a significant level of income equality.

img

Figure 13.1 Gini Index for Select OECD (Organisation for Co-operation and Development) and MENA (Middle East and North Africa) Countries

While the labor-importing countries (Bahrain, Kuwait, Oman, Qatar, Saudi, UAE) do not have indices on poverty and income distribution, such statistics may, in any case, be obscured by the enormous presences of an expatriate labor force. For instance, the composition of nonnationals ranges from a high of 81% in the UAE to a low of 20% of the total population in Oman.17 Immigrants, many of whom are from neighboring countries and settled in the Gulf generations ago, are denied many of the basic rights of citizens; they are often excluded from official census data and surveys and yet are clearly the most affected by poverty and lack of access to basic services. While poverty in terms of income places these countries favorably compared to other developing regions, a bleaker picture is revealed in terms of what is defined as “poverty of opportunity.”18 Inequality of opportunities is one of the most pressing obstacles to achieving economic justice in the region. This point becomes particularly stark as we explore labor market and education outcomes.

Provisions that provide for basic needs, such as quality healthcare, education, employment, and consumer goods, play a vital role in reducing generational poverty and enhancing equal opportunities, particularly over the long term. Outcome indicators and government expenditures in the various areas of the social sector afford a sense of government priorities and the efficiency, sustainability, and equitability with which public funds are being spent. We examine these indicators for MENA countries relative to other comparator groups (“comparators” are based on World Bank–designated low-income, middle-income, and high-income groupings) in the areas of health and education, and other components of the social safety net.

Formal social safety net programs, including employment guarantees, consumer subsidies, cash transfers, and universal health and education services, play a prominent role throughout the Middle East and North Africa region. However, safety net arrangements in many countries tend to be heavily concentrated in providing universal subsidies on consumption goods, which are characterized as being regressive (i.e., the rich receive a larger share of the benefits than the poor), inefficient, and poorly targeted. MENA countries spend on average 5% of gross domestic product (GDP) for social safety net–type programs (including social insurance and social assistance), which is slightly higher than in other developing regions but significantly below levels seen among countries in the European Union.19 While the level of government spending on social assistance in the MENA region is comparable to that of other middle-income countries, a large share does not reach the poor. For example, Jordan's national assistance fund covers only 22,000 households, compared to Egypt's social assistance program that affects an estimated 2.7 million beneficiaries. While health and education outcomes have made notable improvements in the last few decades, the current level of spending is unsustainable in some cases and coverage is limited. In the absence of sound safety net provisions, many of the poor in the region tend to rely on informal mechanisms, which may be adequate to smooth out idiosyncratic shocks but are limited in their ability to address an economic crisis.

Healthcare

A sound healthcare system not only maximizes health outcomes, but it also protects the population against the potentially devastating financial costs of healthcare, provides equitable and high-quality access to services, and is financially sustainable given anticipated economic growth and demographic factors. National health account estimates and indicators on health outcomes for the MENA countries and the comparator groups reveal a telling trend with regard to equitable, efficient, and sustain resource allocation.

In Table 13.2, we provide a snapshot of national health accounts estimates for a select set of MENA countries. Total healthcare expenditures as a percentage of GDP for the MENA region are on par with international trends. However, for a number of countries in the region, health outlays as a percentage of GDP have decreased. This relative reduction is most likely a result of GDP growth (particularly for the oil-exporting countries in the first part of this decade) outpacing growth in healthcare outlays, rather than a reduction in real terms. On average, total per capita healthcare expenditures for most MENA countries (with the most notable exceptions of Iraq and Yemen) are higher than those of the low- and middle-income group of countries. However, the regional disparities in this indicator are striking: In Qatar, total per capita expenditures is $1,489; in Yemen, it is $72 per person. Between the MENA countries, there is also a broad range in government outlays on healthcare as a percentage of total government expenditures: Algeria, Iran, Iraq, and Tunisia allocate about 10% of government expenditures toward healthcare (Jordan nearly 20%), while Yemen spends less than half of that figure (4.3%). Overall, private sector healthcare expenditures as a percentage of total healthcare expenditures have increased for most of MENA; however, there are variations in the ratio of private expenditures to public expenditures in the region. High private expenditures in some countries may signal inadequacies in publicly provided healthcare.

Table 13.2 National Health Accounts Estimates for Select MENA Countries

Source: World Bank, World Development Indicators 2011.

img

Despite vast disparities in expenditures on healthcare, basic health standards in areas such as infant mortality, immunization, and life expectancy rates have improved significantly for all countries in the MENA region (see Table 13.3). In MENA (with the exception of Iraq), during the period 1990 to 2002, infant mortality decreased, with an overall regional average lower than the low-income group of countries. However, infant mortality in the region was still about 10% higher than that of the middle-income group. Moreover, infant mortality figures varied significantly between countries in the region, from a low of 6 per 1,000 live births in Qatar and the UAE to a high of 57 in Yemen. During that same period, overall life expectancy also increased—with an average higher than that of the low-income group and only slightly lower than that of the middle-income countries. Indicators also revealed significant improvement in child immunization, with the 2002 estimate higher than even the high-income comparator group of countries.

Table 13.3 Key Health Indicators for Select MENA Countries

Source: World Bank, World Development Indicators 2011.

Life Expectancy at Birth, Total (years) Mortality Rate, Infant (per 1,000 live births) Immunization, DPT (% of children ages 12–23 months) Immunization, Measles (% of children ages 12–23 months)
1990 2002 2011 1990 2002 2011 1990 2002 2011 1990 2002 2011
Algeria 67 71 73 54 35* 26 89 86 95 83 81 95
Egypt 63 70 73 76 26* 18 87 97 96 86 97 96
Iran 65 69 73 54 34 21 91 99 99 85 99 99
Iraq 61 63 69 40 102 31 83 81 77 80 90 76
Jordan 68 71 73 33 23* 18 92 95 98 87 95 98
Kuwait 75 77 75 14 9 9 71 98 99 66 99 99
Qatar 72 75 78 19 11 6 82 96 93 79 99 99
Saudi Arabia 69 73 74 34 23 8 92 95 98 88 97 98
Tunisia 70 73 75 41 21* 14 93 96 98 93 94 96
UAE 74 75 77 12 8 6 85 94 94 80 94 94
Yemen 55 60 65 98 82 57 84 69 81 69 65 71
MENA 64 69 73 57 44 24 88 92 91 84 92 90
Low-income 57 59 59 93 79 63 64 65 79 57 65 77
Middle-income 68 70 69 40 30 35 88 85 82 89 80 85
High-income 76 78 80 8 5 5 86 95 96 76 90 93

A balanced healthcare system is financed through an equitable contribution from the various partners, including insurance providers, households, and governments. Provisions for universal healthcare coverage have ensured more than 90% of the population in the region is given access to at least basic health services.20 However, full healthcare coverage is also incomplete. For instance, in Saudi Arabia, free healthcare is considered a right for all expatriates employed by the public sector and all Saudi citizens. Health coverage for non-nationals employed in the private sector (a sizable portion of Saudi Arabia's population) is the responsibility of their employers and/or sponsors. Similarly, Iran faces difficulties in meeting its commitment to universal healthcare—nearly all Iranians have access to public healthcare services and limited curative care, and yet a significant portion of the population lacks services to the full range of care through Iran's various health networks. Like most safety net arrangements in MENA, public expenditures for healthcare and health coverage are regressive. In some cases, government-financed outlays often accrue to high-tech hospitals that provide expertise and services for diseases that typically afflict the affluent. Government facilities are usually the social safety nets for the poor and other vulnerable groups. However, such facilities often provide incomplete and insufficient care, particularly in the rural areas, where facilities face severe budgetary limitations. For most of these countries, contributions from private insurance provide only modest financing, and private insurance is out of reach for the impoverished in need of quality care. Similar to many countries in MENA, while Iran does provide universal healthcare coverage, those who can afford it seek services from private sources because of the quality difference between private and public sector healthcare services. Iran's overall high expenditure on private healthcare (as a percentage of total healthcare expenditures) is almost definitely a result of the rich seeking higher-quality services. High overall out-of-pocket expenditures in the region signals that many households absorb a significant proportion of healthcare costs and that there may be little to no financial protection in the event of illness or injury. Poorer families tend to allocate a higher share of their income to healthcare services. For instance, in Algeria, household health expenditure for the poorest 10% of the urban population is three times higher than for the wealthiest 10% of urbanites; for the rural population, it is two times as large.21

The issue of sustainability of the healthcare sector is a critical dimension. Improved healthcare standards are associated with significant population growth, which in turn have placed greater pressure on public healthcare systems in the region. Without adequate healthcare system controls that improve efficiency and coverage, population growth can threaten the sustainability of the entire healthcare system. For instance, at the current average annual rate of growth in population, Saudi Arabia's population is expected to grow by 75% by the year 2020. Population aging alone will require total per capita spending to increase by 12%.22 Given the public sectors' dominance in the healthcare field, it is unlikely MENA countries will be able to continue to provide free cradle-to-grave healthcare indefinitely.

Education

In today's information age, it is clear that the knowledge gap, rather than the income gap, determines a country's competitiveness in the global economy. Education is essential to expanding human capacities and opportunities as well as being a tool for reducing poverty.23 Moreover, there can be no mistake about the prominence and importance Islam places on the acquisition of knowledge. The Quran calls on humankind to use intellect, to reflect and to think, because the objective of life is to seek and discover truths.24 Throughout the Middle East, most countries have adopted a policy of universal education. However, for a number of countries, this has not necessarily resulted in increased school performance and access.

Overall, the average education expenditures in MENA (see Table 13.4) are higher than the low- and middle-income comparator groups. However, there are significant disparities in the amount each country in the region spends. For instance, in some countries (Iran, Saudi Arabia, Tunisia, Morocco, and Kuwait), expenditures on education (as a percentage of GDP) are higher than the average for the MENA region as a whole and even for the high-income group of countries. By contrast, expenditures as a percentage of GDP for the UAE and Qatar are lower than those of the middle-income countries. Indicators measuring the quality of education, such as outlays for education at each level (primary, secondary, tertiary), reveal a similar trend: Saudi Arabia spends far more per student at the primary level (percentage of per capita GDP) than the MENA regional average and the average of the middle-income group of countries. Nearly one-third of public spending on education is devoted to university-level education in Egypt, Jordan, and Kuwait. In Morocco, expenditures per student on tertiary education are particularly high as a percentage of GDP per capita. Per capita expenditures in the UAE are far lower in part because GDP per capita is high and many nationals go abroad for university education.

Table 13.4 Education Financing and Outcome Indicators for Select MENA Countries

img

While there is limited data on equity within the education systems in the region, we can make some broad conclusions based on available data. Generally, high expenditures on education have done little to enhance and ensure potential spillover and safety net effects. Admittedly, adult and youth literacy rates have improved markedly for all countries in the region. However, greater expenditures on education have not been met by demand-side policies that raise the overall enrollment rates and supply-side policies that raise the quality of education. While the average primary school enrollment rate for MENA is higher than that of the low-income group, for a number of countries, enrollment has decreased (see Table 13.4).

Inefficiencies constrain the ability of systems to provide quality and well-targeted education in nearly all spheres of education management, including finance and delivery mechanisms. The inability of public school systems to provide students with critical high-order cognitive and analytical skills jeopardize the MENA region's international competitiveness as the countries attempt improve their economic growth record and attract investment. Government spending on public education is often highly concentrated on tertiary education and vocational training. Yet despite high expenditures, the quality of education in its current form cannot generate the caliber of employees required by the private sector. As we will see, high investments in tertiary education have not been met with positive labor market outcomes, signaling a low or even negative return to education expenditures. For instance, while enrollment rates in tertiary education has outpaced enrollment in primary and secondary schools, Iran continues to have a high level of unemployment. Moreover, the rate and the number of women enrolling in higher education institutions is higher than that of men (in 2000–2001, 88,000 men versus 90,000 women), yet women face an inordinately difficult time finding employment.25

While initially proportionally higher investment on tertiary education may be associated with lower unemployment rates and employment in skill-intensive jobs, such untargeted policies are in reality regressive, diverting public resources from broad-based educational opportunities. Subsidies on higher education tend to produce inequitable outcomes because students who pursue university education tend to be from higher income levels. The case of Egypt provides a poignant example: It is estimated that 54% of Egypt's university-level spending accrues to the wealthiest one-third of households while only 10% goes to the poorest one-third.26

Employment and Labor

Initiatives that help to generate employment tend to have an equalizing effect across society—one of the core goals of the safety net. Equality of opportunity in wage-earning is one of the most important strategies for poverty reduction.27 For many of the MENA countries, labor market distortions are one of the most formidable challenges to achieving sustainable levels of equity and poverty alleviation. According to some estimates, nearly 100 million new jobs will have to be created between the years 2000 and 2020 to keep pace with current demographic trends.28 According to some estimates, Iran alone will have to create at least half a million new jobs per year over the next decade. The challenges presented by this growth include developing a labor market with the needed absorptive capacity and fostering human resource development that will be competitive in international and domestic markets. Successfully facing such challenges requires reforms in education and labor market policies as well as policies that generate private sector growth.

Among countries in the MENA region, the employment generation and social safety net program of choice has historically been guaranteed public sector employment. Public sector employment has created deficit-financed jobs to absorb the excess supply of labor, thereby acting as a welfare program for those who could not successfully integrate into the private sector. Even as structural reforms were implemented and economic outcomes seemed to have improved, employment and job creation in the private sector remain low, in part because the public sector continues to be the employer of last resort, resulting in significant labor market distortions.

The average unemployment rate for the MENA region as a whole is more than twice as high as the high-income country average. The high ranges from nearly 24% and 18% in Algeria and Morocco to a low of about 2% to 3% in the UAE and Kuwait. In Iran, the official unemployment rate has grown from 9% in 1996 to 12.2% in 2005 and over 15%in 2011. The rate continues to grow as a result of a population bulge between the ages of 10 to 20 and women entering the workforce. This same trend can be found in many countries throughout the MENA region.

While overall total unemployment is low among the labor-importing countries of Kuwait, Qatar, Saudi Arabia, and the UAE, unemployment rates among nationals are much higher (see Figure 13.2). This may be a sign of the limited absorptive capacity of the public sector and the skill mismatch among nationals. For instance, according to 2004 estimates, the total unemployment rate in Kuwait was 1.7%; however, the unemployment among the citizen population was 4.9%. In the UAE, total unemployment was 3%, but unemployment among Emeriti citizens accounted for 11.4% of the total national labor force. Moreover, public sector employment is much higher in the rich countries of the Persian Gulf because governments are employers of last resort and use this approach for affording the general population a wasteful subsidy from depleting oil revenues.

img

Figure 13.2 Employment Outcomes

As indicated in Figure 13.3, the wage bill consumes a high of 40% of total current expenditures in Saudi Arabia and a low of 15% in the UAE. Even for the less affluent countries in the region, a sizable portion of the government budget is committed to public sector salaries. For instance, 54% of Morocco's current expenditures are allocated toward the wage bill; in Yemen, this number is nearly 25%.

img

Figure 13.3 Government Wage Bill (2011)

In the wealthier labor-importing countries, the wage bill finances generous salary and benefits packages, which for new college graduates working in the public sector are nearly 50% higher than for those expatriates working in the private sector. Public sector employment in the labor-importing countries in the Persian Gulf is extremely high: about 80%, far above the average for high-income countries (13.5%). In Kuwait, the public administration sector alone employed 52% of the total workforce, 79% of the national workforce, and 46% of expatriates; and in Saudi Arabia and Bahrain, the public sector employs over 80% of the total labor force (see Figure 13.2).29 Despite a high government wage bill in many countries, the trends for the labor-exporting countries are slightly different. This group of countries tends to have lower employment levels in the public sectors—on average 28.7% of total employment.

Not only do employment guarantees strive to promote the redistribution of wealth, they also attempt to protect a sizable portion of the workforce from the consequences of economic volatility. However, these policies fall short in a number of crucial ways. First, they are offered at the expense of the development of a vibrant private sector that can absorb the expanding labor capacity through legitimate market mechanisms. Second, as is the problem with other safety net policies in the region, government sector employment is extended to the more educated and wealthier groups.30 These policies are regressive and suffer from poor targeting. Job promotions are often based on tribal affiliation. While some of the smaller and wealthier countries, such as the UAE, Qatar, and Kuwait, may have sufficient resources to pay reasonable salaries to new entrants in the government sector, this strategy results in gross inefficiencies and acts as a disincentive for citizens to seek gainful employment in more productive sectors of the economy and to gain skills that are actually relevant to the needs of the private sector. Statistics indicate, for instance, that only 33% of Emiratis and 66% of non-nationals who graduated from college pursued degrees in fields that were most relevant to the private sector, such as engineering, medicine, and other sciences.31 Similarly, the Gaza Strip and Saudi Arabia had the lowest percentages of science graduates in higher education (16% and 17%, respectively) in the MENA region, while Algeria and Iran had the highest (58% and 61%, respectively).32 Finally, wasteful subsidies financed by depletable oil and gas reserves (consumption of oil revenues as opposed to their transformation into other forms of capital) deprive the future generations from their birthright.

In more recent years, most countries in the MENA region have begun to institute a number of strategies to increase private sector employment, such as passive and active labor market policies. Some examples of reform initiatives include Saudi Arabia's Human Resource Development Fund (HRDF). The objective of HRDF is to increase private sector employment among nationals by providing temporary wage subsidies and financial assistance for training. One of the major obstacles to this approach may be that many young Saudis resist taking blue-collar jobs as a matter of social status; such attitudes first need to change.33 In Tunisia, public works programs are also an important source of employment targeted specifically to the poor. During the years from 1987 to 1991, such programs in Tunisia employed nearly 75,000 workers per year.34 However, evidence seems to suggest that active labor market programs have a limited effect on long-term job creation and wage growth. Moreover, jobs created by these programs are short term in nature and do little to reduce the longer-term challenges of competing in the job market. Reforms continue to need to be made in public sector employment in the areas of recruitment, linking wages and productivity, and rationalizing public sector wages and benefits.

Subsidies

Nearly all of the MENA countries provide generous universal subsidies on essential goods such as water, electricity, fuel, and food. The most common policy provision is to create a price ceiling, making goods and services more affordable to all households. There are generally no provisions for setting limits on the quantity a single consumer can purchase at the subsidized price, nor is eligibility limited based on income. For resource-rich countries in particular, consumer subsidies and transfers are one of the most formidable mechanisms through which these countries attempt to transfer oil wealth that accrues initially to the government. But, like most safety net policies in the region, subsidies are untargeted, highly regressive, and drain public resources from those most in need. Moreover, as a result of shifts in demographic trends (population growth) and depleting oil reserves, estimates indicate that it will become increasingly difficult for these countries to support the demands for high living standards for future generations. As a result of the dramatic fall in oil prices during the 1990s, many countries in the region were forced to take on increasingly high levels of debt in an effort to maintain subsidies. The lack of fiscal sustainability plus inefficiency and regressiveness highlight the need for MENA countries to reevaluate and reform their subsidy policies.

It is crucial to understand the composition of these subsidies to evaluate their impact on poverty alleviation and income distribution. Most countries in the region spend less than 1% of GDP on cash transfers, which, if administered properly, have been found to be a far more efficient and effective safety net mechanism than subsidies, such as providing government employment or cheap electricity and water. In 2010, nearly 25% of Kuwait's budget is allocated toward public subsidies and transfers, the lion's share of these subsidy expenditures went toward water and electricity.35 Iran's implicit fuel subsidy accounts for nearly 15.5% of GDP36—that is more than government expenditures on health and education combined. In contrast, very little is spent on subsidies that typically target the most vulnerable and poor or that have higher social returns (see Figure 13.4). In 2004, Iran spent only 2% of GDP on subsidies for welfare and social security, and both Qatar and Saudi Arabia spent less than 1% of total expenditures on social services (subsidies). Similarly, while it is estimated that Syria's fuel subsidies could grow to be 14.5% of GDP, it allocated only 1.1% of GDP to social assistance programs (including its pension system). Yemen currently spends nearly 5% of GDP on subsidies—equivalent to its expenditures on health. With that said, Yemen has also made substantial progress in reducing its overall subsidy bill, which in 1996 reached a high of 18% of total expenditures and over 7% of GDP.

img

Figure 13.4 Total Current Expenditures on Social Services for Iran 2002–2003

In the case of subsidies, the price of domestically produced commercial goods (e.g., energy) is set considerably below market levels. Since consumption is generally higher among wealthier segments of the population, a higher portion of the subsidy accrues to them. The leakage rate for Iran's fuel subsidy—that is, the proportion of the subsidy transferred to the economically more advantaged—is 94% in that nation's urban areas and 89% in its rural areas.37 Moreover, of the poorest 10% of households, less than half receive general welfare benefits in cash or in kind and only one-quarter of assistance accrues to the second poorest segment of the population. Similarly, Syria's policies on fuel subsidies have also created inequitable outcomes. According to some estimates, the richest population deciles benefit 25 times more that the poorest deciles, while the poorest half of the population captures less than 20% of total benefits.38 In addition to being regressive, subsidies have resulted in illegal smuggling to neighboring countries. At the height of Yemen's subsidy program, only one-third of the subsidy actually reached consumers; the rest was captured by importers, distributors, and smugglers in neighboring countries.

More recently, authorities in Iran instituted reforms to the fuel subsidies in an attempt to reduce the fiscal burden and the environmental degradation caused by overconsumption.39 The program offers a “smart card” to all car owners, fixing the subsidized fuel allowance and forcing consumers to pay market prices when consumption exceeds the amount rationed.40 The scheme has shortcomings. The very poor have no cars, while others exchange their smart cards for cash or other goods at a disadvantageous exchange ratio. Moreover, economic inefficiencies associated with high administrative costs and leakages to the economically more advantaged could be mitigated if the public was simply provided with cash transfers and gasoline prices were raised to prevailing world market prices.

Reforms

How can the countries in the MENA region better address the needs of the disadvantaged in an Islamic context? An effective, efficient, and equitable social safety net should include three main elements: (1) a well-targeted provision for health and education; (2) a self-funded social security system providing coverage for all workers; and (3) government-funded programs that protect the vulnerable and poor from facing excessive risk. Individual reforms that develop better targeting mechanisms, reduce wasteful government expenditures on subsidies and employment guarantees, and improve education and human resources capacity are an indispensable basis for creating an Islamic safety net system. However, such reforms will have to be slow and progressive, given considerable political constraints. Moreover, reform must be compatible with preexisting economic conditions, social institutions, and cultural realities.

There seems to be a general assumption that all countries in the MENA region have access to vast amounts of oil revenues to fund safety net programs. However, this is far from the case. As indicated in Table 13.5, the smaller, less densely populated countries in the Persian Gulf have greater access to energy reserves. Yemen, Egypt, and Tunisia may be rich in oil (natural gas), but on a per capita basis reserves are quite small. In Jordan and Lebanon, there are no oil reserves. And yet one cannot ignore the reality that natural resource endowments present a unique opportunity for some countries to strengthen the welfare of their citizens. For the major oil-exporting countries, the capacity to address issues of economic vulnerability should be made more tenable by the sheer access to oil and gas revenues. For this group of countries, oil, a depletable resource, must benefit all generations, and governments must proceed with this fact in mind.

Table 13.5 Oil Exports and Per Capita Proven Reserves

Source: Statistics on oil products exports: World Resources Institute. Figures for proven oil reserves: barrels oil equivalent/per capita are based on author's calculations, using data from British Petroleum Statistical Year Book and World Development Indicators.

Oil Products Exports: 1,000 Metric Tons Oil Equivalent, 2003 Proven Oil and Gas Reserves: Sustaining Gains in Poverty Reduction Barrel Oil Equivalent per Capita, 2004
Qatar 32,418 788,564
UAE 112,304 187,754
Kuwait 97,869 115,384
Saudi Arabia 40,0189 18,442
Libya 59,366 6,862
Iraq 43,256 5,616
Oman 41,702 5,074
Iran 133,395 4,753
Bahrain 12,378 1,290
Algeria 73,233 389
Syrian 17,217 173
Yemen 17,805 144
Tunisia 3,207 69
Egypt 9,524 54
Jordan 0 0
Lebanon 0 0
Morocco 849 N/A
Notes: Excludes Israel and Malta; data for Djibouti is unavailable. Per capita figures for the Gulf Cooperation Council countries based on national population. All statistics based on oil equivalents.

For the broad citizenry to take seriously any proposition regarding the management of exhaustible resources, it must be compatible with basic Islamic teachings on ownership rights of depletable resources and the role of the state. Islam is very clear in its treatment of land and in the depletion of minerals. In the specific case of resources below the ground, Islam is unambiguous. Anything underground belongs to society at large; that is, all citizens should have an equal share in the fruit of what is under the land. This incorporates both current and all future generations. A relevant and touchy issue is to what extent these resources should be shared with other countries.

The major oil exporters in the region have an additional means to address the needs of all members of society, especially the disadvantaged. They can use current oil and gas revenues directly, but this solution may not benefit future generations. Alternatively, they can use oil revenues to establish an oil fund and use the earnings from the fund to meet social needs and possibly to supplement the income of even the nondisadvantaged while treating all generations equitably.41 While this may be a solution for the richer countries in the Persian Gulf, it would have to be combined with more active safety net provisions in the case of the more populated countries (Algeria, Egypt, Iran, and Saudi Arabia), and it is of course irrelevant to the resource-poor countries in the region. For these latter more populous countries, an effective progressive income tax is an absolute necessity to address equity issues and to support government programs.

While many countries in the region do not have vast oil reserves, cash transfers are still a viable policy option to help alleviate poverty and to keep the poor from falling deeper into poverty. Of course, the devil is in the details, and how these mechanisms actually are designed and administered is crucial, as such programs have failed to increase welfare in many instances. However, there are also positive examples within and outside the region. For instance, in Jordan, after the economic crisis of 1989, the government decided to replace widely used subsidies with a means-tested cash payment program administered by the National Aid Fund (NAF). The number of NAF beneficiaries grew from 8,000 households in 1987 to 66,000 in 2002. Furthermore, nearly 7.4% of the population was able to access this assistance program in 2002, as opposed to 2.6% earlier. While poverty rates did grow following the crisis, empirical evidence seems to suggest that Jordan's cash transfer program had a crucial role in relieving poverty during the latter half of the 1990s.42 As described in Box 13.1, a number of Latin American countries have found success with conditional cash transfers.

In addition to the establishment of cash transfer programs and individual reforms, a broader and more progressive tax base that raises government revenues efficiently and fairly would help to increase the overall sustainability of the current safety net while improving intergenerational equity. Islam envisages and endorses a system of taxation where revenues are used to fulfill basic social needs. Yet most of the countries in the MENA region lack an effective income tax system. While reforms to the existing safety net policies and institutions, including the introduction of cash transfers, are essential, these reforms cannot replace the critical element of developing the human resource capacity of the region.

Summary

Policies in the Middle East and North African have not broadly reflected the social welfare principles enunciated in Islam. The Quran and the Sunnah provide both normative and ethical guidance on how to develop a fair economic order—with justice at the center of the paradigm. Islam clearly demands that basic needs be met, that equality of opportunity be achieved, and that depletable resources be used to benefit all members of current and future generations equitably.

While governments in the region, particularly those in the oil-exporting countries, may have designed safety net mechanisms that meet the basic needs of some of their population, such policies cannot be said to be fully Islamic for a number of reasons. Perhaps most crucially, state paternalism comes at enormous social and political costs. The combination of universalized, untargeted, and regressive subsidies and high expenditures and poor quality services results in a safety net system that is inefficient and wasteful. Finally, those institutional features of an Islamic economic system, such as zakat, that do exist are poorly administered. Many throughout the Muslim world have lost confidence in the ability of these institutions to alleviate poverty and distribute income equitably in order to establish societies that are just, as required by Islam.

Key Terms

  1. Safety net
  2. Ethics
  3. Poverty
  4. Wealth distribution
  5. Income distribution
  6. Sadaqa
  7. Qardh hassan
  8. Zakat
  9. Khums
  10. Employment
  11. Healthcare
  12. Education
  13. Unemployment benefits
  14. Subsidies
  15. Reforms
  16. Microfinance

Questions

  1. What is the purpose of a safety net?
  2. What are the elements of a comprehensive safety net?
  3. Do you think that a safety net should be an integral element of a caring and ethical society?
  4. How should governments finance safety nets?
  5. Detail the safety net measures prescribed in Islam.
  6. Given the importance of work in Islam, how important is the achievement of full employment and a just wage?
  7. Do safety nets reduce work incentives?
  8. Do you agree with minimum wage legislation? Why or why not? Does minimum wage legislation violate Islamic principles?
  9. What kinds of subsidies are most efficient?

Notes

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset