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  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund
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INTERNATIONAL MONETARY FUND

Middle East and Central Asia Department

Social Spending for Inclusive Growth in the Middle East and Central Asia

Prepared by an IMF staff team led by Koshy Mathai, Christoph Duenwald, and Anastasia Guscina

No. 20/12

Front Matter Page

Middle East and Central Asia Department

Social Spending for Inclusive Growth in the Middle East and Central Asia

Prepared by an IMF staff team led by Koshy Mathai, Christoph Duenwald, and Anastasia Guscina, and including Rayah Al-Farah, Hatim Bukhari, Atif Chaudry, Moataz El-Said, Fozan Fareed, Kerstin Gerling, Nghia-Piotr Le, Franto Ricka, Cesar Serra, Tetyana Sydorenko, Sébastien Walker, and Mohammed Zaher

INTERNATIONAL MONETARY FUND

Front Matter Page

Copyright ©2020 International Monetary Fund

Cataloging-in-Publication Data

IMF Library

Names: Mathai, Koshy. | Duenwald, Christoph. | Guscina, Anastasia. | Al-Farah, Rayah. | Bukhari, Hatim. | Chaudry, Atif. | El-Said, Moataz. | Fareed, Fozan. | Gerling, Kerstin. | Le, Nghia-Piotr. | Ricka, Franto. | Serra, Cesar. | Sydorenko, Tetyana. | Walker, Sébastien. | Zaher, Mohammed. | International Monetary Fund. Middle East and Central Asia Department, issuing body. | International Monetary Fund, publisher.

Title: Social spending for inclusive growth in the Middle East and Central Asia / Prepared by an IMF staf team led by Koshy Mathai, Christoph Duenwald, and Anastasia Guscina, and including Rayah Al-Farah, Hatim Bukhari, Atif Chaudry, Moataz El-Said, Fozan Fareed, Kerstin Gerling, Nghia-Piotr Le, Franto Ricka, Cesar Serra, Tetyana Sydorenko, Sébastien Walker, and Mohammed Zaher.

Other titles: International Monetary Fund. Middle East and Central Asia Department (Series).

Description: Washington, DC : International Monetary Fund, 2020. | Departmental paper series. | At head of title: Middle East and Central Asia Department. | Includes bibliographical references.

Identifiers: ISBN 9781513553115 (paper)

Subjects: LCSH: Government spending policy—Middle East. | Government spending policy—Asia, Central. |

Middle East—Social policy. | Asia, Central—Social policy.

Classification: LCC HJ7461.M38 2020

The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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Contents

  • Acknowledgments

  • Executive Summary

  • 1. Introduction

  • 2. Defining Social Spending

  • 3. The Level of Social Spending in the Middle East and Central Asia

  • 4. Socioeconomic Outcomes in the Middle East and Central Asia

  • 5. Impact of Social Spending on Socioeconomic Outcomes

  • 6. Increasing the Efficiency of Social Spending in the Region

  • 7. Drivers of Efficiency: Institutions and Governance

  • 8. Takeaways and Policy Implications

  • Annex 1. Defining and Measuring Social Spending

  • Annex 2. Data Sources and Coverage

  • Annex 3. Detailed Regression Results

  • Annex 4. Social Spending Policies in Response to COVID-19 Crisis

  • Annex 5. Technical Annex for Stochastic Frontier Analysis of Social Spending Efficiency

  • Annex 6. Case Studies: Social Spending Challenges in Selected Countries

    • Kingdom of Bahrain

    • Republic of Armenia

    • Republic of Tunisia

  • References

  • Boxes

    • Box 1. The COVID-19 Crisis in the Middle East and Central Asia

    • Box 2. Tunisia: Social Spending Efficiency

  • Tables

    • Table 1. Social Protection Responses to COVID-19 in MCD Countries

    • Table 2. Regression Results for HDI Outcome

    • Table 3. Regression Results for Child Mortality Rate Outcome

    • Table 4. Drivers of Efficiency

    • Annex Table 1. Data Sources and Coverage

    • Annex Table 2. MCD Countries Classification

    • Annex Table 3. Regression Results for Human Development Index

    • Annex Table 4. Regression Results for Child Mortality Rate

    • Annex Table 5. Regression Results for HDI

    • Annex Table 6. Drivers of Efficiency

    • Annex Table 7. Drivers of Efficiency: Output Efficiency Scores

    • Annex Table 8. Regression Results for Poverty Rate

    • Annex Table 9. Regression Results for IHDI

    • Annex Table 10. Regression Results for Secondary School Enrollment

    • Annex Table 11. Regression Results for Tertiary School Enrollment

    • Annex Table 12. Key Social Spending Policies in Response to COVID-19 in the Middle East and Central Asia Region

    • Annex Table 13. Social Transfers and Capital Investment, 2019

  • Figures

    • Figure 1. Definition of Public Social Spending

    • Figure 2. Wage Bill, Subsidies, and Social Spending

    • Figure 3. Selected Budgetary Spending with Social Aspects

    • Figure 4. Public Social Spending

    • Figure 5. Additional Spending Needs in 2030 to Meet Selected SDGs

    • Figure 6. Public and Private Health Spending

    • Figure 7. Public Education Spending

    • Figure 8. Social Protection Spending

    • Figure 9. Fiscal Cost of COVID-19, 2020

    • Figure 10. Education Outcomes

    • Figure 11. Improvement in Socioeconomic Indicators

    • Figure 12. Fertility Rate vs. Female Secondary Enrollment

    • Figure 13. Socioeconomic Outcomes in Middle East and Central Asia Countries and Relevant Global Peers

    • Figure 14. Socioeconomic Indicators

    • Figure 15. Public Social Spending and Socioeconomic Outcomes

    • Figure 16. Estimated Boost to HDI from Additional Social Protection Spending and Improved Governance

    • Figure 17. Fiscal Space and COVID-19 Fiscal Cost, 2019–20

    • Figure 18. Fiscal Balance, Debt, and Estimated Cost of COVID-19 Response

    • Figure 19. Efficiency Frontiers in Nonparametric Approach

    • Figure 20. Output Efficiency Scores from Nonparametric Approach

    • Figure 21. Spending Efficiency—Parametric and Nonparametric Approaches

    • Figure 22. Socioeconomic Outcomes under Higher Efficiency

    • Figure 23. Health Care Spending Adequacy and Efficiency

    • Figure 24. Increase in Life Expectancy if COVID-19 Health Spending Is Incorporated into Permanent Government Expenditure

    • Figure 25. Education Spending Level and Efficiency

    • Figure 26. Efficiency and Institutional Quality

    • Annex Figure 1. Pre-Tax Energy Subsidies, 2017

    • Annex Figure 2. Excess Wage Bill

    • Annex Figure 3. Zakat Contributions

    • Annex Figure 4. Funding of Education

    • Annex Figure 5. Net Official Development Assistance and Official Aid Received, 2018

    • Annex Figure 6. Social Spending

    • Annex Figure 7. Public Expenditure on Health and Education

    • Annex Figure 8. Structure of Expenditures

    • Annex Figure 9. Bahraini Equivalized Spending by Income Group and Quintile, 2015

    • Annex Figure 10. Health Indicators and Outcome

    • Annex Figure 11. Education Indicators and Outcome

    • Annex Figure 12. Average Household Income by Educational Attainment of Householder

    • Annex Figure 13. Contributions to Household Equivalized Income Growth, 2005–15

    • Annex Figure 14. Government Employment of Nationals and Average Wage Rate

    • Annex Figure 15. Social Spending in Armenia

    • Annex Figure 16. Socioeconomic Indicators, 1990–2018

    • Annex Figure 17. Tunisia: Social Spending Performance, 1990–2018

    • Annex Figure 18. Tunisia: Social Spending

Acknowledgments

The authors thank Jihad Azour and Thanos Arvanitis for their extensive guidance, as well as Subir Lall, Taline Koranchelian, Juha Kahkonen, and other colleagues in the Middle East and Central Asia Department, as well as David Coady and Maura Francese (FAD), for very helpful comments and suggestions. The authors are also grateful to Laila Azoor for production assistance, Nicolas Mombrial for communications advice, and Houda Berrada for editing. Staff have consulted with the World Bank, UNICEF, and the International Labour Organization and have reflected their feedback in the paper.

Executive Summary

Socioeconomic outcomes in the Middle East and Central Asia have improved substantially over the last two decades. Nearly all countries in the region have made gains in health and education outcomes. And, excluding conflict-affected countries, these gains have generally been larger than in comparator economies outside the region. At the same time, the COVID-19 pandemic has had a substantially adverse impact across the world, and the Middle East and Central Asia region is no exception.

Notwithstanding its past progress, the region continues to face the central challenge of improving social conditions and boosting inclusive growth. Even before the COVID-19 pandemic, high and rising economic and gender inequality, high youth unemployment, internal conflicts, and large movements of refugees threatened economic prospects and underscored the importance of policy efforts to boost opportunities for all and meet the UN Sustainable Development Goals (SDGs). The pandemic has further magnified these challenges and brought into sharp focus the urgent need for higher social spending, particularly on health and social protection, to save lives and protect the most vulnerable.

Social spending is widely understood to be a key policy lever for supporting and promoting inclusive growth. It can play an essential role in improving the welfare and economic potential of citizens and, as shown during the COVID-19 crisis, in protecting vulnerable groups. It can also play a role in boosting long-term growth and reducing poverty and inequality. Ensuring an adequate level of public spending on education, health, and social protection and improving the efficiency of this spending are important for building a healthy and productive workforce and, more broadly, an inclusive society.

This paper examines the role of social spending in improving socioeconomic outcomes in the Middle East and Central Asia. In particular, it addresses the following questions: (1) how large is social spending across the region? (2) how do countries in the region fare on socioeconomic outcomes? (3) how important is social spending as a determinant of these outcomes? and (4) how efficient is social spending in the region?

The key findings are as follows:

  • While countries in the Middle East and Central Asia have made notable progress in recent decades, they still lag global peers in socioeconomic outcomes, and their levels of public social spending are lower as well.

  • Public spending on education, health, and social protection can have a meaningful impact on socioeconomic outcomes. Overall, the results suggest that a 10 percent increase in social spending per capita could close 20–65 percent of the Human Development Index (HDI) gap between countries in the region and their global peers.

  • The gap in outcomes between the region’s countries and global comparators is larger than that in spending, suggesting that not only the amount but also the efficiency of social spending may need to be enhanced. Our empirical findings suggest that increasing the efficiency of spending in the region to the global frontier could—without any increase in outlays— eliminate one-third of the HDI gap.

  • Spending efficiency is linked strongly to indicators of institutional capacity and governance.

Although this paper uses the standard definition of “social spending,” other forms of spending on health, education, and income support also matter for social outcomes. Such spending includes private outlays by households, charitable activity, and foreign-aid-funded projects outside the budget. There may also be a social component to other parts of the government budget (including the wage bill and some subsidies). Ignoring these components could, in theory, skew inferences about the adequacy and efficiency of social spending. Consistent data on these other types of social outlays, however, are often not available, and the social component of the public wage bill and subsidies is particularly difficult to identify properly. That said, to the extent that the sum total of these other forms of social spending is neither systematically higher nor lower in the region than in peer countries—and evidence suggests that they are not—our conclusions should not be materially affected by these measurement issues.

The results suggest some key areas for policy action. Some countries—and particularly those where public social spending is relatively low—may need to focus on raising that spending. To protect fiscal sustainability, this may require reallocations within existing budget envelopes and/or expansion of those envelopes via increased revenue mobilization, as many countries in the region have done in recent years (IMF 2018). Nearly all countries should also aim to increase the efficiency of social spending—particularly those countries with limited capacity to expand their fiscal space and those that fall significantly below the efficiency frontier. Improving efficiency may require improving the targeting of social protection (while ensuring that intended beneficiaries are not mistakenly excluded), addressing existing gaps (for instance, eliminating gender gaps in access to education), promoting financial inclusion (which can facilitate the payment of benefits and reduce the scope for corruption), and perhaps most important—but also most challenging— strengthening institutions and improving transparency and accountability.

The region can build on its initial response to the pandemic. Most Middle East and Central Asian countries were able to quickly mobilize resources for additional health care and social protection outlays in response to the COVID-19 crisis. While the crisis is ongoing, the experience so far already offers valuable lessons on how to reprioritize expenditure and improve spending efficiency, including through greater use of digital technologies.

Social Spending for Inclusive Growth in the Middle East and Central Asia
Author: Mr. Koshy Mathai, Mr. Christoph Duenwald, Ms. Anastasia Guscina, Rayah Al-Farah, Mr. Hatim Bukhari, Mr. Atif Chaudry, Moataz El-Said, Fozan Fareed, Mrs. Kerstin Gerling, Nghia-Piotr Le, Mr. Franto Ricka, Mr. Cesar Serra, Tetyana Sydorenko, Mr. Sébastien Walker, and Mr. Mohammed Zaher