ARAB WORLD: Why social expenditure in the Arab states isn’t working

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The major challenge facing Arab states transitioning from totalitarian regimes to democracy is how to manage social expenditure: that is, state spending on health, education, direct subsidies to poor citizens, cash support for poor families, pensions and social security for those working in the private sector. Even though these states face different situations, such spending shares a number of traits.

The amounts spent on social expenditures -- about 40% to 50% of GDP -- are high in the Arab states, including Morocco, Tunisia, Egypt, Jordan, Lebanon, and Syria. This means that the chances of allocating additional resources for social expenses are slim.

In addition, social spending is distinguished by low levels of competency, especially in healthcare and education -- the two sectors that capture the greatest share of social expenditure. These sectors are usually not subject to oversight and lack indicators to measure their operational efficiency. Most of the expenditures go to wages and salaries, rather than to areas such as research and development, which could help improve competency and reduce waste.

These sectors also are resistant to change. They are based on obsolete regulations and bureaucratic measures that are difficult to change. Because of the low average employee salary, they often do not attract the most competent candidates and offer employees too few incentives to increase their work efficiency and motivation.

The mechanism for targeting expenditure is seriously flawed as well, and the targets are not usually reached. For example, subsidizing a commodity such as bread or fuel means allocating larger subsidies to those who consume more, which benefits the rich rather than the poor, as the former are the largest consumers.

Finally, social expenditure is often used for political ends. The ruling regimes direct spending to purchase political loyalty based on geography or demography, regardless of whether beneficiaries need the help.

As several Arab states suffer from serious budget deficits, social expenditure remains one of the basic avenues to provide social justice alongside economic growth, the two main citizens’ demands during the ‘Arab Spring.’

But states are unable to fulfill citizens’ demands by providing sufficient work opportunities, because the public sector is already saturated and the private sector suffers a lack of dynamism stemming from low levels of investments due to public-policy uncertainties.

Governments thus find themselves facing difficult choices. The emerging political regimes -- such as those in Egypt and Tunisia -- are aware of the problems associated with public expenditure, but halting it risks exacerbating the current situation. Yet they are also unable to expand spending in order to meet citizens’ desires.

It’s worth drawing a distinction between two kinds of expenditure. The first yields swift results and has direct political effects, such as direct commodity subsidies or cash handouts. It is therefore considered to have a high political return, which urges politicians to pursue it despite its negative long-term effects on the state treasury, such as a burdensome fiscal deficit.

The second kind of expenditure is associated with longer-range concerns, such as education and healthcare and its effects do not appear quickly and are thus not considered priorities. Even though education and healthcare are essential sectors, few resources are allocated to reforming them because obtaining significant results would require years.

The challenge of reconciling states’ present and strategic interests can be overcome by implementing new policies. For example, the arbitrariness of commodity subsidy policies has negative financial and political consequences and sometimes deepens the imbalance it sought to correct. Subsidies aimed at poor individuals can achieve an acceptable level of social justice, but mismanagement of such expenditure deepens the existing imbalances. In this regard, policymakers must design policies to reach their targeted groups instead of the arbitrary policy adopted now. That would improve the efficacy of social spending and reduce public dissatisfaction with the current policy.

Moreover, there is a pressing need for good governance and transparency in social expenditure, in order to enhance better regulation and control over it. But improving governance requires institutions that can oversee the government, channels for citizens to participate in setting priorities, and better political institutions as well. The international community and donors can play a more serious role in oversight and consultations to set priorities. Past experience reveals that direct budget-support models used by a number of donor states with recipient states have often failed.

Social expenditure is no doubt a central avenue for approaching social justice. The money currently being spent, however, is not achieving its goals, and continuing with the same model is not sustainable. Reconciling compliance with citizens’ present demands with planning for long-term, strategic goals is a first step in the right direction. Much more can be done to improve the management of such spending, so that citizens can judge the effectiveness of the new regimes. But without oversight, the strategy of giving grants and donations to protect the poor is no longer convincing and cannot continue.

-- Ibrahim Saif in Beirut

Saif is a resident scholar at the Carnegie Middle East Center in Beirut.

Editor’s note: The post is from an analyst with the Carnegie Middle East Center. Neither the Los Angeles Times nor Babylon & Beyond endorses the positions of the analysts, nor does Carnegie endorse the positions of The Times or its blog.