Senior World Bank official expects little ‘resistance’ in MENA to subsidy cuts
Shantayanan Devarajan said it might be “the right time to start trimming and reforming the system of subsidies.”
2017/05/21 Issue: 107 Page: 18
Tunis - The economic costs borne by the Middle East and North Africa countries because of wars and the related refugee problem have been “astronomical,” said Shantayanan Devarajan, the chief economist for the World Bank’s MENA region.
A former professor at Harvard University’s John F. Kennedy School of Government, Devarajan is the author or co-author of more than 100 publications. He has been the chief economist for the World Bank’s MENA region since 2013.
He noted that the war in Syria and neighbouring countries had caused “a slowdown in trade, tourism and investment” and triggered the displacement of a large number of people, with refugees accounting for up to 30% of Lebanon’s population.
There are more than 1 million Syrian refugees registered in Lebanon and more than 500,000 in Jordan. Lebanese Prime Minister Saad Hariri, speaking in April, said his country was close to a “breaking point.” Hariri urged the international community to increase their expenditure per refugee to the equivalent of $10,000-$12,000 for the next five to seven years, compared to the $1,000-$1,200 currently spent on each, Reuters reported.
While praising the “very generous” attitude of the international community in providing Jordan and Lebanon with nearly $1 billion in concessional loans, Devarajan said the assistance given by the body “doesn’t come close to meeting the needs of refugees and host communities in these two countries, let alone the other countries hosting refugees.”
Youth unemployment is another thorny issue in the MENA region. Devarajan called on the nations of North Africa and the Middle East to introduce necessary reforms in their business environments and educational systems to address the problem.
Considering the disproportionate number of 15- to 24-year-olds across the region, MENA countries face an explosive “youth bulge,” which remains a source of instability and potential upheaval.
The rate of unemployment, which nears the 30% mark, is unmatched by any other part of the world. The dearth of jobs is even worse for young women and university graduates, with unemployment rates estimated at more than 40% in many MENA countries.
To create more job opportunities for the region’s young, MENA countries, cautioned Devarajan, cannot rely on public spending alone. “The private sector is the engine of job-creating growth,” he said. Governments, he said, should concentrate on removing “the distortions in the business environment so that the private sector can grow and create jobs,” especially “regulations that prevent small and medium enterprises from growing.”
Among the many obstacles hindering business in the region, international reports single out red tape, including delays in the granting of permits, access to electricity, availability of bank financing, corruption and insecurity.
Touching on the need for educational reform in tackling the mismatch between academic training and the marketplace in the region, Devarajan highlighted the need to “improve the skills of the young people, including the university graduates, so that they are more employable in the modern, globalised, private sector.”
Devarajan said it might be “the right time to start trimming and reforming the system of subsidies.”
Despite the occasional manifestations of social discontent about price hikes in the Arab world, he said he was not overly concerned by possible adverse reactions in the MENA region to subsidy cuts. “The countries that have introduced economic reforms, such as cuts in subsidies, have met relatively little resistance from the public,” Devarajan said.
“One reason,” he explained “could be that world oil prices are so low that the domestic price did not rise very much but another reason is that the public realises that these subsidies were counterproductive. They went disproportionately to the rich. They drained the government budget and they contributed to traffic congestion, air pollution and water depletion.”
According to a 2017 paper by the Houston-based Centre for Energy Studies, 61% of gasoline subsidies went to the top 20% of earners. The bottom 20% of earners received as little as 3% of the subsidies.
Although Devarajan admitted “there are limits” to how much subsidy reform citizens in oil-producing nations would “tolerate,” he said the introduced reforms, including the reduction of fuel subsidies, “will stabilise their economies and leave them in a good position to resume growth.”
Addressing the situation in Libya, Devarajan said that despite continuing insecurity and violence, “the increase in oil production to about 800,000 barrels a day will give the country much-needed breathing room to manage its finances.”