Tue, Oct 09, 2018 - Page 9 News List

Rethinking the state’s role in Arab economies

By Mahmoud Mohieldin and Rabah Arezki

The Arab world has a long tradition of commerce and enterprise. Yet, since achieving independence, many Arab countries have adopted state-led development models that have left their economies overly reliant on the government. This is unsustainable.

The Arab world’s economic model has endured, despite major setbacks in the 1990s, largely because the state employs a large share of workers and provides universal subsidies. This eliminates risk from citizens’ economic lives, entrenching their dependence on the government and stifling entrepreneurship and innovation. It also undermines the delivery of public services, stoking mistrust of the very government on which populations depend so heavily.

The Arab world’s state-led development model might be set to reach a breaking point as hundreds of millions of young people prepare to enter labor markets in the coming decades. With the public sector unlikely to be able to absorb these new workers, there is an urgent need to create a dynamic private sector that not only adopts, but also generates technological innovations that empower workers and deliver durable and inclusive growth.

This approach is in line with the demands of the Sustainable Development Goals, which were approved by all UN member states — including all Arab countries — in 2015. Achieving the goals — which range from eliminating hunger and poverty to protecting the environment — will require the involvement of dynamic private sectors that are capable of producing technological solutions and willing to provide critical financing.

Private-sector financing — say, of the infrastructure projects demanded by goal No. 9 — is particularly important in the Arab world, where many governments are already burdened by debt. To help mobilize that financing, the World Bank Group has launched the Maximizing Finance for Development program.

Of course, governments must also maximize their own resources. In the past, abundant investment and energy revenues limited the incentive to mobilize tax revenues. However, as government coffers are depleted, Arab countries — among the least efficient tax collectors in the world — are under growing pressure to pursue meaningful reform.

Arab governments must also boost the efficiency of their spending. As it stands, while most Arab countries spend a fair amount relative to their income levels, they achieve relatively poor outcomes, especially in health and education.

To improve the state’s functioning and regain citizens’ trust — developments that could facilitate tax collection — Arab governments should apply the concept of “value for money” to public administration. Such a framework for assessing the cost-effectiveness of public-sector activities requires that data about those activities be collected, assessed and disclosed in a transparent way. Mechanisms such as information-feedback loops would then enable authorities to identify quality issues and make improvements quickly.

Here, too, the World Bank Group is taking steps to help. Because investing in human capital is the most important long-term action a government can take, the Human Capital Project focuses on identifying the factors that are undermining the efficiency of investments in this area.

However, even before comprehensive data are available, some approaches for improving the efficiency of public spending and administration stand out. In particular, Arab countries can emphasize the localization of development. By improving the capacity of local governments to plan, finance and deliver key services, including health and education, countries could boost value for money, build confidence among citizens, and make significant strides toward achieving the goals.

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