Built Reimagining Social Protection in the Middle East to Include & North Africa 2023 Cristobal Ridao-Cano Dalal Moosa Montserrat Pallares-Miralles Juul Pinxten © 2023 The World Bank Group 1818 H Street NW, Washington, DC 20433 TELEPHONE: 202-473-1000; INTERNET: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. “The World Bank Group” refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). 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Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of any of the organizations of The World Bank Group, all of Photos by unsplash.com and pexels.com, un- which are specifically reserved. less otherwise noted BUILT TO INCLUDE I Built to Reimagining Social Protection in the Middle East & North Africa Cristobal Ridao-Cano Dalal Moosa Montserrat Pallares-Miralles Juul Pinxten June 2023 Include BUILT TO INCLUDE II Foreword Naturally, the next priority is to expand the coverage of social insurance among vulnera- ble informal workers, including by increasing access to voluntary savings schemes. That should be accompanied by expanded support to enhance the productivity of informal work- ers and to increase the employability of youth and women—along with the elimination of barriers to women’s employment. by Ferid Belhaj Building an inclusive social protection sys- tem will require more resources, but not at any cost. More resources should eventually Regional Vice President come from direct taxes—MENA countries Middle East and North Africa collect little in taxes and mostly rely on re- —THE WORLD BANK gressive indirect taxes. In the meantime, countries like Tunisia show how removing tax exemptions and improving tax admin- istration can also increase tax revenue in a progressive manner. Subsidy reform can also increase efficiency and provide resources for social protection priorities. While generalized subsidies are helping with food and energy inflation stem- ming, among other factors, from the war in Ukraine, they come at a cost that developing oil-importing MENA countries can no longer afford. Countries in the region should at least consider giving higher subsidies to those most P in need at the expense of those less in need and removing subsidies for richer households. eople in the Middle East and North consequences on decisions regarding work, Africa (MENA) region, and around retirement, and hiring. Re-designing pension systems to support the word, are hurting. A polycrisis, active ageing will also increase efficiency. including COVID-19 and Russia’s This report shows that social protection Across MENA, people are living longer and invasion of Ukraine, has had—and policies in countries across the region are, healthier lives, yet most workers continue to is continuing to have—a devast- unfortunately, falling short of protecting retire around age 50, resulting in large pro- ing impact on living standards. people. The social protection responses to ductivity losses and a drain on resources. But most countries in MENA were already COVID-19 and the war in Ukraine have been More efforts are needed to eliminate incen- struggling to reduce poverty and vulnerability commendable, but they have also revealed tives for early retirement and to start incen- before this cascade of shocks. the weaknesses of preexisting social protec- tivizing and supporting late retirement. tion systems. For instance, most of the poor This report argues that labor market ex- do not receive income support, while MENA Undoubtedly, the proposed reforms will chal- clusion is at the root of the problem. Many spends more than any other region on ineffi- lenge the prevailing social contract. The good people cannot find jobs—MENA has the cient generalized energy and food subsidies. news is that countries across MENA have highest youth unemployment rate and the Most workers are not covered by pensions or already started the reform journey. Moving lowest women’s labor force participation rate unemployment insurance, and pension sys- more decisively and comprehensively toward in the world. And most workers are stuck in tems are unsustainable. And MENA countries an inclusive and efficient social protection low-productivity informal jobs with no so- impose more legal restrictions on women’s system will require political support. Set- cial protection. This makes them extremely employment than anywhere else in the world. ting the vision and the roadmap to get there vulnerable to falling into poverty when a helps—Morocco’s Social Protection Reform shock hits—as the recent crises have pain- Crises are painful but they also provide a Program is a good example—and so does fully shown. unique opportunity for reform. As MENA good communication—Egypt, Jordan and countries look to respond to the immediate Morocco did just that to reform fuel subsidies. Reducing labor market exclusion requires, crises and reduce labor market exclusion Sequencing and packaging of reforms—in- first and foremost, a dynamic private sector down the road, this report offers key insights cluding of parametric pension reforms with that generates productive jobs. Our compan- that can help governments build inclusive coverage expansion—are also critical. Con- ion report on jobs in MENA, Jobs Undone, and efficient social protection systems. The tinuous political leadership and ownership is provides options to do that. first order of priority is to build a shock-re- essential to ensuring that the reform process sponsive system to deliver income support continues over time. How can social protection policies help? They to the poor. We are pleased to see Jordan, can play a crucial role in reducing labor mar- Egypt, and, more recently, Morocco mov- It isn’t a question of if the next crisis will hit, it ket exclusion, by facilitating access to produc- ing decisively in this direction. These efforts is a question of when. It is up to MENA coun- tive jobs, protecting workers, and providing should be complemented by support to build tries to be better prepared for it and, more a safety net for people who are left behind the human capital and capabilities of the generally, to help set people up for productive and are at risk of poverty. And they should do poor to help them eventually move out of and healthy lives. Building an inclusive and so in an efficient manner, by ensuring finan- poverty through the labor market—Egypt efficient social protection system will go miles cial responsibility and avoiding unintended has started doing that. to achieve that. BUILT TO INCLUDE III Acknowledgments T his report was prepared by a World mist for the Middle East and North Africa Bank team led by Cristobal Rid- (MENA)) and Anush Bezhanyan (Practice ao-Cano (Lead Economist, Social Manager for SPJ in MENA). The team bene- Protection and Jobs (SPJ)) and fited from consultations during the first half including Dalal Moosa (Senior of 2021 with policy makers, practitioners, and Economist, SPJ), Montserrat Pal- experts in several MENA countries, including lares-Miralles (Senior Economist, Egypt, Iraq, and Jordan, as well as the region- SPJ), and Juul Pinxten (Economist, SPJ). The al event on the Future of Social Protection extended team included Ugo Gentilini (Senior that the MENA Vice Presidency organized Social Protection Specialist, SPJ), Manjula M. during the 2021 Annual Meetings. The team Luthria (Senior Economist, SPJ), Nayib Rive- discussed preliminary findings of the report ra (Economist, SPJ), and Usama Zafar (Ex- at the Ministerial Forum on the Future of So- tended Term Consultant, SPJ). External con- cial Protection in the Arab Region (November tributors included Marian Abdelnour Atallah 2021) and the Arab Household Savings Con- (Paris School of Economics) and Shereen ference (March 2022). Hussein (Professor of Health and Social Care Policy, London School of Hygiene and Trop- The team received valuable advice and feed- ical Medicine). The report is accompanied back from peer reviewers Kevin Carey, Gus- by background papers on social assistance tavo Demarco, Johannes G. Hoogeveen, and (Juul Pinxten, Usama Zafar), social insurance Truman G. Packard and from participants in (Montserrat Pallares-Miralles), and labor pol- the December 2021 workshop to discuss pre- icies (Dalal Moosa). Wiem Jenzri and Sultan liminary findings of the study and the MENA Khair (Short Term Consultants, SPJ) collected SPJ team (Tunisia, June 2021). The team is and updated information on key indicators thankful for the excellent collaboration with on social assistance and subsidies following the poverty team on the work on informality the Atlas of Social Protection Indicators of (Gladys Lopez Acevedo, Marco Ranzani) and Resilience and Equity (ASPIRE) framework. fiscal incidence analysis in Iraq (Lokendra Graphic design by Muhammad Kamal. Phadera, Beenish Amjad, Maynor Vinicio Cabrera), Morocco (Federica Marzo), Tuni- The work was conducted under the overall sia (Federica Alfani), and the West Bank and guidance of Roberta Gatti (Chief Econo- Gaza (Arden Finn, Beenish Amjad). BUILT TO INCLUDE IV Middle East & North Africa MENA Countries High income Bahrain countries Kuwait Malta Oman Qatar HIC Saudi Arabia United Arab Emirates UAE Upper middle Iraq income countries Jordan UMIC Lebanon Libya BUILT TO INCLUDE V Lower middle Algeria income countries Djibouti Egypt Iran Morocco LMIC Tunisia West Bank and Gaza WB&G Low income countries Syria LIC Yemen Regions Middle East and North Africa MENA South Asia SAR Latin America the Caribbean LAC Europe and Central Asia ECA Sub-Saharan Africa SSA East Asia and the Pacific EAP BUILT TO INCLUDE VI Contents Annex References 01 11 25 45 PAGE 77 PAGE 83 PAGE PAGE PAGE PAGE Overview Chapter 1 Chapter 2 Chapter 3 Ending poverty remains Social protection policies in Reimagining elusive in most of MENA MENA are falling short social protection in MENA 1.1 Work is limited 1.2 Social protection 2.1 The COVID-19 2.2 Social 2.3 Social 3.1 Building 3.2 Enhancing 2.3 Increasing and mostly informal plays a crucial role response was assistance does insurance does foundational protection along efficiency of across much of MENA in reducing poverty & constrained by not protect not cover systems the welfare-work & financing vulnerability: a framework ‘pre-existing most of the most workers for social distribution for social PAGE 16 conditions’ poor, while & schemes are protection protection PAGE 21 PAGE 50 inefficient financially PAGE 27 PAGE 47 PAGE 59 subsidies loom unsustainable large PAGE 34 PAGE 29 2.4 Labor 2.5 Social 3.4 Moving 3.5 Reform policies protection toward an journeys provide limited systems will inclusive social PAGE 68 protection to only become more protection workers and out of sync system do little to with tomorrow’s PAGE 64 facilitate reality employment PAGE 41 PAGE 38 BUILT TO INCLUDE VII BUILT TO INCLUDE VIII Boxes Box 1 Defining informal work ................................................................................ 18 Box 2 Rigorous evaluations have shown strong impacts of TKP and informed the expansion and improvement of the program over time................................................................... 33 Box 3 Jordan: building integrated delivery systems for social protection..................................... 49 Box 4 Yemen: fixing the dollar value of cash transfers is helping to protect their value .................... 50 Box 5 Egypt: Egypt has made remarkable progress to improve the protection and opportunities for the poor .... 51 Box 6 Social workers can help provide bundles of support for the poorest segments of the population ......... 51 Box 7 China is using subsidies to voluntary savings and pension benefits to make remarkable gains in effective coverage of informal workers.............................................................. 55 Box 8 Chile’s Seguro de Cesantia has expanded coverage of unemployment insurance while incentivizing job search and re-employment............................................................................... 56 Figures Fig. 1 COVID-19 impacted the poorest households the most...................................................... 14 Fig. 2 COVID-19 had a major impact on workers across MENA, particularly the informal.......................... 14 Fig. 3 Poverty and vulnerability were already relatively high in much of MENA before COVID-19................. 15 Fig. 4 Poverty goes hand in hand with low levels of human capital............................................. 16 Fig. 5 Work helps, but it does not earn a safe passport out of poverty........................................ 16 Fig. 6 Youth unemployment has been persistently higher in MENA than anywhere else............................. 17 Fig. 7 Women’s labor force participation has been persistently lower in MENA than anywhere else............... 18 Fig. 8 Most workers in middle-income MENA countries are informal.............................................. 18 Fig. 9 Foreign workers make up the bulk of the workforce in GCC countries..................................... 19 Fig. 10 Most informal workers are employed in micro-enterprises................................................ 19 Fig. 11 Many informal workers are poor, but most are not—even if they are still vulnerable..................... 20 Fig. 12 The formal private sector in MENA has created little employment........................................ 20 Fig. 13 Microenterprises employ most workers, and they are mostly informal .................................... 21 Fig. 14 Stylized mapping of social protection instruments along the welfare-work distribution.................. 24 Fig. 15 The social protection response to COVID-19 was vigorous in MENA ....................................... 27 Fig. 16 The social protection response to COVID-19 was diverse ................................................ 28 Fig. 17 Most government support went to those who were most impacted by COVID-19, but many were left out....... 29 Fig. 18 Some impressive expansions, but most of the poor are still not covered by cash transfers............... 30 Fig. 19 Low spending on cash transfers and social assistance, while energy subsidies loom large................ 31 Fig. 20 Generalized food subsidies account for the lions share of social assistance spending................... 32 Fig. 21 Egypt’s Takaful and Karama are much more cost-effective than bread subsidies........................... 32 Fig. 22 Most workers in MENA are not covered by pension schemes................................................ 35 Fig. 23 Most of the elderly are not receiving pensions......................................................... 35 BUILT TO INCLUDE IX Fig. 24 Most of the unemployed are not receiving unemployment benefits ........................................ 36 Fig. 25 Pensions schemes tend to be financially unsustainable.................................................. 36 Fig. 26 Pension benefit promises cannot be afforded given contribution rates and retirement ages .............. 37 Fig. 27 Severance pay in MENA is the most generous in the world ............................................... 39 Fig. 28 MENA has the most legal restrictions on women’s employment............................................. 40 Fig. 29 MENA has limited active labor market programs to offer................................................. 40 Fig. 30 MENA is ageing faster than any other region ........................................................... 42 Fig. 31 Most people in MENA are unhappy with policies to redistribute and to create jobs....................... 43 Fig. 32 Globally, pensions coverage has not changed much over time ............................................ 52 Fig. A1 MENA is growing its high-skill occupations much less than its income peers ............................ 77 Fig. A2 Adequacy of regular cash transfer benefits is relatively low........................................... 77 Fig. A3 Targeted cash transfers are more cost-effective than generalized subsidies............................. 78 Fig. A4 Workers contribute to pensions for a portion of their working lives.................................... 79 Fig. A5 Older pensioners tend to have much lower benefits than younger pensioners.............................. 79 Fig. A6 Pensions systems look much ‘older’ than the population, creating deficits too early.................... 79 Fig. A7 Minimum wages are relatively high in a few MENA countries ............................................. 80 Fig. A8 Most people in MENA want more redistribution .......................................................... 81 Fig. A9 Developing oil-exporting MENA countries are running out fiscal space................................... 81 Fig. A10 Most MENA countries still collect little in taxes and rely too heavily on indirect levies.............. 82 Tables Tab.1 Social protection: Protecting people against poverty and other risks in an efficient manner............ 21 Tab.2 All but two MENA countries offer pensions to private sector wage workers .............................. 34 Tab.3 Workers in MENA retire too early because of built-in incentives........................................ 38 Tab.4 Most OECD countries index pensions to inflation........................................................ 55 Tab. A1 Most pension systems in MENA are fragmented............................................................ 80 Tab. A2 Developing oil-exporting MENA countries are running out fiscal space................................... 81 BUILT TO INCLUDE X Overview CHAPTER M ost countries in the Mid- but not at any cost. Protection should be pro- Social protection systems in MENA are dle East and North Africa vided in a financially responsible way while overdue for an upgrade to expand support to (MENA) are struggling to avoiding perverse incentives affecting work, those excluded from the labor market in an reduce poverty and vulner- retirement, and hiring decisions that can ex- efficient manner, and the ongoing crisis con- ability—COVID-19 and now acerbate labor market exclusion. text is creating a unique opportunity for this. Russia's invasion of Ukraine This requires investing in shock-responsive are making the task even Social protection policies in MENA are falling delivery systems, expanding the coverage and harder. Labor market exclusion is at the root short of that benchmark. Most poor people do efficiency of social protection instruments— of poverty and vulnerability in MENA, as not receive income support, while inefficient including income support and opportunities work opportunities are limited, particularly energy and food subsidies loom large in the for the poor and social insurance and produc- for women and youth, and most workers are region. Also, most workers are not covered tivity-enhancing support for informal work- engaged in low productivity informal jobs. by pension or unemployment insurance (UI), ers—and mobilizing additional resources to and pension systems are unsustainable and finance reform in a progressive manner. All Although creating more and better jobs in encourage early retirement. Labor policies of this requires political support to make the MENA is mainly about revitalizing the pri- provide limited effective protection to workers upgraded social protection system part of a vate sector, social protection policies can play and do little to facilitate employment. Popula- renewed social contract. Although there is a crucial role in addressing labor market ex- tion aging, technological change, and climate no single reform path, this report provides clusion by facilitating access to productive change will shape tomorrow’s economies and guidance on sequencing of reforms to move employment, protecting workers, and provid- increase demand for social protection—social toward an inclusive social protection system. ing a safety net for people who are left behind protection systems in MENA are ill-prepared and are at risk of poverty. Social protection to meet these challenges. systems should be built to include people, BUILT TO INCLUDE 1 Overview Much of MENA is struggling to reduce poverty and vulnerability because work is limited and mostly informal ES.1 T he COVID-19 pandemic took a means having no access to other forms of so- toll on poverty in MENA, and cial insurance and not having a legal contract the war in Ukraine is making (for wage workers) and thus not being pro- things worse. It is estimated that tected by the labor laws. At least two-thirds COVID-19 has pushed 16 million of private sector workers in middle-income people in MENA below the $5.50 MENA countries for which there are data are per day poverty line. Job loss and in informal employment, and most of them falling earnings, especially among informal are stuck in informal jobs as employees in workers—not covered by social insurance— low-productivity micro-enterprises (fewer have been the greatest causes of the decline in than 10 workers). Informality is even higher living standards. For example, about half of among youth—more than 90 percent in Egypt informal wage workers in Egypt lost their jobs and Morocco—and has increased over time between February 2020 and February 2021. as public employment has decreased. Foreign Just as the pandemic started to wane, the cri- workers account for most workers in Gulf Co- sis triggered by the war in Ukraine struck. The operation Council (GCC) countries, and they resulting increase in global prices—particu- are not covered by pensions. Although some larly for food and energy—has pushed even expatriate workers have access to alternative more people into poverty. savings instruments, half of expatriate do- mestic helpers—who are mostly women and Poverty and vulnerability were relatively account for between 13 percent (Qatar) and 27 high in much of MENA before the pandem- percent (Saudi Arabia) of the workforce—are 16 ic, driven by labor market exclusion. MENA not covered by any social insurance scheme is the only region where poverty increased or protected by the labor code. during the 2010s, indicating that it is a per- sistent problem. Many people in MENA Creating more and better jobs in MENA is cannot escape poverty because they cannot mainly about increasing market contestabil- find employment or because they are stuck ity. Inefficient firm dynamics—a reflection of in low-productivity informal jobs. the lack of market contestability—result in a mil. stunted private sector dominated by small, Work is limited, particularly for youth and low-productivity firms; approximately two- women. Increasingly better-educated youth thirds of workers are employed in micro-firms are joining the labor force, but many find in Egypt, Jordan, and Tunisia, and at least themselves idle or unemployed; 24 percent three-quarters of those are informal. Islam, of youth in MENA were unemployed in 2019, Moosa, and Saliola (2022) identify two key the highest rate in the world, and it has been reform areas to increase product market so for the past 2 decades. Across the region, contestability: presence and preferential women are becoming just as educated (if not treatment of state-owned enterprises in the more so) than men and value work (almost) economy and price controls over services and as much as men, yet only 20 percent of work- commodities. Although creating more-pro- ing-age women were employed or looking for ductive employment is about revitalizing the people fell below a job in 2019, the lowest rate in the world. private sector, social protection policies can the $5.50 per day play a crucial role in addressing labor market poverty line due Most private sector workers are informal— exclusion by facilitating access to productive to the COVID-19 not covered by pensions. In MENA coun- employment, protecting workers, and provid- pandemic tries, not being covered by a pension typically ing a safety net for people who are left behind. BUILT TO INCLUDE 2 Overview Social protection plays a crucial role in reducing poverty and vulnerability—a framework ES.2 S ocial protection is designed to protect all people against pover- TAB. ES1 Social Protection: Protecting people ty and other risks affecting their against risks in an efficient manner well-being while ensuring financial responsibility and minimizing per- Social assistance Social insurance Labor regulations verse incentives. This vision for so- and programs cial protection is fully aligned with Protection Income support to Income protection Labor regulations: the goal of universal social protection, which address the risk of (pensions) and long- protect workers posits that everybody should have access to poverty term care of workers against risks such upon retirement to as exploitation and social protection when and how they need it. avoid the risk of discrimination It also recognizes the importance of providing old-age poverty and protection efficiently, which involves finan- destitution; protection against risk of injury, cial responsibility and avoiding perverse in- sickness, unemployment centives affecting work, retirement, and hir- while active ing decisions—incentive compatibility. This report sees this vision as a benchmark that national social protection systems should be assessed against and progressively move toward. This vision is realized through an Financial Cost-effectiveness Self-financing, by Labor and economic integrated system of three social protection responsibility through modern delivery aligning contributions inclusion programs: instruments: social assistance, social insur- systems, linking income and benefits; modern delivery support with economic subsidies (to benefits systems; prioritize ance, and labor regulations and programs inclusion and human or contributions) difficult-to-employ (Table ES1). capital investments, carefully designed and low-productivity and prioritizing the and financed through informal workers poorest government budget Social protection instruments can be mapped along the welfare-work distribution of the population. First, the population can be divided into three welfare groups: poor; vulnerable to poverty; and not poor, not vul- Incentive Prevent disincentives Align contributions Labor regulations: nerable to poverty (Figure ES1). This distribu- compatibility to work and become and benefits to give firms enough tion can be adjusted to reflect work status: not financially self- prevent perverse flexibility to adjust working, working informally, and working sufficient by avoiding incentives (e.g., early to demand formally. This stylized distribution is largely beneficiary selection retirement); avoid based on work status program fragmentation; aligned with the evidence. The stylized map- and calibrating make main programs ping of social protection instruments is con- benefits to labor mandatory, but include sistent with the roles described in Table ES1. income voluntary schemes to help bridge the gap Taken together, social protection instruments cover the entire population, but the specif- ic mix of instruments varies along the wel- fare-work distribution and the life cycle. This mapping can also be viewed dynamically, as social protection instruments help house- holds move up in the welfare-work distribu- tion, including after slipping down because “Poverty and vulnerability were relatively high in much of MENA of shocks. To reduce work disincentives, in- come support is tapered off, as opposed to being sharply discontinued, as people become non-poor but still vulnerable. The framework outlined in Table ES1 and Figure ES1 is used before the pandemic, driven by to benchmark social protection systems in MENA and identify reform priorities. labor market exclusion” BUILT TO INCLUDE 3 Overview FIG. ES1 Stylized mapping of social protection instruments along the welfare-work distribution Labor Regulations Mandatory social insurance Voluntary savings schemes Economic inclusion and labor programs Income support Non-working Informal Informal Not poor, not vulnerable poor poor vulnerable Social protection of COVID-19 and made the response more costly, effectively limiting it. policies in MENA Despite recent expansions, most poor peo- ple do not receive income support in much are falling short of of developing (low- and middle-income) MENA, while inefficient subsidies loom protecting the poor large. Only in Egypt and Jordan do cash transfer programs cover most of the poor. Low spending on these programs, and on so- and vulnerable ES.3 cial assistance in general, is the main reason for the low coverage of cash transfers for the poor. At the same time, and despite recent reforms, spending on energy subsidies in MENA is twice that on social assistance and T much higher than in any other region. En- ergy subsidies tend to be regressive because Social protection instruments can help he social protection response to richer households tend to consume more en- address labor market exclusion. Table ES1 COVID-19 was vigorous but lim- ergy than poorer households. They are also and Figure ES1 show that a combination of ited by preexisting conditions. To economically inefficient and harmful to the mandatory and voluntary social insurance varying degrees, all MENA coun- environment. Most social assistance spend- programs can help protect all workers against tries responded to the COVID-19 ing is on generalized food subsidies, not cash short- (injury, sickness, unemployment) and crisis with social protection mea- transfers to the poor. These subsidies tend long-term (old-age poverty) risks. Labor reg- sures, especially income support. to have a sizable impact on poverty by vir- ulations can further protect workers against Most public assistance in Egypt, Jordan, Mo- tue of covering poor and vulnerable people risks such as exploitation and discrimina- rocco, and Tunisia was well targeted to those but are less cost effective than targeted cash tion, although they must be accompanied by most affected—the poorest segments of the transfer programs in all countries analyzed mechanisms to ensure that they eventually population and informal workers—although because many go to non-poor, non-vulnerable provide effective protection to all workers. La- most of them were left out, except in Jordan. households. bor programs can help increase access of job The shock responsiveness of social protection seekers and workers in low-productivity jobs systems—including the availability of UI and Most workers are not covered by social in- to productive work opportunities. Income modern delivery systems with large social reg- surance schemes. Although all MENA coun- support can help poor households meet mini- istries of households and digital payments— tries except Lebanon and the West Bank and mum consumption needs, while economic in- influenced the response. For the most part, Gaza have mandatory pension schemes for clusion programs and investments in human and with notable exceptions such as Jordan, private sector workers, most workers are not capital of children in those households can delivery systems across MENA had limited effectively covered—a reflection of high job help them move out of poverty for good. And shock responsiveness. Pre-COVID-19 cover- informality. Low coverage of workers and to avoid exacerbating labor market exclusion, age of social protection programs also influ- low contribution histories translate into low social protection instruments must be de- enced the response: limited pre-pandemic coverage of pensions for the elderly. Only 12 signed to avoid perverse incentives affecting coverage of income support and social in- MENA countries have UI, which covers less work, retirement, and hiring decisions. surance amplified the initial poverty impact than 10 percent of unemployed people. BUILT TO INCLUDE 4 Overview Pension schemes in MENA tend to be finan- cially unsustainable because they are gen- erous by design. Most pension schemes are defined-benefit plans, with benefits paid from current contributions. For this type of scheme to be financially sustainable, benefits, con- tribution rates, and retirement ages must be aligned; they are not in MENA, resulting in schemes that are in deficit or will become so in a few years. Pension schemes are financial- ly unsustainable because promised benefits are greater than what they should be, given contributions and retirement ages. Built-in incentives to retire early are a key source of imbalance, resulting in approximately 45 percent of old-age beneficiaries receiving an early retirement pension, well above global norms. Thus, although the typical statutory retirement age in MENA is 60 for men and 55 for women, workers often retire at age 50 or earlier. MENA countries often have frag- mented pension systems, including different schemes for public and private sector work- ers, which constrains labor mobility, increas- es administrative costs, and treats workers in different sectors unequally. Labor policies provide limited protection to workers and do not facilitate employment. Reimagining Labor regulations in MENA countries mostly adhere to core international labor standards, social protection but most workers in MENA do not directly benefit from them because they are informal in MENA ES.4 S workers, and weak enforcement of labor reg- ulations makes it difficult to formalize work- ers and protect formal sector workers. Few ocial protection systems in MENA forms to build an inclusive social protection MENA countries have restrictions on hiring, must be upgraded to expand sup- system and gain political support for reform. but most have restrictive dismissal rules. In port to those excluded from the addition, MENA countries have some of labor market in an efficient man- Modern delivery systems are essential to the most restrictive laws against women’s ner. The pandemic and the crisis providing enhanced social protection sup- employment. Across MENA, few job seek- triggered by the war in Ukraine are port efficiently. They are key to delivering ers benefit from employment support, par- exacerbating the inadequacies of the right support to the right people at the ticularly those who need it most. Economic current social protection systems while cre- right time at the least cost. Modern delivery inclusion programs are rare and cover few ating a unique opportunity for reform. This systems are one-stop shops for providing beneficiaries. report identifies reform priorities, tailored social protection—from outreach and regis- to different groups of MENA countries, in tration of potential beneficiaries to delivery Social protection systems will only become three broad strategic policies areas: build- of support. Digital technologies can be lev- less aligned with reality. Population aging— ing foundational systems to deliver social eraged to develop modern delivery systems, expected to be faster in MENA than any other protection effectively and efficiently, en- including through electronic identification, region—technological change, and climate hancing the protection of people along the online registration and data exchange, and change will shape tomorrow’s economies and welfare-work distribution, and increasing digital payments. Shock-responsive features increase demand for social protection. Pop- the efficiency of and financing for social of modern delivery systems—including large, ulation aging will increase demand for pen- protection. The report brings some fresh dynamic social registries, and digitization of sions and long-term care (LTC). Climate-re- perspectives. It builds on the COVID-19 processes and payments—have been critical lated shocks related to MENA’s low rainfall, experience to highlight the role of modern in the response to the pandemic and the war high temperatures, and dry soil will particu- delivery systems; proposes an approach to in Ukraine. The development of modern de- larly affect poor and vulnerable people, who informality that focuses on protecting and livery systems for social protection is a rele- will need support to prepare for, manage, and enhancing the productivity of informal vant reform agenda for all MENA countries, adapt to these shocks. Prevailing social pro- workers; and contributes to the debate on most of which have made progress on some tection systems in MENA are ill-prepared to aging, including active aging and LTC. The elements of modern delivery system, with meet these challenges. report provides guidance on sequencing re- Jordan being at the forefront. BUILT TO INCLUDE 5 Overview Expanding income support and opportunities for the poor and vulnerable ES.4.1 E xpanding income support to the poor is a priority for all develop- ing MENA countries, particular- ly those with large coverage gaps. Funding for cash transfer pro- grams can and should increase, but budgets will continue to be limited, so efforts should continue to increase the ac- curacy of methods to identify the poor. Egypt and Jordan are good examples of countries that have increased coverage to more than half of the poorest 20 percent of their popu- lations through a combination of increased funding, better targeting of the poor, and con- solidation of programs into a single cost-ef- fective cash transfer program (Takaful and Karama Program (TKP) in Egypt; Takaful in Jordan). Enhancing opportunities for the poor and the vulnerable is also a priority for devel- oping MENA countries, particularly those with low levels of human capital. This can be done by complementing income support with interventions that build the human cap- ital and capabilities of poor and vulnerable households (economic inclusion programs). Social registries are useful tools for packaging complementary interventions; Egypt, Jordan, and Morocco are emerging examples of that. Egypt is providing TKP beneficiaries with complementary support to improve children’s nutrition, health, and education. Egypt also has the most-developed economic inclusion initiative in MENA (FORSA), which offers TKP beneficiaries support for self-employ- ment or wage employment to help them move out of poverty. The self-employment package is based on the successful BRAC graduation model, a comprehensive support package pro- vided to extremely poor people in rural areas to help them start and expand income-gen- erating activities. BUILT TO INCLUDE 6 Overview Expanding social insurance protection, particularly for informal workers ES.4.2 T his report proposes an approach Dubai International Financial Center (DFIC) to informality focused on protect- could serve as a model to increase protection ing and enhancing the productiv- of foreign workers in GCC countries*. ity of informal workers. That is not to say that MENA countries Well-designed social pensions can help should not continue their efforts to prevent old-age poverty for workers who do formalize—bringing workers into not contribute enough or at all while being mandatory schemes—but formalization pol- fiscally responsible and minimizing per- icies are unlikely to increase coverage much verse incentives. Social pensions are trans- in the short to medium term—particularly for fers to the elderly financed through general informal workers employed in micro-firms, so government budgets. It is good practice to they must be complemented by alternative target social pensions to the elderly poor, instruments that do not formalize but protect which is the approach Egypt is taking with informal workers. Thus, this report recom- Karama. Another good practice is to subsi- mends shifting the focus of policies toward dize contributory pension benefits to reach protecting informal workers—which includes an adequate minimum pension level. This is but is not limited to formalization—and en- different from minimum pensions in MENA, hancing their productivity. which are often tied to early retirement. It is the approach that China adopted to comple- Voluntary savings schemes (VSSs) can help ment its VSS to increase effective coverage of sustainably increase protection of informal informal workers. workers in MENA. They recognize the irreg- ular and unpredictable nature of informal in- There is ample room to enhance UI in all come and are applicable to informal workers MENA countries; options vary according who have some capacity to save; those who to initial conditions. Countries without UI do not are better served by non-contributory can introduce UI savings accounts with a income support programs. To encourage par- risk-pooling component to guarantee a min- ticipation in VSSs of workers with less capac- imum level of benefits, as in Chile. Coun- ity to save, VSSs typically provide incentives tries with existing UI schemes can consider in the form of matching contributions. To reforms to enhance protection (e.g., by easing make them more attractive, these schemes eligibility), encourage job search (e.g., by ta- should prioritize protection against short- pering benefits through the benefit receipt term risks such as unemployment, income period), and support re-employment (e.g., loss, and sickness. VSSs should ultimately by linking benefit receipt to participation in serve as bridges to well-balanced mandatory labor programs). Countries with existing sev- schemes. VSSs in countries such as China erance pay can tighten it by increasing years and Türkiye are already protecting many of service required for eligibility and reducing informal workers. The savings scheme for payment per year of service, converting it to expatriate workers recently launched in the prefunded accounts, or simply phasing it out. *The DIFC is a special economic zone in the United Arab Emirates (UAE) that has an independent regulatory and legal system. The new savings scheme for expatriate workers replaces the previous end-of-service gratuity arrangement—an unfunded defined-benefit scheme. BUILT TO INCLUDE 7 Overview “Labor regulations must Expanding employment support protect all workers equally, and worker protection including by eliminating ES.4.3 legal restrictions on women’s employment” L abor programs should target those who need support, including lower-skilled youth and women. Global evidence shows that labor programs can increase the proba- bility and quality of employment but only if they target the right peo- ple with the right support. Labor programs are more cost-effective for lower-skilled job seekers—particularly youth and women, . Labor programs should look beyond wage employment and support digital jobs, includ- ing online freelancing. Several not-for-profit organizations are providing such support to Gazan youth, who would otherwise have very limited job opportunities, especially women. The private sector should play a core role in the delivery of labor programs while govern- ment focuses on ensuring quality and results, including through accreditation and perfor- mance-based contracting. Labor regulations must protect all workers equally, including by eliminating legal re- strictions on women’s employment. Efforts should continue to bring informal workers under labor laws and improve compliance with labor regulations while ensuring that protections do not place a burden on busi- nesses. Above all, MENA countries must eliminate legal restrictions on women’s em- ployment. Saudi Arabia has been implement- ing reforms to reduce gender discrimination, and other MENA countries have been making progress too, but much more is needed, and those efforts should be accompanied by other measures to increase women’s employment, including through labor programs, access to finance and childcare, and the development of the care economy. Another important re- form agenda, particularly in GCC countries, is to loosen restrictions on foreign workers. BUILT TO INCLUDE 8 Overview Increasing the subsidy reforms in the 2010s, yet significant energy subsidies remain in much of MENA, porting developing MENA countries do not have the fiscal space to increase spending efficiency of and crowding out fiscal space for other develop- without raising additional revenue. There is financing for social ment priorities, including social protection. room to collect more tax revenue in MENA protection Generalized food subsidies are still the main form of social assistance in most of MENA, countries in a progressive manner. MENA countries rely more on indirect taxes on con- and most countries rely on costly energy and sumption, which tend to be regressive, than I ES.4.4 food subsidies to respond to rising prices on progressive direct taxes on income, profits, triggered by the war in Ukraine. Developing or property. In addition to increasing direct ntegration of programs. Modern deliv- oil-importing MENA countries cannot afford taxes, MENA countries can increase tax reve- ery systems facilitate the consolidation to maintain current levels of spending on sub- nue in a progressive manner by removing tax of similar social assistance programs, sidies, particularly when targeted cash trans- exemptions and improving tax administra- generating savings and increasing cost fers are a more cost-effective alternative. The tion—Tunisia is a reform leader in this area. effectiveness. Examples in MENA in- current crisis should be used as an opportuni- clude the consolidation of Egypt’s Da- ty to reform subsidies, not as an excuse not to. MENA governments should support active man—an old-age social pension pro- Global experiences offer useful suggestions aging. Across MENA, people are living lon- gram—into Karama and Jordan’s monthly for reform, including transforming in-kind ger, healthier lives, but most workers retire cash transfer into Takaful. Integrating pen- subsidies into cash transfers, recalibrating too early, resulting in considerable loss of po- sion schemes will increase equity and labor subsidies to give more to the poor and less tential productivity gains and a significant mobility and reduce perverse incentives and to rich people, and gradually removing sub- drain on pension funds. MENA countries administrative costs. Jordan pioneered the sidies for rich people—using the savings to must extend working lives, which requires consolidation of public and private pension finance social protection priorities. not only adjusting the retirement age to re- schemes in the region. Many other MENA flect gains in life expectancy and eliminating countries have integrated some schemes, MENA countries must mobilize addition- incentives to retire early, but also encouraging rules, or administration, but significant frag- al tax revenue to finance social protection and supporting late retirement. Some MENA mentation remains. priorities in a progressive manner. Increas- countries have been implementing paramet- ing the efficiency of social assistance and re- ric reforms that go in the right direction, in- Reforming generalized food and energy forming subsidies might not generate enough cluding Egypt and Jordan. The Organization subsidies will increase efficiency and pro- savings to finance social protection priorities, for Economic Cooperation and Development vide financing for social protection. MENA including the expansion of cash transfers and countries offer good examples of policies to countries such as Egypt, Iran, Jordan, and opportunities for the poor, labor programs, support active aging. Morocco embarked on sweeping energy and social insurance subsidies, and oil-im- Moving towards an inclusive social protection system A ES.4.5 ddressing labor market exclu- support opportunities for the poor to move has been weakened over the years as citizens sion in MENA requires a vi- out of poverty through the labor market, and have grown dissatisfied with it, particular- brant private sector that gen- then to institute reforms to provide access to ly since 2010. Whether in response to fiscal erates more-productive jobs. sustainable social insurance protection and constraints or citizen demands, this report Growth is expected to decelerate enhance the productivity of vulnerable infor- shows that many MENA countries have been in MENA; as the global econo- mal workers with some capacity to save. In moving away—slowly but surely—from the so- my slows, financing becomes parallel, existing mandatory social insurance cial protection model embedded in the social more expensive, and previous windfall gains programs can be reformed to increase protec- contract (generalized subsides, public sector for oil exporters dissipate, leading to fewer tion of formal sector workers while ensuring employment) toward the type of social protec- jobs and even less fiscal space in oil-import- financial sustainability and supporting labor tion system advocated for in this report—at ing MENA countries for social protection and market inclusion. Labor regulations are also least some elements of it. other development priorities. To accelerate critical for worker protection, but they must growth and harness it to generate more-pro- not create a burden on businesses. Reform will require political support. Mov- ductive jobs, reforms are needed to revitalize ing more decisively and comprehensively the private sector by increasing product mar- The proposed reforms will challenge the toward the proposed new social protection ket contestability. existing social contract, but many MENA system will require political support—partic- countries have already started the reform ularly for some of the more-sensitive reforms Although there is no single reform path, journey, and the social contract is already be- regarding subsidies, pensions, and taxa- some guiding principles can be used to move ing challenged. The vision and reforms out- tion—so that the new social protection sys- toward an inclusive social protection system. lined in this report are a deviation from how tem becomes an integral part of a renewed Modern delivery systems are foundational MENA countries have traditionally thought social contract. Evidence from MENA and should be fit to the level of complexity about social protection as part of the existing countries and elsewhere suggests some use- of the social protection system, which should social contract: governments provide citizens ful principles to gain political support for ideally be determined mainly by where the with social services (health care, education), reform, including establishing a vision and greatest needs are along the welfare-work dis- public sector jobs, and subsidies for food and communication, packaging and sequencing tribution. Therefore, systems should be built energy in exchange for political support and reforms, and ensuring political leadership to deliver income support to the poor, then to limited political participation. This contract and ownership of reform. BUILT TO INCLUDE 9 Overview “The proposed reforms will challenge the existing social contract, but many MENA countries have already started the reform journey” BUILT TO INCLUDE 10 Overview Ending poverty remains elusive in most of MENA BUILT TO INCLUDE 11 Chapter 01 11–24 PAGES 01 BUILT TO INCLUDE CHAPTER 1.1 Work is limited and mostly informal across much of MENA 12 16 1.2 Social protection plays a crucial role in reducing poverty and vulnerability: a framework 21 Chapter 01 T 6 mil. he COVID-19 pandemic turned the Mid- (Figure 2). Informal wage workers, defined as dle East and North Africa region (MENA), wage earners without social insurance, were and the rest of world, upside down. In most affected in the four countries analyzed MENA, the pandemic had claimed more because informal workers were more concen- than 300,000 lives by May 2022 (World Bank trated than their peers in formal employment 2022a). The region’s gross domestic product in sectors more affected by the crisis, such as (GDP) contracted by 3.3 percent in 2020. Ex- retail trade, construction, and tourism; they cept in Lebanon, recovery started in 2021 and lost employment first; and they were not eligi- continued in 2022, particularly in Gulf Coop- ble for unemployment benefits or COVID-19 eration Council (GCC) countries, although remediation measures that formal sector most MENA economies have not recovered workers received. This is important because, to pre-pandemic levels, and the Russia's inva- as shown later, informal workers account for sion of Ukraine poses further significant chal- most of the workforce in MENA, and they lenges and uncertainties (World Bank 2022j). are vulnerable to shocks. As economies in the region began to recover, so did labor markets, The economic contraction had a devastating although employment rates have not reached impact on the living standards of people in pre-pandemic levels. MENA, especially the poorest. It is estimat- people fell below ed that household incomes declined between As the pandemic began to wane, the war in the $2.15 per day February 2020 and June 2021 across the in- Ukraine triggered another global crisis. Dis- poverty line come distribution, but the impact was most ruptions in the supply of food, fuel, and fertil- severe among the poorest 25 percent of house- izers from two major producers, Ukraine and holds (Figure 1). The incomes of at least half Russia, has led to sharp increases in global of the poorest households in Egypt, Jordan, prices that were already rising before the in- Morocco, and Tunisia declined, causing some vasion (World Bank 2022a). Globally, it is esti- to fall below the poverty line. The World Bank mated that the crisis triggered by the war has estimates that COVID-19 pushed 16 million pushed approximately 7 million people below people in MENA below the $6.85 per day pov- the $1.90 poverty line, increased malnutri- erty line, with 6 million falling below the $2.15 tion, and reduced use of education and health per day poverty line (Mahler et al. 2021). The services and productive assets by the poor. poverty impact was severest in Iran, Iraq, and This is a significant setback to COVID-19 re- Lebanon, where other crises compounded the covery efforts, including in MENA countries. effects of COVID-19. Poverty and vulnerability were high before Job losses and falling earnings, especially the pandemic. Figure 3(Panel A) compares among informal workers, have been the poverty rates in developing (low- and mid- greatest causes of the decline in living stan- dle-income) MENA countries in 2018 with dards. Unemployment shot up across the re- those of their income peers using various in- gion. New labor market entrants could not ternational poverty lines: $2.15 per day (ex- find jobs, and many workers lost their jobs. treme poverty, most relevant for low-income Between one-quarter (Morocco) and half countries), $3.65 (moderate poverty, most (Egypt) of wage earners in February 2020 relevant for lower-middle-income countries), had lost their jobs (main transmission chan- and $6.85 (moderate poverty, most relevant nel) or had their wages cut by February 2021 for upper-middle-income countries). Poverty BUILT TO INCLUDE 13 Chapter 01 FIG. 1 COVID-19 impacted the poorest Changes in household income between February 2020 and June 2021, percentage of households, by household income per households the most capita quartile in February 2020 Source: Krafft, Assaad, and Marouani 2022. FIG. 2 COVID-19 had a major impact Percentage of wage workers reporting layoff/suspension and reduced earning between February 2020 and February 2021, by on workers across MENA, type of worker in February 2020 particularly the informal Egypt Jordan Morocco Tunisia Note: Informal workers are private sector wage workers without social insurance Source: Krafft, Assaad, and Marouani 2022. working within or outside firms. BUILT TO INCLUDE 14 Chapter 01 is rampant in many developing MENA coun- capital level of a child born in the poorest tries, although poverty levels tend to be low- 20 percent of the population in Egypt, Jor- er than those of income peers. MENA is the dan, or the West Bank and Gaza is at least 10 only region where poverty increased during percentage points lower than that of a child the 2010s (Figure 3, Panel B), indicating that born in the richest 20 percent, suggesting it is a persistent problem in most developing that lack of opportunities for poor house- MENA countries. The pandemic and now the holds to build human capital partly explains war in Ukraine are making the goal of ending the persistence of poverty. A child born today in a poor family in Egypt 50% poverty even more elusive. The situation in Yemen, where it is estimated that half of the Labor market exclusion is the main cause of can only achieve population is facing acute food insecurity, is poverty and vulnerability—work is limited especially desperate. and mostly informal across much of MENA. The next section shows that high levels of Across the region, high levels of poverty are poverty and vulnerability are linked to poorly accompanied by low levels of human capital. performing labor markets, which tend to be Although levels are generally comparable with characterized by a large share of working-age those of income peers, the productivity—as a individuals, particularly youth and women, future worker—of a child born in a country who are unemployed, underemployed, or out such as Iraq, Egypt, and Yemen is less than of the labor force and a large share of work- of her economic potential 50 percent of the productivity that could be ers in low-productivity informal jobs. Thus, because of inadequate health achieved with complete education and full many people in MENA cannot escape pover- and education investments health (Figure 4). The main constraint on ty and vulnerability because they cannot find human capital in MENA is poor learning employment or are stuck in low-productivity outcomes. There are also large differences informal jobs. Labor market exclusion has according to the socioeconomic level, indicat- been a persistent impediment to shared pros- ing inequality of opportunities; the human perity in MENA (Gatti et al. 2013). FIG. 3 Poverty and vulnerability were Percentage of population living below $2.15, $3.65 and $6.85 a day at 2017 international prices, by region and already relatively high in much year (Panel A), and by country (2018 or latest) (Panel B) of MENA before COVID-19 A. Poverty was rampant across many developing MENA countries before COVID-19 B. MENA is the only region where poverty increased during the 2010s Source: World Bank 2022c. BUILT TO INCLUDE 15 Chapter 01 FIG. 4 Poverty goes hand in hand with Human capital index, 0-1 scale, by country, region and income group, 2010-2020 low levels of human capital Source: World Bank 2022d. Work is limited & “Work helps move people mostly informal out of poverty, but many across much of workers still live in poor MENA 1.1 households—not all work is created equal” W ork is the main way out of poverty, but it does not FIG. 5 Work helps, but it does not earn guarantee it, especially if a safe passage out of poverty it is informal. Across de- Percentage distribution of workers along the veloping MENA countries welfare distribution of the households they with data, except Egypt and live in, latest year Syria, the overwhelming majority of workers live in non-poor house- holds, defined as having an income per capita greater than $5.50 per day (Figure 5). Even in Egypt and Syria, most workers live in non- poor households when poverty is defined relative to the relevant income poverty line for each country. Also, poverty rates among workers are lower than for the general popu- lation (Figure 3, Panel B). Work helps move people out of poverty, but many workers still live in poor households—not all work is cre- ated equal. Formal sector workers enjoy the de jure protections of the labor law and social insurance; informal workers do not. Formal sector workers typically have higher earnings and more stable employment than informal workers. Informal workers are more likely to be poor than formal workers. Thus, work helps people move out of poverty but infor- mal work less so, which is important because work opportunities are limited and mostly Source: ILO 2022. informal in MENA. BUILT TO INCLUDE 16 Chapter 01 FIG. 6 Work is limited, especially for youth Youth unemployment has been & women persistently higher in MENA than anywhere else 1.1.1 Percentages, 2019 Educated youth are increasingly joining the men (if not more so) and value market work labor force, but many find themselves idle or almost as much as men (World Value Sur- unemployed. At 27 percent, the population vey 2022), yet only 20 percent of working-age share of individuals aged 20 to 34 in MENA women were employed or looking for a job is the highest in the world after South Asia. in 2019, the lowest rate in the world. Across Younger cohorts are also increasingly edu- MENA countries, labor force participation cated; MENA has had the highest rates of rates are lower than in their income peers intergenerational education mobility in the (Figure 7), and progress over time has been world over the past few decades (Narayan et limited, except in Saudi Arabia where reforms al. 2018), yet many young people in MENA to reduce restrictions on women’s employ- find themselves idle, unemployed, or stuck ment have facilitated a remarkable increase in informal jobs, making intergenerational in participation rates between 2016 (21 per- income mobility particularly low in the region cent) and the third quarter of 2022 (37 per- (Narayan et al. 2018). Twenty-nine percent of cent). Labor force participation rates typically individuals aged 15 to 24 in MENA were not peak around marital age (mid-20s) and de- employed or in school or training in 2019 (the cline thereafter. In contrast, the much higher Source: ILO 2022. highest rate in the world after South Asia), men’s participation rates in MENA countries ranging from 10 percent in Qatar to 44 per- compare well with those of income peers. cent in Iraq. Many of these idle youth want to The few women who enter the labor market work but cannot find employment; 24 percent are more likely to be unemployed than men. of youth in MENA were unemployed in 2019, The average gap between the women’s un- the highest rate in the world, as has been the employment rate (17 percent) and the men’s case for the past 2 decades (Figure 6). unemployment rate (8 percent) in MENA in 2019 is the largest gap of any region and has Most women in MENA are jobless—more so increased over time as the public sector has than anywhere else in the world. Across the become a less-viable employment option for region, women are becoming as educated as women, more so than for men. BUILT TO INCLUDE 17 Chapter 01 FIG. 7 Women’s labor force participation has been Percentages, 2019 persistently lower in MENA than anywhere else Source: ILO 2022. FIG. 8 Most workers in middle- Share of informal employment in BOX 1 total employment and private income MENA countries sector employment, percentages, are informal latest year Defining informal work This report defines an informal worker as someone who does not contribute to pensions, whether working for a wage or self-employed. Although a broader definition that includes other forms of social insurance protection would be appropriate, only information on pen- sion coverage is consistently available Note: Informal employment is defined as not Source: Labor Market Panel Survey for Egypt across the five MENA countries with contributing to a pension. Surveys include (2018) and Tunisia (2014); Labor Force Survey data. Nevertheless, pensions are the nationals and non-nationals aged 15 to 64. for Jordan (2018), the West Bank and Gaza (2018), and Morocco Labor Force Survey (2019). most common social insurance program in MENA, and not being covered by a pension typically means not having ac- cess to other forms of social insurance. Most workers are informal Lack of pension coverage of private sector wage workers in countries where 1.1.2 contributions are mandatory (most MENA countries), also often means working without a legal contract and hence not being protected by labor laws and regulations in general. In GCC countries, while foreign workers are not Most private sector workers in middle-in- and Morocco are informal. Job informality covered by mandatory pensions, most come MENA countries are informal. This in MENA has not changed much over time of them have written legal contracts. report defines an informal worker as some- (Gatti et al. 2014). If anything, informality one who is not covered by pensions (Box 1). has increased as public employment has Although lack of pension coverage Using this definition, most workers in all five receded.1 Also, many informal workers are means that workers are unprotected, it middle-income MENA countries with data stuck in informality; in Egypt, 68 percent of is important for policy to distinguish are working informally (Figure 8). For private informal workers in 2012 were still informal between situations in which contribu- sector workers—public sector employees tend in 2018 (19 percent became unemployed or tions are mandatory according to law or to have pensions—informality ranges from 62 left the labor force), and in Jordan, 52 percent voluntary (as in many MENA countries percent in Tunisia to 86 percent in Morocco. of informal workers in 2010 were still infor- with self-employed workers) or there is Informality is even higher for youth; more mal in 2016 (31 percent became unemployed simply no pension scheme workers can than 90 percent of working youth in Egypt or left the labor force).2 contribute to (see chapter 2 for details). It is also relevant for policy to differen- 1 The probability of a 25-year-old university-educated men finding a job in the public sector in Egypt, Tunisia, and West Bank and Gaza has decreased over the past few decades while the probability tiate between informal private sector of informal wage employment has increased (Islam, Moosa, and Saliola 2022). wage workers employed in informal (unregistered) versus formal firms. 2 See Lopez-Acevedo et al. (forthcoming) for a detailed analysis of informality in Egypt, Morocco, and Tunisia. BUILT TO INCLUDE 18 Chapter 01 Foreign workers constitute most of the workforce in GCC countries, and none have FIG. 9 Foreign workers make up Share of foreign workers and expatriate domestic helpers in access to pensions. GCC countries rely on the bulk of the workforce total employment, percentages, expatriate workers, ranging from 73 percent in GCC countries latest year of the workforce in Saudi Arabia to 95 per- cent in Qatar (Figure 9). These expatriate workers come from various countries around Expatriate domestic helpers Foreign workers the world, but mostly from South and East Asia. Foreign workers often have insurance Saudi Arabia Bahrain Kuwait Oman Qatar against work injury, but no GCC country pro- vides retirement income for foreign workers, 95% regardless of how many years they work in the country. For most workers, it is not pos- 84% 78% sible to stay in the country after retirement 73% age.3 Some expatriate workers have high in- comes and alternative instruments to save for retirement, but half of expatriate domestic helpers, who account for between 13 percent (in Qatar) and 27 percent (in Saudi Arabia) of 27% the workforce, are not covered by any social insurance scheme or protected by the labor 17% 14% 13% code. Almost all expatriate domestic helpers are women, who are vulnerable to abuse. Most informal workers in middle-income Source: Data on expatriate domestic helpers are from Saudi Arabia’s Labor Force Survey (2019), MENA countries are employed in micro-en- Bahrain’s Labor Market Regulatory Authority (2019), Kuwait’s Labor Force Survey (2015), and Oman’s National Centre for Statistics and Information Data Portal (2019). Data on foreign terprises. In Egypt, Jordan, Tunisia, and the workers are from Saudi Arabia’s Labor Market Survey (2021), Qatar’s Labor Force Sample Survey West Bank and Gaza, most informal workers (2019), and Bahrain’s Labor Market Indicators Dashboard (2021). are employees (Figure 10, Panel A). In Moroc- co, informal employees are the largest group of informal workers (38 percent), followed by self-employed informal workers. This is dif- FIG. 10 Most informal workers Percentage distribution of infor- mal workers, by type of employ- ferent from the profile of informal workers are employed in micro- ment and firm size, latest year in two regions where informality is also ram- enterprises pant (South Asia and Sub-Saharan Africa), where most informal workers (and workers in general) are self-employed (Guven, Jain, and Joubert 2021). More than three-quarters of in- A. Most informal workers are B. Most informal employees work formal employees in Egypt, Jordan, and Tu- employees in micro-enterprises nisia work in micro-enterprises (fewer than 10 workers) (Figure 10, Panel B), which has important implications for social protection (see Chapter 3). Although many informal workers are poor, most are not—even if they are vulnerable. Many informal wage workers in Egypt, Jor- dan, Tunisia, and the West Bank and Gaza live in households that are among the poorest 40 percent of the population (Figure 11). Av- erage income per capita of these households is at or below the international poverty line for each country,4 meaning that they are likely to be poor. Still, most informal wage workers in these countries are not among the poorest Note: Firm size is defined by the number of employees of private and public enterprises. 40 percent of the population; in Jordan, in- Informal employment is defined as not formal wage workers are underrepresented in contributing to pension. this segment of the population (35 percent). As the COVID-19 experience has shown, Source: Labor Market Panel Surveys for Egypt (2018), Jordan (2016), and Tunisia (2014); Labor most non-poor informal workers are vulner- Force Surveys for the West Bank and Gaza (2018) and Morocco (2018). able to shocks. The fact that most informal workers are not poor, and have some capacity to save, has important implications for social protection (see Chapter 3). 3 The only exception is the emirate of Dubai in the United Arab Emirates, which approved a law in 2018 to allow foreigners to stay in the country after retirement age through a specific visa, with some conditions such as a minimum amount of savings in the bank. Saudi Arabia has now a similar provision, called “Premium Residency”, which is also subject to conditions and the payment of a one-time fee of over $210,000 (permanent residency) or an annual fee of over $25,000 (temporary residency). 4 Except in the West Bank and Gaza, where average income per capita is above the $3.20 poverty line. BUILT TO INCLUDE 19 Chapter 01 FIG. 11 FIG. 12 Limited work and high informality are Many informal workers are poor, The formal private sector the result of a stunted but most are not—even if they in MENA has created little are still vulnerable employment private sector Percentage distribution of informal and 1.1.2 formal sector wage workers by household A. Little employment growth income per capita quintile of the households they live in, latest year Average annual growth rate between 2013/14 and 2019/20, percentage 1 6 3 Upper-middle-income 5 Lower-middle-income 4 MENA The limited capacity of the private sector to 4 Morocco generate more and better jobs is the main 3 Tunisia source of unemployment and informality. Egypt The formal private sector is unable to absorb -1 Malta the increasing workforce, particularly as the -3 primacy of public employment has receded, Jordan -4 pushing people into the informal sector or WB&G unemployment or out of the labor force. The average growth rate of employment within Lebanon formal firms between 2013/14 and 2019/20 was only 1 percent per year for MENA econo- mies, which is markedly lower than 5 percent for middle-income peers (Figure 12, Panel A). B. …as most firms contracted or Between 2016 and 2019, employment in most stayed the same firms in MENA economies contracted or re- mained the same; the few expansions have Percentage of firms that expanded or contracted between 2016 and 2019 mostly happened in large firms (Figure 12, Panel B). In addition, the limited jobs being created have tended to be concentrated in low- er-productivity sectors, slowing labor produc- tivity growth (Islam, Moosa, and Saliola 2022). Inefficient firm dynamics result in a stunted private sector dominated by small, low-pro- ductivity firms. There is a persistently low rate of firm entry in MENA, the most produc- tive firms do not drive firm growth, and firms exiting the market are not always the least productive (Islam, Moosa, and Saliola (2022). Inefficient firm dynamics have resulted in a productive structure dominated by small and micro, low-productivity firms; approximate- Note: Informal employment is defined as not ly two-thirds of workers are employed in mi- contributing to pension. Only households cro-firms in Egypt, Jordan, and Tunisia (Fig- that derive their income solely from wage work are included in the analysis. ure 13), and at least three-quarters of those are informal workers. In addition, there is little Source: Labor Market Panel Surveys for Egypt (2018), Jordan (2016), and Tunisia mobility; almost all firms that were small in (2014); Labor Force Surveys for the West 2016 were still small in 2019 (Islam, Moosa, Bank and Gaza (2018) and Morocco (2018). and Saliola 2022). 50% Note: Annual employment growth is calculated using employment from the last fiscal year and employment recalled 2 fiscal years This is not a productive structure that will ago. There are several limitations to this allow MENA countries to compete with the measure. First, firm entry and exit are not rest of the world or provide opportunities to considered. Second, this employment growth is narrowly defined for formal firms with their people. With accelerating technologi- five or more employees that are not fully cal change and globalization, the prevailing government owned. productive structure in MENA countries will Source: Islam, Moosa, and Saliola 2022. cause them to diverge further from other competing countries because technological change and globalization are rewarding fron- of expatriate domestic workers tier firms and not lagging firms (Berlingieri, in the GCC are not covered by Blanchenay, and Criscuolo 2017) and reward- any social insurance scheme or ing countries with a high share of produc- protected by the labor code tive firms (Ridao-Cano and Bodewig 2018). BUILT TO INCLUDE 20 Chapter 01 FIG. 13 Technological change is also making jobs in high- and upper-middle-income countries more intensive in nonroutine, cognitive and Social protection Microenterprises employ most workers, and they interpersonal tasks—high-skill jobs. These are also the jobs that the increasingly edu- plays a crucial role are mostly informal Percentage distribution of employees by cated youth in MENA are demanding, as well as the jobs that help move people out in reducing poverty firm size, latest year of poverty and vulnerability. Private sector workers in Egypt, Jordan, and Tunisia per- form significantly fewer of these tasks than in & vulnerability: other upper-middle-income countries such as Türkiye, and high-skill occupations are grow- a framework 1.2 S ing much less in MENA countries than in their income peers (Figure A1). ocial protection is designed to Creating more and better jobs in MENA is protect all people against pover- mainly about increasing market contest- ty and other risks affecting their ability. This involves reforms to ease firm well-being while ensuring finan- entry and ensure efficient growth and exit cial responsibility and minimiz- of firms so that more-productive firms are ing perverse incentive. This vision the ones growing and creating jobs while the for social protection is fully aligned least-productive contract or exit the market. with the goal of universal social protection, A comparison of product market regulations which posits that everybody should have ac- in MENA with those of 37 high-income and cess to social protection when and how they 14 upper-middle-income countries identified need it (World Bank 2022e).6 It also recog- two areas that must be reformed to increase nizes the importance of providing protection product market contestability:5 presence and efficiently, which involves financial respon- treatment of state-owned enterprises in the sibility and avoiding perverse incentives economy and price controls on many services affecting work, retirement, and hiring deci- and commodities, including gas, electricity, sions—incentive compatibility. This report Note: Firm size is defined by the number of employees in private and public and food staples such as bread (Islam, Moosa, sees this vision as a benchmark that national enterprises. Informal employment is defined and Saliola 2022). social protection systems should be assessed as not contributing to social insurance against and progressively move toward. This (pensions). Social protection policies can play a crucial vision is realized through an integrated sys- Source: Labor Market Panel Surveys for role in addressing labor market exclusion. tem of three instruments: social assistance, Egypt (2018), Jordan (2016), and Tunisia Whereas creating more-productive employ- social insurance, and labor policies. These (2014). ment is mainly about revitalizing the private instruments, and the systems built around sector, social protection policies can play a them, are collectively referred to in this doc- crucial role in addressing labor market ex- ument as social protection. The contribution clusion by facilitating access to productive of each instrument to the three elements of employment, protecting workers, and provid- this vision—protection, financial responsi- ing a safety net for people who are left behind bility, incentive compatibility—is described and are at risk of poverty. below and summarized in Table 1. TAB. 1 Social protection: Protecting people against poverty and other risks in an efficient manner Social assistance Social insurance Labor regulations and programs Protection Income support to address the risk Income protection (pensions) and Labor regulations: protect workers of poverty long-term care of workers upon against risks such as exploitation retirement to avoid the risk of and discrimination old-age poverty and destitution; protection against risk of injury, sickness, unemployment while active Financial responsibility Cost-effectiveness through modern Self-financing, by aligning contri- Labor and economic inclusion pro- delivery systems, linking income butions and benefits; subsidies (to grams: modern delivery systems; support with economic inclusion and benefits or contributions) carefully prioritize difficult-to-employ and human capital investments, and pri- designed and financed through gov- low-productivity informal workers oritizing the poorest ernment budget Incentive compatibility Prevent disincentives to work and Align contributions and benefits to Labor regulations: give firms enough become financially self-sufficient prevent perverse incentives (e.g., flexibility to adjust to demand by avoiding beneficiary selection early retirement); avoid program based on work status and calibrating fragmentation; make main programs benefits to labor income mandatory, but include voluntary schemes to help bridge the gap 5 Product market regulations directly affect market contestability through the costs that firms face when they enter the market and the degree of competition between firms that are already in this market. The rigidity or flexibility of product market regulations affects the number of firms that operate, their growth, and their ability to create jobs. 6 The focus is on ensuring protection against risks; actual support is provided when the risk is realized (e.g., poverty, unemployment) or before it to prevent the risk from materializing in the first place (e.g., productive inclusion support to prevent the risk of poverty). BUILT TO INCLUDE 21 Chapter 01 Social assistance: Protecting people against poverty 1.2.1 Protection Financial Incentive responsibility compatibility Social assistance encompasses Social assistance is non-con- Social assistance programs benefits provided to individuals tributory and thus, by defi- should be designed to avoid and households without requir- nition, not self-financing, disincentives to work and to ing any financial contribution although it can and should become financially self-suffi- from them. It can have several be cost-effective, aiming to cient by not tying beneficiary forms and functions (Grosh et maximize impact on poverty selection to work status and al. 2022), but its main goal is to of every dollar spent. Global ensuring that social assistance protect people against poverty, evidence suggests that this benefits are set below the in- defined as being unable to meet can be achieved by developing come that people can make by basic needs. Because those are modern delivery systems that working. mostly monetary, social assis- provide the right support to the tance should focus on providing right people at the right time, income support to the poor. including in response to shocks; This can be complemented by linking income support with support to address other vulner- economic inclusion programs abilities, such as psychosocial and human capital investments support. in children to help poor and vulnerable people move out of poverty; and prioritizing sup- port to the poorest people. Social insurance: Protecting workers throughout their careers and upon retirement 1.2.2 Protection Financial Incentive responsibility compatibility Social insurance protects workers against Social insurance is financed through contri- Aligning contributions and benefits also pre- the risk of old-age poverty by ensuring an butions from workers and their employers vents perverse incentives to retire too early to adequate pension and long-term care (LTC) (on workers’ behalf), and it should be self-fi- collect relatively generous pension benefits, upon retirement, as well as against the risks nancing. Defined-contribution schemes are possibly complemented with income from in- of work injuries, sickness, unemployment, self-financing because benefits are paid from formal work; contribute to pension schemes and income loss while working. contributions and investment returns. In only in the last few years before retirement; contrast, in defined-benefit schemes—most and misreport earnings. Social insurance public pension programs in MENA—ben- schemes should treat private and public efits are determined using a formula that sector workers equally to avoid distortions. considers factors such as salary history and Unemployment benefits should be calibrated length of employment. Defined benefits can over time to encourage beneficiaries to look and should be designed to be financially for work. Workers tend to underestimate sustainable by balancing benefits and con- risks, particularly over a longtime horizon, tributions, in an actuarial sense, at the system so social insurance programs should be man- level. This does not prevent cross-subsidiza- datory at their core. But voluntary savings tion between individuals, as social insurance schemes can be used to complement benefits programs pool risks that not all individuals of mandatory schemes and protect informal realize equally (e.g., people who die sooner workers who are not covered by mandatory subsidize those who die later). Nor does it social assistance and have some capacity to preclude providing subsidies to guarantee a save (Guven, Jain, and Jouvert 2022). These minimum benefit level or encourage certain schemes can include subsidies (financed by groups to contribute. These subsidies should the government) and be based on capacity be carefully designed and financed through to save to encourage enrollment, but they the general government budget, not social should be designed to eventually have these insurance schemes (Packard et al. 2019). workers join mandatory schemes. BUILT TO INCLUDE 22 Chapter 01 “Social protection instruments cover the entire population, while the mix varies along the welfare-work distribution and the life cycle” Labor policies: Protecting workers and facilitating employment 1.2.3 Protection Financial Incentive responsibility compatibility Labor policies include labor regulations and As with social assistance, labor and economic Labor regulations regarding hiring and dis- non-contributory labor and economic in- inclusion programs are non-contributory, and missing workers and setting a minimum wage clusion programs.7 The main goal of labor thus financial responsibility comes down to should not only protect workers, but also give policies is to protect workers and facilitate cost-effectiveness. Modern delivery systems, firms enough flexibility to adjust employment access to employment. Labor regulations matching job seekers to vacancies, and em- and wages in response to changes in demand include provisions related to hiring and dis- ployment support programs based on profil- (World Bank 2013; 2019). They should also missing workers and basic conditions for ing can help, as can a focus on programs with be neutral as to where and how workers earn employment. They are designed to protect demonstrated impact that are delivered by, or a living. Job placement support should be all workers against risks such as exploitation at least in partnership with, the private sector. designed to avoid worker replacement, and and discrimination based on characteristics As with social assistance, prioritizing those whenever relevant, receipt of income support such as gender and race. To be effective, labor most in need is crucial for cost-effectiveness. should be linked to participation in economic regulations must be complied with, which re- Labor programs should prioritize job seekers inclusion programs. quires adequate awareness and enforcement. who are harder to employ, and workers who Labor and economic inclusion programs are are stuck in low-productivity informal jobs. designed to connect people to the labor mar- Economic inclusion programs should focus ket through employability support (e.g., job on the poor and vulnerable. search assistance, skills training, productive assets) and job placement support (e.g., wage subsidies, business financing). Labor pro- grams are directed at job seekers and work- ers in general, while economic inclusion pro- 7 Unemployment insurance is covered grams are focused on the most vulnerable and under social put more emphasis on employability support. insurance. BUILT TO INCLUDE 23 Chapter 01 Social protection instruments can be ments varies along the welfare-work distri- employment) and long-term risks (old-age mapped along the welfare-work distribu- bution and the life cycle. This mapping can poverty). Labor regulations can further pro- tion of the population. The population is also be viewed dynamically: social protection tect workers against risks such as exploitation first divided into poor; vulnerable to pover- instruments help households move up in the and discrimination but must be accompanied ty; and not-poor, not-vulnerable to poverty distribution, including after slipping down by mechanisms to ensure that they provide (Figure 14). The distribution is then adjusted because of shocks. To reduce work disincen- effective protection to all workers. Labor pro- to reflect work status: not working, working tives, income support is tapered off as people grams can increase access to productive work informally, and working formally. For ease become non-poor but are still vulnerable, as opportunities for job seekers and workers in of exposition—and largely supported by ev- opposed to being abruptly discontinued. The low-productivity informal jobs. Income sup- idence—it is assumed that all nonworking framework outlined in Table 1 and Figure 14 port can help poor households meet mini- households are poor, households mostly is used to benchmark social protection sys- mum consumption needs, while economic in- relying on informal income are poor or vul- tems in MENA (Chapter 2) and identify re- clusion programs and investments in human nerable, and households mostly relying on form priorities (Chapter 3). capital of their children can help them move formal income are not poor and not vulnera- out of poverty for good. To avoid exacerbat- ble to poverty. The stylized mapping of social Social protection instruments can help ing labor market exclusion, social protection protection instruments is aligned with the address labor market exclusion. The com- instruments must be designed to prevent per- roles described for each instrument. Taken bination of mandatory and voluntary social verse incentives affecting work, retirement, together, social protection instruments cover insurance programs can help protect all and hiring decisions. the entire population, and the mix of instru- workers against short- (injury, sickness, un- FIG. 14 Stylized mapping of social protection instruments along the welfare-work distribution Labor Regulations Mandatory social insurance Voluntary savings schemes Economic inclusion and labor programs Income support Non working Informal Informal Not poor, not vulnerable poor poor vulnerable BUILT TO INCLUDE 24 Chapter 01 02 25–44 2.1 2.2 2.3 2.4 2.5 The COVID-19 Social assistance Social insurance Labor policies Social protection response was does not protect does not cover provide limited systems will only constrained by ‘pre- most of the poor, most workers protection to become more PAGES existing conditions’ while inefficient and schemes workers and do out of sync with subsidies loom large are financially little to facilitate tomorrow’s reality unsustainable employment Social protection 27 29 34 38 41 policies in MENA are falling short CHAPTER BUILT TO INCLUDE 25 Chapter 02 BUILT TO INCLUDE 26 Chapter 02 2.1 The COVID-19 response was constrained by ‘pre-existing conditions’ 1.1% A ll MENA countries responded to the COVID-19 crisis with social AVERAGE protection measures to varying degrees, especially social assis- tance. COVID-19 triggered the largest fiscal stimulus in history. Globally, social protection spend- ing accounted for 18 percent of the total fis- cal stimulus package and was nearly 5 times the spending level during the 2008 financial crisis. MENA countries spent an average of about 1.1 percent of GDP on social protec- of GDP spent on tion measures, which is lower than in other social protection regions and just over half of the global average measures by of 2 percent, with Iran and Jordan spending MENA countries at or above that level (Figure 15). Social assis- tance measures were the preferred response in MENA and around the world, mostly in the form of cash transfers, which covered approximately 23 percent of the population in MENA. MENA countries also used social insurance and labor market measures, partic- ularly waivers of social security contributions, wage subsidies, and liquidity support to firms (Figure 16). Globally, the use of social insur- ance and labor measures increased with in- come level, with high-income countries rely- ing on them as much as on social assistance. FIG. 15 The social protection response to Social protection expenditures in response to COVID-19 during 2020-21 as a percentage of GDP COVID-19 was vigorous in MENA Source: Gentilini et al 2022. BUILT TO INCLUDE 27 Chapter 02 70% of the poorest quartile of households in Jordan received support “…most of the poor in developing FIG. 16 MENA countries, except Jordan The social protection response to COVID-19 was diverse and Egypt, were not receiving cash Number of measures across MENA countries transfers when the pandemic hit, which tended to amplify the initial poverty impact of COVID-19…” Most public assistance went to the poor countries. For example, Djibouti, Egypt, and and vulnerable, although many were left Jordan had social registries that covered out. In Egypt, Jordan, Morocco, and Tuni- half or more of the population, and many sia, government assistance benefited the MENA countries were already delivering poorest 25 percent of households the most cash transfers digitally, but delivery systems (Figure 17, Panel A). Because they suffered across MENA had limited shock responsive- the greatest income losses from COVID-19, ness. A notable exception is Jordan, where a public assistance was thus well targeted, but preexisting shock-responsive delivery system except in Jordan—where 70 percent of the facilitated the largest, best-targeted, fastest poorest quartile of households received sup- response in MENA. port—government assistance did not cover most of the poorest households. Similarly, Coverage of social protection programs be- most assistance to workers was well targeted fore the pandemic influenced the response. to informal workers, but except in Jordan, Countries with cash transfer programs cover- most informal workers did not benefit from ing most of the poor only had to worry about support (Figure 17, Panel B). those households that become poor with the pandemic. As shown in the next section, most The shock responsiveness of social protec- of the poor in developing MENA countries, tion systems partly influenced the response. except Jordan and Egypt, were not receiving Availability of instruments determined type cash transfers when the pandemic hit, which of response. For example, many MENA coun- tended to amplify the initial poverty impact tries do not have unemployment insurance of COVID-19 and made the response more (UI); workers in those countries who lost their costly, effectively limiting it because of fis- jobs had no access to unemployment benefits. cal constraints. Similarly, most workers in Globally, the response was larger and faster in developing MENA countries are informal, countries with modern social protection de- and they were the most affected and had no livery systems that included shock-responsive automatic form of protection (e.g., UI) and elements such as digital identification, large could not benefit from COVID-19 measures social registries of poor and vulnerable house- for formal sector workers such as wage subsi- holds, and digital payments (Gentilini 2022; dies. Some informal workers benefited from Beazley, Marzi, and Steller 2021). Some of COVID-19 support but, except in Jordan, Source: De la Flor et al. 2021. these elements were present in some MENA most did not. BUILT TO INCLUDE 28 Chapter 02 FIG. 17 Most government support went to those who were most impacted by COVID-19, Social assistance but many were left out does not protect A. Most informal workers are employees Percentage of households receiving government assistance by February most of the poor, 2021, (by income per capita quartile of the household in February 2020) while inefficient subsidies loom large 2.2 D espite recent expansions, most poor people do not receive in- come support in developing MENA countries.8 Egypt, Iraq, and Jordan significantly ex- panded coverage of regular cash transfer programs before and after COVID-19 (Figure 18, Panel A). Cover- age of Egypt’s TKP is five times as large as it B. Most government support went to wage workers was 2015, and the introduction of the Takaful that were most impacted by COVID-19 program in 2019 almost tripled the coverage of cash transfers in Jordan by 2022. Despite Percentage of wage workers receiving government assistance these expansions, only the cash transfer pro- by February 2021, by type of wage work in February 2020 grams in Egypt and Jordan cover most of the poorest 20 percent of the population (Figure 18, Panel B). When using national poverty lines, Egypt’s TKP covers 50 percent of the poor (up from 21 in percent in 2016), and Jor- dan’s cash transfers cover 62 percent of the poor (up from 21 percent in 2018). The intro- duction of a new poverty-targeting mecha- nism in 2016 is estimated to have increased coverage of Iraq’s cash transfer program from 20 percent to 51 percent of the poor.9 Similar- ly, the good poverty targeting of West Bank and Gaza’s Cash Transfer Program allows it to cover a relatively large share of the poor despite its small size.10 Low spending on cash transfer programs, and on social assistance more generally, is the main reason for the low coverage of the poor. MENA spends the least of all regions on cash transfers as a percentage of GDP, and all MENA countries (except Iraq and Jordan, which are also the only two MENA countries that spend more than 1 percent of GDP on cash transfers) spend significantly less than Note: Informal employees are private informal wage workers Source: Krafft, Assaad, their income peers (Figure 19). Low spending working in establishments; informal non-employees are and Marouani 2022. on cash transfers generally parallels low spend- private wage workers working outside of establishments. ing on social assistance more generally. Only South and East Asia and the Pacific spend less >90% on social assistance than MENA, although Al- geria, Egypt, Iraq, Libya, Morocco, and Tunisia spend more than 2 percent of GDP on social assistance—more than their income peers. 8 For a more detailed analysis of social assistance in MENA, see companion paper by Pinxten and Zafar (forthcoming). 9 Based on simulated coverage of the 2016 of the population of poverty-targeting model. Actual coverage would Egypt receives some be lower because of errors in implementation of type of food subsidy the targeting mechanism. BUILT TO INCLUDE 29 Chapter 02 At the same time, spending on general- ized energy subsidies is high in the region. FIG. 18 Some impressive expansions, but Despite recent reforms, MENA countries most of the poor are still not spend 2 times as much on energy subsidies covered by cash transfers for consumers as on social assistance and much more than in any other region. Ener- A. Cash transfer beneficiaries as B. Cash transfer beneficiaries as a gy subsidies tend to be regressive (because a percentage of the population percentage of total population and the richer households tend to consume more en- poorest 20% of the population, latest year ergy than poorer households), economically inefficient, and harmful to the environment (IMF 2013). Temporary cash compensation schemes sometimes accompany energy sub- sidy reforms such as those in Egypt, Iran, Jordan and Morocco, but only in Egypt were savings from the subsidy reform used to expand regular cash transfers for the poor (Mukherjee et al. 2022). Most social assistance spending is on gen- eralized food subsidies not cash transfers for the poor. Cash transfers are the main so- cial assistance instrument in Djibouti, Iraq, Morocco and Jordan, whereas in Tunisia, Egypt and Lebanon, generalized or qua- si-generalized food subsidies are the main social assistance program (Figure 20). Egypt’s quasi-universal food subsidy program is the largest social assistance program in the coun- try and the largest food subsidy program in the region, providing subsidized baladi bread to 72 million people and food ration cards to more than 64 million people; more than 90 percent of the population receives some type of food subsidy (World Bank 2022h). Although Note: Panel A: Jordan’s National Aid the richest 20 percent of households benefit Fund (NAF), Iraq’s Cash Transfer Program less than poorer households, approximately (CTP), Tunisia’s National Program of three-quarters of rich households benefit from Assistance to Needy Families (PNAFN). Panel B: coverage for each country is food subsidies. Fee waivers11 are less used calculated by adding up the coverage of than generalized food subsidies in MENA. the main cash transfer programs; coverage of Iraq’s CTP is estimated using the poverty-targeting model. Generalized food subsidies are significantly less cost-effective than cash transfers for Source: Panel A: World Bank 2022g; Panel the poor. Generalized food subsidies are of- B: household surveys, latest year. ten inadequate for the needs of the poor,12 but they tend to have a sizable impact on poverty by virtue of covering almost all 10 However, the program is subject to poor and vulnerable people. For example, frequent interruptions due to lack of Egypt’s food subsidy program has a larger funding—benefits were discontinued for impact on poverty than any other social as- most of the year in 2022. sistance program, including TKP (Figure 21, 11 Fee waivers include waivers or Panel A), but the cost-effectiveness (impact reductions in fees for publicly provided services such as health care, electricity, per dollar spent) of food subsidies is much and water. lower than that of TKP—the most cost-ef- fective program—because food subsidies 12 For example, Egypt’s baladi bread subsidy provides each beneficiary with up are far more costly than TKP, and many of to five loafs per day for a subsidized the benefits go to non-poor, non-vulnerable price of 5 piasters ($0.26); the full cost households (Figure 21, Panel B). In Jordan, per loaf is 60 to 65 piasters per loaf. The subsidy is about 1 percent of the Takaful is the most redistributive, cost-effec- median income of the poorest 40 percent of tive item in Jordan’s budget (Figure A3) (Ro- the population. Food ration cards provide driguez-Takeuchi and Wai-Poi 2021). Its im- a monthly cash allowance of 50 Egyptian pact on poverty is even larger than the (now pounds (~$2.50), about 6 percent of the median income of the poorest 40 percent, discontinued) bread subsidy compensation to buy goods from among more than 100 because, although the latter reached 80 per- products sold in administered outlets with cent of the population, benefits were small.13 monitored prices (World Bank 2022h). The relative cost-effectiveness of generalized 13 About $38 per person per year for food subsidies versus targeted cash transfers Jordanian households earning less than is similar in Morocco and Tunisia (Figure $25,000 per year. Beneficiaries of the old National Aid Fund cash transfer program A3) (AFD 2020; World Bank 2022f ). qualified automatically and received $46 per person per year. BUILT TO INCLUDE 30 Chapter 02 FIG. 19 Low spending on cash transfers and Spending on energy subsidies, social assistance and cash transfers as a percentage of GDP, 2021 or latest year social assistance, while energy subsidies loom large 0% Energy Subsidies Social Assistance Cash Transfers Regions 0.2% 1.1% 1.0% EAP 0.8% 1.4% 0.8% SSA 0.5% 2.0% 1.3% ECA 0.7% 1.8% 0.9% LAC 0.7% 1.1% 1.0% SAR 3.9% 2.0% 0.7% MENA Lower middle income 0.9% 1.5% 0.9% LMIC 5.6% 1.7% 0.3% West Bank & Gaza 1.6% 3.2% 0.5% Tunisia 1.2% 2.4% 1.6% Morocco 7.3% 1.9% 1.5% Iran 4.2% 2.2% 0.2% Egypt 1.8% 0.6% 0.4% Djibouti 8% 3.6% 0.4% Algeria Upper middle income 0.9% 1.5% 1.2% UMIC 12.2% 2.0% 0.1% Libya 5.6% 1.2% 0.0% Lebanon 0.4% 1.1% 1.1% Jordan 5.7% 2.0% 1.3% Iraq High income 0.2% 1.8% 1.4% HIC 5.9% 0.7% Saudi Arabia 5% 0.8% Kuwait Note: Spending on social assistance and cash transfers excludes COVID-related spending Sources: World Bank 2022g for spending on social and health fee waivers. Generalized food subsidies are included in social assistance assistance and cash transfers; IMF for spending on spending for MENA countries but not for regional and income group averages. Energy energy subsidies: (https://www.imf.org/en/Topics/ subsidies are explicit subsidies on fossil fuels for consumers in 2021. climate-change/energy-subsidies). “MENA countries spend 2 times as much on energy subsidies for consumers as on social assistance” BUILT TO INCLUDE 31 Chapter 02 FIG. 20 Generalized food subsidies account for the Percentage shares of social assistance spending by main type, latest year lions share of social assistance spending Note: Generalized food subsidies include quasi-generalized subsidies. Source: World Bank 2022g. Targeted food and in-kind subsidies include school meals. TKP has been shown to reduce poverty and FIG. 21 Egypt’s Takaful and Karama are much more improve human capital. It is a rare example cost-effective than bread subsidies in the region of a social assistance program that has undergone rigorous evaluations that have found strong positive impacts and have A. Poverty impacts (percentage point B. Share of program expenditure informed expansion and improvement of the reduction) and cost-effectiveness spent on each welfare group, (impact/cost) of programs percentages program. The evidence shows that TKP is not only reducing poverty, but also building and protecting human capital and productive assets in the face of shocks (Box 2). Lack of impact on school enrollment in the first eval- uation of the program led to enforcement of education conditionalities, which increased school enrollment. Source: World Bank (2022h). BUILT TO INCLUDE 32 Chapter 02 BOX 2 RIGOROUS EVALUATIONS HAVE SHOWN STRONG IMPACTS OF TKP AND INFORMED THE EXPANSION AND IMPROVEMENT OF THE PROGRAM OVER TIME Since its inception in 2015, TKP has delivered poverty-targeted condition- al cash transfers to a growing number of poor households in Egypt. Several rounds of rigorous evaluations have found strong positive impacts and helped inform the expansion and im- provement of the program. The first evaluation in 2018 revealed that beneficiary households were 11.4 percentage points less likely to be poor thanks to the program. The program also increased spending on food by more than 8 percentage points— partic- ularly on fruit and meat—and on school supplies and transportation to school. The second evaluation was conducted during the COVID-19 pandemic (2022) and showed more muted impacts of the program on spending over the longer term, including on nutritious food, al- though it had a significant impact on total household assets, driven by house- hold investment in productive assets. This positive impact did not prevent COVID-19 from damaging beneficia- ries’ welfare, but it reduced the probabil- ity that they resorted to negative coping strategies, such as taking children out of school. Debt levels have also fallen. The first evaluation showed no impact on school enrollment, although the lack of enforcement of education con- ditionalities explained that. The second evaluation, after conditionalities were enforced, found that the program in- creased primary school enrollment by 6 to 8 percentage points and preparatory school enrollment by 2 to 3 percentage points. The first evaluation found that the program reduced the probability of being treated for malnutrition but had no impact on health care use. The sec- ond evaluation showed some positive impacts on health, such as less of a ten- dency for children aged 6 to 23 months to be wasted (too thin for their age). Lastly, there were small but significant impacts on gender equality in benefi- ciary families. Source: IFPRI 2018; 2022. BUILT TO INCLUDE 33 Chapter 02 A Social insurance ll but two MENA countries have regular pension schemes for private sector workers, but Although all but two countries in MENA have pension schemes for private sector workers, most workers are not effectively does not cover only half have UI. 14 Pension schemes are the most common covered by pensions—a reflection of the high degree of job informality across MENA. Cov- most workers social insurance program. They provide income to workers upon erage, defined as the ratio of active contribu- tors to the labor force, is 50 percent or higher & schemes retirement (or their survivors) and to people with disabilities. All MENA countries except Lebanon and the West Bank and Gaza have only in Algeria, Egypt, Jordan, and Tunisia and is particularly low in GCC countries be- cause expatriate workers are excluded from are financially mandatory-contribution pension schemes for private sector wage workers (Table 2),15 pensions (Figure 22). Coverage has changed little across MENA countries (and globally) unsustainable but self-employed workers are excluded from pensions in many more countries (Djibouti, Iraq, Lebanon, Oman, Qatar, Syria, United since 2010. Low coverage among workers translates into low coverage of pension ben- efits for elderly adults (Figure 23), although 2.3 Arab Emirates (UAE), West Bank and Gaza, many countries are using non-contributory Yemen) and are not required to contribute in programs (social pensions) to increase cov- Bahrain, Morocco, and Saudi Arabia.16 Most erage of elderly adults. Pension coverage schemes are designed as defined-benefit and is low not just because many private sector pay-as-you-go schemes—current pensions are workers never contribute to pensions, but also financed from current contributions.17 Most because those who contribute tend to do so countries with pensions also offer protection for only a portion of their working lives, typ- against work injuries, but only 12 have UI. All ically one-third or less (Forteza and Mussio UI schemes are based on mandatory contri- 2012). Low contribution density means that butions from workers and their employers, some workers do not reach minimum years of except in Bahrain (the government pays the service required to qualify for pensions, and employer contribution) and Egypt and Iran others receive low benefits. (only contributions from employers). All UI schemes are defined benefit. TAB. 2 All but two MENA countries De jure social insurance coverage of private sector workers, by offer pensions to private type of social insurance scheme sector wage workers Income group Country Pensions Sickness & Work Injury Unemployment Family maternity allowances 14 For a more detailed High income Bahrain ✓ ✓ ✓ analysis of social insurance in MENA, Kuwait ✓ ✓ see companion paper Malta ✓ ✓ ✓ ✓ ✓ by Pallares-Miralles (forthcoming). Oman ✓ ✓ 15 Like the other Qatar ✓ MENA countries, Lebanon and the West Saudi Arabia ✓ ✓ ✓ Bank and Gaza have UEA ✓ pension schemes for civil servants Upper middle Iraq ✓ ✓ ✓ and members of the military. income Jordan ✓ ✓ ✓ ✓ 16 Even in countries Lebanon ✓ ✓ where contributions Libya ✓ ✓ ✓ are mandatory for self-employed workers, Lower middle Algeria ✓ ✓ ✓ ✓ ✓ there tends to be more legal restrictions on income Djibouti ✓ ✓ ✓ ✓ access to other forms Egypt ✓ ✓ ✓ ✓ of social insurance programs for self- Iran ✓ ✓ ✓ ✓ ✓ employed workers than for wage workers. Morocco ✓ ✓ ✓ ✓ ✓ 17 Reserves are Tunisia ✓ ✓ ✓ ✓ ✓ accumulated when WB&G contributions are higher than pension Low income Syria ✓ ✓ expenditures and drawn from when Yemen ✓ ✓ contributions are lower than pension Source: Pallares-Miralles (forthcoming) and ILO (2022). expenditures. BUILT TO INCLUDE 34 Chapter 02 Many individuals, especially low-income FIG. 22 FIG. 23 workers, receive low pension benefits be- cause of low contribution densities and Most workers in MENA are not Most of the elderly are not a lack of pension indexation. At the same covered by pension schemes receiving pensions time, pension schemes in MENA countries tend to provide more generous pension ben- Ratio of active contributors to the Ratio of persons above statutory efits for full-career workers (approximately labor force, percentage, 2020 or latest retirement age receiving an old-age pension—contributory or non-contributory— 80 percent of earnings before retirement) to the number of persons above statutory than in most other countries, although most retirement age, percentage, 2020 or latest private sector workers who qualify for a pen- year available sion are not full-career contributors typically only contributing for the minimum length of service required to qualify for a pension (Figure A4), particularly low-income work- ers. In most MENA countries, pensions are indexed in only an ad hoc manner, meaning that the nominal value of pensions increases only sporadically and is not linked to price or wage changes. Ad hoc changes also make pension income less predictable, and lack of pension indexation to inflation—the most common practice globally—decreases the purchasing power of pensions over time, as lower pensions for older than younger pen- sioners illustrate (Figure A5). Few workers are protected against unem- ployment. Only 12 MENA countries have a mandatory-contribution UI scheme. Until 2022, the UAE did not have UI but provided non-contributory assistance to unemployed people, as do other GCC countries for work- ers that do not qualify for UI. In 2022, the UAE launched a new UI scheme as part of reforms aimed at attracting talent and invest- ments. The scheme offers compensation for up to 3 months for national public and private sector employees. Although it varies across countries with UI schemes, workers typically qualify after 1 year of contributions, on par with global practice. The lack of UI (or unem- ployment assistance) and high job informal- ity means that few workers in MENA having access to unemployment benefits, resulting in fewer than 10 percent of unemployed peo- ple receiving unemployed support, except in Bahrain (Figure 24). For those receiving sup- port, benefits tend to be more generous than the global norm, with an average 83 percent replacement rate of employment income during the initial unemployment spell. Pension schemes in MENA tend to be fi- nancially unsustainable. For defined-bene- fit pay-as-you-go schemes to be financially sustainable, benefit promises must be aligned with contribution rates and retirement ages, which means that policy makers can choose only two of three parameters (benefits, contri- bution rates, retirement age) and let the third Source: ILO (2022); and Pallares-Miralles Source: ILO (2022). parameter balance the system. When param- (forthcoming). eters are not aligned, the schemes eventually run cash flow deficits (pension expenditures higher than contributions). Reserves may initially cover these deficits, but once those are depleted, deficits become a fiscal liability. Pension systems in MENA countries tend to be financially unsustainable. Some countries, such as Jordan (Figure 25, Panel A), have a BUILT TO INCLUDE 35 Chapter 02 few years before they run into deficits, where- as others, such as Tunisia (Figure 25, Panel B), are already in deficit. FIG. 24 Most of the unemployed are not receiving unemployment benefits Ratio of recipients of unemployment cash benefits to the number of unemployed persons, percentage, 2020 50% private sector pension coverage is 50% or higher only in Algeria, Egypt, FIG. 25 Pensions schemes tend to be financially unsustainable A. Financial projections of the balance of Jordan’s pension scheme as a percentage of GDP Jordan and Tunisia B. Financial balance of Tunisia’s pension schemes as a percentage of GDP Source: ILO (2022). Source: Pallares-Miralles (forthcoming). BUILT TO INCLUDE 36 Chapter 02 “Pension schemes are financially unsustainable because promised benefits are above what they should be given contributions and retirement ages.” Pension schemes tend to be financially un- ance is survivor pensions, which are typically sustainable because they are ‘generous’ by 100 percent of the deceased’s entitlement, design. Pension schemes are financially un- well above the global norm. 45% sustainable because promised benefits are above what they should be given contribu- Early retirement and low coverage—partic- tions and retirement ages. First, in all MENA ularly at younger ages—make pensions sys- countries with data except Egypt, accrual tems look much older than the population. rates are above what they should be given Most workers do not contribute to pensions, contribution rates and the typical retirement and those who do tend to do so later in their age (55) in MENA (Figure 26). The second working lives and retire early. (Figure A6, Pan- source of imbalance is the low statutory retire- el A, shows a typical example in MENA) This ment age and, especially, built-in incentives is reflected in system dependency ratios (pen- to retire before that (Table 3); all countries sioners to contributors) that are much higher allow early retirement with little or no penal- than population dependency ratios (popula- ty,18 with approximately 45 percent of old-age tion aged 65 and older to population between 18 This means that no benefit reduction beneficiaries receiving an early retirement aged 15 to 64) (Figure A6, Panel B). Thus, even factor is applied for pension in MENA, well above non-MENA when pension schemes run surpluses thanks early retirement or countries (20 percent). Thus, although the to relatively young populations, those will turn of old age that the reduction typical statutory retirement age in MENA is into deficits quickly even while population de- factor is less than beneficiaries receive the cost of paying the 60 for men and 55 for women, workers often pendency ratios are still low because schemes an early retirement pension for a longer retire at 50 or earlier. Another source of imbal- are much older than the population. pension in MENA period of time. FIG. 26 Pension benefit promises cannot Accrual rates given different contribution rates for a retirement be afforded given contribution age of 55, percentages rates and retirement ages Note: The line represents the accrual rate needed for each contribution rate to keep the pension system in Source: Pallares-Miralles balance for a retirement age of 55, assuming an individual starts working at age 25 and dies at age 80. (forthcoming). BUILT TO INCLUDE 37 Chapter 02 Design imbalances and system fragmenta- tion also generate perverse incentives and TAB. 3 Workers in MENA retire too early because inequalities. Built-in incentives for early of built-in incentives retirement make people retire early and un- fairly favor them over those retiring at the Early retirement Reduction factors Legal Effective statutory age. Also, most pension schemes retirement retirement age age (average) in MENA tie pension benefits to earnings in the last few years before retirement, creating Algeria 59 (LOS: 32 years) 1% 60/55 58 an incentive for workers to collude with em- Bahrain Any age (LOS: 20/15) 2% 60/55 54 ployers to underreport earnings early in their Djibouti 50 5% 60/56 - careers and inflate them in the last few years. They also unfairly favor workers with steep Egypt Any age (LOS: 20) Set by law 60 57 earning profiles (high- and middle-income Iran 50/45 (LOS: 30) No reduction 60/55 55 workers) over those with flatter earning pro- Iraq (public) Special cases only No reduction 50a 58 files (low-income workers). MENA countries often have multiple pension schemes for Iraq (private) Any age (LOS: 30/25) No reduction 60/55 59/57 public and private sector workers, or mul- Jordan 50 Set by law 60/55 55 tiple institutions collecting contributions Kuwait Specific conditions No reduction 55 54 or making payments (Table A1). Fragmen- tation constrains labor mobility, increases Lebanon (public) Special cases No reduction 64 64 administrative costs, and treats workers in Libya - - 65/60 - different sectors unequally. In Morocco, for Malta 61 No reduction 65 64 example, the maximum replacement rate Morocco (public) Any age (LOS: 24/18) 6% 63 59 is 100 percent for public sector workers but only 70 percent for private sector workers. Morocco (private) 55 (LOS: 3240 days) No reduction 60 56 This is not only unfair, but also creates an Oman 45 3% 60 55 incentive to work in the public sector and Qatar 40 2%-2.5% 60 45 makes it more costly for the private sector to attract workers. These challenges have been Saudi Arabia (public) Any age (LOS: 25) No reduction 60 58 documented for some time (e.g., Robalino Saudi Arabia (private) Any age (LOS: 25) No reduction 60/55 56 2005), yet there has been little progress in Syria 55/50 (LOS: 20) No reduction 60/55 - addressing them. Tunisia (public) 55 (LOS: 30) 0.50% 62b 58 Tunisia (private) 55 (LOS: 30) 2.00% 62c 60 Labor policies West Bank and Gaza (public) - - 60 60 provide limited Note: LOS, minimum required length of service (years of contributions) to qualify for Reduction factor is the percentage used to reduce early pensions for each Source: Pallares-Miralles (forthcoming). protection to early retirement; X/X refers to men/women. a. Mandatory retirement age 60. year prior to the normal retirement age workers and do b. Mandatory. c. Gradually increasing to 62. little to facilitate employment L 2.4 abor regulations provide limit- ed protection to workers across MENA while constraining employ- ment in some cases.19 Labor regu- lations in MENA countries mostly adhere to core international labor standards, but most workers in MENA do not directly benefit from them by virtue of being informal, and weak enforce- ment of labor regulations makes it difficult to formalize workers and protect formal sector workers. As shown below, few MENA coun- tries have restrictions on hiring, but most have restrictive dismissal rules, and although 19 For a more detailed minimum wages are only high in a few coun- analysis of the tries, no MENA country has a mechanism to labor market and prevent minimum wages from escalating. In policies in MENA, see addition, MENA countries have some of the companion paper by Moosa (forthcoming) most restrictive legislation against women’s and Hatayama, Li, and employment in the world. Osborne (2022). BUILT TO INCLUDE 38 Chapter 02 Although only a few MENA countries have countries the minimum wage does not appear FIG. 27 restrictions on hiring, most have high dis- to be too binding (yet)—most workers (includ- missal costs. High dismissal costs and strict ing informal workers) earn more than the Severance pay in MENA is the labor regulations can reduce formal employ- minimum wage. Revisions to the minimum most generous in the world ment—particularly among youth and low-skill wage tend to be rare and ad hoc. No MENA workers—and productivity.20 Most countries country has a mechanism for automatically Severance pay, averaged over workers with have flexible hiring regulations; only Algeria, adjusting the minimum wage based on ob- 1, 5 and 10 years of tenure, in weeks of salary, latest year Djibouti, Iraq, and Morocco have laws restrict- jective criteria such as changes in the cost of ing fixed-term contracts. In Morocco, for ex- living and productivity growth, which would ample, the maximum cumulative duration of prevent the minimum wage from becoming a fixed-term employment relationship is 12 a binding constraint on formal employment. months. Severance pay (end-of-service com- pensation) is higher across the region than Legal restrictions on women’s employment in income peers—almost 27 weeks of salary are still widespread across MENA, more so in Egypt (Figure 27)—and procedures for dis- than in any other region. Laws and regu- missal are burdensome in developing MENA lations that discriminate based on gender countries.32 In many MENA countries, sever- restrict women’s participation in the labor ance pay is used as a substitute for UI. Where- market and result in wage gaps between men as UI is designed to protect workers who lose and women (Islam, Muzi, and Amin 2019; employment, severance pay acts as a deterrent World Bank 2021). Although some MENA to employers firing workers in the first place. countries, such Saudi Arabia, have under- Also, unlike UI, severance pay relies on an em- taken some notable reforms recently, women ployer’s liability and pools financial risk at the in MENA face unfair laws that economically firm level, so it is often not paid when firms disempower them. MENA has the lowest av- have liquidity constraints, and compliance is erage Women, Business, and the Law index limited (Kuddo, Robalino, and Weber 2015). in the world (Figure 28),23 with all MENA countries except Morocco falling well below The minimum wage is relatively high in a their income peers. The greatest barriers in- few countries, and no MENA country has clude restrictions on employment in certain a mechanism to prevent it from becoming industries and at night, need for permission a binding constraint. Bahrain, Egypt, Saudi from a husband or legal guardian to work, Arabia, and the UAE have no minimum wage limited maternity leave, and lower retirement protection in the private sector.22 In countries ages than men. Algeria, Iran, Jordan, Oman, that do, the ratio of the minimum wage to the and Qatar do not have laws prohibiting gen- value added per worker tends to be compara- der discrimination in employment, and ble with that of income peers, but it is high in fewer than half of MENA economies have Jordan, Morocco, Tunisia, and the West Bank legislation mandating equal remuneration and Gaza (Figure A7). However, even in those for work of equal value. Source: World Bank Employing Workers 2020 database: https://www.worldbank.org/en/ research/employing-workers/data.https:// Photo: UN Women/Christopher Herwig www.worldbank.org/en/research/employing- workers/data. 20 See, for example, Bassanini, Nunziata, and Venn (2009); Harasty (2004); and Kugler and Saint-Paul (2004). 21 All developing MENA countries and Bahrain require employers to notify a third party and obtain approval from that third party before an employer can let a worker go or issue collective dismissals. 22 In Bahrain and Egypt there is a minimum wage for the public sector. In Saudi Arabia, there is a policy through the Nitaqat quota system that amounts to (essentially) a minimum wage for Saudi workers. 23 The Women, Business, and the Law index measures legal differences between men’s and women’s access to economic opportunities across 190 economies. It is the average of eight indicators, representing different phases of a woman’s career, scaled to a maximum score of 100. BUILT TO INCLUDE 39 Chapter 02 Across MENA, few job seekers benefit from ductivity informal jobs, nor are they provided employment support, particularly those who with the right support to include them in the FIG. 28 are excluded from the labor market, nor are labor market. Third, training programs tend they provided with the right support. Most to be of poor quality and irrelevant to mar- MENA has the most legal MENA countries offer some type of labor ket needs. Fourth, the provision of labor pro- restrictions on women’s program to job seekers, although less so than grams tends to be highly fragmented across employment in Europe and Central and South Asia (Fig- several government agencies. Women, Business and the Law Index, 2023 ure 29). The most common type of support is job-matching services, mostly through Economic inclusion programs for the poor online platforms. Most countries also offer are rare and tend to cover few beneficiaries. training programs and job placement support Despite the increasing importance and prov- such as wage subsidies and stipends. Only en results of these programs around the world, half of MENA countries provide counselling only a few of these programs are provided in services, and apprenticeship and internship MENA, and a smaller share of beneficiaries programs are rare (Angel-Urdinola and Ta- is covered than in other regions. In 2020, only nabe 2012). Although data on labor programs 1 percent of the total number beneficiaries of are limited, there is evidence of weaknesses. these programs in the world came from the First, coverage of these programs tends to be region (Andrews et al. 2021). Only nine coun- limited relative to the number of job seekers. tries have some type of economic inclusion Second, from wage subsidies to training, program (Djibouti, Egypt, Iraq, Jordan, Leba- programs tend to target college-educated job non, Morocco, Syria, the West Bank and Gaza, seekers (Angel-Urdinola and Tanabe 2012). Yemen). Few of these programs are linked to Few programs target the poor or those more social assistance. A notable exception is FOR- in need of support, such as people who are SA in Egypt, an incipient economic inclusion difficult to employ and workers in low-pro- program tied to TKP. “Across MENA, few job seekers benefit from employment support, particularly lower skilled, youth and women” FIG. 29 MENA has limited Share of countries within each region offering various active labor market types of active labor market programs to offer programs, percentage Source: World Bank 2023a. Source: Ulku and Georgiva 2022. BUILT TO INCLUDE 40 Chapter 02 P Social protection opulation aging, technological change, and climate change will shape tomorrow’s economies and cial assistance, unemployment support, and employment support to reconnect workers to jobs. Climate change will make MENA’s systems will increase demand for social pro- tection. Although populations in low rainfall, high temperatures, and dry soil become more pronounced, further stressing only become MENA are young, they are expect- ed to age faster during this century water supplies and food production systems. Climate-related shocks will particularly affect more out of sync than in any other region of the world (Figure 30). Population aging will increase demand for pensions and LTC. Technological change poor and vulnerable people, who will need support to prepare for, address, and adapt to these shocks. with tomorrow’s is accelerating and making jobs more skill intensive, increasing demand for high-skill Prevailing social protection systems in reality 2.5 workers at the expense of low-skill workers (Ridao-Cano and Bodewig 2018). Although this shift is happening more slowly in MENA MENA are ill-prepared to meet these challenges. Pensions and unemployment schemes do not cover most workers, and for- countries than in their income peers (Figure mal LTC is almost nonexistent. Population A1), low- and medium-skill jobs will increas- aging will make financially unsustainable ingly be lost, increasing the demand for so- pension schemes go bankrupt faster. Cash → Although populations in MENA are young, they are expected to age faster during this century than in any other region of the world BUILT TO INCLUDE 41 Chapter 02 transfer programs tend to have limited cov- redistribution, more so than any other sur- erage, delivery systems are unprepared to veyed region except Eastern Europe (Figure accommodate large expansions or respond A8). The same data show that most people to large shocks, labor programs tend to be are worried about losing jobs or not finding small, and supporting delivery systems are them.24 At the same time, most people are not ready to accommodate large expansions. unhappy with government efforts to reduce the gap between the rich and poor (Figure 31, Beyond the ‘hard data’, people in MENA Panel A) and to create jobs (Figure 31, Panel are becoming dissatisfied with existing so- B), as well as with social security systems cial protection systems. Most want more (Figure 31, Panel C). Overall lack of trust in income equality and redistribution, and governments—mostly associated with per- they are dissatisfied with the social protec- ceptions of corruption—may partly explain tion instruments that governments use to this (Diwan, Tzannatos, and Akin 2018), but redistribute income and wealth. According part of the dissatisfaction with redistributive to data from Wave 7 (2017-2020) of the World policies is genuine, as most people are satis- Values Survey, all surveyed MENA countries fied with other government services such as except Iraq (Egypt, Iran, Jordan, Lebanon, education and health care. Tunisia) prefer greater income equality and “Population aging, technological change, and climate change will shape tomorrow’s economies and increase demand for social protection” FIG. 30 MENA is ageing Shares of the population 65 years-old and older in 2020—bars (left axes)—and ratio of faster than any the projected share in 2100 to the share in other region 2020—dots (right axes) 24 Although 78 percent of respondents in MENA are better educated than their parents, only 44 percent said that they are better off than their parents, highlighting that intergenerational income mobility is more limited than intergenerational Source: United Nations (2022). educational mobility. BUILT TO INCLUDE 42 Chapter 02 FIG. 31 Most people in MENA are unhappy with policies to redistribute and to create jobs A. Satisfaction with policies B. Satisfaction with C. Satisfied with to reduce the gap between the policies to create jobs social security systems rich and the poor, percentages 31% Egypt 25% Iraq 64% Jordan Source: Panel A: Arab Barometer Wave 5 (2018-19): https://www.arabbarometer.org/ surveys/arab-barometer-wave-v/; Panel B and C: Haerpfer et al. (2022). 16% Lebanon “Most [people of MENA] want more income equality and redistribution, and they 33% Total are dissatisfied with the social protection instruments that governments use to redistribute income and wealth.” BUILT TO INCLUDE 43 Chapter 02 BUILT TO INCLUDE 44 Chapter 02 03 Reimagining social protection in MENA CHAPTER BUILT TO INCLUDE 45 Chapter 03 45–76 PAGES BUILT TO INCLUDE 46 Chapter 03 S ocial protection systems in MENA are over- due for an upgrade. Social protection systems can play a crucial role in reducing poverty and vulnerability, mainly by addressing la- bor market exclusion, but social protection systems in MENA often provide limited pro- tection to people in need, and inefficiencies abound. Most people in MENA are growing Building foundational systems for social dissatisfied with these systems, which are be- coming less adequate as countries grapple protection 3.1 with the impacts of population aging, tech- nological change, and climate-related shocks. The pandemic and the crisis triggered by the S war in Ukraine are making the inadequacies of social protection systems more apparent than ever while creating a unique opportunity ocial protection strategies need to for reform. be accompanied by modern deliv- ery systems to implement them. Social protection in MENA must be re- Social protection strategies are imagined to make it more inclusive. This needed to set the vision and frame- requires expanding and increasing the level work for a coherent package of so- of protection of those in need while ensur- cial protection instruments along ing financial responsibility and minimizing the welfare-work distribution, but to imple- perverse incentives. This report identifies ment them successfully, modern systems to reform priorities tailored to different groups deliver the right support to the right people of MENA countries in three broad strategic at the right time and the least cost must ac- policies areas: building the foundational sys- company them. Modern delivery systems are tems to deliver social protection effectively one-stop shops for providing social protection and efficiently, enhancing the protection of (World Bank 2020). They include an assess- people along the welfare-work distribution, ment phase that is common to all programs and increasing the efficiency of and financing and addresses outreach, registration, and as- for social protection. The policy areas and sessment of needs of potential beneficiaries. reform priorities are closely aligned with Based on that, eligible households and indi- the strategic priorities in the SPJ Compass. viduals are enrolled in programs, and benefits This report brings some fresh perspectives. are delivered through a common platform (for It builds on the COVID-19 experience to em- payments) or by program-specific service pro- phasize the importance of building modern viders. This is accompanied by continuous delivery systems; proposes an approach to monitoring of beneficiaries and management informality that focuses on protecting and en- of grievances. Digital technologies have facil- hancing the productivity of informal workers; itated the development of modern delivery and contributed to the debate on ageing, in- systems, including through electronic iden- cluding active aging and LTC. The report also tification systems, online registration and provides guidance on sequencing of reforms data exchange, and digital payments. Key to build an inclusive social protection system objectives and features of modern delivery and how to gain political support for reform. system include: BUILT TO INCLUDE 47 Chapter 03 Development of modern delivery systems for 1 Inclusiveness 3 Efficiency social protection is a relevant reform priori- ty for all MENA countries. Modern delivery To reach as many people who need sup- To reduce administrative costs, redun- systems are the backbones of enhanced social port as possible. Key features of modern dancies, and errors, including through protection systems. Most MENA countries delivery systems that contribute to consolidation of processes across have made progress on some elements of this goal include outreach, such as the programs and of programs (facilitated these systems, including unique identifica- deployment of social workers, to ensure by common processes for intake and as- tions, social registries, and digital payments, that people are aware of programs and sessment of needs); robust tools to assess and countries such as Egypt, Jordan, and how to seek support, especially the needs and conditions; and digitization Morocco are already developing integrated poorest and most vulnerable segments of processes, including payments and delivery systems for social protection. Jordan of the population; social registries that verification of identification and data. is building interoperable delivery systems for cover a large portion of the population social assistance, social insurance, and la- (as in Egypt, Jordan, and Saudi Arabia) bor programs (Box 3). Egypt’s TKP exchanges are dynamic (on-demand registration) data with the Unified National Registry—the (as in Türkiye’s Integrated Social As- 4 Shock-responsiveness largest federated social registry in MENA, sistance System), and include multiple covering the entire population—for automat- ways to access them (online, in-person, To identify and provide support to peo- ic data cross-checking and to help identify over the telephone) (as in Jordan); ple affected by shocks quickly, including complementary (to cash) human capital and robust grievance redress mechanisms through large, dynamic social registries; economic inclusion support to the poor. Mo- with multiple access channels to ensure tools to assess needs and conditions rocco’s Unified Social Registry is a one-stop that everybody is treated fairly and quickly; and digitization of processes shop for social assistance programs that will errors are corrected; and common sys- and payments. These shock-responsive be used to implement an ambitious social tems to deliver support to nationals and features have proven their value during protection reform program. non-nationals, regardless of funding COVID-19 and the war in Ukraine. source (as in Türkiye’s Integrated Social Assistance System).25 5 Complementarity of social protection 2 Effectiveness instruments To identify the right support package Different platforms to deliver social for the right people and deliver it at the assistance, social insurance, and labor right time, including through social reg- programs need to talk to each other istries with comprehensive, up-to-date (through interoperable systems) to information; robust tools to assess needs ensure the complementarity of social 25 In response to the Syrian refugee crisis, and conditions and prioritize support to protection instruments. international and the most in need; use of social workers government actors are to help develop and implement support increasingly working packages for the poorest and most vul- to align and integrate systems, with nerable populations (e.g., Chile Solidar- Türkiye’s Integrated io); and digitization of delivery processes Social Assistance and payments. System serving as a successful model (Seyfert et al. 2019). BUILT TO INCLUDE 48 Chapter 03 BOX 3 JORDAN: BUILDING INTEGRATED DELIVERY SYSTEMS FOR SOCIAL PROTECTION Jordan’s National Aid Fund (NAF) built a modern delivery plat- form for its new cash transfer program, Takaful, in 2019. The plat- form uses digital technologies to automate processes, including for household registration, data verification, assessment of needs and prioritization for support, enrollment of beneficiaries, and digitization of payments through basic bank accounts and e-wal- lets. To ensure access, NAF conducted outreach at the national and local levels, and households can be assisted with registration in person at a NAF office or over the telephone. Much of the reg- istration information is pre-filled and verified against databases from more than 30 government agencies, including the Social Security Corporation (SSC) and the Ministry of Labor, through the National Unified Registry (NUR) data aggregator. Interop- erability with SSC and other agencies allows NAF to ascertain formal income and assets, which are used as inputs into a tool measuring the welfare level of households. Administrative data are updated regularly. Most households are enrolled through beneficiary sessions in which basic information about digital payment options is also provided. NAF considers applications through the year, replacing households who are no longer eligible with new eligible households according to their welfare levels. The shock-responsive features of the Takaful delivery, including a social registry that covers more than 70 percent of the Jordanian population, facilitated the largest (in terms of coverage), best-tar- geted, fastest response to COVID-19 in MENA. The government launched Takaful 2 in the first half of 2020, providing 3 months of emergency cash transfers to 237,000 households relying on informal income that had become poor. In December 2020, the government launched Takaful 3, providing emergency cash transfers to 160,000 households over 12 months. For Takaful 3, all potential beneficiaries were subject to virtual home visits to verify some of the data, which have now become a regular option for data verification. All payments for Takaful 2 and 3 were delivered through e-wallets and in parallel to the main Takaful program. The Takaful platform set the basis for NUR, an integrated deliv- ery system for all social assistance programs. The Takaful plat- form was already being used in 2019 to provide complementary services to poor and vulnerable households, including health insurance, electricity support benefits, transportation subsidies, and the bread subsidy. Jordan’s SSC used its modern platform for social security bene- fits to deliver a large-scale wage subsidy program in response to COVID-19, covering more than 100,000 workers in firms most affected by COVID-19 between December 2020 and June 2022. Through its data exchange platform, SSC was able to identify beneficiary firms and workers quickly. SSC opened joint bank accounts with beneficiary firms for each worker and made sub- sidy payments after it had been verified that firms had paid their shares. Jordan’s Ministry of Labor launched a digital platform called Sajjil to match job seekers to vacancies and refer them to ap- propriate employment programs based on statistical profiling. Regional employment centers are also supporting registration in person or over the telephone. The platform is being used to implement the National Employment Program, which provides financial support to firms to pay for wages and to train new work- ers. Conditional payments are made using the SSC platform de- scribed above, and Takaful beneficiaries are targeted for support using the interoperability with the Takaful platform. BUILT TO INCLUDE 49 Chapter 03 Enhancing protection along the welfare-work distribution 3.2 Expanding income support BOX 4 and opportunities for the poor and vulnerable YEMEN: FIXING THE DOLLAR VALUE OF CASH TRANSFERS IS HELPING 3.2.1 TO PROTECT THEIR VALUE E A World Bank–financed cash transfer xpanding income support to the GCC countries can consider alternative program has been providing life-saving poor is a priority for all develop- income support instruments to support payments to the poorest one-third of the ing MENA countries, particular- low-income workers. For example, a negative population in Yemen since 2017. The ly those with large coverage gaps. income tax provides a transfer to households government of Yemen had implement- Funding for cash transfer pro- that file taxes but do not earn enough to pay ed the program, but it was discontinued grams can and should increase, but taxes, with the transfer amount diminishing soon after the civil war erupted at the budgets will continue to be limit- and eventually disappearing as earnings ap- end of 2014. ed, so efforts should be made to increase the proach and surpass the threshold. Although accuracy of methods used to identify who is a pure negative income tax has never been Cash transfer benefits were originally poor (Grosh et al. 2022). As discussed above, implemented anywhere beyond some exper- denominated in Yemeni rials and had except for Egypt and Jordan, all developing iments in the United States, the earned in- been losing purchasing value as the cost MENA countries cover significantly less than come tax credit—a form of negative income of the minimum food basket increased, half of the poorest 20 percent of the popula- tax that provides a subsidy to people with but in late 2019 the rial began to depre- tion with cash transfers. Egypt (Box 5), Iraq, taxable earnings below a certain level, with ciate sharply, particularly in the south and Jordan have significantly increased the the subsidy typically depending on income of the country, triggering a tripling of coverage of cash transfers to the poor by in- and number of children—has been a popular the cost of the minimum food basket creasing funding and improving targeting. tax instrument in the United States and oth- in the south (40 percent increase in the In Jordan, the introduction of a much better er OECD countries (Moffitt 2003). Negative north) by November 2021 (more than 90 poverty-targeted program, Takaful, tripled income tax schemes require good systems to percent of the food consumed in Yemen the coverage of NAF cash transfers to the verify income, which GCC countries mostly is imported.) As a result, the number of poor between 2018 and 2021, despite only have, and well-functioning personal income people facing high acute food insecurity adding twice the number of beneficiaries. tax systems, which they do not. In-work ben- increased from 13.5 million (45 percent The ongoing consolidation of the old NAF efits schemes that do not operate through the of the population) in December 2020 to cash transfer program into Takaful (now tax system and provide income support to 17.4 million (54 percent of the popula- renamed as the Unified Cash Transfer Pro- working families—popular in most OECD tion) by January 2022. gram) could further increase coverage to 71 countries—are an alternative (OECD 2005). percent of the poor at no additional cost. In response to the loss of purchasing Enhancing opportunities for poor and vul- power of cash transfer benefits and Cash transfer benefits should be calibrated nerable people should also be a priority for the implications for food insecurity to needs and their purchasing power protect- many MENA countries, particularly for and malnutrition, the benefit level was ed. Ideally, cash transfer benefits are linked people with low levels of human capital. fixed in dollars in November 2021 and to some minimum income level—such as the This can be done by complementing in- then converted to rials at market rates poverty line—and calibrated to the gap be- come support with interventions that build in the south and the north before each tween the income per capita of beneficiary the human capital and capabilities of poor payment cycle. As a result, in January households and that minimum level. This and vulnerable people (economic inclusion 2022, the average cash transfer benefi- design ties benefit amounts to needs while programs). There is growing evidence of the ciary saw their benefit double from the reducing work disincentives. It is built into positive impact of combining cash transfers original rial-denominated benefit. guaranteed minimum income schemes, which with complementary interventions to im- are popular in Europe and are being imple- prove children’s nutrition, health, and edu- mented in Saudi Arabia (Coady et al. 2021),26 cation (Banerjee et al. 2018). For example, But guaranteed minimum income schemes the receipt of cash transfers can be tied to require good income-verification systems, and use of education and health services—such 26 An interesting feature in developing MENA countries, most income as school attendance by children and visits of the guaranteed minimum is informal.27 Benefits can still be linked to to health facilities by pregnant mothers and income program in Saudi Arabia is that, to further some minimum income level and calibrated small children—and participation in educa- reduce work disincentives, using observable, objective measures of need, tion sessions to improve health and nutrition benefits are decreased, but such as the presence of pregnant and lactating practices (e.g., Yemen’s Cash for Nutrition not totally discontinued, once households earn more women, small children, or elderly or disabled program) (Kurdi et al. 2019). Social registries than the minimum income. people. It is important to maintain the pur- can also be used to bundle income support chasing value of cash transfers, which requires with human capital investments, as in Egypt 27 Although there are methods to impute informal some regular indexing to inflation. When do- (Box 5). Bundles of support for the poorest income, those are better nors fund cash transfers, as in Yemen, fixing segments of the population can also be pro- used for assessing relative the hard-currency value of benefits can help vided through social workers (Box 6). needs and prioritizing support than for estimating prevent loss of purchasing power due to local income gaps and calibrating currency depreciation (Box 4). benefits accordingly. BUILT TO INCLUDE 50 Chapter 03 BOX 5 BOX 6 SOCIAL WORKERS CAN HELP PROVIDE BUNDLES OF SUPPORT FOR THE POOREST SEGMENTS OF THE POPULATION Programs like Chile Solidario, Puente (Costa Rica) and Unidos (Colombia) use social workers to develop and imple- ment bundles of support for the poorest segments of the population. Similar pro- grams are being developed in the West Bank and Jordan. These programs are built on the premise that the poorest EGYPT: EGYPT HAS MADE households require a tailored, intensive approach to social protection. Evalua- REMARKABLE PROGRESS TO tions of these types of programs show IMPROVE THE PROTECTION AND positive, long-lasting impacts (e.g., Nei- OPPORTUNITIES FOR THE POOR dhöfer and Niño-Zarazúa 2019). Social workers work with target families to assess needs, conditions, and capac- TKP was introduced in 2015. The Takaful provides SIM cards to beneficiaries for ities and establish priorities; develop component is designed to reach poor fam- communication and outreach. A robust a plan of action, with expected results ilies with children (0-18 years). It requires grievance redress mechanism is used to associated with set priorities and spe- 80 percent school attendance and four receive and respond to queries and com- cific tasks and services to accomplish health care visits for mothers and chil- plaints about the program through in-per- those results; and support implemen- dren below the age of six per year. Kara- son and web-based channels. Program tation of the action plans, including by ma provides benefits to the elderly poor, applicants’ data are cross-checked against delivering some support services direct- poor orphans, and poor people with dis- Egypt’s Unified National Registry, the larg- ly (e.g., psychosocial support), helping abilities. TKP’s coverage of the population est social registry in MENA, covering the families obtain basic paperwork (e.g., quintupled between 2016 and 2022 (from entire population. The program uses proxy identification cards, birth and mar- 3 percent to 15 percent), and thanks to its means testing to prioritize support for the riage certificates), facilitating access good targeting mechanism, expansion of poorest households, and targeting accura- to referral services and programs (e.g., the program has increased coverage of the cy is in line with the best-performing cash cash transfers, subsidies for health in- poor (according to the national poverty transfer programs around the world. surance or utilities, programs to support line) from 21 to 50 percent. employability, social care services), and The TKP registry, which covers approx- monitoring progress. TKP is by far the most cost-effective pro- imately 30 percent of the population, is gram in reducing poverty in Egypt, far being used to provide complementary hu- exceeding the largest social assistance man capital support to TKP beneficiaries, program (food subsidies) because it costs including to combat illiteracy, facilitate much less than food subsidies (0.3 per- access to reproductive health care and cent versus 1.4 percent of gross domestic family planning services, and improve product), and although it covers less of the child nutrition and well-being and hous- poor population (50 percent versus virtu- ing conditions. The registry was also used ally 100 percent), it delivers five times as to introduce a new economic inclusion many benefits. In addition, it has proven program in 2019 called FORSA, which is impacts on household welfare and human being piloted in eight of 27 governorates capital generation (IFPRI 2018; 2022). In and targets TKP beneficiaries who have recognition of this success, the govern- been in the program for longer than 1 year ment of Egypt has expanded the program (or in families close to the TKP eligibility nationally. It is estimated that TKP is line). The program offers two alternative reaching up to 5 million households in packages: one for self-employment and 2023, making it the largest poverty-target- one for wage employment. With the first ed conditional cash transfer in the Middle package, beneficiaries receive a productive East and North Africa (MENA). asset to start income-generating activities, along with financial literacy training and TKP has a strong delivery system that is technical training on how to start the inclusive and efficient, often well beyond activity. With the second package, bene- the program itself. Beneficiaries are in- ficiaries receive job matching and skills creasingly able to choose to receive their training for employment in the private benefits digitally; all TKP households have sector. Both packages include behavioral been issued debit cards. The program also interventions. BUILT TO INCLUDE 51 Chapter 03 Economic inclusion programs can help lift poor and vulnerable people out of poverty. Expanding social insurance Economic inclusion programs are designed protection, particularly for to increase the income-generating capacity informal workers of poor and vulnerable households (Andrews et al. 2021). These programs typically include 3.2.2 a package of interventions that vary in com- position and intensity according to the lev- E el of poverty and context (e.g., rural versus urban). The BRAC graduation model—first implemented in Bangladesh—which has vidence from MENA and else- ing. Globally, these efforts have made little been replicated in about 50 countries (Ma- where shows that efforts to for- difference in coverage (Figure 32) (Palacios tin, Sulaiman, and Rabbani 2008), focuses on malize workers are unlikely to and Robalino 2020). This is particularly the extremely poor rural people. It is a high-inten- make a big difference in informal- case in developing countries in MENA, where sity, time-bound support package to start and ity. As discussed in Chapter 1, the most informal workers are employed in mi- expand income-generating activities, includ- main way to reduce informality is cro-enterprises, which labor inspections tend ing technical training, high-value asset trans- for the private sector to generate not to reach. That said, greater enforcement, fers (grants, interest-free loans, in-kind trans- more productive jobs. Social protection pol- including through risk-based labor inspec- fers such as farm animals), coaching, and icies can help protect and support informal tions,29 can increase coverage in larger firms. financial inclusion. The model has positive workers. The most popular policy in MENA Also, simplification of administrative pro- long-lasting impacts (Banerjee et al. 2015). is to formalize workers, that is, to bring infor- cesses has attracted self-employed workers Economic inclusion programs in urban areas mal workers into mandatory social insurance (Price et al. 2017), and access to registries of tend to focus on helping moderately poor and schemes and keep them there. This policy is self-employed workers (e.g., farmers in Egypt vulnerable people access wage employment. implemented through incentives (e.g., sub- and Tunisia, taxi drivers in Jordan) has made They are typically part of larger labor pro- sidized contributions), enforcement (e.g., it easier to formalize them. grams—to which poor and vulnerable people inspections, penalties), and awareness rais- have preferential access—and are linked to cash transfer programs. Most advanced cash transfer programs (e.g., Mexico’s Prospera) FIG. 32 Globally, pensions Ratio of active contributors (to pensions) to the labor include an economic inclusion component. coverage has not changed force in the mid-2010s much over time (vertical axis) and mid-1990s Although incipient, there are some promis- (horizontal axis) across 47 countries, percentages ing economic inclusion initiatives in MENA. The most developed initiative is FORSA in Egypt (Box 5), which is being piloted in eight of 27 governorates, targeting all working-age individuals in TKP families that have been in the program for longer than 1 year (or in fam- ilies close to the TKP eligibility line). It offers two alternative packages: one for self-employ- ment, based on the BRAC model, and the oth- er for wage employment. Jordan’s Economic Empowerment Strategy uses the interoper- ability between the Takaful and Sajjil plat- forms to give selected Takaful beneficiaries preferential access to employment support programs, such as the ongoing National Em- ployment Program, although coverage is lim- ited. To maximize cost-effectiveness, selected Takaful beneficiaries include 18- to 40-year- olds in households that are close the poverty line, have at least basic education, and are un- employed or informally employed.28 Develop- ing MENA countries must invest much more in economic inclusion programs for poor and vulnerable people. The above examples pro- vide some suggestions, including leveraging existing cash transfer programs. Source: ILO (2022). 28 Only one qualifying individual can be selected from each Takaful household. Qualifying individuals in households that are not benefiting from Takaful but are close to the poverty or eligibility line are also considered for support. 29 Inspections target firms and own-account workers at high risk of noncompliance with labor regulations. Labor inspections are more effective when they provide support to comply with regulations. BUILT TO INCLUDE 52 Chapter 03 Developing MENA countries are also strug- much, particularly for informal workers em- gling to keep workers actively contribut- ployed in micro-firms, and should thus be ing throughout their careers. As shown in complemented by alternative instruments to Chapter 2, a distinctive feature of pension protect informal workers. This report recom- systems in MENA is low contribution den- mends shifting the focus of policies toward sities, the result of workers coming in and protecting informal workers, which includes out of informality and contributing for only but is not limited to formalization, as well as a portion of their careers. As a result, many enhancing their productivity—covered later workers are not able to reach the minimum in this chapter. Also, any instrument to pro- number of years of service required to qualify tect informal workers should be easily acces- for a pension or end up with low pension sible; mobile payment technology can help, benefits. Pension design parameters tend as can deployment of mobile social security to make tenures in the formal sector short. units in remote areas, as in Morocco. In Egypt, for example, workers can receive a minimum benefit of 65 percent of the min- VSSs can increase protection of informal imum wage after 15 years of service.30 For workers in MENA. VSSs are defined contri- workers earning the minimum wage, there bution programs and thus are self-financing is little incentive to contribute beyond that by design, with contributions being volun- because it would take close to 30 years of tary. These schemes recognize the irregular, service to receive a benefit equal to the min- unpredictable nature of informal income, imum wage. Also, in many MENA countries, but they work only for informal workers with pension benefits are calculated based on some capacity to save; non-contributory in- one’s salary from the last few years before come support programs better serve those retirement, which gives workers an incentive who do not. To encourage workers with less to contribute only later in their careers. As capacity to save to participate, VSSs typical- discussed in more detail later in this chapter, ly provide incentives in the form of match- these perverse incentives to contribute late ing contributions.31 VSSs should ultimately and retire early must be eliminated. serve as a bridge to well-balanced mandato- ry schemes. To make them more attractive, Bringing informal workers into unbalanced these schemes should first protect against mandatory schemes can decrease sustain- short-term risks such as unemployment, in- ability. Simulations conducted for several come loss, and sickness and gradually add MENA countries show that increasing the old-age insurance. VSSs can also be used to coverage of unbalanced schemes increases provide complementary benefits to workers revenue for a while and delays when schemes already contributing to mandatory schemes. go into deficit but eventually makes deficits VSSs are a promising complementary instru- larger because the additional workers covered ment to increase coverage of informal work- retire with generous pensions. Thus, reforms ers in MENA. to balance mandatory schemes and eliminate perverse incentives—discussed later in this A growing number of countries are add- chapter—must accompany efforts to formal- ing VSSs to their suite of social insurance ize workers. Schemes that offer lower con- programs. VSSs are increasingly part of the tribution rates for informal workers to join effort to enhance protection while ensuring mandatory programs must also adjust bene- financial sustainability. As benefits of tradi- fits accordingly, although that may result in tional mandatory pension systems have been low benefits, making them less attractive to cut substantially since the 1990s, VSSs have workers. Morocco’s new scheme for self-em- increasingly filled the gap, accounting for ployed workers is an example of that. It sets 20 percent of retirement income in OECD a minimum contribution according to the countries (OECD 2019a). New Zealand’s Kiwi sector (workers can contribute more), and Saver and the United Kingdom’s NEST are benefits are tied to contributions, but bene- examples of well-established VSSs, but there fits tend to be too low for low-income workers. are also initiatives in developing countries Contribution subsidies can help address that (Rudolph 2019; World Bank and DFAT forth- problem, but they must be targeted to workers coming). Although these programs are mostly for whom such subsidies are likely to make a designed for formal workers, some are open difference and financed by general govern- to informal workers and have significantly ment budgets—not by the schemes. increased coverage, as in China (Box 7) and Türkiye (Rudolph 2019). Both countries pro- 30 It was 10 years before the new Social Security Law was passed in This report suggests an approach to infor- vide sizable matching contributions, partic- 2019. mality focused on protecting and enhancing ularly China, and Türkiye makes enrollment the productivity of informal workers. This automatic when workers change jobs, which 31 Targeting of subsidies should not be based on self-reported approach moves away from formalization reduces transaction costs. Most of these (informal) income but on reliable as the main objective of social protection schemes include measures to discourage opt- methods to estimate the capacity policies for informal workers. That is not to outs, such as linking contributions to other to save. say that MENA countries should not contin- benefits. Other developing countries are 32 Rwanda’s Ejo Heza Long-Term ue their efforts to formalize workers. They taking advantage of financial technology to Savings Scheme, which allows for should, and the above paragraphs offer some introduce specific VSSs for informal workers, short- and long-term savings, covers 1.4 million people, about guidance on how to do it, but formalization including in Colombia, India, Kenya, Nigeria, 18 percent of the working-age policies are unlikely to increase coverage Rwanda, and Thailand (Guven et al. 2021).32 population. BUILT TO INCLUDE 53 Chapter 03 Retirement savings accounts can help pro- even without perverse incentives and with the pensions can take the form of a flat transfer tect foreign workers. Expatriate workers do availability of VSSs, there will be workers who to all elderly adults regardless of contribu- not have access to social insurance schemes do not earn enough or contribute long enough tion history, with the possibility of adding in GCC countries. At best, they are given a to claim an adequate pension or any pension contributory pension benefits. This type of lump-sum payment at the end of their ser- at all. Another common reason for inadequate social pension is beyond the fiscal means of vice. Retirement saving accounts and linking benefits is lack of pension indexation, which developing MENA countries. Transfers can workers automatically to their home coun- particularly affects older pensioners. Policy also be calibrated to account for contributory try pension systems, whenever relevant, can options to address inadequate pensions or no pensions or be targeted to noncontributors. increase protection for foreign workers in pensions at all are presented below. Although this model reduces fiscal costs, it GCC and other MENA countries with many discourages contributions. A preferred ap- expatriate workers. Dubai International Fi- Well-designed social pensions can help pre- proach is to target social pensions to poor nancial Center launched a savings scheme vent old-age poverty among workers who do elderly adults. This is the approach that for expatriate public sector employees in July not contribute enough or at all while being Egypt is taking with Karama. Another good 2022—the Savings Scheme for Employees in fiscally responsible and minimizing per- practice is to subsidize contributory pension Government of Dubai—with plans to extend verse incentives. The number of countries benefits to reach an adequate minimum pen- it to private sector employees. The scheme implementing social pension programs has sion level. This is different from the mini- is designed to increase savings and protec- increased rapidly (World Bank 2022e), in- mum pensions in MENA, which are tied to tion of foreign workers while helping attract cluding in MENA. Social pensions are trans- early retirement.35 It is the approach China talent to Dubai. The previous end-of-service fers to elderly adults financed by general adopted to complement its VSS to increase benefit will be folded into the new savings government budgets. At one extreme, social effective coverage (Box 7). scheme. In countries where national social insurance schemes cover expatriate workers, there is room to increase portability of pen- sions through bilateral agreements with send- ing countries. Such agreements already exist in some MENA countries for their nationals who emigrate abroad.33 A MENA-wide agree- ment could also be considered to facilitate mobility within the region.34 Pension benefits need to be adequate to ensure effective protection. Pensions are adequate when they prevent old-age poverty (main objective) and ensure a reasonable stan- dard of living during retirement relative to before retirement (consumption smoothing). As shown in Chapter 2, although pension schemes in MENA are generous by design, many workers contributing to these schemes end up with low benefits, particularly low-in- come earners, partly because many workers do not contribute for long enough. To the ex- tent that perverse built-in incentives to retire early drive this, those incentives should be removed and replaced with incentives to re- tire later (discussed later in this chapter), but 33 Bilateral special security agreements have been reached between Tunisia and France, Tunisia and Belgium, Morocco and Spain, Morocco and France, Egypt and the Netherlands, and Egypt and Sudan. 34 GCC countries already have such an agreement. Examples of regional agreements include the Ibero-American Multilateral Convention on Social Security, the Inter-African Conference on Social Insurance, the Caribbean Community, and the European Union. 35 As noted earlier, these minimum pensions are defined as a share of the minimum wage for a minimum service period that is typically short (as short as 5 years in Tunisia). These shares tend to be higher than what minimum wage workers can receive if they have a full career; they are subsidized. This creates an incentive to retire early, particularly for low-wage earners. The pension systems bear the subsidies, making them less financial sustainable. Also, the shares often vary according to sector, generating inequalities. BUILT TO INCLUDE 54 Chapter 03 Pensions must be automatically and fairly BOX 7 indexed if they are to provide effective pro- tection. Most MENA countries only adjust CHINA IS USING SUBSIDIES TO VOLUNTARY pension benefits in an ad hoc manner. No SAVINGS AND PENSION BENEFITS TO MAKE MENA country has a pension indexation REMARKABLE GAINS IN EFFECTIVE COVERAGE mechanism whereby pension benefits are au- OF INFORMAL WORKERS tomatically updated based on objective eco- nomic variables, typically changes in prices (price indexation) or average earnings (earn- ings indexation). Pension indexation makes benefits more predictable and transparent. Table 4 shows the indexation policies in 35 OECD countries.36 Price indexation is the most common policy. In some cases, a dis- count factor, cap, or affordability condition is applied to price indexation (Greece, Neth- erlands, Portugal). The second most common policy is a combination of price and wage indexation, followed by wage indexation 36 In practice, many only—some countries use discount factors of these countries (Germany, Latvia, Norway) or affordability have frozen benefits or capped benefit conditions (Luxembourg). Price indexation increases since 2010. guarantees the purchasing power of pensions Like many countries, China struggled for years to expand cover- age of its contributory pension system to workers outside formal employment. Although some progress was made between 1997 TAB. 4 Most OECD countries index and the late 2000s, coverage of rural workers stalled at around pensions to inflation 55 million (of 469 million rural workers). In response (and in- formed by lessons from extensive subnational pilot programs), TYPE OF INDEXATION COUNTRY the central authorities designed a scheme for informal workers that was expanded nationally for rural workers in late 2009 and Price (P) only Belgium, Canada, Chile, Costa for urban informal workers in 2011. The plan’s design is an inno- Rica, France, Korea, Mexico, vative, and successful, example of blurring of the lines between Spain, Türkiye, United States, contributory social insurance and social assistance. Italy, Austria, Greece, Hungary, The Netherlands, Slovak Republic, The basic design, common to the rural and urban plans—and, Portugal more recently, the basis for a merged rural and urban plan—is Wage (W) only Ireland, Australia, New Zealand, as follows. It is a voluntary plan in which informal workers are Germany, Luxembourg, Norway, required to make a modest annual contribution to an individual Sweden, Denmark, Latvia, Lithuania account. (When introduced, the minimum annual contribu- tion was around $15, although workers could choose to contrib- Price and wage More weight to P (Finland, Poland), ute more.) The local government matches this contribution, more weight to W (Slovenia, which is typically invested in low-return term deposits. After Estonia), equal weight to W and a minimum of 15 years of contributions, the worker is entitled P (Switzerland, Czech Republic), at age 60 to a basic monthly pension, a minimum of approx- United Kingdom (maximum of P, W or imately $11 per month. The central government in western 2.5%), Japan (W until age 68, P and most central provinces finance the basic benefit entirely, after that) with a higher share of subnational financing in coastal and some other central provinces. The design combines a matching Source: OECD 2021. defined-contribution voluntary pension scheme in the accu- mulation phase and a heavily subsidized minimum pension in the payout phase; the subsidy is approximately 80 percent of the total pension received on average. The increase in coverage of informal sector workers because of this plan has been impressive. By 2018, approximately 360 million rural and urban informal workers were contributing “Pensions must be automatically and to the plan, and 150 million elderly people were receiving pay- ments. Although the high level of subsidization is a major factor in this success, the approach is still more cost-effective than fairly indexed if they a fully subsidized social pension for informal workers. At the same time, concerns remain about the adequacy of benefits, especially compared with those that the formal sector pension plan provides for urban workers and, especially, pension plans for the public sector. are to provide effective Source: Packard et al. 2019. protection” BUILT TO INCLUDE 55 Chapter 03 during retirement. Full earnings indexation qualify after 1 year of contributions, on par efits must be carefully designed so that they can be very costly, but some earnings index- with global practice, although low coverage provide adequate protection to unemployed ation allows pensioners to share some gains of unemployment benefits among the un- individuals while retaining the incentive to from productivity growth.37 employed suggests that there is room to ease look for employment. Job search can be fur- eligibility for UI. Benefits tend to be more ther encouraged and re-employment support- There is ample room to enhance UI protec- generous than the global norm, and there is ed by linking benefit receipt to participation tion in all MENA countries; options vary no sliding scale to encourage job search, nor in labor programs, at least for unemployed according to initial conditions. Five of the are benefits linked to participation in labor people relying on the risk-pooling compo- eight MENA countries without mandatory programs, except in Oman. nent. The best example of such scheme is UI have severance pay (Iraq, Libya, Qatar, Chile’s Seguro de Cesantia (Box 8). Countries West Bank and Gaza, Yemen), and three do Countries without UI can introduce UI with existing severance pay programs can not (Djibouti, Lebanon, Syria). All countries savings accounts with a risk-pooling com- tighten them by increasing years of service with UI schemes except Jordan, Oman, and ponent to guarantee a minimum level of required for eligibility and reducing payment UAE also have severance pay. As shown in benefits. UI savings accounts are defined per year of service or simply phase them out. Chapter 2, severance pay imposes high lia- contribution schemes with contributions bility on employers and is a bad substitute from workers and employers. Employer con- for or complement to UI in terms of effec- tribution can be seen as a pre-funded form of tive protection of workers and efficiency. severance pay. The risk-pooling component is 37 This is particularly the case All UI schemes in MENA are designed as a budget-financed contribution from the state when real earnings are growing very defined-benefit pay-as-you-go schemes, al- to individual accounts to guarantee a mini- rapidly, as happened in Eastern Europe during the transition though Jordan has individual virtual unem- mum level and duration of benefits when the to market economies, when real ployment accounts. Although it varies across worker becomes unemployed, regardless of earnings growth at times reached 20 countries with UI schemes, workers typically savings accumulated. These minimum ben- percent per year. BOX 8 CHILE’S SEGURO DE CESANTIA HAS EXPANDED COVERAGE OF UNEMPLOYMENT INSURANCE WHILE INCENTIVIZING JOB SEARCH AND RE-EMPLOYMENT the unemployed) is comparable with that of programs in Europe. Several features of its unemployment insurance system are par- ticularly attractive: → The hybrid insurance model that com- bines individual savings with risk pool- ing is better able to address the needs of workers who change employment frequently, as well as long-term unem- ployed individuals. → The new system is better at smooth- ing consumption than Chile’s purely non-contributory unemployment ben- efit. → Benefits are indexed to protect their value from inflation and stabilize re- placement rates. → A The system is financially sound and fter a decade of historically low un- The Seguro de Cesantia scheme was launched compatible with incentives. Benefits employment, Chile faced the effects in 2002 and has undergone subsequent re- are limited to 5 months at a time, a of the Asian Crisis in 1999, with un- forms. The scheme is open to all private sec- worker may draw upon the pooled employment rates rising above 10 percent. tor formal workers and combines unemploy- fund only twice every 5 years, and the Existing non-contributory unemployment ment insurance savings accounts to which overall payout rate from the pooled assistance was inadequate, as it targeted workers and employers contribute with a fund is capped at one-fifth of its cur- only low-income people and covered only 2 state-financed solidarity (risk-pooling) com- rent balance in any given month. percent of unemployed people in 2001. Sev- ponent that kicks in when individual savings Unemployed people who rely on the erance pay was generous and available only are insufficient to finance a minimum ben- risk-pooling component are required for workers with open-ended contracts. efit that declines over 5 months. to receive additional training and job search assistance. The priority of the new government was After 20 years, Seguro de Cesantia is widely to introduce an income protection mecha- regarded as a model for providing effective → The system has evolved with features nism to respond to shocks without increas- financial support to unemployed people to extend coverage to people with tem- ing labor costs and to safeguard incentives while encouraging job search and re-em- porary employment contracts and oth- for re-employment. ployment. Program coverage (46 percent of er forms of nonstandard employment. BUILT TO INCLUDE 56 Chapter 03 Countries with existing UI schemes can also consider reforms to enhance protection, encourage job search, and support re-em- ployment. Given the low coverage of the unemployed, eligibility requirements must be eased, and benefits can be decreased over time to encourage job search and be linked to participation in labor programs (Martin 2014). Traditional UI schemes can also be reformed to allow partial withdrawals from unemployment accounts to address short- term emergencies, as is the case in Bahrain and Jordan; virtual individual accounts can facilitate that. To complement the reform of defined-benefit pay-as-you-go UI schemes, prefunded severance pay accounts (to which employers contribute) could be considered in lieu of the existing system to increase effec- tive protection and efficiency. Although the priority is to protect workers now and prevent old-age poverty in the fu- ture, MENA countries must also start think- ing about LTC for elderly adults. In a few decades, the current youth bulge will move into old age, providing a potential second demographic dividend, but to reap it, MENA countries must start working on policies to maximize the economic contribution of older people—discussed later in this chap- ter—and ensure access to adequate social protection, health care, and LTC services to enable older people to live longer, healthier lives and continue being economically ac- tive. MENA countries have not paid enough attention to this agenda. Formal LTC mechanisms must start being developed now. The region’s LTC model relies mostly on informal care provided by families or community groups. This model is increasingly breaking down as social norms regarding the role of women change and people move to cities. It also continues to be an obstacle to women’s employment. Global Expanding employment support experience shows that a LTC model relying on residential care institutions is not the solu- and worker protection tion either, as it tends to be unsustainable and 3.2.3 is not what most older people want (Rofman E and Apella 2020). A family-based, holistic LTC model, with the assistance of profes- sional LTC services, support (e.g., training, nhancing employment support to vacancies and employment support pro- assistive technology), and relief (e.g., cash requires building a robust deliv- grams based on the job seeker’s profile. The benefits), would be best suited for the region ery system. Labor programs are principle should be that all job seekers can in terms of sustainability and cultural con- the least developed social protec- benefit from job-matching services and that text. Within such a framework, older people tion instrument in MENA. Very other publicly funded support should be re- are empowered, and healthy behavior and few people benefit from labor pro- served for those who need it, especially peo- self-care are promoted. Professionalization of grams, and they are often not those ple who are difficult to employ. Job counselors LTC services will create good job opportuni- most in need. Labor programs are no magic also play a crucial role in directing job seek- ties for women. Countries can use a combina- bullet, but if well designed, they can facili- ers to the right type of support, providing tion of social insurance mechanisms and the tate access to productive employment. This counseling, and monitoring progress (case budget to finance LTC (Rofman and Apella requires a robust delivery system, including management). Jordan is building such a sys- 2020). This agenda is most relevant for high- a platform that collects information from job tem, which has been operational for a while and upper-middle-income countries, partic- seekers, employers, and employment service in high-income countries such as Australia ularly those with rapidly aging populations. providers and uses it to match job seekers and the United Kingdom. BUILT TO INCLUDE 57 Chapter 03 Labor programs should target those who programs that are contracted out to the pri- need support, including lower-skilled youth vate sector deliver better results than those and women. Global evidence shows that la- delivered directly by government agencies, bor programs can increase the probability particularly when there is more competition and quality of employment but only if they (Hirshleifer et al. 2016). The private sector is reach the right people and provide them with more efficient and better equipped to know the right support. Labor programs are more what the labor market wants than the pub- effective and cost-effective for lower-skilled lic sector. The main role of governments and less-experienced job seekers, particular- should be to ensure quality and results, in- ly youth and women, and especially if they cluding through accreditation and perfor- provide services that improve human capital mance-based contracting. Australia, Chile, (Escudero 2018; Escudero et al. 2017). That and the United Kingdom have successfully group includes first-time entrants, long- implemented that approach (Finn 2020). term unemployed people, and workers stuck in low-productivity informal jobs. Success- Labor regulations must protect all workers ful youth programs in the United Kingdom, in a neutral way. Efforts should continue to United States, and several Latin American bring informal workers under the protection countries target disadvantaged out-of-school of labor laws and provide effective protection youth (typically aged 15 to 29 with less than to all workers by increasing compliance with secondary education), providing them with labor regulations. Protection should not place a comprehensive support package that in- a burden on businesses. MENA countries cludes vocational training, socioemotional must reform severance pay (or replace it with skills training, job search assistance, and UI schemes) and introduce mechanisms to internships. The main impact of these pro- adjust minimum wages automatically based grams is on formal employment and salaries on objective criteria, such as changes in the (quality of employment) (Attanasio et al. cost of living and productivity growth. Above 2015; Ibarraran et al. 2015). Impacts tend to all, MENA countries must eliminate legal dis- be larger for young women, particularly when crimination against women. Saudi Arabia has programs are designed to recognize women’s been implementing reforms to reduce gender “Labor programs are mobility and time constraints, for example by providing additional subsidies to women to discrimination, including removing restric- tions on movement, prohibiting dismissal of more cost-effective cover transportation expenses. pregnant women and discrimination in em- ployment and in accessing financial services, Labor programs need to support new forms and criminalizing sexual harassment (World for lower skilled and of employment in the digital economy. Labor programs should look beyond wage employ- Bank 2020a). These reforms have contribut- ed to a remarkable increase in women’s labor less experienced job ment and support digital jobs, including on- line freelancing. Digital technologies have en- abled large projects in some parts of the world force participation between 2016 (21 percent) to the third quarter of 2022 (37 percent). Other MENA countries have been making progress seekers, particularly to be broken down into small tasks that can be outsourced to firms and individuals elsewhere. too, but much more is needed to eliminate legal restrictions on women’s employment, and oth- youth and women” Tasks can be complex (e.g., software devel- opment, translation) or simple (e.g., labelling er measures to increase women’s employment, including through labor programs, access to photos, describing products, gathering data, finance and childcare, and development of the answering calls), providing opportunities for care economy, should accompany those efforts. high- and low-skilled youth alike. Global on- line freelancing support is growing, includ- Although significant barriers remain, some ing a small but growing number of platforms MENA countries are loosening restrictions serving the Arab world. Organizations such as on foreign workers. All GCC countries have Gaza Sky Geeks and Gaza Gateway provide recently eliminated the requirement for online freelancing support to Gazan youth, migrant workers to obtain their employer’s who would otherwise have limited job oppor- permission to leave the country. Qatar and tunities. Support programs typically include Saudi Arabia have introduced other mea- some initial training, followed by incubation sures, including allowing migrant workers to support for a specified period. Most gradu- change jobs before the end of their contract ates of these programs end up as independent without requiring a no objection from em- freelancers, employees, or entrepreneurs. On- ployers. Jordan has been introducing mea- line freelancing can be particularly beneficial sures to increase access of Syrian refugees to for women, as it can be done from home. As employment, including issuing work permits MENA countries invest in innovative pro- in sectors in which they were not previously grams such as online freelancing support, they permitted to work, granting work permits in should also evaluate such programs. some sectors on a seasonal basis or without tying them to a specific employer, and ex- The private sector should play a core role tending the policy for home-based business in providing employment support. Labor registration to cover Syrian refugees. BUILT TO INCLUDE 58 Chapter 03 Increasing efficiency of & financing for social protection 3.3 T his section discusses options to increase the efficiency of social protection beyond the efficiency gained from adopting modern de- livery systems, including reforms to increase financial responsibility and minimize perverse incentives and options to increase financing for the re- form priorities identified in the previous sec- tion, including expansion of cash transfers and opportunities for the poor, labor pro- grams, and social insurance subsidies. BUILT TO INCLUDE 59 Chapter 03 Integration of programs Reform of generalized 3.3.1 subsidies 3.3.2 R eforming generalized food and energy subsidies will increase efficiency and provide financ- ing for social protection. MENA countries such as Egypt, Iran, Jordan, and Morocco embarked on sweeping energy subsidy re- forms in the 2010s, yet significant energy subsidies remain in much of MENA. Energy subsidies tend to be regressive (because rich- er households tend to consume more energy than poorer households), economically inef- ficient, and harmful to the environment (IMF 2013), and as discussed earlier, they crowd out other budget priorities, including social protection. Only temporary compensation schemes, not expansion of regular cash trans- fers for the poor, often accompanied past reforms. Today, generalized food subsidies are still the main form of social assistance in most of MENA despite evidence that they C are significantly less cost-effective in reduc- ing poverty and inequality than cash transfer ommon delivery systems facil- registration systems compatible, integrating programs for the poor. itate consolidation of similar pension payments, cross-verifying eligibility), social assistance programs, gen- financial (e.g., unifying pension funds, ana- Most MENA countries have relied on costly erating savings and increasing lyzing assets and liabilities of each scheme energy and food subsidies to respond to ris- cost-effectiveness. A recent ex- and the financial situation of the integrated ing prices triggered by the war in Ukraine. ample was the consolidation of system), and governance (e.g., establishing Since February 2022, Iraq and all developing Egypt’s Daman, an old-age social an institution to manage the system with ad- oil importers except Lebanon have increased pension program, into Karama. In Jordan, equate representation of stakeholders in the food and fuel subsidies. Although that has qualifying beneficiaries of the NAF’s monthly governing bodies). contained some of the increase in domestic cash transfer program are being migrated to prices, it imposes substantial fiscal costs on Takaful. The old program will be discontin- Despite progress in some MENA coun- already constrained budgets and rising public ued within a few years, and an analysis of tries, more is needed to integrate pension debt (World Bank 2022i). Analyses conducted the remaining caseload is being conducted schemes. Jordan pioneered consolidation of for Egypt, Morocco, and the West Bank and to identify alternative forms of support. Re- public and private pension schemes in the Gaza show that providing cash transfers to maining funds will be used to further expand region in 1995 (for new civil servants) and the poor is more cost-effective than increas- Takaful. Because of Takaful’s improved tar- 2003 (for new members of the military). In ing generalized subsidies (World Bank 2022i, geting methodology, it is estimated that this Bahrain, the pension system has been inte- World Bank, 2022f ). Therefore, developing reform will reduce inequality and poverty by grated administratively, but civil servants oil-importing MENA countries cannot afford 0.4 percentage points each (Rodriguez-Takeu- and private sector employees are still sub- to maintain current levels of spending on chi and Wai-Poi 2021). ject to different rules. The two public sector subsidies, particularly when there are more schemes in Morocco are being integrated. cost-effective alternatives. The current crisis Integrating pension schemes will increase Egypt merged its public and private sector can be used as a unique opportunity to reform equity and labor mobility and reduce per- schemes in 2019, but separate schemes for subsidies rather than an excuse not to do so. verse incentives and administrative costs. various groups remain. In 2021, Saudi Arabia Many countries, including MENA countries, approved the merger of the public pension Examples from MENA and elsewhere pro- have historically had separate schemes for dif- agency with the General Organization of vide useful guidance for reforming food ferent types of workers, but as schemes have Social Insurance. These reform efforts are subsidies. Between 2016 and 2020, Indonesia grown, labor market conditions changed, and commendable, but they fall short in most moved gradually from an in-kind rice subsidy mobility increased, the rationale for this sep- cases, and more MENA countries must join. that covered 50 percent of the population to a aration has disappeared, and challenges have International experience shows that integra- food voucher system for rice and other, more accumulated (limits to labor mobility, high tion is most successful when schemes are nutritious, foods that covers the poorest 25 administrative costs, perverse incentives, in- sustainable and credible, which is hardly the percent of the population with three times the equalities), which has led to reform efforts to case in MENA. Also, integration creates new benefit value of the old program (Holmemo integrate schemes or harmonize their rules budgetary outlays. Thus, the pace of integra- et al. 2020). An expansion of the cash trans- at different levels: design (e.g., establishing tion and its sequencing with complementary fer program for the poor accompanied this the same rules for public and private sector reforms (e.g., to make schemes financially reform. In 2018, Jordan replaced a universal employees), administrative (e.g., making sustainable) must be carefully considered. in-kind bread subsidy with a small cash com- BUILT TO INCLUDE 60 Chapter 03 pensation program, removing the richest 20 percent of the population and giving slightly greater benefits to NAF beneficiaries. The program was discontinued in 2021 as the gov- ernment continued to expand Takaful and had to finance the response to COVID-19. Egypt has been considering re-calibrating benefits to give more to the poor at the ex- pense of richer households, which could pave the way to replacing the in-kind bread subsidy with a cash payment. These reforms must happen and be accompanied by gradual re- moval of the subsidy for richer households, using savings to expand programs such as TKP and FORSA (World Bank 2022h). Al- though the reform is yet to be defined, Mo- rocco would like to reform food subsidies to finance expansion of family allowances. Mobilization of additional revenue in a progressive manner 3.3.3 M ENA countries must mobi- lize additional tax revenue to finance reform priorities in social protection. Increas- ing the efficiency of social assistance and reforming subsidies may not generate enough savings to finance reform priorities. Oil-importing developing MENA countries do not have the fiscal space to increase spending without raising additional reve- nue. Structural factors, COVID-19, and the war in Ukraine have stressed public finances, increasing deficits and public debt to alarm- ing levels, including in Egypt, Jordan, and Tunisia (Table A2); higher interest rates make debt servicing more expensive. Continuous borrowing can eventually make debt burdens unsustainable (World Bank 2022h). Thus, de- veloping MENA countries, particularly oil importers, must raise additional tax revenue to increase funding for social protection and other development priorities. Aid must also be provided to low-income countries. Tax revenue remains low. On average, MENA collects only about 12 percent of GDP in tax- es, less than half of what OECD countries col- lect on average and less than any other region (Figure A9, Panel A). It is mostly oil producers that collect little in taxes because they collect revenue from oil, whereas Morocco and Tu- nisia collect more than 20 percent of GDP in taxes. There is room to increase tax collec- tion in MENA, particularly in oil-importing countries, as the gap between potential and realized tax revenue accounts for 14 percent of GDP (IMF 2022a). BUILT TO INCLUDE 61 Chapter 03 “Bringing wealthy and high-net-worth individuals into the tax net may be one of the most progressive & effective ways to increase tax revenue in MENA” Taxation is mostly focused on regressive lev- 5 percentage points below the African aver- estimated that 1 percent of GDP is lost to tax ies. Indirect taxes on consumption of goods age. Thus, there is ample room in MENA to evasion in Morocco (IMF 2022). Thus, efforts and services, such as a value-added tax (VAT), collect more direct taxes from higher-income to remove exemptions, rationalize rates, and account for more than half of tax revenue in and wealthier individuals and corporations.38 improve tax administration should continue MENA, and direct taxes on income, profits, in Morocco and elsewhere in MENA. In Jor- capital gains, and property account for less Bringing wealthy and high-net-worth indi- dan, eliminating general sales tax exemptions than one-third (Figure A9, Panel B); the share viduals into the tax net may be one of the that unify rates for all items could raise an of indirect and direct taxes in OECD coun- most progressive and effective ways to in- additional 5 percent of indirect taxes, which tries are one-third and 40 percent, respective- crease tax revenue in MENA. Offshoring can be used to fund progressive expenditures ly. Indirect taxes are highly efficient but tend of wealth by high-net-worth individuals, to more than compensate for the small in- to be regressive because the poor spend more coupled with other forms of evasion, is an crease in poverty (0.2 points) (OECD 2019a). of their income than wealthy people. Take enormous loss of public revenue (Dom et al. the example of Jordan; indirect taxes, which 2022). This is particularly relevant in MENA. Eliminating special tax regimes for small account for 8 percent of GDP, increase the According to a lower-bound estimate (Alstad- firms can increase tax revenue and remove Gini Inequality Index by 0.5 points. The per- sater, Johannesen, and Zucman 2018), the barriers to productive job creation. Many sonal income tax is highly progressive, but it equivalent of 10 percent of world GDP is held MENA countries, such as Egypt, Morocco, reduces inequality by only 0.1 points because as financial wealth in offshore tax havens out- and Tunisia, give favorable tax treatment it accounts for less than 1 percent of GDP side the reach of national tax authorities. In to self-employed people and micro-firms in (Rodriguez-Takeuchi and Wai-Poi 2021). Evi- MENA, it is estimated to be a staggering 40 terms of lower income taxes and VAT exemp- dence from Morocco also shows that VATs are percent of the region’s GDP; at 15 percent, tions. Although these special tax regimes tend regressive and increase poverty (AFD 2020). Latin America and the Caribbean comes in to be well intended to bring small firms into a distant second place. the tax and social security systems, they help The focus on indirect rather than direct tax- generate a productive structure dominated by es is often based on the wrong arguments. Removing tax exemptions and improving small, low-productivity firms (Lopez-Acevedo MENA governments often wrongly blame tax administration can also increase tax rev- et al. forthcoming) because they create dis- the reliance on indirect taxes on the infor- enue. Tunisia has been removing exemptions incentives for small firms to expand beyond mal sector. Instead, the main problem is that from VAT and rationalizing rates, as well as the qualifying thresholds and help small, tax systems are skewed toward richer people. reducing tax evasion by increasing tax trans- low-productivity firms survive. Operating at Most Egyptians working in the informal sec- parency, strengthening revenue data collec- such small scale also reduces tax enforcement tor should pay no income tax or a top mar- tion, and facilitating international exchange authorities’ likelihood of catching firms that ginal rate of 2.5 percent; and the top income of information, which alone increased tax cheat the system, encouraging fraudulent be- tax bracket (25 percent) is very low according revenue by 54 percent (OECD 2019a). Those havior and informality. to international standards. In countries such measures have helped Tunisia become the as Jordan, there are good property registries, leading country in MENA in tax collection. 38 See, for example, the simulated impacts of yet property taxes account for only 0.3 percent Morocco has also strengthened tax adminis- an expanded income tax for in the West Bank and Gaza the top 10 percent of income earners in the of GDP. Also, it is easier to collect taxes from tration by simplifying taxation and rational- West Bank and Gaza (currently are only paying corporations than individuals, yet Egypt’s izing tax exemptions, although exemptions only 1.1 percent of their income in income corporate income tax rate (22.5 percent) is from VAT and corporate tax remain, and it is taxes) (World Bank forthcoming). BUILT TO INCLUDE 62 Chapter 03 Support age are critical. People are staying healthy until much later in life, and jobs are becoming gains at the cost of increasing the disincentive for firms to hire workers formally, undermin- active aging more intensive in cognitive, nonroutine tasks ing coverage. Recent reforms in Iraq increas- that older people are more able to do, which is ing the minimum pension and decreasing the 3.3.4 why most OECD countries are going beyond retirement age from 63 to 60 have undermined increasing retirement ages and eliminating the financial position of pensions. incentives to early retirement to supporting active aging. Measures include financial in- Although limited in scope, a few MENA centives for older people to retire later (be- countries have been implementing para- Active aging is central to maximizing the yond the statutory retirement age) and ways metric reforms that go in the right direction. economic contribution of older people and to help them do so, including encouraging The 2019 reform in Egypt was the most am- making pensions more sustainable. Across employers to retain and hire older workers bitious of all. It included parametric reforms MENA, people are living longer, healthier and promoting the employability of work- to improve financial sustainability, including Lives, but most workers retire too early, when ers throughout their working lives (OECD increasing the retirement age and reducing they are healthy and most productive. This 2019b). There is evidence showing the bene- incentives for early retirement (e.g., increased results in considerable loss of potential pro- fits of hiring and retaining older workers and minimum years of service, larger benefit re- ductivity gains and is a significant drain on providing programs to encourage senior entre- duction factors). The reform also included pension funds. MENA countries must sup- preneurship. For example, mixed-age teams in some measures to improve effective protec- port active aging, which requires adjusting the the workplace are more productive than teams tion (e.g., expanded scope of pensionable retirement age to reflect gains in life expectan- of workers of the same age (Zwick, Göbel, earnings, pension indexation to inflation), cy, eliminating incentives to retire early, and and Fries 2013). Working conditions should but it also reduced pension adequacy, as the encouraging and supporting late retirement. be adapted to the capacities and changes in valorization of earnings was linked to inflation Adjustments are also needed for two other circumstances of older workers. instead of growth in average earnings. Moroc- sources of unsustainability and inefficiency co has also improved the financial position of in MENA’s pension systems: accrual rates and Important lessons can be learned from para- its pension scheme for civil servants through the earnings history used for pension calcu- metric reform efforts in MENA. In most cas- a well-aligned, albeit limited, reform of ben- lation. All these reforms must be well aligned es, they have been minor, ad hoc, and focused efits, contribution rates, and the retirement and packaged with reforms to integrate pen- on short-term gains, which has had little age. Jordan has also been making incremental sion systems and increase effective protection. impact on long-term sustainability of pen- changes to its social security law. In 2020, it sions and, in some cases, has created harm increased the minimum early retirement age A growing number of countries have been in other areas. For example, in 2017, Tunisia and minimum length of service required for implementing measures to support active increased the retirement age by 2 years, but it retirement and applied higher reduction fac- aging. In the context of population aging, mo- also increased contribution rates, which were tors for early retirement pensions.39 Recently bilizing the potential labor force more fully already among the highest in MENA. These approved reforms in Bahrain and Saudi Ara- and sustaining high productivity at an older measures generated only short-lived financial bia also go in the right direction. BUILT TO INCLUDE 63 Chapter 03 Moving toward Addressing labor market exclusion in MENA requires a vibrant private sector that generates more productive jobs. Growth to revitalize the private sector by increasing product market contestability. an inclusive social resumed strongly in MENA in 2022 (by an estimated 5.7 percent, the highest rate in a Although there is no single reform path, there are some principles to guide sequenc- protection system decade) but was mostly driven by oil export- ers, who enjoyed windfalls from high oil and ing of reforms to move toward an inclusive social protection system. Modern delivery gas prices and rising production. Growth is systems are necessary to deliver social pro- expected to decelerate to 3.5 percent in 2023 tection effectively and efficiently. They must 3.4 and 2.7 percent in 2024 as the global econo- be continuously upgraded and adjusted to the my slows, financing becomes more expen- level of complexity of the social protection sive, and previous gains for oil exporters dis- system. Although there is no single reform sipate (World Bank 2023b). This will mean path (see Reform Journeys below), where the fewer jobs and more-limited fiscal space in greatest needs are along the welfare-work dis- oil-importing MENA countries for social tribution should be the main determinant of protection and other development priori- the level of complexity of the social protection ties. To accelerate growth and generate more system at each point in time (political econo- productive employment, reforms are needed my considerations aside—see below). 1 2 Systems should be built to deliver in- As that basic safety net becomes more come support to the poor and those who widely available, support can be added become poor. This is what Egypt and to enhance opportunities for the poor to Jordan (and Iraq to a lesser extent) have move out of poverty through the labor done and continue to do (see Reform market. Although still incipient, the best journeys below). Most other low- and example of that is Egypt. middle-income MENA countries are moving in the right direction, but prog- ress must be accelerated. 3 4 That can be followed by reforms to pro- At the same time, existing manda- vide access to sustainable (even if subsi- tory-contribution social insurance dized) social insurance protection and programs can be reformed to increase enhance the productivity of vulnerable protection of formal sector workers— informal workers with some capacity to including through UI—while ensuring save while making social pensions avail- financial sustainability and supporting able to elderly adults who do not have labor market inclusion. Although some sufficient savings to reach a minimum MENA countries are improving protec- income level. This is a policy gap in most tions and adjusting parameters to make middle-income MENA countries pensions more sustainable, none have approached social insurance reform holistically. 5 Labor regulations are also necessary to protect workers. More efforts should be made to ensure that they provide effective protection to all workers while avoiding placing a burden on businesses. Basic labor protections are largely in place, but legal restrictions on female employment remain in much of MENA, compliance tends to be weak, and dis- missal costs and minimum wages are high. 39 Because only new entrants are affected, no impact of these changes is expected for at least 20 years. BUILT TO INCLUDE 64 Chapter 03 Upgrading social protection systems in MENA will require political support. The vision and reforms proposed in this report are status quo, who benefits from it, and who benefits from reform. Communication re- garding fuel subsidy reform in Jordan (2012) “It is important a deviation from how MENA countries have traditionally thought about social protection is a good example; the prime minister led a massive campaign to explain the risks to the for MENA as part of the social contract between the state and the people. MENA’s social contract was economy of keeping fuel subsidies, the un- equal way in which rich and poor households governments built around the idea of asabiyya (solidarity between individuals) with the patronage of a just ruler (Krieg 2017). It translated into a benefited from them, and how a temporary cash transfer program could mitigate the im- pact on vulnerable people.41 Good communi- to initiate a commitment by governments to provide cit- izens with access to social services (health cation has also facilitated implementation of a reforms of social security in Jordan; the conversation with care, education), public sector jobs, and food and energy subsidies, all in exchange for cit- Social Security Corporation widely dissemi- nated a set of publicly oriented materials to their citizens about the vision for izens’ political support and limited political deliver a key message: the system is going participation. This contract has been weak- bankrupt because of incentives, gaming, ened as citizens have grown dissatisfied with and evasion that benefit mainly a minority it, particularly since 2010. This is partly about the diminished ability of governments to de- of high-income earners.42 That has translated into good public perception of social security social protection liver on their promise as public employment receded, the quality of services deteriorated, and some benefits were curtailed, but it is also in Jordan (Figure 31), but there is room to im- prove communication about other social pro- tection policies. Although most Jordanians in the context of about citizens becoming increasingly aware of the social contract benefiting a few at the want to reduce inequality and criticize cur- rent policies, only a few can identify specific a renewed social expense of the majority,40 the inequalities re- sulting from it, and dissatisfaction with gov- programs such as Takaful, despite its success. contract, as well as ernment policies to address it, as well as citi- zens demanding more political participation. Communicating the progressive nature of direct taxes increases compliance and sup- port for reform. Lack of equity in taxation the roadmap that Evidence from MENA and elsewhere sug- gests some principles to help gain political undermines the social contract. A sense that the wealthiest people in society do not pay can be followed to support for reform. Whether in response to fiscal constraints or citizen demands, this re- their fair share can undermine compliance of taxpayers and weaken support for tax re- move toward port shows that many MENA countries have been moving away from the social protection model embedded in the social contract (gen- form. By increasing efforts to tax wealthy people, governments may be able to build broad-based trust in the system, ultimately that vision” eralized subsides, public sector employment) generating even greater revenue gains over toward the type of social protection system time (Dom et al. 2022). A randomized exper- advocated for in this report—at least some iment with more than 30,000 respondents elements of it. Moving decisively and com- from eight developing countries showed that prehensively toward that system will require people are more willing to pay taxes when political support, particularly for some of the they are told that taxes are progressive and more sensitive reforms regarding subsidies, less willing when told that they are regressive. pensions, and taxation, so that the new social Respondents for whom the information re- protection system becomes an integral part ceived was counter to their prior beliefs were of the renewed social contract. Experiences the main drivers of these results, suggesting of MENA countries and others suggest prin- that communication of progressive tax reform ciples that can be used to help gain support can help gain public support for it (Hoy 2022). for reform, including vision and communica- tion, packaging and sequencing of reforms, Sequencing sensitive reforms and pack- and political leadership and ownership of re- aging them with compensatory measures form. These principles are illustrated below increases the chance of success. Morocco’s 40 Hertog (2023) argues that the coalition using examples of key reforms. energy subsidy reform is a good example of between a big state and firms and workers a well-sequenced reform that allowed mar- benefiting from its policies (insiders) is It is important for MENA governments to kets and individuals to adjust to higher pric- behind the low dynamism of developing Arab initiate a conversation with their citizens es. The government announced in 2013 an economies and resistance to change. about the vision for social protection in the automatic mechanism for partial fuel price 41 See Inchauste and Victor (2017) for details context of a renewed social contract, as well indexation, followed by full indexation in on Jordan’s experience and, more generally, lessons from international experience on the as the roadmap that can be followed to move 2014 and full liberalization of prices by the political economy of energy subsidy reform. toward that vision. That process can lead to end of 2015. The government also recently a compact for social protection that includes announced an ambitious social protection re- 42 For example, the use of the “Olive Tree Analogy” sparked public debate. The analogy measurable indicators of progress that people form agenda. Although the full details are yet focuses on the consequences of misusing olive can monitor and hold governments account- to be developed, the reform package includes trees by not limiting the use to reaping the able to. Such compact would put specific re- improvements in health insurance, pensions, fruits but using the wood for heating and other purposes. Although such behavior maximizes forms in a larger context and facilitate com- UI, and family allowances and reform of food today’s benefits, it will prevent coming munication about them. subsidies to finance the expansion of family generations from benefiting tomorrow. allowances. Indonesia provides a good ex- 43 World Bank Statistical Capacity Communication of sensitive reforms re- ample of sequencing and packaging of hard Indicator, https://datatopics.worldbank.org/ quires explaining the costs of keeping the reforms; temporary cash transfers and the statisticalcapacity/. BUILT TO INCLUDE 65 Chapter 03 introduction of a new conditional cash trans- has been rigorously evaluated, reinforcing its exceptions. Labor force and household sur- fer program for poor families accompanied national and global status as best practice vey data are key to analyzing labor market removal of fuel subsidies in 2005. Between and informing its expansion. exclusion, poverty and vulnerability, and the 2016 and 2020, Indonesia gradually replaced benefit incidence of major social protection the inefficient rice subsidy program with a Better data and transparency must be pro- programs, yet these surveys are widely un- modern, better-targeted voucher program vided to support social protection reform. available, inaccessible to researchers, or out- that enhanced benefits to poor households As the example of Brazil with Bolsa Familia dated in several MENA countries. Also, pro- (Holmemo et al. 2020). shows, good data and transparency are key to gram administrative data are often limited informing policy reform and ensuring polit- and difficult to access. MENA has the lowest Packaging taxation with other compensa- ical support for it, yet rigorous evaluation of statistical capacity of all regions around the tory measures is important. Raising taxes is social protection programs in MENA is rare, world, and it has declined since 2005.43 rarely popular, but showing that the money with the evaluation of TKP being one of few will be used for purposes that society values can ease the path of reform. Brazil intro- duced a tax on financial transactions to cover the cost of its conditional cash transfer and other non-contributory social protection pro- grams (Chowdhury 2016). Colombia’s 2019 tax reforms, which included reductions in VAT exemptions, were packaged with com- pensatory cash transfers (Londono-Velez and Querebin 2022). Packaging of reforms is particularly appro- priate for pensions. Attempts to undertake parametric reforms often fail because they are typically put forward alone and perceived as failure of the state to fulfill promises because of fiscal constraints as populations age. Thus, in addition to communication and education, it becomes crucial to establish parametric re- form as part of a larger old-age reform pack- age that includes measures to support active aging and enhance old-age protection. Also, people are more willing to join social insur- ance schemes when they can also use them to address short-term shocks such as unemploy- ment, income loss, and emergency health care and education expenditures, which is why access to UI is so important. VSSs should be designed to address these risks, and people should be able to withdraw some social secu- rity funds to respond to emergencies. Leadership and continuous ownership are essential elements of successful reforms. Big reforms typically need a strong leader and government to be initiated and continuous ownership to be carried forward, adjusting as needed and informed by evidence. These features are well illustrated in Brazil’s Bolsa Familia program. In 2003, the federal gov- ernment merged four cash transfer programs into one conditional cash transfer program, Bolsa Familia, to increase the impact on the poor and efficiency. This program benefited from rigorous evidence of what does and does not work with Brazil’s own cash transfer pro- grams and Mexico’s cash transfer program (now called Mexico Prospera). Bolsa Familia was launched under the leadership of Pres- ident Lula da Silva, who made it his admin- istration’s flagship program to reduce pov- erty and inequality. The program continued through Presidents Dilma Rousseff and Jair Bolsonaro, who renamed it Auxilio Brasil and significantly expanded coverage and benefits after unanimous approval from parliament. Throughout the years, the program’s impact BUILT TO INCLUDE 66 Chapter 03 Reform journeys S 3.5 “There is no single ome guiding principles can be followed to move toward a more inclusive social pro- tection system. Modern delivery systems are reform path but the critical and should be fit to the level of com- plexity of the social protection system, which should ideally be mainly determined by where the greatest needs are along the welfare-work reform journeys of distribution. Therefore, systems should first be built to deliver income support to the poor and then to support access to opportunities for them to move out of poverty through the some countries in the labor market, followed by reforms to provide access to sustainable social insurance protec- tion and enhance productivity of vulnerable informal workers with some capacity to save. region illustrate how In parallel, existing mandatory-contribution social insurance programs can be reformed to increase protection of formal sector work- it could look like” ers while ensuring financial sustainability and supporting labor market inclusion. Labor reg- ulations are also crucial, but increasing efforts must be made to ensure that they are applied and do not place a burden on businesses. There is no single reform path. The examples below illustrate the reform journeys of some countries in the region that have been at the forefront of reform in recent years. They are not presented as best practices but rather to illustrate the different entry points and paths that some proreform MENA countries have adopted, as well as the unfinished reform agenda. To various degrees, Egypt, Jordan, and Morocco have used subsidy reforms as entry points for reforming their social pro- tection systems, built solid delivery systems to provide income support and access to op- portunities to an expanding number of poor and vulnerable households, and introduced parametric reforms of public pensions while still struggling with limited coverage and pro- tection of informal workers. Saudi Arabia has developed a sophisticated safety net system for the poor and the unemployed, is at the forefront of reforms in MENA to reduce legal restrictions on women’s employment, and has embarked on an ambitious pension reform process, but it is struggling with restrictions on and limited protection of foreign workers. BUILT TO INCLUDE 67 Chapter 03 BUILT TO INCLUDE 68 Chapter 03 Egypt 3.5.1 T he removal of energy subsidies population. The program has been reformed between 2014 and 2016 marked a to increase efficiency, including by replacing turning point for social protection subsidies of inputs to bread with subsidies of in Egypt. The reform momentum bread itself and by introducing smart cards. and savings that the reform gener- There have been limited efforts to reduce the ated helped launch TKP in 2015. benefit for the richest households. Egypt can Takaful provides benefits to poor no longer afford to keep the food subsidy pro- families with children (0-18) conditional gram in its current form, particularly given on school attendance and health visits for high food prices, tight fiscal space, and high beneficiary mothers and children. Karama borrowing costs. It could consider convert- provides benefits to the elderly poor, poor ing all in-kind subsidies to cash and using orphans, and poor people with disabilities, the Unified National Registry to recalibrate replacing a social pension. Expansion of the benefits to give more to poor households and program has enabled coverage to increase less to wealthy households and then gradually from 21 percent to 50 percent of the poor removing subsidies for wealthy households; population. Benefits are distributed digitally savings could be used to expand programs through debit cards that can be used for pur- such as TKP and FORSA. chases. Several impact evaluations have in- formed the expansion of and improvements The 2019 Social Security Law marked a sig- in the program, more so than any other social nificant milestone in Egypt’s social insurance program in MENA. system—possibly the most ambitious reform effort in the region so far. The law consoli- A modern delivery system was built around dated administration of the social security TKP and linked to the Unified National Reg- system, unifying a fragmented set of social istry, the largest social registry in MENA, insurance schemes under one framework. It covering the entire population. The TKP included parametric reforms to increase fi- registry, which covers about 30 percent of nancial sustainability, including increasing the population, is being used to provide the retirement age and reducing incentives complementary human capital support to for early retirement (e.g., by increasing min- TKP beneficiaries and was used in 2019 to imum years of service and benefit reduction introduce an economic inclusion program factors). The reform also included measures called FORSA (the largest such initiative in to improve effective protection (e.g., expand MENA); a housing initiative in 2017; and the scope of pensionable earnings, pension more recently, a comprehensive village de- indexation to inflation, a new complementary velopment initiative (Hayat Kareema). defined contribution scheme with individual savings accounts), but it also reduced pension Despite being significantly less cost-effective adequacy, as the valorization of earnings was in reducing poverty and inequality, Egypt’s linked to inflation instead of growth in aver- quasi-universal food subsidy program far age earnings. Additional reforms are under outspends TKP to remain the largest social discussion to increase the adequacy of pen- assistance program in the country. The pro- sions and extend coverage of social insurance gram provides subsidized baladi bread and to informal workers; a defined-contribution food rations to more than 90 percent of the VSS could be considered as an option. BUILT TO INCLUDE 69 Chapter 03 BUILT TO INCLUDE 70 Chapter 03 Jordan 3.5.2 A n important recent milestone population at no additional cost—thanks to in MENA. The Takaful platform was used in that Jordan reached in its so- Takaful’s superior poverty targeting. 2019 to provide some complementary services cial protection reform journey to poor and vulnerable households, includ- was removal of fuel subsidies Reform of bread subsidies facilitated expan- ing health insurance, and is being used as in 2012, accompanied by a tem- sion of Takaful. The universal in-kind bread the basis for developing the National Uni- porary compensation scheme, subsidy was replaced in 2018 with a small fied Registry, an integrated system for all so- along with a first attempt at cash benefit, removing the richest 20 percent cial assistance programs that will be used to building a social registry around it, but sav- of the population and giving slightly higher bundle income support with human capital ings from the subsidy removal were not used benefits to NAF beneficiaries. The program investments and economic inclusion support to expand programs for poor and vulnera- was discontinued in 2021 as the government to poor and vulnerable people. ble people, which continued to be small and continued to expand Takaful and had to fi- mostly channeled through the NAF monthly nance the response to COVID-19. The labor and economic inclusion agenda is cash transfer program. new but moving in the right direction. The The state-of-the-art delivery platform that Economic Empowerment Strategy lays out Takaful was launched in 2019 to expand in- was built around Takaful was pivotal to the the approach to providing economic inclu- come support for the poor. Takaful continued COVID-19 response and set the basis for the sion support to poor and vulnerable people to expand, and by 2021, it had tripled cover- National Unified Registry. The shock-respon- and employment support to job seekers in age of cash transfers to 62 percent of the poor, sive features of the Takaful delivery, includ- general. A platform (Sajjil) has been built despite less than doubling the number of ben- ing a social registry that covered more than to match job seekers to vacancies and refer eficiaries. Ongoing consolidation of the NAF 70 percent of the Jordanian population and them to appropriate employment programs monthly cash transfer program into Takaful, digital payments (mostly though e-wallets), based on statistical profiling. Sajjil is being now called Unified Cash Transfer, is expected facilitated the largest (in terms of coverage), used to implement the National Employment to increase coverage to 71 percent of the poor best-targeted, fastest response to COVID-19 Program, and Takaful beneficiaries are being prioritized for support using interoperability between Sajjil and the Takaful platform. Jordan’s social insurance reform journey started with the integration of public and private pension schemes in 1995 (for new civil servants) and 2003 (for new members of the military). The 2014 Social Security Law introduced new protections—UI, maternity, and inclusion of self-employed workers—and some parametric adjustments to increase the financial sustainability of pensions. Subse- quent amendments to the law introduced more parametric adjustments, including more recently (2020) the increase in the minimum retirement age and the reduction factors applied to early retirement. Also, in an effort to attract self-employed workers, al- ternative regimes (with lower contributions but also lower benefits) are now offered to self-employed workers. Efforts to bring informal workers into man- datory social insurance programs have had limited success. A defined-contribution VSS is under consideration. Such a scheme would protect informal workers while being a bridge to mandatory schemes and could provide additional benefits to those already contributing to mandatory schemes. Also, bolder parametric adjustments are needed to ensure the financial sustainability of pen- sions, along with support of active aging. Although UI is available, and partial with- drawal is possible from virtual individual accounts for short-term emergencies, eligi- bility could be eased and job search incen- tives increased. BUILT TO INCLUDE 71 Chapter 03 BUILT TO INCLUDE 72 Chapter 03 Morocco 3.5.3 M orocco has been providing strong commitment to reforming the social sidies, which garnered almost 0.3 percent of income support and health protection system to make it more inclusive GDP each in 2022. insurance to an expanding and sustainable. but still limited share of poor Pension reform began with introduction of families. Tayssir provides Expansion of income support and health a new scheme for self-employed people in cash transfers to poor fami- insurance will be financed through a com- 2022. As with AMO, different contribution lies with children conditional bination of budget-financed subsidies and rates are established for different professions, on school attendance. It was piloted in 2008 contributions. The reformed AMO also in- and contributions are translated into pension and has been expanding in recent times but cludes self-employed workers, sets insurance rights using a point system. Contributions still covered only approximately 6 percent premiums for 30 different professions, and are voluntary until 2025, when they will be- of the population in 2022. There is room to extends coverage to the non-working spous- come mandatory. One challenge for this new improve targeting of the poor. The Régime es and children of workers. RAMED will be scheme is ensuring that point-based benefits d'Assistance Médicale (RAMED), a subsi- replaced by a new sub-program under AMO are adequate. Another challenge is attract- dized health insurance scheme for poor and called TADAMON, which will pay premiums ing informal workers with limited capacity vulnerable people, was piloted in 2008 and for the poorest 27.5 percent of the population. to save to the program. A possible solution expanded nationally in 2012 as part of the For family allowances, although the details is to introduce matching contributions for effort to achieve universal health coverage. have not been worked out, the logic is the these workers. It may be too soon to make By the end of 2022, RAMED covered about same: benefits will be fully subsidized for the scheme mandatory by 2025; informal in- 27 percent of the population. poor households and partly financed through comes are often irregular and unpredictable, contributions for everybody else. The govern- and it may take some time for informal work- Morocco has been developing an integrated ment plans to finance all subsidies through ers to gain confidence in the program. delivery system for social assistance since the reform of generalized flour and sugar sub- 2017. The Unified Social Registry will serve as a single point of entry and registration for all applicants for social programs and be used to cross-check information, assess needs using a common targeting method, and refer appli- cants to qualifying social programs. A better method to target poor and vulnerable house- holds has also been developed and approved. The Unified Social Registry is operational and will be used to expand income support and health insurance to poor households. Coverage of pensions and UI has been low be- cause most workers are informal, and reform efforts have been limited until recently. There have been reforms to harmonize the two pub- lic pension schemes (for civil servants and employees of public companies) and increase their financial sustainability. The private sec- tor scheme has been limited to salaried work- ers and not recently subject to any significant reform, although in 2022, a new scheme for self-employed workers was introduced. In 2020, the government embarked on an ambitious social protection reform program, which is to be completed by the end of 2025 and has four pillars: universalize health insur- ance coverage around the Assurance Maladie Obligatoire (AMO); universalize the family allowance program, which currently provides income support to children of formal salaried workers and is financed in part by employer contributions; expand coverage of pensions and increase their financial sustainability; and expand UI. The National Social Security Fund will manage all programs except public sector pensions. The four pillars are in differ- ent stages of development, but they signal a BUILT TO INCLUDE 73 Chapter 03 BUILT TO INCLUDE 74 Chapter 03 Saudi Arabia 3.5.4 S audi Arabia has made significant beneficiaries of the social assistance program the poverty line. Benefits are calibrated to the reforms to its social protection sys- (Damman) to a labor activation program gap between household welfare, measured tem in recent years. Much of it was (Tamkeen). Damman beneficiaries that are through a hybrid means-test, and the poverty kick-started following the launch of ready to enter the labor market can receive job line. To minimize work disincentives, bene- Vision 2030 in 2016. A vision for so- search assistance or business start-up support fits are reduced—but not discontinued—once cial protection and evidence-based (for those with capacity to start a business), households start earning an income. reforms to realize it—covering so- while skills training is offered to beneficiaries cial assistance, pensions, labor and migra- that need support before entering the labor The pension system has also been undergo- tion—were put forward by an inter-govern- market. To this day, 160,000 beneficiaries ing important reforms. In 2021, civil service ment social protection task force. have found jobs and 35,000 started a busi- pensions law was amended to introduce ness. Also, a Guaranteed Minimum Income parametric reforms to increase sustainability, The protection and economic inclusion sup- (GMI) program was established in 2021—the and the administrators of public and private port to the poor have been significantly en- first and only such program in MENA, tar- pensions—the Public Pension Agency (PPA) hanced. In 2017, the government linked the geting Damman beneficiaries who live below and the General Organization of Social Infra- structure (GOSI)—were merged. Saudi Arabia has been at the forefront of reforms to reduce legal restrictions to wom- en’s employment in MENA. Over the period 2017-18, the government removed restrictions to free movement of women, abolished the guardianship law, prohibited the dismissal of pregnant women, equalized pay regulations and access to financial services, criminalized sexual harassment and expanded materni- ty leave. In 2018, the government began to provide transportation subsidies to working women through an active labor market pro- gram called Wusool as well as childcare subsi- dies through another program called Qurrah. Although much remains to be done, these reforms have contributed to a remarkable increase in women’s labor force participa- tion between 2016 (21 percent) and the third quarter of 2023 (37 percent). Labor market reforms have been introduced to assist new entrants and the long-term un- employed. In 2018, the government began to provide recent school graduates with on-the- job training support through a wage subsidy program called Tamheer, and it introduced three new types of work modes: a flexible hourly work contract called “MRN”; certifi- cates for freelancers, including gig economy workers; and telework contracts that allow remote work. An unemployment assistance program (Hafiz) was reformed in 2021, pro- viding non-contributory, income-tested as- sistance for up to 15 months to new graduates and people who have been out of the labor force for at least two years—including women re-entering the labor market after childbirth. The benefit is scaled down over the receipt period to incentivize job search. Although significant restrictions on foreign workers remain, the employer-sponsored khafala sys- tem was abandoned in 2021, allowing migrant workers to freely choose their employers one year after arrival in the country and comple- tion of the original contract. BUILT TO INCLUDE 75 Chapter 03 BUILT TO INCLUDE 76 Chapter 03 Annex FIG. A1 MENA is growing its high- Change in the share of FIG. A2 occupations between 2000 and skill occupations much 2018, by occupation type, less than its income peers percentage points Adequacy of regular cash transfer benefits is relatively low Cash benefits per capita as a percentage of relevant international poverty line for each country Note: High-skill occupations include managers, professionals, associate Source: ILO (2022). professionals, and technicians. Medium-skill occupations include clerical support workers; service and sales workers; craft and related trades workers; plant and machine operators and assemblers; and skilled agricultural, forestry, and fishery workers. Low-skill workers include elementary occupations. Source: Gentilini 2022; World Bank 2022g BUILT TO INCLUDE 77 Annex FIG. A3 Targeted cash transfers Budget in local currency units (blue bars) and cost are more cost-effective effectiveness (orange dots) than generalized in reducing poverty, most subsidies recent year Egypt Jordan Morocco Tunisia Iraq Note: National Aid Fund (NAF, Jordan); Liquid Petroleum Gas (LPG), Public distribution system (PDS, Iraq), Cash Transfer Program (CTP, Iraq). Programme National d'Aide aux Familles Nécessiteuses (PNAFN, Tunisia). Source: AFD (2020), World Bank (forthcoming). BUILT TO INCLUDE 78 Annex FIG. A4 FIG. A5 Older pensioners tend to Average pension benefit as a percentage of the minimum wage, have much lower benefits by age and sex, percentage Workers contribute to than younger pensioners pensions for a portion of their working lives JORDAN EGYPT Average number of contributory years at the time of retirement, by retirement age JORDAN Source: Pallares-Miralles (forthcoming). IRAQ FIG. A6 Pensions systems look much ‘older’ than the population, creating deficits too early TUNISIA, PRIVATE PENSIONS B. …that is making pensions systems look much older than the population (System and population dependency ratios in Morocco, percentages) TUNISIA, PUBLIC PENSIONS Note: System dependency ratio is the ratio of Source: Pallares-Miralles pensioners to contributors; population dependency (forthcoming). ratio is the ratio of the population aged 15 to 64 Source: Pallares-Miralles (forthcoming). to the population aged 65 and older. BUILT TO INCLUDE 79 Annex TAB. A1 Most pension systems FIG. A7 in MENA are fragmented Minimum wages are relatively Mandatory pension schemes and Current status high in a few MENA countries institutions Ratio of statutory minimum wage Algeria 5 institutions; 3 schemes Public and private sector employ- to the value-added per worker, ees covered under same scheme and latest year institution, but self-employed people and members of military covered under separate institu- tions Bahrain 1 institution; 2 schemes Assets merged into single fund; royal decree harmonizing rules yet to be implemented Djibouti 1 institution; 2 schemes Partially integrated Egypt 1 institution; 1 scheme Law passed in 2019 to consolidate administration and unify parame- ters of two previously separate funds for public and private sec- tor employees Iran 2 institutions; 18 schemes Various categories of public and military personal, rural sec- tor, etc. covered under separate schemes Iraq 2 institutions; 2 schemes Integration under consideration Jordan 1 institution; 1 scheme (2 old Fully integrated system schemes phasing out) Kuwait 1 institution; 1 scheme Fully integrated system Lebanon 1 institution; schemes Military and civil servants cov- ered Libya 1 institution; 1 scheme Fully integrated system Malta 1 institution; 1 scheme Fully integrated system Morocco 3 institutions; 3 schemes Two public schemes and institu- tions being integrated Oman 10 institutions; 11 schemes Merger of all funds under consid- eration Qatar 1 institution; 2 schemes (1 old Public and private sector employ- scheme phasing out) ees covered under same scheme and institution with slightly differ- ent rules Saudi Arabia 1 institution; 3 schemes Institutions for public and pri- vate sector pensions merged in 2001 (join assets), but schemes have slightly different rules Tunisia 2 institutions; 7 schemes No discussions on integration or harmonization of rules United Arab Emirates 2 institutions; 2 schemes Abu Dhabi, Dubai, and others have separate schemes (public and pri- vate sector employees are covered by same scheme) West Bank and Gaza 1 institution; 4 schemes (3 old Public sector and security service schemes phasing out) employees covered Yemen 3 institutions; 3 schemes Public, private, and military are covered under different schemes Source: World Bank Employing Workers 2020 database: https://www.worldbank.org/en/ Source: Pallares-Miralles (forthcoming) research/employing-workers. BUILT TO INCLUDE 80 Annex FIG. A8 TAB. A2 Developing oil-exporting MENA countries are running out fiscal space Most people in MENA want more Fiscal balance Public debt redistribution %GDP Preference for redistribution 2019 2020 2021 2022a 2019 2020 2021 2022a index, scale 1-10, 2017-2020 Gulf Cooperation Council Bahrain -9 -17.7 -11.3 -3.3 Kuwait -11.1 -31.2 -9.6 2.2 11.6 11.7 8.7 5.3 Oman -5.0 -16.4 -3.3 5.4 53.3 71.0 63.2 42.7 Qatar 1.0 -2.1 0.2 8.4 Saudi Arabia -4.6 -11.5 -2.4 2.6 23.0 34.0 30.8 25.7 United Arab Emirates 0.4 -5.2 0.3 7.4 Developing oil exporters Algeria -9.6 -12 -7.2 -0.9 45.5 52.1 63.0 51.8 Iran -4.5 -5.8 -5.3 -2.3 42.7 44.7 40.8 38.0 Iraq 1.3 -5.8 4.0 12.5 44.7 64.7 53.2 57.5 Libya 1.7 -64.4 10.6 2.5 106.7 238.2 87.0 70.4 Syria -8.1 -8.4 -7.5 -9.3 Yemen -5.9 -4.8 -2.2 -2.2 Developing oil importers Djibouti -0.9 -1.7 -3.3 -1.5 70.3 75.9 71.7 71.8 Note: Following Diwan, Tzannatos and Akin (2018), the Egypt -8.1 -7.9 -7.4 -6.2 90.2 87.0 92.4 88.3 preference for redistribution index is the average of the Jordan -4.9 -7.3 -6.4 -5.4 97.4 109.0 113.7 114.1 answers to two questions in the Lebanon -10.5 -3.3 0.7 0.3 171.1 179.2 172.5 162.6 World Values Survey that are scaled between 1 and 10: “We Morocco -3.7 -7.1 -5.9 -5.1 60.3 72.2 68.9 69.4 need larger income differences as incentives for individual West Bank and Gaza -7.5 -7.5 -5.7 -1.8 39.5 53.9 54.9 52.6 effort” (1) vs. “Incomes should Tunisia -2.8 -8.6 -7.2 -6.6 68.0 77.8 82.4 79.3 be made more equal” (10); and “People should take more Source: World Bank (2023c). responsibility to provide for themselves” (1) vs. “Government a=Estimated. should take more responsibility to ensure that everyone is provided for” (10). 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