Summary :

1. Interest in the relationship between growth and equity has deep roots and a long history in economic thinking and development debates.

2. Traditionally, thinking has been divided between those who favour focusing on efficiency and growth as the best way to overcome poverty and inequality and those who advocate explicit policies to assist the poor even if this might come at the expense of a slower overall growth rate.

3. In recent years, thinking has evolved beyond such a presumed trade-off with calls for a better and more integrated understanding of the relationship between growth and distribution.

4. Asia’s experience of rapid and sustained growth in recent decades has contributed to this re-thinking demonstrating that considerable poverty reduction is possible in the face of persistent, if not widening, inequalities.

5. The outbreak of mass protests against authoritarian regimes in MENA – dubbed the ‘Arab Spring’ – has similarly shown how a narrow focus on growth and a failure to consider its wider ramifications can have far-reaching consequences.

6. An overriding economic lesson of the decade before these uprisings is arguably that it is not growth per se but the type and pattern of growth achieved that matters as well.

7. This report considers MENA’s recent trajectory of growth and considers critically its prospects for achieving inclusive growth.

8. It is structured into two parts: the first part reviews the evolution of thinking on the relationship between growth and equity and considers its prospects in the MENA region from a broad macro perspective. The second part itself consists of two parts: first, it focuses on inequality aspects of inclusive growth through a detailed case study of wage adjustments and disparities during economic crises in Egypt and Jordan; second it offers a detailed study of the role of Micro and Small Enterprises (MSEs) in Egypt and in MENA.

9. Chapter 1 starts first by reviewing the evolution of thinking on growth and distribution in economic theory and development policy showing how pro-poor growth strategies have given way to concerns about inequality in recent years

10. It then examines the concept of inclusive growth and its analytical aspects considering whether and to what extent it differs from pro-poor growth both analytically and in practice. This demonstrates the absence of a universally agreed notion of inclusive growth.

11. Chapter 2 deals with a wide range of indicators pertaining to economic growth and distribution in MENA and analysing, where possible, the experience of these countries over time and in a comparative context with other developing regions.

12. It shows that overall the MENA region has fared relatively better recently both in historical terms and compared to other regions. Most MENA countries enjoyed respectable average annual real GDP growth rates of 4%-5% during the period 2000-10.

13. The same period also witnessed many other encouraging achievements: life expectancy rose, educational and health indicators improved, the number and proportion of slum dwellers declined and more people enjoyed civic amenities such as access to improved drinking water and sanitation.

14. The demographic experience of the region, however, has been an important challenge exhibiting some of the highest national unemployment rates and youth unemployment rates and the lowest female and participation in the workforce. In this respect, there is much that the countries in the region need to do to enhance their prospects for achieving inclusive growth.

15. This Chapter also offers a detailed analysis of poverty and inequality in the region. While the absolute level of poverty for each country measured on the basis of the international poverty lines may be contentious, the location and the movement of poverty relative to the international poverty curve in each country sheds light on the nature of poverty reduction in the country concerned.

16. We argue that the international poverty lines of $2 and $2.75 a day are unlikely to give accurate measures of poverty in any of the MENA countries, but it is plausible to maintain that the national poverty lines for the MENA countries are likely to fall between the two international poverty lines – closer to the lower line for countries such as Egypt and Morocco, and to the upper line in the case of the other countries.

17. As far as inequality is concerned, our data point out to a number of findings. Firstly, the Middle East is varied, and so are the income distribution patterns it displays. Secondly, the data tend to place the region’s income distribution levels between those for Africa and Asia. Therefore it is not true that the Middle East has exceptionally low levels of income inequality. In fact it has both high and low inequality levels, and it tends to have moderately high levels of inequality overall (some countries like Egypt are on the lower end of the scale of inequality, with an income distribution closer to Asian pattern; others, such as Iran, have fairly high inequality, closer to African levels). Thirdly, a key finding is that despite huge structural changes in these economies, income distribution has not changed by much. Over the last few years, there are indications of a worsening tendency, but the trend is not noticeable when compared to worsening income distribution in fast growing Asian countries.

18. Chapter 3 comes back to the notion of inclusive growth and its measurement. We offer a methodology for constructing a single combined score for measuring inclusive growth for comparison purposes. This is based on 13 selected indicators pertaining to several broad categories of: growth, health and demographics, labour force and employment, gender, education, sanitation, inequality and governance.

19. A comparison is offered for standardised inclusive growth scores thus estimated (with a minimum = 0 and maximum = 100) for the two periods of 2000-02 and 2008-10.

20. Our data show that within the Middle East region, Iran and especially Syria follow a deteriorating trajectory in this period (with a decline of 13.1% and 19.4%, respectively). This is in contrast with all other countries where a strong trend of improvement is observed: Yemen by as much as almost 30%; Lebanon by 25% and Turkey and Israel by about 15%.

21. Further sensitivity analysis is conducted to establish the relative importance of each of the thirteen indicators included in the IG index for a select sample of five North African countries (Algeria, Egypt, Libya, Morocco and Tunisia).

22. Results show that employment indicators (both employment-to-population ratio and female workforce as a % of the total labour force) have the largest impact in all these five countries. This is especially true of Algeria (particularly in 2000-02) as well as in Tunisia. The inclusion of the inequality indicator (Gini) improves the situation in Egypt. By contrast, almost all of these five countries do well in respect of sanitation and education indicators whose elimination lowers their IG index below 100%. Last but not least, Morocco shows a more varied pattern since its IG index shows sensitivity to the structure of employment as well.

23. These results are interesting and to a large extent reinforce our descriptive discussion of a wide range of indicators offered in Chapter 2, particularly highlighting the importance of employment indicators in MENA.

24. Chapter 4 thus focuses on the labour market as an important arena where inequality and social impact of economic adjustments and crisis are witnessed, but also where reforms and policy interventions can be carried to achieve inclusive targets.

25. It examines public-private, gender and education dynamics of wage inequality in Egypt and Jordan during a period of economic liberalization and crises. It draws from four comparable labour market surveys in Egypt: the 1988 Labour Sample Survey followed by three rounds of the Egypt Labour Market Panel Survey (ELMPS 1998, 2006 and 2012), and for Jordan, one also highly comparable round of the Jordan Labour Market Panel survey (JLMPS 2010).

26. The results of analysing descriptive data in these surveys point to two distinct phases in Egypt: an initial one of wage erosion and narrowing pay differentials, and a subsequent phase of recovery of real wages and decompression of the wage structure up until 2006. The onset of the financial and post-revolution crisis in Egypt seem to have coincided with a moderation in real wage rises, whereby the traditionally lower paid segments saw bigger rises. This resulted in compression of wage structure (i.e. reduced inequality), again, but still everyone’s wages are low enough that there is a rise of the share of workers below the low earnings line, who can be described as the working poor, to a startling 46% of all working Egyptians.

27. Estimates from a joint model of sector allocation and wage determination based on data after the onset of the crisis period in both countries, point to a moderated rise in real pay, and a stable wage structure but very wide gender-based pay gaps in the Egyptian private sector by international standards. High returns to university education for women helped maintain a compressed gender wage differential in Jordan in comparison to Egypt.

28. The Chapter concludes by drawing implications for inclusive labour market reforms as MENA countries recover from the crisis. Such policies centre on moving away from using the public sector as a lead wage-setter and employer of last resort and towards enhancing measures that increase the equality of opportunity for modern and relevant training and education programmes systems to upgrade the quality of the labour force in the private sector.

29. Chapter 5 utilises the 2003-2011 MSE surveys in Egypt to evaluate the characteristics of that sector in comparison to other surveys in Egypt and similar ones in MENA. It provides a situation analysis of the role, scope, challenges and opportunities related to MSEs in Egypt as presented by recent enterprise data.

30. It also examines changes over the 2003-2006 period which witnessed both global recession and domestic political upheavals leading to economic crisis. Three main conclusions and broad sets of policy recommendations are drawn from the comparative analysis in this chapter.

31. First, the structure of MSEs is relatively small and mainly concentrated in the range of 2-4 employees, and the majority of enterprises are concentrated in trade activities followed by services and manufacturing activities, so new policies should give more emphasis to manufacturing activities to increase their numbers, productivity and employability.

32. In general, the MSEs productivity, quality of products, competitiveness and ability to innovate is rather below the performance of other developing countries such as India, Thailand, Malaysia, Indonesia, Taiwan, Vietnam. Thus any development of the MSEs should stress on various technical assistance packages for the different types of economic activities, especially those that are more competitive and have potentials for growth and expansion.

33. Second, results indicate that informality still dominates the MSE sector in Egypt. Inherently, there is a disincentive to expand beyond a certain limit and most government regulations fail to reach them. As they grow, they become visible to taxes and other regulations and so far all the institutional steps, procedures and programs that were undertaken to improve the business climate surrounding MSEs were not sufficient enough to convince them to work on a formal basis. Yet, formal enterprises have better opportunities for interacting in the market and expanding their clients’ base, with the formal private and public sectors through subcontracting, and thus raising their capacities to introduce better production technologies and raise their productivity and efficiency. Thus more conducive steps should be introduced to help MSEs become more formal and enjoy the privileges of widening the scope of their markets. Offering fiscal incentives such as tax exemptions in the first three years of starting up the business could be one step; presenting business bonus for innovation (registering patents or trademarks) and tax exemptions for all activities that involve research and development would be another step; granting certain fiscal incentives for exporting is also helpful.

34. Third, the main source of capital for MSEs comes from own savings of the entrepreneurs or inheritance.

Formal loans play a very modest role in financing MSEs, therefore the government should look into the procedures adopted by the banks and try to improve and facilitate them. Up and until now, the outreach capacity of the formal lending institutions is quite limited in its ability to support MSEs

with its needs for funding. This result indicates that the present financial packages are not sufficient to meet the entrepreneurs’ needs, and are not capable to reach them. Strengthening the capacities of the existing NGOs operating in economic support to MSEs is direly needed. In addition, new NGOs should be encouraged to operate in this field. Any intervention in this respect should target the areas of weakness such

as the female owned enterprises, and the micro enterprises (less than 5 workers) and rural-located MSEs.

35. Overall and in addition to boosting small enterprises through technical assistance, providing finance, offering better work places, and opening up windows of transactions with the larger enterprises and the public sector and government purchases would act as enabling factors. Specifically, new policies should also provide fiscal incentives to large and medium sized enterprises for establishing strong business links and extending the supply chain with the MSEs, by setting standards to their products, which could be used as intermediate inputs to larger enterprises.

36. In Chapter 6 we see that like with enterprise data, results based on the latest household level micro

and small enterprises data in Egypt reveal that the structure of MSEs is relatively small and mainly concentrated in the range of 2-4 employees and this proportion has been drastically increasing over time, particularly as a coping mechanism in recent recessionary times. The majority of enterprises are concentrated in trade and the main source of capital for MSEs comes from own savings of the entrepreneurs or inheritance sources such as loans , as well as informal sources like family loans and ROSCAs.

37. More in-depth analysis of wealth status of households based on transition matrices for the change in wealth status across quintiles for 2006-2012 shows a definite trend towards compression with the proportion who moved up from the bottom quintiles and the proportion who moved down from the top quintile much higher than in 1998-2006.

38. Regression analysis based on cross-sectional and panel data with MSEs indicate that they are more likely to prosper the larger in size (more than 10 workers and relatively high levels of capital), and this indicates that any policy aiming to sustain and develop MSEs should help them increase their capital through providing continuous and secure access to finance and technical assistance. The positive changes in the enterprise (size, formality and capital) or the entrepreneur’s characteristics (age and education) affect the household’s wealth status positively. Training in areas such as domestic and international marketing, technical aspects of the production process, legal, financial and administrative procedures is required to enable the enterprise to improve their products, add new lines and innovate.

39. The results show that formal loans play a very modest role in financing MSEs, therefore the government should look into the procedures adopted by the banks and try to improve and facilitate them. They also single out one rather promising form of informal financing for household enterprises in Egypt: ROSCAs, which account for a significant proportion of sources of finance for both small and larger enterprises that exceeds both bank loans and household savings.