Financing Universal Social Protection Systems in the Arab Region: What Alternatives to Debt and Austerity?

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Executive Summary

This paper offers a detailed analysis of the social protection financing landscape, identifying challenges and proposing reforms. Suggested solutions include self-financed contributory schemes, fiscal and public finance reforms, debt relief and restructuring, climate finance instruments, and global funding mechanisms. The paper’s added value lies in politicizing a typically technical discussion and drawing comparative insights from five national contexts: Egypt, Lebanon, Jordan, Tunisia, and Morocco.

Historically, social protection in Arab States was designed to offset political system deficits and ensure political compliance through the provision of public health, education and subsidies, and public sector employment. Over time, these systems shrank to narrow targeted safety nets influenced by foreign aid, which allowed political and religious groups to keep providing social services and maintain their constituent bases. The Bretton Woods Institutions (BWIs) have influenced Arab social protection policies, further promoting the poverty alleviation approach, as well as indebtedness and austerity, thereby shrinking the fiscal space available for social spending.

As a result, income inequality is stark, with the top 10% earning 64% of total income, while the bottom 50% earn only 9%. Poverty rates in low-income and conflict-afflicted Arab countries are alarmingly high. Despite this, there is a lack of political will to implement reforms for universal social protection, with governments claiming infeasibility without international assistance. Hence, the traditional Arab social protection model, which emerged post-World War II, is increasingly being rejected amidst compounding crises, and rising poverty, unemployment and wage gaps. This rejection has further broken down social contracts in Arab countries.

The paper in particular emphasizes the importance of contributory schemes and redistributive tax systems as alternative mechanisms to finance universal social protection, focusing on the reforms needed to put these two tools into practice. Contributory schemes face challenges due to a lack of political will, public distrust, and a large informal labor sector. They should, nonetheless, be expanded to include informal labor, migrants, and refugees, with governments and employers significantly subsidizing contributions. In turn, tax systems are weakened by evasion, avoidance, and their regressive nature. Poor tax administration and corruption also deplete public resources, which are already strained by high military expenditures and other public spending priorities.

These alternative mechanisms are rooted in the concept of Social and Solidarity Economy (SSE), which prioritizes people and social outcomes over capital. Solidarity financing, encompassing diverse initiatives, such as mutual funds and cooperatives, is thus proposed as a viable solution. Institutionalizing successful solidarity systems and tying them to good governance is likewise recommended. Moreover, climate finance and debt restructuring present opportunities to channel resources into social spending. As for fiscal decentralization, it is found to be able to strengthen local governance and community-led initiatives when demographic and sectarian hurdles are absent.

The paper suggests a comprehensive set of solutions while analyzing their feasibility in the different Arab contexts, given their specificities. The solutions are translated into a set of policy recommendations that are addressed to governments or International Financial Institutions (IFIs) for their implementation, either in the short-medium run or in the long run, depending on the current level of their political will vis-à-vis each reform. The ultimate aim of these reforms is to renew social contracts in Arab countries and achieve sustainable, inclusive, and effective social protection systems that are mostly domestically financed.

Table of Contents

Introduction            1

Social Protection in the Arab Region: How Competing Priorities and Demands Shape Policies            2

The Challenges of Financing Universal Social Protection in the Arab Region      5

Barriers to Contributory Schemes: Insufficient Political Will, Institutional Fragmentation, and Lack of Public Trust           6

Public Finance and Fiscal Policies: The Inherent Insufficiencies in Government-Financed Schemes         8

The Multilayered Impact of IFIs’ Policies    13

Alternatives and Missed Opportunities                        30

Contributory Schemes: Redesigning What Is Possible       32

Taxation and Fiscal Reforms: Increasing the Tax Base and Revenues from Progressive Fiscal Tools       32

Climate Finance: The Missed Opportunity  34

Debt Restructuring and Other Potential Alternatives: A Range of Options to Choose from as Feasible   36

Conclusion and Policy Recommendations       38

Short-Medium Term Solutions: What Can Be Done           38

Long-Term Solutions: What Could Be Done           39

The views represented in this paper are those of the author(s) and do not necessarily reflect the views of the Arab Reform Initiative, its staff, or its board.