An overview of economic and social risks and reforms in the social protection system in the MENA region

World Bank

English

DigitalCommons@ILR

 
 
  S E C T O R  B R I E F  
 
 
 
SOCIAL PROTECTION IN MENA 
 
 
 
Yemen Second Social Fund Project 
 
In May 2000, the World Bank approved 
a credit to Yemen in the amount of 
US$75 million (56 million SDR) to 
support the Second Social Fund for 
Development Project. 
 
The objective of the project is to 
improve the range of services and 
options available to the poorer 
segments of the Yemeni population 
through a combination of community 
development, capacity building, and 
micro-finance programs. The project will 
also continue to support the Yemen 
Social Fund for Development, which 
was financed by the Bank, and has 
proven to be a significant element in 
Yemen's strategy of spreading the 
benefits of growth and protecting the 
poor.  
 
The project is expected to benefit the 
poor who lack access to essential 
services, as well as disadvantaged 
communities experiencing high rates of 
unemployment or underemployment. 
Project benefits would fall into three 
areas:  1.) Benefits would accrue 
directly to the poor through: (a) the 
creation of temporary and permanent 
employment; (b) greater access to 
essential social services; and (c) 
greater economic integration of women 
through access to health services, an 
improved water supply, and access to 
micro-finance and education services. 
2) The project will improve the 
capacities of domestic non-
governmental and local government 
entities to plan and implement 
development projects, thereby 
complementing the activities of the 
central government.  3) The project will 
make special efforts to assist vulnerable 
groups (e.g., destitute women, street 
children, orphans, the mentally- and 
physically-handicapped). 
Regional Issues and Strategic Directions 
 
The MENA region faces important economic and social risks that threaten 
investments in human capital and compromise the welfare of the population: 
 
Given an incomplete agenda of structural reforms, economic growth remains weak 
and erratic. Several studies cite the region’s worsened total factor productivity 
(TFP) growth as a primary reason for low economic growth (see Keller and Nabli, 
2002; Dasgupta et al., 2002) and conclude that TFP growth in MENA has not been 
positive for the last thirty years. At the core of the problem are such factors as an 
unfriendly private sector business environment, public sector dominance in 
economic activities, underdeveloped financial sectors, and inadequate levels of 
human capital — a recent study found that education, by gearing students toward 
public sector employment, has failed to contribute to economic growth (Pritchett, 
1999). 
 
Economic growth in the region is also affected by external shocks as well as social 
and political instability. The lack of economic diversification and dependence on 
commodities has exposed many countries not only to oil-price volatility but also to 
trade shocks and the post-1998 global economic decline. Regional political 
events—including the Palestinian-Israeli conflict, September 11, and the Afghan 
and Iraq wars—have also imposed a toll on the countries.   
 
Due to a rapidly growing labor force, unemployment is becoming one of the main 
development challenges. Driven by still-high fertility rates and increasing female 
labor participation rates, the labor force is projected to grow by more than four 
million units, on average, each year between now and 2030.  This will require the 
creation of more than fifty million new jobs between 2002 and 2015. The labor 
force growth rate is expected to decline gradually from the current 3.3 percent per 
year to 1.8 percent only in the second half of the 2020s. In the absence of 
institutions that support private sector lead growth and a dynamic labor market, the 
unemployment rate, currently estimated at around 16%, will likely rise.  The 
unemployment problem is more pronounced in Algeria, Egypt, Iran, and Morocco, 
which together account for two-thirds of the labor force in the region. 
 
The gradual integration into the world economy brings new opportunities but at the 
same time new sources of risks and new constraints. International competition will 
impose important reallocations of resources across sectors and the restructuring of 
public firms. The flexibility integral to the development of product and service 
markets will diminish the number of “guaranteed for life” jobs.  At the same time, 
the requisite monetary and fiscal discipline will limit expenditures in the social 
sectors.  In addition, growth, transformations in the socioeconomic structure, 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
urbanization, and an increase in the share of women participating in the labor force 
can reduce the effectiveness of informal social protection mechanisms (.e.g., the 
family and/or kinship ties).   
 
Current social protection systems are not well adapted to the current 
socioeconomic environment: 
 
All countries in the region have put in place comprehensive public social protection 
systems that combine labor market programs, social insurance programs, and 
social assistance programs. The goal of these programs is to assist individuals and 
families in managing social risks, which can stem from man-made (unemployment, 
inflation) or natural sources (disease, death, adverse weather).  Social protection 
interventions help lessen the economic effects of shocks and help promote the 
accumulation of human capital among the poor and vulnerable. Most social 
protection systems, however, are facing problems. 
 
Labor Markets.  Across the region, the public sector has been operating as an 
employer of last resort. This is particularly true in oil-rich countries such as Algeria, 
Iran, and Libya. At the same time, instead of focusing on income protection, 
governments have focused on job protection.  The results have been rigid labor 
regulations that reduce incentives to hire workers, an imbalance between worker 
protection within and outside the firm, and a series of often ad-hoc programs such 
as supply-driven vocational training, limited job-search assistance, and wage 
subsidies that attempt to stimulate job creation.  
 
These programs receive substantial public resources, yet their effectiveness 
remains in doubt.  Most of these programs have continued to operate in the 
absence of appropriate monitoring and impact evaluation systems. Moreover, 
international experiences suggest that the programs cannot substitute for structural 
reforms that generate private sector investment and growth. Moreover, the costs of 
these programs, particularly if not well designed, can surpass their social benefits.  
In essence, in an attempt to avoid job destruction, governments have also 
hampered job creation and the programs as currently implemented to address 
unemployment have not been successful.   
 
Social Security System. Most countries in the region have developed health 
insurance and pension systems.  Algeria, Egypt, and Iran also have an 
unemployment insurance system.  In general, the insurance system faces 
problems in terms of design that affects financial sustainability, incentives and 
equity. 
 
Health insurance systems are affected by weak institutional capacity to manage, 
regulate, and supervise. In all cases, there is little or no information regarding 
utilization patterns and unit costs and it is therefore not possible to price health 
insurance plans. As a result, contributions to the health system are ad-hoc and 
often insufficient to finance generous benefits packages.  At the same time, the 
free health care offered through the public system reduces incentives to enroll in 
the insurance scheme and thus impairs and reduces the contributory base. Another 
issue is related to inadequate payment mechanisms for providers, mostly public 
providers. Current practices do not generate incentives to control costs and 
improve the quality of care. 
 
All countries in the region have implemented defined-benefit (DB) pensions 
systems that provide old-age, disability, and survivorship pensions.  While most 
schemes still own some reserves, they are mainly managed on a pay-as-you-go 
basis.  Pension systems tend to be fragmented, with at least one separate scheme 
for public and private sector workers, with different contribution and benefit rules. 
This restricts the mobility of the labor force. In the majority of cases the pensions 
systems have been given mandates that are too large.  Replacement rates for the 
full-career worker often surpass 80 percent of the last salary across levels of 
income, and minimum pensions can exceed 40 percent of the average wage. 
These large mandates reduce incentives to better diversify the sources of savings 
for retirement and simply are not affordable. Contribution rates and retirement ages 
are not aligned with the current levels of income replacement. Hence, despite still-
favorable demographics, most systems are accumulating large implicit pension 
debts that threaten macroeconomic stability and have the potency to become the 
source of important adverse intergenerational transfers.  In addition, benefit 
formulas and eligibility conditions do not follow best practices in the design of DB 
schemes. Today’s regulations create incentives to strategically manipulate wages 
and to retire early. They also generate large variations in implicit rates of return 
across individuals as a function of wage histories and enrollment/retirement 
strategies. Hence, while distribution is taking place within the DB schemes, it is not 
necessarily from high- to low-income. 
 
Social Assistance Programs, such as public works, food subsidies, cash 
transfers, and social funds, have been used to help reduce poverty and mitigate 
income shocks for the poor. In MENA countries, informal mechanisms abound in 
rural areas, such as transfers from family and non-government sources, as formal 
methods of social protection seldom extend to the rural population. Migration too 
has played an important role as a risk-coping mechanism. 
 
Unfortunately, social assistance programs have not been designed within the 
context of an integrated social protection strategy. There is little or no coordination 
between the various institutions involved in the implementation of these programs. 
Moreover, the majority are not appropriately monitored, targeted, and evaluated. 
Hence, it is frequent to observe duplications between programs, leakages that 
reduce the benefits received by the poor and vulnerable, and ineffective distribution 
systems. The efficiency of these programs—especially those involving subsidies—
can be improved. 
 
Various reforms in the social protection system are now being considered: 
 
Governments and international partners recognize that prudent macroeconomic 
policies, better governance, and more efficient regulatory institutions are requisite 
elements of a global social protection strategy.  It is also important to improve the 
effectiveness of the social protection system while involving the private sector and 
civil society in developing, implementing, and managing the social protection 
programs. Some of the necessary interventions in labor markets, social insurance 
systems, and social assistance programs are discussed below. 
 
The proposed strategy regarding active labor market programs (ALMPs) and 
policies has four pillars: (i) review labor market regulations to provide more 
flexibility to firms while enforcing labor standards; (ii) design appropriate programs 
(e.g., severance packages and/or unemployment insurance and job search) to 
protect the income of workers transiting between jobs; (iii) rigorously assess the 
impact of ALMPs and gradually phase out those that are not cost-effective; and (iv) 
reform vocational training programs to reduce fiscal costs and to be more 
responsive to market demands. 
 
Regarding social insurance, the focus is in the area of pension reform. The 
recommendation is to adopt an integrated vision that looks not only at the current 
public schemes but also at the role that occupational plans and the insurance 
sector could play as sources of voluntary savings for retirement.  There are many 
possibilities in terms of design, but in all cases the following principles will need to 
be respected:  (i) the system should provide adequate pensions for retirement; (ii) 
the system should be financially self-sustainable and secure; (iii) the system should 
allow for a proper diversification of savings for retirement; (iv) the system should be 
administratively efficient; and (v) if redistribution takes place it should be 
transparent and progressive.  A priority is to reform current defined-benefit pay-as-
you-go systems to improve financial sustainability, efficiency, and equity. 
Necessary interventions include: (i) gradually reducing the current mandate of the 
schemes; (ii) integrating schemes for civil servants or at least creating “bridges” 
that facilitate labor mobility across sectors; (iii) bringing benefit formulas and 
eligibility conditions up to the standard, to reduce economic distortions and make 
the systems sustainable; (iv) identify mechanism to finance the current implicit debt 
of the systems in a transparent way; and (v) support the development of the 
necessary regulatory and supervisory framework to promote the emergence of 
voluntary private pensions. 
 
Social Safety Nets need to be better coordinated among institutional providers and 
should be better targeted, monitored and evaluated.  Public works programs can 
reach the poor through improved self-targeting wage-setting mechanisms. The 
financial sustainability of social funds also needs to be addressed through, for 
instance, a more intensive use of cost-recovery mechanisms. Further 
improvements in targeting food and other subsidies  to the poor are needed, as part 
of a broad poverty alleviation strategy; and the role of the government in 
microfinance could be limited to define the regulatory framework as part of a 
country's financial sector development strategy. Countries also need to consider 
diversifying safety net instruments, exploring conditional transfers following 
properly evaluated pilots. Several evaluations, mainly in Latin American countries, 
have shown the benefits that these programs can bring to promote the 
accumulation of human capital among the vulnerable and poor. 
 
At the same time, it is necessary to mainstream vulnerable (including disabled) and 
disadvantaged women and children into the broader Human Development agenda. 
Cross-sector strategies are needed to help achieve Education for All and to reduce 
child labor. Gender issues must be integrated into the policy process to ensure that 
women can participate in the economy and balance family responsibilities. 
Disability in MENA, which is emerging as a key development issue with negative 
impact on labor productivity, needs to be mainstreamed and the strategy should 
include a balanced approach among interventions that focus on prevention, 
mitigation, rehabilitation, and inclusion. 
 
How the Bank Supports This Strategy 
 
The focus in the MENA region in the area of social protection has been on the 
reform of vocational training programs (Bank operations have been developed in 
Algeria, Egypt, Jordan, Lebanon, Morocco, Tu nisia, and Yemen) and the design of 
social investment funds (Bank operations implemented in Algeria, Egypt, Morocco, 
the West-Bank Gaza, and Yemen). The latter is used to mitigate shocks on the 
most vulnerable groups and also as compensatory mechanisms to increase the 
access to and the quality of basic social and infrastructure services used by the 
poor. A few adjustment loans have addressed safety net concerns.  
 
Moreover, the Bank is engaged in addressing the critical needs of the countries in 
conflict, including the West-Bank Gaza and Iraq. In Iraq, the Bank is supporting the 
revitalization and reform of the social protection system. To this end, a workshop 
was held in June 2004 to discuss with senior policymakers the current situation of 
the system and the priorities in terms of technical assistance. In the West-Bank 
Gaza, the Bank is implementing an innovative conditional cash transfer program. 
 
The Bank has also expanded activities in the area of labor markets and pension 
reform. Regarding labor policies, the focus is on better understanding the 
functioning of labor markets and the impact of current programs.  In addition, the 
Bank is providing capacity building for the design and implementation of impact 
evaluation systems for active labor market programs.  A comprehensive study of 
the labor market in Tunisia was completed and reviews of employment strategies in 
selected countries are underway. The Bank also organized a workshop on impact 
evaluation methodologies in Casa Blanca in January 2004. To explore the linkages 
between labor market policies and other reforms aimed at job growth, the Bank is 
also organizing a regional conference on “Job Creation and Skills Development in 
the Middle East and North Africa Region (MENA) in Cairo, Egypt, in December 
2005. 
 
On pensions, the Bank has launched a large program of technical assistance which 
covers Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, 
Morocco, the West-Bank Gaza, Tunisia, Yemen, and Syria.  Through this program 
the Bank is assisting the governments to evaluate the financial situation of current 
schemes and designing multi-year reform programs. The assistance includes 
training and capacity building activities in areas such as modeling of pension 
systems, administration, and management of public pension funds. The regional 
report Pensions in the Middle East and North Africa Region: Time for Change was 
published in May 2005 and presented at a regional conference on pensions in 
Rabat Morocco. 
 
In addition child labor and protection has been an area of growing emphasis 
particularly through improving the understanding of the problem and aiming at 
mainstreaming necessary policy interventions into the broader Human 
Development agenda (e.g., Egypt, Jordan, Morocco, and Yemen). In addition, the 
emerging program on the inclusion of vulnerable youth and the disabled has made 
headway in the region, with strategic workshops held in the Bank in June 2003 and 
2004. 
 
All dollar figures are in US dollar equivalents.
September 2005
For more information, please contact: 
In Washington: Sereen Juma, Phone: 1 (202) 473-7199; Fax: 1 (202) 522-0003; Email:  
Sjuma@worldbank.org 
 


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