Discussion Paper

Subsidy reforms in the Middle East and North Africa: strategic options and their consequences for the social contract

Vidican Auktor, Georgeta / Markus Loewe
Discussion Paper (12/2021)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

ISBN: 978-3-96021-149-5
DOI: https://doi.org/10.23661/dp12.2021
Price: 6 €

After independence, energy and food subsidies became a cornerstone of the social contracts in the Middle East and North Africa (MENA) countries. Governments spent heavily to reduce poverty and strengthen their own legitimacy. However, as government rents faded, subsidy spending became financially unsustainable and foreign donors pressed for reforms. Yet, reform has been challenging for all the governments as subsidies affect all consumers, therefore raising the risk of government delegitimisation. Several publications have analysed the subsidy reforms of various MENA countries, but few have systematically analysed their impacts on the prevailing social contracts. This paper shows that reforms in a key policy field such as subsidy spending can affect the nature of social contracts profoundly and distinctly, depending on the reform strategy. It assesses the reform processes that took place in Morocco, Egypt and Iran primarily between 2010 and 2017, thus before the United States once more tightened sanctions against Iran and before the COVID-19 pandemic broke out. We argue that governments applied distinct strategies to reduce subsidy spending without provoking major social unrest to reforms, with the effect that the social contracts of the three countries changed in quite different ways. Morocco’s government removed most subsidies, especially those that predominantly benefitted the middle-class. It explained the need for reforms, engaged in dialogue with society and implemented some compensatory measures for the poor. Thereby it succeeded in preserving substantial features of its prevailing social contract. The Egyptian government, in contrast, dismantled subsidy schemes more radically but without systematic information and consultation campaigns. Also, its compensatory measures remain limited, which shows that the government no longer relied on social benefits as a means of legitimisation. Instead, by using repression and a narrative of collective security, the emerging social contract has been transformed from being a provision to being a protection pact. Finally, Iran replaced subsidies with a generous quasi-universal cash transfer scheme, which was more cost-efficient and egalitarian. Even if inflation and external shocks eroded these benefits, the reform paved the way to a more inclusive social contract, at least for a couple of years. Lessons learnt from past social transfer reform strategies will be all the more interesting for MENA governments once they embark on post-COVID-19 reconstruction strategies, which are likely to compensate households for financial losses made during the COVID-19 crisis and help them make a new start in economic terms.