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«The Effects of Fiscal Policies on the Economic Development of Women in the Middle East and North Africa Nicole Laframboise and Tea Trumbic © 2003 ...»

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WP/03/244

The Effects of Fiscal Policies on the

Economic Development of Women in the

Middle East and North Africa

Nicole Laframboise and Tea Trumbic

© 2003 International Monetary Fund WP/03/244

IMF Working Paper

Middle East and Central Asia Department

The Effects of Fiscal Policies on the Economic Development of Women in the

Middle East and North Africa

Prepared by Nicole Laframboise and Tea Trumbic1

Authorized for distribution by Mohammad Shadman-Valavi December 2003 Abstract This Working Paper should not be reported as representing views of the IMF.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Statistics indicate that the economic and social development of women in the Middle East and North Africa (MENA) compares unfavorably with most regions in the world. This paper assesses the influence of government expenditure and taxation policies on the economic and social welfare of women in the region. On the expenditure side, we test the explanatory power of public social spending in the determination of key female social indicators. We find that the relatively weak social outcomes for MENA women are not explained by the amount of government social spending, suggesting the answer lies in the efficiency and reach of present spending. With respect to taxation, the main issues in the literature on gender bias in taxation are highlighted and applied in a general manner to the MENA context. Some simple policy recommendations are suggested.

JEL Classification Numbers: H2, H5 Keywords: government social spending, social indicators, gender bias Authors’ E-Mail Addresses: nlaframboise@imf.org, ttrumbic@imf.org The authors are grateful to Rina Bhattacharya, Erwin Tiongson, Eric Mottu, Hamid Davoodi, and Ludvig Soderling for their helpful comments and suggestions. Presented at the Annual Joint Seminar organized by the Arab Fund for Economic and Social Development and the Arab Monetary Fund, in cooperation with the World Bank and the International Monetary Fund, at the Arab Fund Headquarters in Kuwait, October 20-21, 2003.

-2Contents Page I. Introduction

II. Background

III. Comparative Study: Economic and Social Indicators of Women by Region

IV. Effect of Government Spending on Social Outcomes of Women in MENA

A. Survey of Recent Work

B. Data Set

C. Estimation and Results

V. Taxation: Sources of Possible Gender Bias and Considerations for MENA

A. Survey of Recent Literature

B. Considerations for MENA

VI. Conclusions and Policy Implications

Tables

1. Public Health and Education Expenditure: Bivariate Regressions

2. Public Education Spending and the Female Secondary Enrollment Rate

3. Public Health Spending and Mortality Rate

Figures

1. Selected Economic and Education Indicators

2. Selected Government Expenditure and Education Indicators

3. Selected Government Expenditure and Health Indicators

4. Central Government Revenues

Appendix Country Groups for Regions Presented in Figures

References

-3

–  –  –

Much has been written about the weak rates of economic growth in the Middle East and North Africa (MENA) over the past quarter century. Most recently, the topic was explored in the IMF’s September 2003 World Economic Outlook, and has been the subject of many analytical papers.2 These papers point to an array of structural causes for the region’s low growth performance, with common ground usually staked around the following characteristics: large public sectors, a high level of trade protection, restrictive labor markets, weak institutions, and political instability. These factors resulted in weak investment efficiency and low and declining labor productivity.

MENA’s experience with economic growth was also featured in the comprehensive and insightful Arab Human Development Report (UNDP, 2002), which focused on the status of human capabilities in the Arab world. The authors pointed in particular to the underutilization of Arab women’s capabilities as an important factor in the region’s poor economic performance. “Arab women remain marginalized and underutilized in all arenas, notably in terms of their economic, intellectual and leadership abilities.”(page 98). The report stresses that efforts to mobilize the potential of half of the population of Arab countries will have a positive impact on economic growth. A new report by the World Bank drew the same conclusion, and estimated that per capita growth in GDP could have been 0.7 percent higher on average had female labor force participation reached its potential over the past decade.” 3 Indeed, the share of MENA women in the formal workforce remains well below participation rates in comparator country regions, and reflects the performance of other indicators of women’s development in MENA, such as fertility rates, female education levels, and the participation of women in the political and administrative processes. Many developing countries exhibit considerable gender inequality in these areas; however, the MENA region places consistently well behind Latin America and East Asia, just above South Asia.4 This is more noteworthy when account is taken of relative per capita output (PPP basis), where MENA outperforms East Asia and the Pacific and South Asia (and sub-Saharan Africa). As noted in the Arab Human Development Report, the MENA region is said to be “richer than it is developed” in terms of human development indicators, a reflection of the region’s history of investing in physical capital over human resources.





Abed (2003), Dasgupta and others (2002), Keller and Nabli (2002), Sala-i-Martin and Artadi (2002), Makdisi, Fattah, and Limam (2000), and Davoodi and Erickson von Ullmen (2001) World Bank (2003).

The regions included for purposes of comparison are: East Asia and Pacific, Europe and Central Asia, Latin America, and South Asia. See Appendix I for a list of countries in each region.

-4The point of comparison is not to rank regions by performance, but to highlight the opportunity costs of not exploiting the economic and human potential of women. Evidence of these costs has been documented in the literature exploring the linkages between gender inequality and economic growth, and the linkages between gender inequality and specific development goals. For instance, gender inequality in education and access to resources can prevent reductions in fertility and child mortality, and hold back the rise in education levels of successive generations.5 The purpose of this paper is to assess the influence of government expenditure and taxation policies on the economic and social welfare of women in MENA. On the expenditure side, we test the explanatory power of public social spending on key female social indicators. The intuitive policy assumption being tested is that the higher the social spending, the better the social outcome. However, in line with earlier research, we find that the relatively poor showing of women in this region is not explained by the amount of government social spending; hence the answer must lie in the effectiveness of existing spending. With respect to taxation, the main issues in the literature on gender bias in taxation are highlighted and applied in a general manner to the MENA context. Some simple policy recommendations based on principles of equity and efficiency are suggested.

The paper is structured in the following manner: Section II examines earlier research on the effect of gender inequality on growth and development goals, and points out the relevance of the topic for the IMF. Section III presents descriptive data on income, government social spending, and indicators of the health and education of women in MENA relative to women in comparable developing country regions. Section IV is devoted to an empirical study of the effect of government spending on certain social indicators of women.

Section V reviews the main gender issues related to taxation policies and applies them to the MENA context. Section VI draws general conclusions and highlights the implications for fiscal policy and IMF policy advice.

II. BACKGROUND

The extent to which gender inequality in education reduces economic growth rates was examined by Klasen, who found sizable effects, directly in terms of lower human capital, and indirectly through its impact on investment and population growth.6 He estimated that annual economic growth rates in MENA since 1960 could have been raised by up to

0.9 percentage point had the education of women been more advanced.

Hill and King (1995), Klasen (2002 and 1999), Murthi, Guio and Drèze (1995), Summers (1994), Thomas (1990 and 1997), World Bank (2001).

Klasen (2002), Dollar and Kraay (2000), Drèze and Sen (1989), Pritchett and Summers (1996), Ravallion (2001), UNDP 1996, World Bank 2000.

-5Other theoretical works examine the links between gender inequality in education and earnings on fertility and economic growth. Studies by Lagerlöf and Galor & Weil showed that gender inequality in education can result in high fertility, low economic growth and ongoing inequality in education, leading to a vicious circle. Empirical studies using international panel datasets generally show that, among other things, investment in human capital is associated with higher growth, and population growth dampens economic growth.7 A few empirical studies examining specifically the effect on income levels of low female school enrollment have found a strong positive correlation.8 This paper was prepared for a seminar on “Arab Women and Economic Development” hosted jointly by the Arab Fund for Economic and Social Development and the Arab Monetary Fund. In practice, this topic falls more under the purview of the World Bank and different UN agencies. That being said, the economic development of women is relevant for the IMF since it is captured under the broad sweep that defines the Fund’s mandate, including “contributing...to the development of the productive resources of all members...” (Article I (i)). In other words, the topic is important to the extent that it affects the overall growth potential of IMF member countries, and reflects the allocation and distribution of income within members.

For instance, Fund policy advice on the size of the public service wage bill or on tax reforms will have first order consequences for the employment and incomes of women, and for the incentive structure behind women’s decisions about education, reproduction and labor force participation. In terms of indirect effects, recommendations regarding the size of the fiscal deficit in the context of overall fiscal sustainability will lead to decisions, for example, on the allocation of public spending on health. Research has shown that public spending on health care has a bigger impact on the poor, thus can reduce poor-rich differences in health status.9 However, few studies have considered the effect of public spending specifically on the health or education status of women.

Whether low growth causes high fertility or vice versa is slightly controversial. Many studies can be cited supporting both views, including: Barro (1991), Galor and Weil (1996), Asian Development Bank (1997), Easterly and Levine (1997), Bloom and Williamson (1998), Lagerlof (1999), and Easterly (2001).

Hill and King (1995), Dollar and Gatti (1999), Knowles and others (2002). Earlier studies by Barro and Lee (1994) and Barro and Sala-i-Martin (1995) had strange results because of econometric problems related to multicollinearity and the need for dummy variables to control for a region-related data anomaly.

Gupta, Verhoeven and Tiongson (2001), Le Grand (1987), World Bank (1995), Brockerhoff and Hewett (2000), Gakidou and King (2000). This issue took on increased importance with the introduction of the HIPC initiative since the resources freed up by debt relief under HIPC were to be directed to health and education.

-6

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III. COMPARATIVE STUDY: ECONOMIC AND SOCIAL INDICATORS OF WOMEN BY REGION

A survey of data on government social spending and key health and education indicators aggregated by region is presented in Figures 1–3.10 The aggregated data in this section comes from the World Bank’s World Development Indicators on education (EDStats) and health data (HNPStats). (See Appendix for the countries in each region.) Social spending is examined since it is the most readily available policy instrument for the provision of social services to all citizens, including women (Tanzi, 1999). 11 In addition, with the new emphasis on social conditionality under external assistance programs, there has been increased focus on the productivity of social spending and its effectiveness at improving social equity and economic growth.



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