Speech

Public Wage Bills in the Middle East and Central Asia

January 9, 2018

Good morning. I am pleased to welcome you to today’s event. I would like to express my appreciation to Carnegie for hosting the event and to Michele Dunne for assembling such an impressive panel and for moderating today’s discussion.

Today we are launching a paper examining the management of public sector wage bills in the Middle East and Central Asia. It was prepared by a team of my IMF colleagues, led by Natalia Tamirisa and Christoph Duenwald.  

Globally, spending on public wages absorbs around one-fifth of total government spending on average. This has important fiscal and macroeconomic consequences. Moreover, the efficiency of public wage spending—as well as other public services—is crucial for the economy of any country, advanced, emerging market, or low-income. Such policies are essential if countries are to achieve strong, sustainable, and inclusive growth.

Our previous work has shown that the process of reforming public wage bills can be complicated and time consuming. It requires robust institutions and considerable political will. 

Moreover, reforms have a better chance of achieving sustained success when they are part of longer-term structural reforms to the economy. This will be more effective than short-term measures such as freezes on wages or hiring.   

The paper we are launching today looks at this topic through the lens of the Middle East and Central Asia. This is a region where policy makers are grappling with challenges related to public sector employment and wages. Addressing them will have important implications for economic welfare more broadly.

First, some countries are experiencing weak growth and high unemployment, with large numbers of young people entering the job market each year. This has put pressure on governments to find ways to generate jobs.

Second, many countries are facing a difficult budget environment, partly due to lower oil prices and falling foreign-exchange remittances. This requires fiscal adjustment.

Third, demands to improve the delivery of public services are increasing. But these services have fallen short of public expectations.

Finally, internal and regional conflicts have presented the challenge of managing unprecedented flows of refugees, migrants, and internally displaced people. This has placed immense burdens on government services across the region, further straining budget resources.

What does our paper find? One key finding is that wage bills in the Middle East and Central Asia are high compared to other regions. Average wage bills amount to 10 percent of GDP, compared to 6 percent in similar countries outside the region. If anything, this highlights the macroeconomic significance of the issue at hand.

This is partly a legacy of the past, reflecting the prevalence of state-driven economic models in many countries. Government too often acts as an “employer of first resort,” and public sector jobs serve as social support.  This strains resources that could be put to more effective use elsewhere.

In oil-exporting countries, we also see governments attempting to maintain social cohesion by offering high levels of compensation compared to the private sector. Needless to say, this has distorted labor markets and competitiveness.

In addition, the political instability and conflict across the region means that security-related employment is on the rise. This can have implications for public wage bills.

While the challenges of managing public-wage bills are perhaps most acute in the Middle East, there are also difficulties in the Caucasus and Central Asia. Public employment remains high in these countries despite slower government hiring during the transition to market-based economies over the past 25 years.

So what are the policy solutions? I will leave it to the other speakers this morning to detail our recommendations on this issue. But allow me to offer the big picture: governments need to pursue wage bill policies that are fiscally sustainable and focused on providing effective and equitable public services. Reforming public wage bills can make room for spending that enhances inclusive growth—including social protection—and promote higher and fairer growth in the Middle East and Central Asia. This requires reforms that are sequenced and designed to work in synergy with other policies.

I hope that our paper, and today’s discussion, will stimulate the debate around this important topic. Indeed, we have already benefitted significantly from our dialog with civil society organizations and labor unions. Our aim is to motivate better public service delivery. This, in turn, can support the broader reforms needed to increase private sector employment across the region—and boost sustainable and inclusive growth.      

I look forward to our discussion today, and hope it will deepen our understanding of these issues.  I will now hand the floor to Jihad.

Thank you.