THE OTHER HALF OF THE DEAL:

[T]here is a strong rationale for moving away from universal consumer subsidies, especially for fuel--at a minimum because of how heavily subsidies weigh on the budget. Yet, attempts at reforms have caused protests, at times violent, even when measures were taken to mitigate the effect on the poor.

Opposition to subsidy reform is so strong because consumer subsidies are at the heart of the unspoken social compact in which Arab citizens give up their voice and tolerate low government accountability in exchange for subsidies, free education and medical care, and public jobs. That social contract is being tested by a burgeoning youth population and emptying budget coffers. Dissatisfaction is exacerbated by the failure of many Arab states to deliver adequate services in the subsidized sectors such as public transportation. In many Arab countries, private and mostly informal operators provide the lion's share of transportation services. These operators stepped in where the state failed to deliver and in many ways the fuel subsidy was a transfer in kind to compensate the non-state operators for doing the state's job. The removal of fuel subsidy is perceived by the often-large number of small operators as a transfer from their pockets to those of a state that has done nothing to deserve it.

A new approach to reform is thus needed to account for the dynamics of the constantly evolving social contract between the (political and economic) elites and the people. Reform of consumer subsidies cannot be considered independently of the implicit producer subsidies including to inefficient state-owned enterprises and exclusive access to public contracts by cronies. The approach should articulate the broader vision of economic transformation toward a more genuine private sector and therefore address both consumer and producer sides. Transformation should also be complemented by a more vibrant social protection system that cushions individuals from bad economic shocks and poverty. Currently, protection systems in Arab countries are limited, inefficient, and fragmented. Well-designed and well-implemented systems can encourage more individual risk-taking and the development of entrepreneurship and sustainable private sector development.

The inability of many Arab governments to deliver reliable basic services such as electricity, water, waste management, public transportation, and telecoms is at the heart of the distrust. While universal subsidies should be reformed promptly, it is appropriate that the government first improve its performance and encourage competition in key sectors on which citizens depend. Such reforms would improve the quality of services making it easier to justify to consumers the higher tariffs that would result from reduced subsidies.

Transparency and data disclosure is essential to reform in the public sector and to create accountability mechanisms to limit corruption. In too many Arab countries, there is limited open government, which reduces the likelihood of achieving open markets that have no barriers to entry. For instance, the lack of transparent public procurement and the failure to digitalize government payments and receipts encourage red tape and the capture of markets by elites with connections to the government. What is more, inadequate disclosure of data and statistics prevents evidence-based policymaking and limits the ability of governments to self-correct and avoid big mistakes. In other words, the burden of reforms in Arab countries should fall first on governments to help ensure that citizens will accept the burdens occasioned by transformative reforms.

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