Harnessing Social Safety in a Context of Changing Social contracts: Compensation Schemes and Subsidy Reforms in the GCC

At the end of 2014 and the beginning of 2015, multiple GCC countries increased energy prices and hinted at a longer-term reform of the subsidy system. Truly reforming the subsidy system (as opposed to a one time increase due to favourable political economy conditions) would signify a remarkable shift in the implicit social contract that governed the Gulf region for decades. In that social contract, Government distributed welfare from oil revenues by offering low-cost or free-of-charge goods and services. Energy subsidies were and remain a critical corner stone in this social contract. Increasing energy prices will therefore not only inevitably affect household welfare, but might also be considered as a sign of government breaking its part of the deal.

It is therefore that reforming governments are investigating how they can develop sound and targeted social safety nets as to offer timely compensation for energy subsidy reforms. This is a daunting task, as it requires innovations in, among others, intra-governmental coordination, social data collection, social security institutions and general political culture. Many countries in the MENA region have implemented subsidy reforms earlier (and continue to do so today). They have already investigated and implemented various compensation schemes. Whereas there are notable political economy and other differences within the MENA region, it is useful to review the compensation schemes used in the MENA region and verify their potential usefulness and feasibility in a GCC context.

The proposed paper will first review compensation schemes used in the MENA region, to then identify their level of applicability in a GCC context. The paper will evaluate how the schemes operated, what their respective strengths and weaknesses are, and how governments developed the political culture and institutional capacity to deliver more targeted social assistance. I will focus on developing social data collection and registries, successfully tightening coverage and the necessary financing to implement schemes. It will particularly discuss the political economy challenges associated to setting up the institutional framework from planning over coordinating to implementing social assistance. It will evaluate these challenges in a GCC context and make specific recommendations as to what are the key next steps for GCC countries to better target social assistance.

By: Tom Moerenhout

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