Risk Sharing in the Middle East and North Africa: The Role of Remittances and Factor Incomes

Abstract

This paper investigates welfare gains and channels of risk sharing among 14 Middle Eastern and North African (MENA) countries, including the oil-rich Gulf region and the resource scarce economies such as Egypt, Morocco and Tunisia. The results show that, for the 1992-2009 period, the overall welfare gain across MENA countries is higher than those documented for the Organization for Economic Cooperation and Development (OECD) nations. In the Gulf region, the amount of factor income smoothing does not differ considerably when output shocks are longer-lasting than transitory; whereas the amount smoothed by savings increases remarkably when shocks are longer-lasting. By contrast, both factor income flows and international transfers respond more to permanent shocks rather than to transitory shocks in the non-oil MENA countries. The results also show that a significant portion of shocks is smoothed via remittance transfers in the economically less developed MENA countries, but not in the oil-rich Gulf and OECD countries. Finally, for the overall MENA region, a large part of the shock remains unsmoothed, suggesting that more market integration is needed to remedy the weak link of incomplete risksharing.