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Interesting papers on Egypt's economy...
#1 Great article by Carnegie covering Egyptian economy holistically...
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Good, broad assessment of Egypt's economy (slghtly dated, October 2007) - focus on reform eras of 1990-2007 with successes, pain points and recommendations… Worth a read, pretty fair and balanced, very well sourced, giving credit where due and identifying what went wrong (not just lambasting the system yaani) ...
SME specific: SMEs account for 75 percent of Egypt’s employment, 80 percent of its GDP, and 99 percent of its nonagricultural private sector. (Also, from a recent article: "Egypt comes 94th in the World Bank’s “Doing Business” measure of regulations. Small and medium-sized companies cannot get credit from state banks. Many small firms do not even have bank accounts. The new government is planning to create a financial instrument for small firms. It is a start, but the next government will have to do a lot more.")... |
Summary
So, though it could be accurately stated that the country has witnessed positive results at the macroeconomic level, it also should not be forgotten that those positive results were largely due to external factors and were combined with a failure to create a competitive environment, improve the regulations for doing business, reduce corruption, and promote transparency in state institutions and among political leaders.
The task of engaging in such a process and achieving its goals will be almost impossible unless the country builds dynamic, transparent, and effective institutions that can facilitate the process and sustain its outcomes.
Therefore, if Egypt is to meet its current economic challenges and engage in comprehensive reform, special attention should be paid to developing a set of formal and informal institutions that can define the rights and obligations for all actors in the economy and regulate the process of reform.
Egypt’s main task is to develop institutions that can achieve the desired economic reforms. In this paper, it has been argued that to make clear what the desired reforms are, certain institutional mechanisms need to be in place. Developing the institutions described above certainly does not mean that Egypt will automatically implement comprehensive economic reform with the outcomes guaranteed. It means, however, that the more concrete steps that are taken toward reaching a more inclusive social contract, the higher the potential will be for implementing comprehensive reform.
1. Institutions:
Three types of state institutions need to be developed: institutions that influence the work of the bureaucracy, institutions that shape politicians’ behavior by punishing or rewarding certain types of behavior—influencing the accountability and transparency of politicians—and institutions that widen political space and participation for Egyptian citizens.
Particular care should be given to improving the provision of welfare services, especially health and education, which have suffered during the reform era. (Source: http://www.jstor.org/pss/4007162 "This is evident if the pre- and post adjustment situations are analysed in terms of the poor's access to education and health services. The introduction of cost recovery measures has negatively impacted on the poor and increased their vulnerability to exploitation by exposing them to a wide range of 'hidden' and informal fees. Further, the introduction of special policies designed to mitigate the rising costs of education and health care are not being implemented due to a set of institutional and political reasons.")
2. Private Sector
One way in which economic reform can become more responsive to the needs of the SMEs is byintroducing private-sector representative organizations where both small and big enterprises interact; because SMEs are more numerous, their bargaining power in shaping economic policy would be strengthened.
In addition, the reorganization of business organizations according to the economic sector would help mitigate the side effects of the sectors’ shifting importance in the economy. Indeed, in this regard, the state should focus on targeting the potential drivers of future economic growth by selecting specific high-value-added sectors and rewarding those companies that succeed while withdrawing support from those that do not. Better monitoring and enforcing of responsible corporate practices are both necessary steps, particularly in the Special Economic Zones where labor rights are most often violated.
3. Civil Society
For instance, union leaders who restrict the union activities of their constituencies instead of representing them are not conducive to developing a consensus on reform.
In addition, Egypt needs to widen the space for political activities. This requires two main steps: making sure that the elections are fair and transparent and amending the regulations pertinent to the freedom of assembly and activities of political parties. Within the context of economic reform, expanding political space is important for two main reasons. First, it helps increase participation in the process of reform and it increases Egyptian citizens’ chances to benefit from the upsides of economic reform. Second, it puts pressure on the political parties in Egypt to develop specific economic programs and to formulate agendas to present to the voters, which would allow Egyptian citizens to assume a more proactive role in influencing the nature of economic reform efforts.
Conclusion:
Economic reform is by nature an uneven process, with resources and human power shifting across sectors. Determining which sectors should be promoted and which methods need to be used—as well as monitoring the implementation of reforms and protecting the vulnerable groups affected by them—are significant areas that require central coordination between the state, business, and civil society.
Finally, three main issues should be taken into consideration in the process of developing new and reformed institutions in Egypt. The first is the need to avoid building technocratic institutions that are disconnected from the realities on the ground. In the process of developing the needed institutions, it is important to consider the political issues that are pertinent to these institutions and infl uence their effectiveness, the ideological differences among various stakeholders in society, and the issue of legal reform in Egypt. The second main issue is the need to clarify the role, obligations, and rights of each institution to minimize conflict and avoid having institutions that are nonfunctional and dominated or hijacked by one side, for example, state actors or elites. The third main issue is the need to facilitate interaction among various institutions, to foster comprehensive economic reform that takes into account social policies and leads to a wider scope of ownership.
Interesting details:
The state’s large military expenditures and the effects of the wars of 1967 and 1973 weighed heavily on the economy, and the country was not able to sustain high rates of economic growth. According to World Bank data, average growth declined from 7.52 percent during the period from 1959/1960 to 1964/1965 to 2.85 percent during the period 1964/1965 to 1973.
Financing took place mainly through costly short-term credit and at the very high commercial interest rates prevailing at the time…at the end of 1981, Egypt’s foreign debt had amounted to more than 100 percent of its gross national product.
The government signed an economic stabilization program with the International Monetary Fund in May
1991 and a structural adjustment program with the World Bank in November 1991. This period witnessed the successful stabilization of the economy and serious privatization efforts, which resulted in about one-third of all SOEs’ assets being privatized between 1991 and 1998.
The second generation of reform, from 1998 to 2004, focused on trade and institutional measures. Several external and internal factors had pushed for this reform. External conditions had become more difficult after the global financial crises that many countries witnessed during the period 1997–1999. Internal
factors that lessened confidence in the economy included the 1997 terrorist attack in Luxor, which resulted in the killing of 62 people, including 58 tourists, and the “loan deputies” financial scandal. This scandal involved five former members of the People’s Assembly who were accused of using their political positions to get about LE 1.5 billion in loans from corrupt officials in state-owned banks. These internal events had repercussions for both the growth path of and trust in the Egyptian economy.
The government launched a comprehensive fi nancial sector reform plan in September 2004. By late 2006, more than half the banking sector had become privately owned. In June 2005, banks began to be required to have a minimum of LE 500 million in paid-up capital. Since the launch of the plan, most joint venture banks have been sold to the private sector, with the most notable sale being that of the Bank of Alexandria to a foreign bank in December 2006. As a result, the majority of banking assets have been placed in private ownership. In addition, over half of private-sector nonperforming loans (NPLs) were restructured by mid-2006, with public-sector NPLs being cleared with a capital infusion by the government since 2005, mostly from privatization receipts.
Understanding the significance of this shift [from socialist to market driven] requires looking more closely at the actors and process that led to the recent written changes in the social contract. In effect, the Egyptian government’s acceleration of the shift from a state-dominated economic model to a market economy since the early 1990s has generated support among certain sectors of the Egyptian population while at the same time alienating other sectors.
The political elite and state officials were in general skeptical about reform, especially the privatization of SOEs. They feared losing political and economic patronage options and rents as a result of reform. Nevertheless, they had to succumb to the prescriptions of the international financial institutions at a time of financial crisis. It is important to emphasize that their hesitancy did not indicate genuine and effective opposition to reform. On the contrary, the Egyptian political elite recognized the desirability of reforms but were concerned that these reforms, if conceivably taken too far, could undermine their own power. This hesitancy, which dictated the speed, breadth, and depth of reforms, was held by the political establishment itself and thus did not represent a form of opposition. However, it should be noted that a major reason for the reluctance of government officials to support reform is the priority given to political and regime stability, which could be challenged by new groups gaining power as a result of market reforms.
Support for economic reform policies—and, crucially, for their implementation— came from and was shaped by two main sources: those actors whose economic opportunities and influence would be increased by the reform, and those groups that are politically loyal to the regime because they are close to it or are already part of the establishment. A further important determinant of the situation is the limited role of formal business and labor representative institutions in shaping economic policy, an issue explored in greater detail below. Indeed, a direct link with the regime has proven more beneficial for business and union leaders than institutional channels such as membership in business associations or labor unions.
Business circles have influenced the way reform policies were implemented. In general, men with connections to the Egyptian government or military institutions benefi ted from favorable business terms, and the implementation of Egypt’s privatization program favored the wealthy business elite—or the
“whales,” as they are known locally. An example is the sale of Coca-Cola in 1993 to businessman Mohamed Nosseir. According to Sfakianakis, Nosseir’s relations with the then–minister of the public business sector, Atef Ebeid, allowed him to make the purchase with little competition. Nosseir would go on to sell the company after two years at more than triple the acquisition price. Another example was the move in the late 1990s to involve the private sector in the state cinema industry. Only two families were allowed to bid for and to operate the cinemas, due to connections with Egyptian politicians. The lack of
a competitive environment has also led to distrust of the aims of reform. An important example of making large gains in an uncompetitive environment is the case of the Zayat family in the beverage industry
(source: http://www.palgraveconnect.com/pc/doifinder/10.1057/9781403982148)
Although the business elite has been very influential in shaping reform efforts, as well as determining the outcomes and reaping the rewards, SME businesspeople have been too weak to have any influence on the reform process or its outcomes. This situation is related to two main factors. The first is their lack of participation in the reform process. The debate surrounding the nature and means of reform as well as reform plans and their implementation has been limited to a small group of technocrats, members of the Cabinet, and high-ranking members of the NDP. The second factor is the lack of representation of SME businesspeople in the People’s Assembly, and hence in committees that deal with reform issues, in contrast to the significant representation of the business elite.
The country’s balance of payment account registered surpluses of $1.8 billion in 2005 and $1 billion in 2006, which has helped the Central Bank increase its foreign reserves, which reached $22.7 billion (excluding gold) at the end of October 2006. (Today @ $24.8B: http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/egy/eng/curegy.htm)
Another issue to be raised in evaluating economic reform programs is the limited reduction in the size of state employment. Private-sector employment accounted for 70 percent of total employment in 2005, compared with 67 percent in 1990. Though the share of employment in SOEs declined during this period from 10 to 5 percent, the share of government employment actually increased from 22 to 26 percent, after registering a decrease in recent years. The Egyptian state is caught in a quandary. On the one hand, it wants to pursue reform efforts because its current economic conditions and external pressure from international financial institutions do not permit it to pursue expansionary measures and policies of granting subsidies. On the other hand, the social and political price of abandoning this role and public spending programs has been greater than what could be borne by the Egyptian state; it has been faced with resistance from people who are negatively affected by these measures, as is shown below.
Unemployment is mostly concentrated among youths in the age range of 15 to 24 years, with university graduates being the only education group that witnessed an increase in unemployment during the period. It should be noted that many graduates typically wait for years without looking for work in the private sector in the hope of finding employment in the public sector, where the work conditions are better, particularly for women. However, it seems that expectations are being modified as the chances of securing state employment are decreasing
Although it is obvious that more jobs have been created during the reform era, the evidence shows that these jobs have been created in sectors with low productivity. Indeed, while the share of agriculture in total employment declined from 40 percent in 1990 to 30 percent in 2003, the share of manufacturing also declined from 14 to 11 percent. In contrast, the share of trade and tourism rose from 9 to 13 percent, and the share of services rose from 22 to 27 percent, with an important role for the informal economy. A closer inspection of the sectoral composition of GDP at constant prices reveals that agriculture contributed to 15.5 percent of GDP in 2005/2006, compared with 16.5 percent in 2001/2002. Manufacturing contributed to 18.9 percent in 2005/2006, in contrast to 19.8 percent in 2001/2002. In contrast, over this period the contribution of gas increased from 2.9 to 4.7 percent of GDP, the contribution of restaurants increased from 1.8 to 3.3 percent, and the contribution of the Suez Canal increased from 2.3 to 3.4 percent. In other words, the recent growth pattern is not in productive sectors with the potential of enabling sustainable employment growth. A related feature is that Egyptian exports have become less diversified during the reform period, because the top twelve export items constituted 59 percent of total exports in 2003 compared with 37 percent in 1992. In addition, the new exports introduced during this period are of low value.
Opposition to reform efforts has been driven by three main factors. The first factor consists of ideological considerations marked by a lack of consensus on the nature and tools of economic reform, on the one hand, and the absence of effective participation by various stakeholders in the process and implementation of reform programs, on the other hand. Underlying the second factor are socioeconomic concerns. Many reform policies have been predicted to increase the gap between the Egyptian rich and poor before the masses can feel the positive effects. With unemployment and poverty already high, this has provoked resistance to reform from Egypt’s poor. Second, the consistent failure of reform efforts to address socioeconomic problems and the perception that this reform has generated more damages to society than benefits has fueled the drive to oppose the current reform efforts. Finally, the third factor driving opposition to reform efforts has been the efforts of certain members of the economic and political elite to secure their privileges in current and future economic arrangements.
The position of civil society, especially political parties (apart from the NDP) and small grassroots organizations, vis-à-vis current reform agendas is totally different from the position of the business and political elite, who are often close to if not part of the regime. Though civil society members agree with the government on the need for reform, they totally disagree on the nature and tools of reform… The main argument put forward in this regard is that the Egyptian economy is neither ready for such an open system nor capable of competing in the international market. Therefore, such steps would harm the economy, and especially SMEs.
The impact of this opposition on the reform agenda is limited. Such limitations are mainly related to three interlinked factors. The first is the absence of specific programs and visions that counter the current economic reform agendas. Even the economic program of the Muslim Brotherhood—which enjoys relatively better institutional capacity, compared with other secular and leftist political parties—is quite general and does not propose alternative economic policies.
The second interlinked factor is the lack of sufficient political space for civil society and the government’s control over many civil society institutions. In addition, the government controls civil society institutions, and it thus mobilizes their leadership to support its agendas and programs.
The third interlinked factor includes the internal weakness and problems of civil society in Egypt. Business associations and labor unions are often run to promote the personal patronage of their leaders, and they do not enjoy autonomy from the state, which manipulates them through direct links with their leaders.
Traditionally, labor unions in Egypt have been controlled by the regime, because unions are bound to be part of the state-controlled Egypt Trade Union Federation (ETUF). Membership in the ETUF is mandatory. According to the International Confederation of Trade Unions’ 2006 annual survey of violations of trade union rights in Egypt, “the 2003 labor law makes it legal for an employer to fi re someone without giving any reason.” Thus, unions have not been an effective lobby for economic reform. Instead, union leaders, who are mostly members of the NDP, have collaborated with the regime to limit the rights of public-sector workers.
Reform efforts in Egypt have suffered from three main interlinked constraints. First, they have lacked coordination with social policies and various sectoral policies. As seen above, the reform packages implemented in Egypt have focused mainly on macroeconomic and financial reform, with little attention given to social and structural problems. In a country like Egypt where social problems, including unemployment, poverty, and regional disparities are severe, such an approach is inadequate. The result of modifying this approach has been not only a failure to address these problems but also an increase in their severity during the reform era, combined with an incapability to mitigate the negative side effects of reform in the daily life of ordinary people. This failure has been an important impediment to sustaining deep reform, because Egyptian citizens have lost trust in the reform efforts and their objectives.
The second interlinked constraint is that Egypt has failed to create a healthy and enabling environment for conducting business and to build an economy that can compete in the global economy
The third interlinked constraint is that reform efforts in Egypt suffer from a lack of a consensus about issues of timing, means, and goals. Hence, changes in the social contract, due to the reform process, have not enjoyed consensus among main parties affected by the contract: state, market, and civil society. What makes this rift quite severe is the absence of mechanisms for debating the reform among all relevant stakeholders. Participation in policy making and policy implementation is limited to the ruling elite and their close associates in the business and political communities, without any effective participation from other stakeholders.
The SMEs represent the business sector that is most burdened by current heavy regulatory measures and thus faces considerable obstacles to doing business. SMEs account for 75 percent of Egypt’s employment, 80 percent of its GDP, and 99 percent of its nonagricultural private sector. According to the World Bank Investment Climate Survey, access to fi nance and the associated cost are among the top constraints impeding SMEs’ investment and growth.
As is illustrated in the next section, the problems in Egypt’s institutional and governance arrangements have limited the country’s capacity to implement better-coordinated reform programs that are more closely linked to social policies and allow a wider scope of ownership.
Egypt needs to develop a productive economy that can sustain a mode of growth less dependent on external factors while creating decent jobs for the unemployed, the underemployed, and new entrants into the labor market.
It should be emphasized that institutional development takes a long time. Given the nature of the Egyptian state and the main actors in the market and civil society, developing the necessary institutions and, most important, making them function properly within a short period of time seems unrealistic. Hence, Egypt should make the choice: Either start developing these institutions soon or lag behind. Building these institutions is the responsibility not only of the Egyptian state but also of the private sector and civil society.
So, though it could be accurately stated that the country has witnessed positive results at the macroeconomic level, it also should not be forgotten that those positive results were largely due to external factors and were combined with a failure to create a competitive environment, improve the regulations for doing business, reduce corruption, and promote transparency in state institutions and among political leaders.
The task of engaging in such a process and achieving its goals will be almost impossible unless the country builds dynamic, transparent, and effective institutions that can facilitate the process and sustain its outcomes.
Therefore, if Egypt is to meet its current economic challenges and engage in comprehensive reform, special attention should be paid to developing a set of formal and informal institutions that can define the rights and obligations for all actors in the economy and regulate the process of reform.
Egypt’s main task is to develop institutions that can achieve the desired economic reforms. In this paper, it has been argued that to make clear what the desired reforms are, certain institutional mechanisms need to be in place. Developing the institutions described above certainly does not mean that Egypt will automatically implement comprehensive economic reform with the outcomes guaranteed. It means, however, that the more concrete steps that are taken toward reaching a more inclusive social contract, the higher the potential will be for implementing comprehensive reform.
1. Institutions:
Three types of state institutions need to be developed: institutions that influence the work of the bureaucracy, institutions that shape politicians’ behavior by punishing or rewarding certain types of behavior—influencing the accountability and transparency of politicians—and institutions that widen political space and participation for Egyptian citizens.
Particular care should be given to improving the provision of welfare services, especially health and education, which have suffered during the reform era. (Source: http://www.jstor.org/pss/4007162 "This is evident if the pre- and post adjustment situations are analysed in terms of the poor's access to education and health services. The introduction of cost recovery measures has negatively impacted on the poor and increased their vulnerability to exploitation by exposing them to a wide range of 'hidden' and informal fees. Further, the introduction of special policies designed to mitigate the rising costs of education and health care are not being implemented due to a set of institutional and political reasons.")
2. Private Sector
One way in which economic reform can become more responsive to the needs of the SMEs is byintroducing private-sector representative organizations where both small and big enterprises interact; because SMEs are more numerous, their bargaining power in shaping economic policy would be strengthened.
In addition, the reorganization of business organizations according to the economic sector would help mitigate the side effects of the sectors’ shifting importance in the economy. Indeed, in this regard, the state should focus on targeting the potential drivers of future economic growth by selecting specific high-value-added sectors and rewarding those companies that succeed while withdrawing support from those that do not. Better monitoring and enforcing of responsible corporate practices are both necessary steps, particularly in the Special Economic Zones where labor rights are most often violated.
3. Civil Society
For instance, union leaders who restrict the union activities of their constituencies instead of representing them are not conducive to developing a consensus on reform.
In addition, Egypt needs to widen the space for political activities. This requires two main steps: making sure that the elections are fair and transparent and amending the regulations pertinent to the freedom of assembly and activities of political parties. Within the context of economic reform, expanding political space is important for two main reasons. First, it helps increase participation in the process of reform and it increases Egyptian citizens’ chances to benefit from the upsides of economic reform. Second, it puts pressure on the political parties in Egypt to develop specific economic programs and to formulate agendas to present to the voters, which would allow Egyptian citizens to assume a more proactive role in influencing the nature of economic reform efforts.
Conclusion:
Economic reform is by nature an uneven process, with resources and human power shifting across sectors. Determining which sectors should be promoted and which methods need to be used—as well as monitoring the implementation of reforms and protecting the vulnerable groups affected by them—are significant areas that require central coordination between the state, business, and civil society.
Finally, three main issues should be taken into consideration in the process of developing new and reformed institutions in Egypt. The first is the need to avoid building technocratic institutions that are disconnected from the realities on the ground. In the process of developing the needed institutions, it is important to consider the political issues that are pertinent to these institutions and infl uence their effectiveness, the ideological differences among various stakeholders in society, and the issue of legal reform in Egypt. The second main issue is the need to clarify the role, obligations, and rights of each institution to minimize conflict and avoid having institutions that are nonfunctional and dominated or hijacked by one side, for example, state actors or elites. The third main issue is the need to facilitate interaction among various institutions, to foster comprehensive economic reform that takes into account social policies and leads to a wider scope of ownership.
Interesting details:
The state’s large military expenditures and the effects of the wars of 1967 and 1973 weighed heavily on the economy, and the country was not able to sustain high rates of economic growth. According to World Bank data, average growth declined from 7.52 percent during the period from 1959/1960 to 1964/1965 to 2.85 percent during the period 1964/1965 to 1973.
Financing took place mainly through costly short-term credit and at the very high commercial interest rates prevailing at the time…at the end of 1981, Egypt’s foreign debt had amounted to more than 100 percent of its gross national product.
The government signed an economic stabilization program with the International Monetary Fund in May
1991 and a structural adjustment program with the World Bank in November 1991. This period witnessed the successful stabilization of the economy and serious privatization efforts, which resulted in about one-third of all SOEs’ assets being privatized between 1991 and 1998.
The second generation of reform, from 1998 to 2004, focused on trade and institutional measures. Several external and internal factors had pushed for this reform. External conditions had become more difficult after the global financial crises that many countries witnessed during the period 1997–1999. Internal
factors that lessened confidence in the economy included the 1997 terrorist attack in Luxor, which resulted in the killing of 62 people, including 58 tourists, and the “loan deputies” financial scandal. This scandal involved five former members of the People’s Assembly who were accused of using their political positions to get about LE 1.5 billion in loans from corrupt officials in state-owned banks. These internal events had repercussions for both the growth path of and trust in the Egyptian economy.
The government launched a comprehensive fi nancial sector reform plan in September 2004. By late 2006, more than half the banking sector had become privately owned. In June 2005, banks began to be required to have a minimum of LE 500 million in paid-up capital. Since the launch of the plan, most joint venture banks have been sold to the private sector, with the most notable sale being that of the Bank of Alexandria to a foreign bank in December 2006. As a result, the majority of banking assets have been placed in private ownership. In addition, over half of private-sector nonperforming loans (NPLs) were restructured by mid-2006, with public-sector NPLs being cleared with a capital infusion by the government since 2005, mostly from privatization receipts.
Understanding the significance of this shift [from socialist to market driven] requires looking more closely at the actors and process that led to the recent written changes in the social contract. In effect, the Egyptian government’s acceleration of the shift from a state-dominated economic model to a market economy since the early 1990s has generated support among certain sectors of the Egyptian population while at the same time alienating other sectors.
The political elite and state officials were in general skeptical about reform, especially the privatization of SOEs. They feared losing political and economic patronage options and rents as a result of reform. Nevertheless, they had to succumb to the prescriptions of the international financial institutions at a time of financial crisis. It is important to emphasize that their hesitancy did not indicate genuine and effective opposition to reform. On the contrary, the Egyptian political elite recognized the desirability of reforms but were concerned that these reforms, if conceivably taken too far, could undermine their own power. This hesitancy, which dictated the speed, breadth, and depth of reforms, was held by the political establishment itself and thus did not represent a form of opposition. However, it should be noted that a major reason for the reluctance of government officials to support reform is the priority given to political and regime stability, which could be challenged by new groups gaining power as a result of market reforms.
Support for economic reform policies—and, crucially, for their implementation— came from and was shaped by two main sources: those actors whose economic opportunities and influence would be increased by the reform, and those groups that are politically loyal to the regime because they are close to it or are already part of the establishment. A further important determinant of the situation is the limited role of formal business and labor representative institutions in shaping economic policy, an issue explored in greater detail below. Indeed, a direct link with the regime has proven more beneficial for business and union leaders than institutional channels such as membership in business associations or labor unions.
Business circles have influenced the way reform policies were implemented. In general, men with connections to the Egyptian government or military institutions benefi ted from favorable business terms, and the implementation of Egypt’s privatization program favored the wealthy business elite—or the
“whales,” as they are known locally. An example is the sale of Coca-Cola in 1993 to businessman Mohamed Nosseir. According to Sfakianakis, Nosseir’s relations with the then–minister of the public business sector, Atef Ebeid, allowed him to make the purchase with little competition. Nosseir would go on to sell the company after two years at more than triple the acquisition price. Another example was the move in the late 1990s to involve the private sector in the state cinema industry. Only two families were allowed to bid for and to operate the cinemas, due to connections with Egyptian politicians. The lack of
a competitive environment has also led to distrust of the aims of reform. An important example of making large gains in an uncompetitive environment is the case of the Zayat family in the beverage industry
(source: http://www.palgraveconnect.com/pc/doifinder/10.1057/9781403982148)
Although the business elite has been very influential in shaping reform efforts, as well as determining the outcomes and reaping the rewards, SME businesspeople have been too weak to have any influence on the reform process or its outcomes. This situation is related to two main factors. The first is their lack of participation in the reform process. The debate surrounding the nature and means of reform as well as reform plans and their implementation has been limited to a small group of technocrats, members of the Cabinet, and high-ranking members of the NDP. The second factor is the lack of representation of SME businesspeople in the People’s Assembly, and hence in committees that deal with reform issues, in contrast to the significant representation of the business elite.
The country’s balance of payment account registered surpluses of $1.8 billion in 2005 and $1 billion in 2006, which has helped the Central Bank increase its foreign reserves, which reached $22.7 billion (excluding gold) at the end of October 2006. (Today @ $24.8B: http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/egy/eng/curegy.htm)
Another issue to be raised in evaluating economic reform programs is the limited reduction in the size of state employment. Private-sector employment accounted for 70 percent of total employment in 2005, compared with 67 percent in 1990. Though the share of employment in SOEs declined during this period from 10 to 5 percent, the share of government employment actually increased from 22 to 26 percent, after registering a decrease in recent years. The Egyptian state is caught in a quandary. On the one hand, it wants to pursue reform efforts because its current economic conditions and external pressure from international financial institutions do not permit it to pursue expansionary measures and policies of granting subsidies. On the other hand, the social and political price of abandoning this role and public spending programs has been greater than what could be borne by the Egyptian state; it has been faced with resistance from people who are negatively affected by these measures, as is shown below.
Unemployment is mostly concentrated among youths in the age range of 15 to 24 years, with university graduates being the only education group that witnessed an increase in unemployment during the period. It should be noted that many graduates typically wait for years without looking for work in the private sector in the hope of finding employment in the public sector, where the work conditions are better, particularly for women. However, it seems that expectations are being modified as the chances of securing state employment are decreasing
Although it is obvious that more jobs have been created during the reform era, the evidence shows that these jobs have been created in sectors with low productivity. Indeed, while the share of agriculture in total employment declined from 40 percent in 1990 to 30 percent in 2003, the share of manufacturing also declined from 14 to 11 percent. In contrast, the share of trade and tourism rose from 9 to 13 percent, and the share of services rose from 22 to 27 percent, with an important role for the informal economy. A closer inspection of the sectoral composition of GDP at constant prices reveals that agriculture contributed to 15.5 percent of GDP in 2005/2006, compared with 16.5 percent in 2001/2002. Manufacturing contributed to 18.9 percent in 2005/2006, in contrast to 19.8 percent in 2001/2002. In contrast, over this period the contribution of gas increased from 2.9 to 4.7 percent of GDP, the contribution of restaurants increased from 1.8 to 3.3 percent, and the contribution of the Suez Canal increased from 2.3 to 3.4 percent. In other words, the recent growth pattern is not in productive sectors with the potential of enabling sustainable employment growth. A related feature is that Egyptian exports have become less diversified during the reform period, because the top twelve export items constituted 59 percent of total exports in 2003 compared with 37 percent in 1992. In addition, the new exports introduced during this period are of low value.
Opposition to reform efforts has been driven by three main factors. The first factor consists of ideological considerations marked by a lack of consensus on the nature and tools of economic reform, on the one hand, and the absence of effective participation by various stakeholders in the process and implementation of reform programs, on the other hand. Underlying the second factor are socioeconomic concerns. Many reform policies have been predicted to increase the gap between the Egyptian rich and poor before the masses can feel the positive effects. With unemployment and poverty already high, this has provoked resistance to reform from Egypt’s poor. Second, the consistent failure of reform efforts to address socioeconomic problems and the perception that this reform has generated more damages to society than benefits has fueled the drive to oppose the current reform efforts. Finally, the third factor driving opposition to reform efforts has been the efforts of certain members of the economic and political elite to secure their privileges in current and future economic arrangements.
The position of civil society, especially political parties (apart from the NDP) and small grassroots organizations, vis-à-vis current reform agendas is totally different from the position of the business and political elite, who are often close to if not part of the regime. Though civil society members agree with the government on the need for reform, they totally disagree on the nature and tools of reform… The main argument put forward in this regard is that the Egyptian economy is neither ready for such an open system nor capable of competing in the international market. Therefore, such steps would harm the economy, and especially SMEs.
The impact of this opposition on the reform agenda is limited. Such limitations are mainly related to three interlinked factors. The first is the absence of specific programs and visions that counter the current economic reform agendas. Even the economic program of the Muslim Brotherhood—which enjoys relatively better institutional capacity, compared with other secular and leftist political parties—is quite general and does not propose alternative economic policies.
The second interlinked factor is the lack of sufficient political space for civil society and the government’s control over many civil society institutions. In addition, the government controls civil society institutions, and it thus mobilizes their leadership to support its agendas and programs.
The third interlinked factor includes the internal weakness and problems of civil society in Egypt. Business associations and labor unions are often run to promote the personal patronage of their leaders, and they do not enjoy autonomy from the state, which manipulates them through direct links with their leaders.
Traditionally, labor unions in Egypt have been controlled by the regime, because unions are bound to be part of the state-controlled Egypt Trade Union Federation (ETUF). Membership in the ETUF is mandatory. According to the International Confederation of Trade Unions’ 2006 annual survey of violations of trade union rights in Egypt, “the 2003 labor law makes it legal for an employer to fi re someone without giving any reason.” Thus, unions have not been an effective lobby for economic reform. Instead, union leaders, who are mostly members of the NDP, have collaborated with the regime to limit the rights of public-sector workers.
Reform efforts in Egypt have suffered from three main interlinked constraints. First, they have lacked coordination with social policies and various sectoral policies. As seen above, the reform packages implemented in Egypt have focused mainly on macroeconomic and financial reform, with little attention given to social and structural problems. In a country like Egypt where social problems, including unemployment, poverty, and regional disparities are severe, such an approach is inadequate. The result of modifying this approach has been not only a failure to address these problems but also an increase in their severity during the reform era, combined with an incapability to mitigate the negative side effects of reform in the daily life of ordinary people. This failure has been an important impediment to sustaining deep reform, because Egyptian citizens have lost trust in the reform efforts and their objectives.
The second interlinked constraint is that Egypt has failed to create a healthy and enabling environment for conducting business and to build an economy that can compete in the global economy
The third interlinked constraint is that reform efforts in Egypt suffer from a lack of a consensus about issues of timing, means, and goals. Hence, changes in the social contract, due to the reform process, have not enjoyed consensus among main parties affected by the contract: state, market, and civil society. What makes this rift quite severe is the absence of mechanisms for debating the reform among all relevant stakeholders. Participation in policy making and policy implementation is limited to the ruling elite and their close associates in the business and political communities, without any effective participation from other stakeholders.
The SMEs represent the business sector that is most burdened by current heavy regulatory measures and thus faces considerable obstacles to doing business. SMEs account for 75 percent of Egypt’s employment, 80 percent of its GDP, and 99 percent of its nonagricultural private sector. According to the World Bank Investment Climate Survey, access to fi nance and the associated cost are among the top constraints impeding SMEs’ investment and growth.
As is illustrated in the next section, the problems in Egypt’s institutional and governance arrangements have limited the country’s capacity to implement better-coordinated reform programs that are more closely linked to social policies and allow a wider scope of ownership.
Egypt needs to develop a productive economy that can sustain a mode of growth less dependent on external factors while creating decent jobs for the unemployed, the underemployed, and new entrants into the labor market.
It should be emphasized that institutional development takes a long time. Given the nature of the Egyptian state and the main actors in the market and civil society, developing the necessary institutions and, most important, making them function properly within a short period of time seems unrealistic. Hence, Egypt should make the choice: Either start developing these institutions soon or lag behind. Building these institutions is the responsibility not only of the Egyptian state but also of the private sector and civil society.
#2 Article from Economic Research Forum w/ recommendations
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Structural Problems:
• Growth did not create sufficient productive jobs to absorb the new entrants into the labor market, with open unemployment persisting at around 9 percent and 21 percent among the youth (age 15-24). The share of wages to total income declined from 28 percent in 2000 to 25 percent 2009. The process for wage formation in the private sector was not made explicit and trade unions were anything but independent. • The informal sector, which accounts for 30 percent of GDP and employs approximately 40 percent of the labor force, saw none of the improvements in the business environment by virtue of operating extra-legally. As a result, small entrepreneurs could not expand their business or become more productive since they had limited or no access to formal credit, contracts with large firms or government or even the protection of the law. Workers in this sector operated at low levels of productivity and wages, with no protection against old age, unemployment or ill health. |
• Finally, there was no systematic effort at equalizing economic opportunity among Egyptians. Successive governments made only shy attempts if any to improve the quality of education and health services. As a result, even though the policy of free education and health services continued, the services offered did not enable the poor to acquire the necessary skills to benefit from rewarding opportunities in the labor market. Moreover, there is ample evidence
that those who benefited from free higher education tend to be rich, born to educated parents and live in urban areas.
Model Basics:
• Economic growth is a necessary but not sufficient condition to achieve widely shared prosperity. The job creating intensity of economic growth, reforms of the social sectors (education,
health) and safety nets are all critical ingredients to bring about shared benefits, greater equality of opportunity and protection of the very poor.
• The role of the state is critical in facilitating the functioning of markets through enforcing contracts, protecting property rights and safeguarding against anti-competitive behavior.
The state is also responsible for adopting measures to bring about a more egalitarian society. Where the role of the state is debatable is when it comes to selective intervention to promote certain activities or sectors over others (for example, through ownership, taxes/subsidies, or restrictions). Here the decision must be made on
a case-by-case basis.
• Competition, “good”, in the sense of dynamic and innovative, private sector and profit maximization are the most efficient mechanisms for resource allocation, improving productivity and
encouraging innovation. However, markets do not function in a vacuum and generally do not produce the best outcomes for society on their own. Safeguards are necessary to protect consumers from exploitation and ensure that workers have the right to decent working conditions and fair pay.
• No successful emerging country has made it without benefiting from the opportunities offered by global markets. At the early
stage of development, domestic savings (and investment) are too low, domestic markets too limited and endogenous technology too underdeveloped to achieve rapid growth. Carefully designed integration into world markets can help relax these constraints.
Short run:
• Provide incentives to private sector employers to increase hiring through a temporary holiday on payroll taxes and temporary on-the-job training subsidies to encourage internships and apprenticeships. These subsidies must be widely available to all employers and not simply focused on large firms. They should be temporary in nature
and phased out over time as the worker becomes more productive and thus more employable.
• Revise the minimum wage upward, given it has been the same for years. However, in doing so the new minimum wage should ensure that employment can lift people out of poverty but not setting the minimum wage too high to destroy existing wage structures or push new jobs into the informal sector. The minimum wage must not be set at a level higher than the current entry-level wage in formal private sector establishments. It should be set as hourly rather than monthly wages so as not to discourage part-time work. Finally, it should be indexed to inflation so that its value does not erode over time.
• In response to the recent strikes asking for higher wages in the public and private enterprises, initiate legislation to clearly specify a wage negotiation process between the employers and the legitimate representatives of labor. The government should not be in a position of negotiating specific deals, simply because that is not feasible.
• Finally, prepare the grounds for reforming the wage structure in government, abolishing the existing parallel structure made possible by aid money. To ensure that the new system will enable government to attract and retain the most qualified public servants, compensation packages should be high enough but subject to an acceptable ratio between maximum and minimum salaries. Implementation should come when the government finance can accommodate the additional cost.
Job Growth Initiatives:
• Augmenting domestic savings (currently around 16-17 percent of GDP) with foreign savings (and investment) so that both account for at least 25 percent of GDP. The emphasis should not be any more on the quantity of foreign capital, but on its quality in terms of boosting job creation and sustained development.
• Reforming the education and training systems, not only to meet labor demand but also to enable the poor to benefit from their investment in acquiring human capital and benefiting from the opportunities offered by economic growth
Social Equality Initiatives:
• Review the pattern of public expenditure to make it more socially equitable. For example, investment in infrastructure should be more
balanced across governorates, paying particular attention to rural areas and upper Egypt. Public expenditure on social services (mainly education and health) should be rationalized so that those who are able to pay do so, while those who cannot are not deprived from getting the same quality of service.
• Phase out energy subsidies to reduce excessive consumption and improve the environment. If necessary, some exceptions can be made, for example, the use of energy in public transportation and taxes. By the same token, make serious progress on targeting the allocation of commodity subsidies to the poor by getting rid of all subsidies and shifting to cash transfer, conditional or not. The current regime is by all accounts inefficient, costly and fails short of helping the very poor adequately.
• Reconsider the tax regime to bring about greater equality without taking the risk of lowering government revenues. For example, rather than staying with a flat rate of 20 percent on all incomes above a certain level, there may be some room for a higher upper bracket. By how much should be the subject of analysis and debate.
• Devise efficient and equitable insurance schemes, especially regarding health and unemployment
#3 Presentation from Carnegie w/ recommendations
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Summary comes off as very neoliberal but paper is much more balanced and has some good data and comparative statistics... Also good discussion on subsidies, transparency, SMEs and all relatively short/manageable sections:
The Egyptian economy is going through a critical period as the country transitions to democracy. While the shift from authoritarianism is certainly welcome, it has inevitably incited instability unknown to Egypt for the past thirty years. The implementation of economic reform amid this uncertainty is particularly challenging as political demands take precedence. The state attempted several times to revive the Egyptian economy since the Infitah, or “open door,” policy initiated by President Anwar Sadat in the mid-1970s. Successive, though unsuccessful, reform programs during the 1990s contributed to the pervasive poverty that served as a central driver of the 2011 Egyptian revolution and persists today. Past experiences can provide useful lessons for what to avoid in the future, even if they are unable to impart what exactly should be done. |
A successful transition to democracy can be facilitated by a sound economy and the economic well-being of citizens. Indeed, the transitional government led by the Supreme Council of the Armed Forces (SCAF) that is managing the country until the parliamentary and presidential elections are held is facing tremendous challenges. Yet it has unwisely rushed to fulfill the populist demands of the revolution with little consideration of their long-term effects. While perhaps politically expedient, reactive measures—such as the government’s recent increase in the public-sector minimum wage and the extension of fixed contracts to 450,000 public employees—are nonetheless placing added pressure on an already unsustainable budget deficit. Combined with the maintenance of economically inefficient subsidies, the long-term implications of continued poor economic policymaking will be severe.
The Egyptian economy has been in decline since Hosni Mubarak stepped down in February 2011, in part because of the instability inherent in transitioning states, which in this case was amplified by the global downturn. The effects of the current slowdown are most visible in terms of domestic consumption, direct private investment, and tourism. To reverse these recent trends and to move the economy forward as a whole, the transitional government must prioritize the following in the short term:
Addressing these problems and implementing the short- and medium-term measures outlined above will help put the economy back on track and avert the expansion of public expenditure to even further unsustainable levels. Until now, the transitional government has failed to take bold steps in the right direction and has not paid adequate attention to the economic aspects of the transition. Egypt has historically fared poorly in governance indicators such as rule of law, quality of business regulations, and corruption associated with ineffective social spending. The result of the poor ratings is misallocation of resources. Consequently, the government could face the worst-case scenario of continued economic decline and a reversion to authoritarianism.
The Egyptian economy has been in decline since Hosni Mubarak stepped down in February 2011, in part because of the instability inherent in transitioning states, which in this case was amplified by the global downturn. The effects of the current slowdown are most visible in terms of domestic consumption, direct private investment, and tourism. To reverse these recent trends and to move the economy forward as a whole, the transitional government must prioritize the following in the short term:
- Restore security
- Acknowledge and respond to the reticence of the public sector—both domestic and foreign—with a clear road map that will guarantee investment during this period of volatility
- Stop demonizing the private sector and establish new partnerships with independent entrepreneurs
- Adopt a more participatory and transparent approach in the decision- making process
- Ensure the availability of funds for small and medium enterprises by providing guarantees to commercial banks for a limited period of time
- Channel foreign grants and loans for infrastructure and housing projects to the poor and other public utilities
- In the medium term after the parliamentary and presidential elections, the government needs to:
- Bolster weak institutions
- Address low levels of investment and limited financial resources
- Correct imbalances between producers and consumers
- Broaden the now limited trickle-down effects of growth that widen the income gap between rich and poor
Addressing these problems and implementing the short- and medium-term measures outlined above will help put the economy back on track and avert the expansion of public expenditure to even further unsustainable levels. Until now, the transitional government has failed to take bold steps in the right direction and has not paid adequate attention to the economic aspects of the transition. Egypt has historically fared poorly in governance indicators such as rule of law, quality of business regulations, and corruption associated with ineffective social spending. The result of the poor ratings is misallocation of resources. Consequently, the government could face the worst-case scenario of continued economic decline and a reversion to authoritarianism.
