Posted by on December 14, 2019 1:45 pm
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“Why Egypt is not on a path to end its long struggle with poverty”


By Mahmoud Farouk, courtesy of Atlas Network

 

In 1979, Fouad Ajami wrote that Egypt finds herself between her “pride and place, between her limited material resources and her unbounded psychological esteem for herself, between her old glory and her current poverty.” Forty years later, Egyptians are still immersed in the same contrast, and their struggle to leave poverty is still evident. The economic figures such as GDP coming from Egypt in the last three years raise three questions: 1) Is the Egyptian government on the right track to end its long-standing struggle with poverty, or are the figures nothing but recurrence of the previous wave of economic improvement before 2011? 2) Why are Egyptians unhappy with the recent reforms? and 3) What are the missing policies to make Egyptian society benefit from economic reforms?

 

Contrast—The Egyptian economy before and after 2011

 

The positives of economic reform prior to 2011 were undeniable. However, a thick wall prevented a great part of the Egyptian society from benefiting from such reform. Prior to 2011, there were three ways for Egyptians to make their way to the market and benefit from its growth: to be a local or national leader in the National Democratic Party (NDP), to be close with the party’s leaders, or to be part of the informal sector. Some Egyptians chose the NDP way; others have no choice but the informal market, which eats their money and gives them very little economic and social benefits.

 

Five years before the 2011 uprising Egypt witnessed significant progress in most of its economic indicators. In contrast, the poverty rate increased from 16.7% in 1999/2000 to 25.2% in 2010/2011. Moreover, in parallel with the new organized communities that started to grow in Egyptian cities, slum communities spread all over Egypt. The same scenario has repeated itself with the current government: in a time of quantifiable economic improvement, poverty increased to 32% in 2017/18.

 

Two factors were behind such distortion in the years before 2011: first, the political system allowed some Egyptians to have greater access to the market and to benefit from its reforms then others. Second, the vast majority of Egyptians earned their living and grew their business in the informal sector, which denied them any social progress.   

 

Egypt and the scenario of Somalia on the Nile  

 

The years of political turmoil after the 25th of January 2011 revolution destroyed all the benefits that the Egyptian economy built before 2011 and left Egypt with one of her darkest fears—the fall of what remains of its poor economy. When President Abdel Fattah al-Sisi came to power in 2014, he tried, like a­­ll other Egypt’s rulers, to postpone the answer to Egypt’s poverty dilemma that has faced all rulers of Egypt in its contemporary history. ­

 

One year later, in July 2015, Washington scholars were asking whether Egypt will turn into “Somalia on the Nile” due to its security and economic situation deteriorating. The answer appeared in Egyptians’ daily lives only one year later as Egypt was on the verge of collapse like no time before.

 

In 2016 the Egyptian government was closer than ever to bankruptcy. Demonstrations that had vanished from the Egyptian scene appeared again, but this time because of the absence of basic commodities, such as sugar, baby formula, and medication. Security problems were at their highest. Tourist cities were empty with only 2.3 million visitors to Egypt. Several countries issued warnings to their citizens not to visit Egypt, and other countries evacuated their citizens from Egypt. On the economic level, the remittances of Egyptians abroad—a main source of foreign currency to Egypt—disappeared from Egyptian banks and went to the black market, thanks to a government policy to protect Egyptian currency. The collapse of the Egyptian state was clear as the sun in the Arabian Sahara, and the Egyptian government found itself between a rock and a hard place—either poverty and chaos, or to start a painful economic reform program.

 

In late 2016, the Egyptian government took steady steps towards economic reform with a loan from the International Monetary Fund (IMF). With the currency liberated, the government started a structural budget and subsidy reform, amended tax laws, and started a program to privatize public property.

 

The fruits of economic reform

 

By 2019 Egyptian society began to reap the benefits of economic reforms. Egypt’s cash reserve rose to $45.25 billion in November 2019 from about $15 billion in the summer of 2016. Inflation fell to 3.1% after reaching almost 35% in 2017. Unemployment, which has been on a steady rise since the 2011 revolution, has fallen to 7.8% from 13% in 2014. Tourism, which had almost disappeared, rose to 11.3 million visitors in 2018.

 

The reforms haven’t stopped on the macroeconomic level but have embarked on serious and long-awaited legislative reforms to ease up the business process in the country. The Egyptian parliament passed a new bankruptcy law to speed up and simplify the post-bankruptcy process, and prevent imprisonment in bankruptcy cases. The government issued regulations that ease the process of obtaining industrial licenses significantly, and reduces the number of days to obtain licenses from 600 to between 7 and 30 days. The Ministry of investment opened investor’s branches, where entrepreneurs can obtain licenses, register, and modify companies within a few hours. The reforms led to economic recovery and growth after the lean years. Egypt’s growth reached 5.4% in July 2018 after it was only 2.3% in July 2016.  

 

Why are Egyptians unhappy?

 

In the spring of 2019, Minouche Shafik (Director of London School of Economics and Political Science) gave a speech at the American University in Cairo about “Egypt economics and opportunity…”, saying that it is “crucial to the success and stability of society” that its individuals have a “pathway to the ambition for social mobility.” Egyptians at large rarely have an opportunity for such social mobility with every wave of economic growth.  

 

Despite the hardship that Egyptians face when it comes to political and human rights situations, this time Egyptians are unhappy because there are two obstacles preventing Egyptians from the pathway for social mobility. First: the increase of prices since 2016 along with ending energy and food subsidies; and second: the vast majority of Egyptians still don’t have easy or equal access to the market at a time when the Egyptian army is competing in every sector of the market and even called “the owners of the republic” because of the officers’ role in economic and political arenas.

 

While the Egyptian government is on the right track when it comes to macroeconomics policies, especially reforming the longstanding waste of resources such as the food and energy subsidy programs, and while more Egyptians can find jobs, the government is still lagging behind when it comes to microeconomic policies, especially when it comes to policies and programs that can increase productivity, improve Egypt’s balance of payments, and limit the bureaucracy effect on businesses. The question remains whether the Egyptian government will stop halfway, as its predecessors, or will work together to write an end to the struggle of poverty in Egyptian society.  

 

Three policies missing in Egypt’s economic reform programs

 

Above all, limit the role of military in the market and give a bigger role to the private sector.

 

President Al-Sisi replaced the crony capitalists of the NDP with the Egyptian army, and again Egyptians found themselves between a rock and a hard place. Before 2011, those who have close relations to the NDP could easily have access to economic opportunities, such as getting land or getting licenses quickly in order to start a project. Now the way to economic opportunities is either directly exploited by the army or is only available through the army. Free and fair competition is impossible in recent Egypt.  

 

The regime supporters and Al-Sisi himself argued, “the army is efficient and finishes its projects in a short period of time and costs less than the private sector.” The main reasons behind this is that the army can easily avoid the bureaucracy while the private sector cannot. The army can simply obtain land, licenses, and contracts by direct order without being subject to tender and public auction laws and can offer much lower prices than the private sector because the main labor are soldiers who receive far less wages then those who work in the private sector. Therefore, the Egyptian regime must end the role of the army in the economy and give bigger space to the private sector. If the Egyptian regime continues to increase the role of the army in the economy, Egypt will end up in a state with a single major company that devours the vast majority of the market, and the Egyptians who are left will live on the remaining crumbs.

 

Improve the trade balance.

 

Egypt’s economy suffered from trade deficit for decades that played a main role in weakening Egypt economy. Writing in 2018, Barak Brafi highlighted, in his analysis “Egypt’s new realism”, the problem that troubled Egypt since Nasser is “balance of payments and current account deficits combined with an overvalued currency that impeded exports.” The current reforms that the Egyptian government is taking is considering half of the problem, the overvalued currency, and the government liberated the Egyptian currency in 2016 which led to flourishing Egypt’s exports and increased tourism. However, the balance of payments and current account deficits still a main problem that the Egyptian government must be giving an enough attention.

 

Formalize the informal economy.

 

According to the Egypt’s minister of planning, the informal economy contributes 40% of Egypt’s GDP. Such an economy has been described by Hernando De Soto as “dead money,” as people cannot use their assets as a guarantor for loans to start a new business or to buy a place to live. The informal economy which is companied by (Real estate – businesses) is the “nation’s biggest employer” and more than 90% of the real estate in Egypt are without legal title. The estimated value of the informal sector in Egypt as Hernando De Soto measured it is “30 times greater than the market value of the companies registered on the Cairo Stock Exchange and 55 times greater than the value of foreign direct investment in Egypt since Napoleon invaded.” Encouraging the informal sector to join the formal sector will not only increase state taxes, which will affect the state’s reliance on debt, but also will give a great part of Egyptian society a pathway to  social mobility. Not ending the informal sector dilemma will keep a great part of Egyptian society living under abuse, humiliation from corrupt public officials, and puts them under daily risk of losing their ability to buy and sell—a risk that made Mohammed Bouazizi burn himself to death and shook the Arab world.     

 

Ending Egypt’s struggle

 

In short, there are three policies that the Egyptian government must do to complete its economic reform program. First, the army needs to exit or at least have a very limited role in the market with fair competition with the private sector. Second, Egypt’s trade balance must improve by limiting the role of the bureaucracy in controlling businesses. Third, the Egyptian government must encourage and include the informal sector, currently 40% of Egypt’s GDP, into the formal market. Without that, Egyptians won’t be able to end their longstanding struggle and will remain as Ajami described it forty years ago, “an old civilization that cut off from its roots.”

 

 


Mahmoud Farouk is a board member of Egyptian Center for Public Policy Studies, an Atlas Network partner and winner of the 2018 Templeton Freedom Award. He founded the organization and is its former executive director. Farouk is currently Program Coordinator for Civil Society Partnerships at Project on Middle East Democracy (POMED), where he works to strengthen support for genuine democratic development in the Middle East and North Africa.