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Egypt after Mubarak

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Egypt’s Enduring Challenges: The Economic Priority

July 5th 2011

Egypt - Egyptian Kid at Rally

Unlike Tunisia’s Jasmine Revolution, Egypt’s Papyrus Revolution was not sparked primarily by economic grievances. Dissatisfaction with authoritarian government—and especially with Hosni Mubarak— served as the chief mobilizing factor in the demonstrations. While the economy was not the primary issue galvanizing these particular protests, however, it does animate much of today’s popular discontent in Egypt.

Hosni Mubarak’s thirty-year rule was not characterized by innovative or dynamic policies. But in 2004—for reasons that remain unclear—he took a risk, appointing a new cabinet, the composition of which signaled a change in approach on economic policy, at least. The fourteen new members of the thirty-four-member cabinet were not old National Democratic Party (NDP) warhorses but rather younger businessmen and technocrats.

Symbolic in this respect was the new prime minister, Ahmed Nazif, a graduate from a Canadian university with a PhD in computer engineering.

The new government was established just two years after President Mubarak appointed his son Gamal as head of the ruling party’s Policy Secretariat. With this promotion, Gamal, who had until just a few years earlier been an investment banker based in London, essentially became the third highest ranking civilian in Egypt. And when the cabinet was formed in 2004, several of the new ministers came from the ranks of Gamal’s Policy Secretariat.

The combination of new blood, technocratic and financial expertise in the cabinet, and an administration in Washington dedicated to a “freedom agenda” raised expectations that the Egyptian government would finally move forward with long-overdue economic reforms. And this so-called government of businessmen did not disappoint. Indeed, in terms of financial sector reform, privatization, and myriad legislative changes, Cairo moved with unusual speed, making the government of Egypt the poster boy for developing world economic reform, earning plaudits from the World Bank, the International Monetary Fund, and other institutions.

What follows is a discussion of Egypt’s largely successful efforts at economic reform. While Cairo has much more to accomplish on this front, seven years of effort produced significant benefits for the state. Regrettably, however, to date the majority of Egypt’s impoverished residents have profited little from the improvements.

In the aftermath of the Papyrus Revolution, economic reform in Egypt is of increased urgency. The demonstrations and the toppling of Mubarak have placed stress on an already fragile economy. Shuttered businesses cost Egypt an estimated $310 million per day.80 Spooked by the unrest, the Egyptian stock market lost nearly one fifth of its value. Worse, tourists— the state’s second largest source of revenue after the Suez Canal—are unlikely to return in full force for some time.

Given Egypt’s economic hardship and a sour public mood that associates economic reform with corruption, whoever eventually takes control in Cairo will presumably not push forward any time soon with the difficult measures that lie ahead in the reform program. Ultimately, the implementation of these economic reforms will make Egypt more prosperous, but the process will prove painful, unpopular, and perhaps destabilizing.

Economic Growth

Through the prism of macroeconomics, Egypt’s seven year experiment in reform coordinated by Gamal Mubarak was a real success story. Gone are the days of the stagnated state-controlled economy. While the government still does own some largely unprofitable businesses, such as textile factories, in recent years the state has put up impressive numbers in terms of economic growth. In 2007, Egypt posted real gross domestic product (GDP) growth of 7.1 percent; 7.2 percent in 2008; and a 4.7 percent rate of GDP growth in 2009.81 Compared to previous years, growth in 2009 seems low. Yet given that this growth occurred at the low point of the global economic downturn, the number was remarkable. Indeed, Egypt’s performance that year led then Minister of Trade and Industry Rachid Mohamed Rachid to tout the emerging market in Egypt as “oxygen” to the world’s economy.

According to the International Monetary Fund (IMF), the reforms introduced since 2004—including the establishment of a well-functioning foreign exchange market, the cutting of tariffs and personal and corporate income taxes, the streamlining of business regulations, and the privatizing of large state-owned assets—all contributed to an improved business climate.83 In addition to improving conditions for locals, these changes effectively transformed Egypt into an attractive locus of foreign direct investment (FDI).

In 2004, FDI in Egypt was $2.2 billion; in 2007, FDI peaked at $11.6 billion; and it dropped to $9.49 billion in 2008. While FDI levels declined by 35 percent in the beginning of fiscal year 2010, the Egyptian government was reportedly campaigning hard to raise $15 billion for much-needed infrastructure projects such as roads, trains, ports, and hospitals.

Growth was also driven by government pragmatism, including the 2004 decision to promote Egypt’s bid to establish Qualified Industrial Zones (QIZs), where Egyptian manufacturers created products consisting of at least 11.7 percent Israeli content to be sold duty-free in the United States. Over the course of one year, Egyptian exports to the United States rose by 56 percent.86 Cairo also responded quickly and aggressively in 2008 to counter the worst effects of the global economic downturn, including through a tax forgiveness policy and a financial stimulus package.

Public debt—now at 75 percent of GDP—remains a problem, but as of December 2010, the trend line looked good considering state arrears had stood at nearly 130 percent of GDP in 2000. Still, this is not much worse than the U.S. public debt of 70 percent or U.S. GDP predicted for 2015.

Despite notable successes, the Egyptian economy has very serious structural deficits that will not be easily remedied any time soon. Endemic unemployment ranks among the most problematic issues, and particularly so during the current period of economic slowdown. Some 650,000 Egyptians enter the job market every year, and to prevent increased unemployment—officially at nearly 10 percent but likely higher—Egypt needs 6 percent annual growth in GDP.

Egypt’s largest sector is agriculture—a segment of the economy that is shrinking. Even so, the situation is much worse for the educated than for the illiterate. Indeed, college graduates, the youth, have among the highest rates of unemployment. In part, this phenomenon owes to most university students being enrolled in humanities rather than practical sciences such as engineering, but it is also related to deficiencies in the Egyptian education system.

According to a United Nations survey, almost half of sampled Egyptian employers said they find the practical training applicants received at school and their ability to apply this training “very poor.” This statistic is borne out by anecdotal evidence. In 2008, one Egyptian entrepreneur confided that he had recently hired five foreigners—instead of nationals. “No one is qualified here,” he complained. Instead of depositing funds from sales of government assets into the Treasury, the businessman urged putting at least 10 to 15 percent of the windfall toward worker retraining.

Egypt’s perennial subsidies are also a significant drag on the economy. Energy and food subsidies—a relic of Nasserist socialism of the 1950s—reach nearly $10 billion per year. In the 1970s, then president Anwar Sadat tried to phase out some of these subsidies, a move that resulted in widespread riots. Although the Mubarak government pledged as part of its economic reform initiative to phase out fuel and electricity subsidies by 2014, this aid has become akin to a sacred cow.91 Roughly 80 percent of the 56 billion Egyptian pounds (LE) in subsidies—or $9.7 billion—offsets the cost of energy (i.e., fuel and electricity). As a result, fuel costs in Egypt are lower than those in Saudi Arabia. While impoverished Egyptians depend on low energy costs to heat and cool their homes and fuel their automobiles, the subsidies also have a negative impact on the economy above and beyond adding to the deficit.

Not only does subsidized energy promote inefficiency in Egyptian production, cheaper fuel means more cars in Cairo, exacerbating some of the worst traffic in the world. Moreover, it encourages Egyptians to use rather than conserve energy, taxing an electricity grid that is already near capacity. In the summer of 2010, the artificially low price of fuel combined with a heat wave to create routine power outages in Cairo, a development not seen since the 1960s.

Consistent with its 2004 reform program, the government had pledged to raise the prices at the end of 2010. Following the Papyrus Revolution, however, it appears likely that these energy subsidies will be here to stay for some time.

Government food subsidies amounting to $3 billion a year, or nearly 5 percent of the budget, are no less problematic. Egyptians—nearly 40 percent of whom live on less than $2 per day—have come to depend on government food assistance, especially for wheat products. Egypt has long been unable to meet its demand for wheat domestically, and today the commodity accounts for 5 percent of the country’s total imports.93 Indeed, Egypt is the world’s top wheat importer, bringing in about 7 million tons per year.

The wheat subsidy is problematic in a number of regards. First, Egypt does not provide the subsidy directly to the people—it distributes subsidized flour to bakeries, a practice that has promoted extensive corruption.

At the behest of foreign donors, the Mubarak regime experimented with some pilot programs— including one in Port Said—distributing food “smart cards” to individuals, but this program is not expected to be adopted on the national level any time soon. Second, the extensive government support for bread has resulted in widespread misuse and waste, an issue discussed at greater length earlier in this study.

In a broader sense, this dependence on the government’s largess has contributed to food insecurity in Egypt. Bread is a staple, one that may be consumed at unnaturally high rates because of the artificially low price. When Russia announced in 2010 that it would no longer export wheat, a brief panic ensued in Egypt that the state would be unable to meet its enormous appetite for the commodity.

Still other government subsidies are directed toward building materials—steel and concrete, for example—in industries previously closely associated with senior NDP members. Despite government support for the purchase of these materials, however, prices nevertheless increased markedly in recent years, an almost inexplicable phenomenon given the slowing of the economy. This development may have been linked to the persistence of monopolies during Mubarak’s tenure, despite legislation designed to investigate and prosecute antitrust violations.

The dramatic events of January and February 2011 may put economic reform on indefinite hold. If and when it ever resumes, however, the next round will likely enter a critical phase, touching the sacred cow of subsidies. This will undoubtedly be an unappealing prospect for a new, unsteady post-Mubarak government.

…But No Trickle-Down

The implementation of the economic program since 2004 indisputably led to impressive macroeconomic growth—the doubling of GDP per capita from $3,000 in 1998 to $6,000 in 2009—but the vast majority of Egyptians have not benefited much from the reforms. The problem, according to an authoritative 2009 report published by the Board of Trustees of the General Authority for Investment and Free Zones in Egypt, is that the benefits of economic expansion have failed to trickle down to the poor, creating a growing gap between the very rich and everyone else. Worse, the NDP’s constant harping on its success in this arena raised public expectations that in turn fueled growing frustrations.

The absence of trickle-down is evident even to the most casual visitor to Egypt. But the structural problems underpinning this crisis bear discussion. According to the 2009 Board of Trustees report, “growth itself is necessary but [has been] insufficient to increase employment and limit poverty.” The report cites three principal causes for this dynamic:

  1. Sources of growth have been located primarily in sectors with the least employment. Egypt’s largest employment sector—agriculture—experienced little if any growth in recent years.
  2. Particularities of the local labor market are such that 35 percent of the labor force works in the informal sector, which has the lowest salaries and few available “decent jobs.” Complicating matters further, 44 percent of the labor force is illiterate or semi-illiterate, and those with high school educations—28 percent of workers—have the highest rate of unemployment in the country, at 33 percent (compared to 10 percent across Egypt).
  3. Distribution of income is limited: 40 percent of the lowest wage earners garner just 15 percent of the salaries. Likewise, in geographic terms, more than 75 percent of the poor are concentrated in Upper Egypt and the Nile Delta, both relatively low-growth areas. In recent years, increases in food prices have had a profound impact on the impoverished. So too have drops in salaries. The end result: Egypt’s poor and “near poor” are becoming poorer.

That the poor have not benefited from Egypt’s macrolevel prosperity is not a secret. The excerpts just cited are taken from a governmental report, for instance, and politicians discuss it openly. Egyptian businessmen claim it will take an additional six to seven years before the effects are felt more broadly. Former prime minister Ahmed Nazif also routinely asserted that the NDP’s focus on encouraging investment would create jobs to help the poor.

As noted, officially, unemployment in Egypt stands at 10 percent but is likely much higher, especially in particular geographic pockets. Youth unemployment stands at more than double the global average of 12 percent. 98 Perhaps even more problematic is Egypt’s soaring underemployment rate. Although population growth has slowed considerably, Egypt is still struggling to create enough good jobs to gainfully employ its labor force. Worse, with government hiring abating, the private sector has proved unwilling to take on domestically educated hires with degrees of “limited value.”

While Egyptian PhD taxi drivers have been ubiquitous for what seems like generations, the problem has been exacerbated by state efforts to educate a broader swath of its population in skills the economy does not need. Statistics in Egypt on controversial and noncontroversial issues alike have historically not been particularly reliable, but conservative reports suggest that underemployment affects some 7.5 percent of the working population, depressing wages and creating a significant drag on the economy, proving altogether to be a major source of discontent, particularly among the educated.

Likewise, generally, jobs that are available in Egypt do not pay very much. Indeed, the minimum wage in Egypt has stagnated since 1984 at 35 LE (or $6.30) per month.101 By comparison, public sector salaries— which can reach $75 per month—appear exceedingly high. But given rising commodity prices, the relative buying power for all Egyptians has declined considerably, effectively lowering the standard of living for a wide segment of the population.

Egyptians complain bitterly about high prices and have done so since the reforms started to bite. At times, the popular outcry forced the Mubarak regime to backtrack. As noted, to forestall shortages and increases in the price of rice, for example, the regime banned the product’s export in 2008.

The level of trickle-down and rising prices has unsurprisingly led to labor unrest and a demand for a higher minimum wage. In 2010, dozens of strikes were held, often resulting in the government accommodating the demands of picketers. In the spring of 2010, protestors in Cairo called for an increase in the minimum wage to 1,200 LE (or $210) per month, a demand that Egyptian courts have viewed sympathetically. Making this increase more urgent was the fact that many civil servants’ wages fell well below the poverty line.

Pensions, too, have stagnated for years despite increased costs of living. Indeed, this form of government assistance was so meager—in some cases, $8.75 per month—that in May 2010, the Ministry of Finance announced significant boosts in the grants to 2.7 million pensioners. According to then minister of finance Yusuf Boutros Ghali, as of July 2010, those receiving 50 LE a month would soon see a 170 percent increase.

Despite unemployment, underemployment, and a rising cost of living, debate rages about whether the Egyptian middle class is shrinking or expanding, especially since penetration of consumer goods such as televisions and cell phones is so significant. There are, for example, more than 55 million mobile cellular subscriptions in Egypt.

NDP officials, of course, denied any contraction of the middle class. In a July 2009 interview with al- Masry al-Youm, former NDP secretary for organizational affairs Ahmed Ezz pointed to increasing sales of automobiles in Egypt (80,000 in 2003, 300,000 in 2008) and increasing numbers of students enrolled in private schools as proof that the middle class was on the rise. In April of that year, Gamal Mubarak protested to the Wall Street Journal that “a lot of the fruits of those [economic] reforms have actually trickled down” to the poorest Egyptians.108 By and large, however, Egyptians are unconvinced. As expectations continue to rise, the perception of a growing gap between rich and poor is growing even faster than the reality.

At least in part, this perception helped fuel the popular discontent reflected in the Papyrus Revolution. Notwithstanding the dramatic changes in Egypt’s government, the structure of the national economy remains the same, ensuring that related frustrations will persist and continue to shape the political and social dynamics in the state for years to come.

David Schenker is the Aufzien fellow and director of the Program on Arab Politics at The Washington Institute, from where this monograph, of which this is part 3, is adapted. Previously, he served as Levant country director, the Pentagon’s top policy aide on the Arab countries of the Levant, in the Office of the Secretary of Defense; in that capacity he was responsible for advising the secretary and other senior Pentagon leadership on the military and political affairs of Syria, Lebanon, Jordan, and the Palestinian territories.

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