The Political Economy of Reforms in Egypt. Khalid Ikram
reforms commonly take much longer to implement because they require fundamental changes in the organizing and/or functioning of institutions—their chief aim is to improve governance. And the widespread experience is that faith-, ideology-, and culture-based attachments to institutional structures, or those rooted in a long history, are fiercely resistant, or even immune, to policy. Thus, for example, second-stage reforms generally require a reform of the bureaucracy. This is seldom easy and could be particularly difficult in Egypt. More than one-fourth of the country’s labor force is employed in various parts of the government—in 2016 there was one government employee for every thirteen citizens (even this figure excludes the Armed Forces)—and is set in its attitudes and methods of working. The reforms might also require creating entirely new institutions or politically empowering existing ones, such as regulatory agencies that would actually restrain monopolistic or oligopolistic behavior by firms. They would also require fundamental changes in the functioning of the commercial judicial system in order to speed up judgments and to reduce the case burden on judges. And measures would also have to be put in place to ensure that judicial decisions were implemented promptly.
The two stages of reforms also raise different issues of political economy. Apart from some exceptions—such as businesses that might be compelled to compete against international firms because reforms had cut import tariffs—the groups affected by first-stage reforms are often too fragmented or too poor to carry much political clout and thus their concerns can be set aside more easily. But, as Navia and Velasco (2003, 268) put it, “By contrast, the set of interests potentially affected [by changes in governance] in the next stage reads like a Who’s Who of highly organized and vocal groups: teachers’ and judicial unions, the upper echelons of the public bureaucracy, state and local governments, owners and managers of private monopolies, and the medical establishment.” Their resistance can prove lethal to the reform program.
Fifth, most of Egypt’s GDP growth of the last fifty years has come from adding more labor and particularly capital; the contribution of total factor productivity (TFP), that is, the efficiency with which factors of production are used, has been very small. Productivity in this sense results not only from technology change, but also from any other changes that influence the efficiency with which inputs are converted into output.5 Of particular importance are such factors as changes in regulations and the working of institutions that govern the economy. A discussion of the principal conceptual issues relating to TFP measurement and of Egyptian data problems will be found in Ikram (2006, 101–16); here only the main results from recent studies will be summarized.
A paper by Mohammed (2001) estimated that for the period 1965–2000, capital accumulation contributed about two-thirds of the growth in real GDP, growth in human-capital-adjusted labor about one-third.6 Egypt was becoming a capital-intensive producer. The capital intensity of production is not surprising in view of the overvalued exchange rate and the negative real interest rates that prevailed in Egypt over much of the period. The contribution of TFP between 1965 and 2000 was mildly negative; this says that any combination of labor and capital would have produced less output in 2000 than it could have in 1965. Productivity growth appears to have been important mainly during 1975–80, when it accounted for about 14 percent of GDP growth. Estimates for more recent periods—for example, Boopen, Sawkut, and Ramessur (2009) and the Conference Board (2015)—continue to show the same picture of a very low contribution by productivity growth, including zero or negative contribution from 2007 through 2014. The IMF (2005) estimated the long-run (1961–2004) average contribution of TFP to Egypt’s GDP growth at only 0.9 percent, and IMF (2015) put the growth of TFP between 2004 and 2010 at a mere 0.8 percent per year. World Bank (2015) estimated that during the ten years 2004–13, growth was mainly driven by capital, which on average contributed 70 percent of overall growth, while labor and TFP growth contributed 18 and 11 percent respectively. There is a wide consensus, therefore, that in the period from 1965 to 2016 as a whole, TFP growth contributed very little, if at all, to the growth of Egypt’s GDP.
Pushing the story back to 1950 reaffirms the same finding. Maddison (1970, 53–54) calculated that in the period 1950–65, changes in productivity contributed only 20 percent to the growth of Egypt’s income. However, Maddison arbitrarily assigned weights of 0.5 to both labor and capital. If we instead substitute the weights estimated from more recent studies, productivity improvements would account for barely 12 percent of the growth of GDP during that period.
These are very different from the findings for the fast-growing developing countries and the developed countries. The Nobel laureate Robert Solow (1957), who pioneered the technique of growth accounting, estimated that for the period 1909–49 capital accumulation contributed 11 percent to the growth of the United States’ GDP, increases in labor contributed 38 percent, while the remaining 51 percent came as a result of technical progress. This pattern appears to have stood the test of time; for example, Denison (1962, 1985) came to broadly similar conclusions for the period 1929–82.
Egypt’s experience with TFP growth also differs markedly from that of the fast-growing East Asian countries. Estimates of the contribution of TFP differ between various studies, but the broad conclusions are that for South Korea in the period 1960–2005, increases in physical capital accounted for about 40 percent of the GDP growth, increases in labor about 30 percent, while increases in TFP contributed about 30 percent. Over roughly the same period, the contribution of capital to the growth of output in Taiwan was about 46 percent, that of labor about 18 percent, while TFP growth contributed nearly 36 percent. For the high-performing East Asian countries (Hong Kong, Singapore, Indonesia, Malaysia, and Thailand, in addition to South Korea and Taiwan) as a group, the average growth of GDP between 1960 and 2003 was 6.5 percent a year; of this, capital contributed nearly 49 percent, labor 25 percent, and TFP growth 26 percent (World Bank 1993a, 60–70; Thorbecke and Wan 1999, 3–20; Kim and Hong 1999, 183, table 8-5; Stiglitz and Yusuf 2001, 16, tables 1.3 and 1.4).
The experience of China provides further confirmation of the importance of factor productivity to growth. The World Bank (1997b) estimated that TFP growth accounted for 30 to 58 percent of China’s growth during 1978–95. A more recent and very detailed growth accounting exercise by Yueh (2013) for three decades from 1979 estimated that about 45 percent of the country’s growth could be attributed to capital accumulation, and about 30 percent to TFP; the rest was contributed by increases and improvements in the labor force. A decomposition of the gains from TFP indicated that 8 percent of total GDP growth was explained by the transfer of labor and capital from public-sector enterprises to the private sector. About 20 percent of growth was explained by institutional improvements, such as providing greater flexibility for the internal movement of labor liberalizing the financial sector. This analysis therefore highlights the importance of the contribution of TFP to total growth, and within TFP, the importance of improving the efficiency of institutions (Yueh 2013).
The findings on Egypt’s TFP growth indicate that GDP growth in Egypt has resulted more from using additional labor and capital than from using these factors more efficiently—“the result more of perspiration than inspiration,” as Paul Krugman, another Nobel laureate, put it (Krugman 1997). If Egypt’s TFP growth does not step up substantially, generating the required growth of GDP will require rates of increase in capital, savings, and in the quality of human resources that may not be feasible (Ikram 2006, 314–15; Hevia and Loayza 2011, 21–25 offer estimates of increases in investment and savings rates that would be required under different assumptions of GDP and TFP growth; the rates are about double those sustained by Egypt in the last fifty years). Indeed, this underscores that Egypt’s major long-term economic challenge is to shift from a strategy based on factor accumulation (principally that of increasing the input of capital) to one that is based on productivity growth.
The failures of productivity growth inevitably impacted Egypt’s competitiveness in the world economy. Between 2007 and 2014, Egypt’s competitiveness ranking for the macroeconomic environment and major indicators deteriorated. Thus, compared with 148 countries, Egypt’s ranking fell from 115 in 2007 to 140 in 2014; for government budget balance, from 119 to 146; for gross national savings (as percent of GDP), from 65 to 108; for general government debt, from 109 to 122; and for the annual percentage change in inflation, from 106 to