The Political Economy of Reforms in Egypt. Khalid Ikram
17 percent in 1965 and 14 in 2016; that of imports to GDP, 21 and 23 percent; of taxes to GDP, 15 and 16 percent. A study by Galal and el-Megharbel (2008) that looked at two indicators of structural transformation—increases in product variety and total factor productivity—within the key sector of industry for the twenty-year period 1980–99 found that in fact variety decreased, while total factor productivity remained stagnant. They argued that policy during this period did not help new activities; did not make assistance to firms conditional upon specified concrete goals (such as export performance); and did not provide clear indications to firms about when assistance would cease, thereby leaving alive the suggestion that it could continue indefinitely.
Without paying attention to the foregoing matters, it would become progressively more difficult to sustain the economy’s expansion at the required rate, and the implicit compact—economic benefits in exchange for political quiescence—between the rulers and the ruled could unravel. This is not to suggest that purely political issues, such as the public’s desire for democracy and the problem of presidential succession, might not have been important, indeed perhaps even the dominant, factors in the revolution of 2011. The point is that fundamental contradictions in the political-economic strategy were showing up and will have to be addressed by whatever regimes are in power during at least the next twenty or thirty years. To add to the problem, perceptions of inequities in the distribution of incomes were rising, and had been ignored by the authorities. Thus, despite impressive economic growth in 2005–2008, social and economic factors were fermenting a politically menacing brew beneath the surface. The mixture exploded in 2011 in the form of a massive uprising against the rule of President Mubarak.
3. If one had the temerity to try to sum up in a picture and a few numbers the critical reasons for Egypt’s failure to perform to its economic potential over the last fifty years, they could be illustrated by figure 1 and the numbers quoted earlier for the contribution of TFP to Egypt’s GDP growth.
The message is clear. Egypt’s investment rate was insufficient to expand the economy at a rate that would fully employ the labor force; the domestic savings rate fell short of even the inadequate investment rate; and institutional weaknesses inhibited productivity increases from compensating for the investment shortfalls. The persistent gap between investment and domestic savings also measures the extent to which Egypt relied on foreign savings to finance its investment and to cover its balance-of-payments deficits, which explains the continual piling up of external debt and the resulting exposure of the country to external political pressure. Of course, behind the savings–investment performance lie deeper institutional issues, such as matters of governance, the structure of incentives, the working of the bureaucracy and the commercial judicial system, implementation capacity, and the shortcomings of the education and training system.
Figure 1. Investment and domestic savings, 1965–2016 (percent of GDP)
Source: World Bank, World Development Indicators
4. What about future prospects? In view of the growth and age structure of the population and the approximate relationship between employment and GDP growth, Egypt’s economy needs to grow at around 7 percent a year in real terms for at least the next two decades and probably longer in order to absorb the additions to the labor force and to reduce the rate of unemployment and underemployment from the past. This is particularly necessary in order to give the population, and especially the young, the possibility of fulfilling their capabilities and leading lives that they value.
The required GDP growth rate compares with a rate of about 4.7 percent that the country averaged over the fifty-year period between 1965 and 2016. The experience of fast-growing developing countries suggests that a sustained 7 percent growth rate is likely to require an investment rate in excess of 30 percent of GDP (compared with Egypt’s 20 percent average of 1965–2016), and most likely even higher as the economy becomes more complex and has to produce more sophisticated goods and services. Moreover, if Egypt is to reduce its dependence on foreign savings and finance most of the investment from its own resources, the domestic savings rate would have to be of the order of 25–27 percent of GDP (allowing a manageable deficit on the external accounts). Raising the savings rate to this level could pose a stiff challenge, as Egypt’s domestic rate of savings between 1965 and 2016 averaged barely 13.5 percent of GDP.
Seventh, while this might seem paradoxical in view of the shortcomings of past policies and economic performance that are discussed in this book, I would underscore that the most important message from Egypt’s experience of the last fifty years is that one must not underestimate the country’s resilience. Egypt has repeatedly surprised observers and confounded predictions of economic doom. As Hilmi Abdel Rahman, a former minister of planning who played a major role in devising economic strategies for the country, said: “Egypt will frequently not act on policy until the eleventh hour, but it will act. It would not have survived intact for more than five thousand years if it hadn’t done this.”
Consider some reasons for optimism. In 1947 the country had a population of some 19 million inhabitants; in 2016 the population of Greater Cairo alone was about that number. The difference between Egypt’s present (2016) population of some 90 million and that in 1947 is equal to the total present-day population of the United Kingdom or France. These 90 million persons—four and a half times the number in 1947—have, on average, higher real incomes, are better fed, housed, clothed, educated, and connected to the rest of the world, and have longer life expectancies and much greater opportunities to fulfill their capabilities than their counterparts in 1947. Moreover, these improvements have taken place despite Egypt’s being engaged in hostilities with Israel on a number of occasions and suffering an invasion by the United Kingdom and France. These facts attest to the strength of the Egyptian people and the resilience of the economy, and bear witness to the distance it has traversed and the obstacles it has overcome during the last seventy years.
If one has misgivings about Egypt’s economic performance, the regret is for the country not performing to its potential. The reproach is that Egypt could have done better. If, say, South Korea and Taiwan, perched on the edge of Asia, destitute of natural resources, and rent for long periods by war (and in the case of South Korea, with its capital city occupied twice by enemy forces), could achieve so much so quickly, then it should not be impossible for Egypt, with its abundance of resources—to name but its strategic location, oil and gas deposits, fertile agriculture, myriads of tourist attractions, intellectual abilities and long tradition of learning, and large labor force—to achieve something comparable.8
In managing the future, policymakers cannot ignore the role and the weight of the past. Elements of continuity from earlier periods are pervasive. The Egyptian economy of today is in many respects the product of past molds. The capital stock of today in the productive sectors and the infrastructure are the result of past investments (in both good and bad projects); more importantly, the institutions, the administrative structure, the policy framework, the modes of production and organization, the vested interests, and the habits of thought and work are collectively an inheritance that defines many of the features of the economy today and colors much of its prospects. In shaping the future, policymakers will have to manage this legacy from the past.
The change in Egypt’s economic future will not happen by itself. It will require conscious changes in many areas, but most importantly in people’s attitudes and ways of thinking. The Holy Qur’an stresses this message: it says (8:53): “God never changes the favor He has bestowed on any people until they first change what is in themselves.” This is reiterated (13:11): “God changes not the condition of a people until they (first) change what is in themselves.” It is in the spirit of this injunction that this book seeks to identify some crucial economic challenges that confronted Egypt and discusses how politics and economics interacted to address them. Such a discussion might contribute to clarifying the course toward which changes in policymakers’ attitudes and thinking might usefully be directed in the future.