The Egyptian Economy: Waiting for a Miracle?

Almost two years after the beginning of the January 25 revolution, the Egyptian economy faces daunting challenges. Technically in recession, Egypt has experienced an extended period of slow economic growth, a high budget deficit, declining foreign currency reserves, and a widening gap in the balance of payment. The Egyptian pound is under intense pressure. Meanwhile, throughout the country, more people are slipping below the poverty line, while those already beneath it are sinking ever deeper.

Debate over how to tackle the crisis is raging, particularly in light of the labor force’s increasingly vocal demands, which Egypt currently does not have the resources to meet. In the absence of an overarching vision of how to address the crisis, the parties involved struggle frantically to find a solution with little success. It seems that, given this reality, only a miracle could rescue the Egyptian economy, and indeed society, from the bleak future it now faces. 

History, however, shows that miracles do not just happen, they are deliberately made. In many major “miracles,” there has been a vision. Muhammad Ali’s Egypt, Meiji Japan, the post–World War II recovery of the United States and Europe, the Asian Miracle that lifted millions out of poverty in record time, and the emergence of the BRICS (Brazil, Russia, India, China, South Africa) as global economic powers were all deliberate miracles.

Egypt should follow the example of these nations and seek its own vision. As a given, that vision must take into account the realities of the country’s economic system (in other words its initial conditions), the effects of the recent major upheavals throughout the Middle East and North Africa, and the economic transformation currently unfolding at the global level. It should also seek to address a set of issues that can ensure a successful economic transition and provide concrete solutions for the short term (the next twelve months) and medium term (from now until 2020). Egypt should focus on creating employment and building a skilled labor force to foster growth, reduce poverty, and make the country globally competitive. 

The Growth, Employment, and Poverty Nexus

There can be no escaping the present crisis without first putting the Egyptian economy back on the path to growth and reducing poverty and unemployment. The country’s pre-revolution record is impressive if one looks only at GDP growth. Prior to 2011, the Egyptian economy was growing at a rate of 7.2 percent a year. Between 2000 and 2010, GDP doubled from $100 billion to $220 billion, while GDP per capita increased from $1,600 to $2,800. 

However, the fruits of this growth did not “trickle down” to lower income groups. Between 2000 and 2010, 20 percent of the population was below the absolute poverty line (1,854 Egyptian pounds, or about $304, per year in 2008), while 22 percent was at risk of falling beneath it if there were an internal or external economic shock. At present, unemployment stands at 12.6 percent for the entire labor force but climbs to 25 percent for youth. This constitutes a genuine socioeconomic time bomb.

The policy challenge is how to design and implement a broad-based culture of growth that can successfully reduce poverty. The answer lies in developing a growth strategy that focuses heavily on employment and generating demand. Here again, the experiences of other countries can be illuminating. John Maynard Keynes’s formula for bringing economies out of the 1929–32 Depression used public finances to stimulate the economy and attract the private sector. 

The 2008 global economic crisis has lent credence to his point of view. As recently as September 17, 2012, Larry Summers the former U.S. secretary of the treasury under President Bill Clinton, put forward a blueprint in the Financial Times designed to help Britain emerge from the crisis. Taking a stand against austerity measures in the UK, he focused on generating demand. Princeton University economist Paul Krugman has been advocating a similar approach in the United States. 

Egypt’s starting point should be generating demand by increasing employment. By 2020, the Egyptian population will reach 100 million, of which 33 million will make up the labor force.¹ To create jobs for the larger workforce, the economy needs to grow for an extended period (over ten years) at 7 percent per year. That would require increasing investment from its present level of 15 percent of GDP to 25 percent. In order to achieve this, a strategy for mobilizing resources is needed at both the domestic and international levels. The government should immediately begin implementing a significant stimulus package for investment in noninflationary areas such as infrastructure, education, health, and social housing. The private sector should also be incentivized to participate in this process. 

But it is not clear how the stimulus package could be financed, given Egypt’s large budget deficit, which is estimated at $22 billion (135 billion Egyptian pounds) or 7.6 percent of GDP. The national domestic debt is also high at around $197 billion (1.2 trillion Egyptian pounds), or 70 percent of GDP. Thus external resources in the amount of $10–12 billion are of vital importance in bridging the financial gap.² Ideally, the trickle of aid from the countries of the Gulf Cooperation Council would be increased. In the interim, however, Egypt must secure loans from the World Bank and the International Monetary Fund (IMF). Egypt has been a member of the IMF since December 1945 and has the right to borrow on the basis of its contributions. 

But Egypt must also develop a homegrown program with clear financial and monetary policies to avoid the stigma of conditionality that accompanies such loans. Moreover, it is time to do away with the highly unjust system of subsidies that swallows 30 percent of the country’s total budget expenditure, mostly for fuel. Above all, Egypt must launch a campaign to attract Arab and foreign investment, which slid from $13 billion in 2010 to a negligible $300 million this year. 

These approaches must be complemented by sector-based policies. Egypt’s future depends on launching a new phase of industrialization based on increased competitiveness, enabling it to participate in global production chains. An ideal driver of this change is small and medium enterprises. In the past, there has been much talk and little action in support of these enterprises, but they hold tremendous potential, including the capacity to absorb over 40 percent of the labor force by 2015. Egypt must qualitatively shift to the promotion of entrepreneurship through the creation of a unique body to support this type of enterprise, as happened with Malaysia’s Small and Medium Enterprise Corporation.

Of course, none of these changes can come to fruition if political stability is not restored in Egypt. According to the World Economic Forum’s Global Competitiveness Report 2011, political instability accounts in large part for the decline in Egypt’s ranking in doing business. 

Increasing Skill in the Labor Force

Egypt must also enhance the skill of its labor force. Out of 22 million workers, 42 percent are either illiterate or semiliterate. The majority of these workers can be classified as “working poor,” whose real wages have stagnated over the last three decades and are below the official poverty line. These factors explain the low and declining productivity of the Egyptian worker. The Global Competitiveness Report singles out the low efficiency of the labor market as one of the major factors accounting for Egypt’s declining ranking in the Global Competitiveness Index. Egypt’s position in 2011–12 was 94 out of 142 countries, compared to 81 the previous year. More serious is the country’s current labor market efficiency ranking on that index: at 141 out of 142 countries.

This situation reflects the impact of two major characteristics of the Egyptian labor market. First, there is a chronic shortage of demand for labor. This is the result of the economy’s failure to generate sufficient jobs to absorb the new entrants to the labor market—thus the rise in unemployment, especially among the youth. Second, on the supply side, Egypt’s educational institutions and training programs are not giving their pupils the skills required by domestic and international employers. As a result, these people are not just unemployed, they are unemployable, which has become a major constraint on productivity enhancement and competitiveness. 

These are not new developments, with the debate on education reform dating back at least to the 1970s. The inadequately educated Egyptian workforce has been cited by the World Bank/International Finance Corporation’s Doing Business report as a significant factor in the country’s low ranking, and Egypt ranked 110 out of 182 countries on the Adequacy of Education Index. The best hope for Egypt to overcome these statistics is a vigorously implemented national employment program that transcends the oft-repeated, vague call for “educational reform.” 

A massive effort involving genuine partnership between the public and private sectors is required to overhaul Egypt’s educational and training systems, moving away from the supply-side policies of the past in favor of demand-oriented approaches. In this context, the Training Fund mentioned in Egypt’s Labor Law of 2003 should be drastically revised to set up an autonomous institution responsible for capacity building throughout the country. Egypt must also thoroughly revise its defunct wage structure, more clearly define occupations, and replace the chaotic wage policy of today with one that links wages to productivity.

Linking Vision and Reality

In a globalizing world economy, the relative prosperity of nations depends on the manner and terms by which they integrate into that economy. Given Egypt’s faulty economic policies and unskilled labor force, the present structure of Egyptian exports is dominated by primary commodities and low-tech products. Meanwhile, countries like Turkey, Malaysia, Brazil, and China have increased their share in world trade by moving up the ladder and exporting medium- and high-tech products. At the root of their success is a process of continuous improvement and a sharpening of their competitive edge. Egypt’s Competitiveness Strategy drawn by the Egyptian National Competitiveness Council provides a clear roadmap for catching up in this area. 

In the end, however, Egypt’s political economic framework must serve as the source of change. The country must clearly define the relative roles of the state and the private sector. Growth should be led by the private sector while the public sector plays the role of regulator and organizer and takes the lead in stimulating investment—especially in the short-term recovery phase. The legal framework organizing these roles should enjoy stability and avoid frequent upheavals.

Egypt must also keep in mind that a weak institutional framework often proves to be the missing link between vision and reality. Stable institutions that enforce contracts, protect property, and fight corruption are indispensable to a successful transition. Egyptians must work to transform ingrained mindsets dominated by traditional values, which tend to hinder progress and productivity. History demonstrates that genuine dialogue in a democratic setting is the most effective way to change people’s attitudes.