Equity matters

Can we pursue rapid free market economic growth while maintaining equity and social justice? Yes, answers Ayman Ismail

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The year 2007 brought positive economic news to Egypt. The country was designated as a top economic and business reformer by the World Bank and witnessed a rapid growth rate of 7.2 per cent, a stable macro-economic environment and currency, large inflows of foreign direct investment, and a booming stock market.

However, another report, by the World Bank and the Ministry of Investment, paints a dark picture for prevailing levels of poverty, based on 2005 figures. Over 40 per cent of Egyptians live under the poverty line of 1,854LE per year, or five LE per day, while 10 per cent live in absolute poverty on less than 2.7 LE per day. Compared to the year 2000, these figures highlight a pattern of divergence: the rich are getting richer, and the poor are growing in number and getting poorer.

Reading through these numbers I felt as if we live in two countries: one that is enjoying an economic boom, with high employment, growing salaries and disposable income, access to luxury housing in the new Cairo suburbia, and upscale shopping and entertainment, and another lives in informal housing and shantytowns that are growing bigger and more crowded; mostly unemployed youth, with little hope of finding decent employment, securing a house, or building a family. A growing number struggle to even feed themselves and their families.

It may take formal reports by economists to confirm this dichotomy with facts and figures, but it only takes few hours of walking in the streets of Cairo, wandering around its neighbourhoods and shops, ridings its taxis and subway to see these stark contradictions staring one in the face, for those who can bear to look. The first question that comes to mind is why? Why do these stark contradictions exist? What is really driving this rapidly growing divergence?

On the one hand, economic growth is driven by two main factors. First, the current government has implemented a package of liberal and administrative reforms over the past four years, and these reforms have started to pay off. They reduced bureaucracy for businesses, lowered taxes and customs, promoted Egyptian exports, encouraged new investments (both domestic, Arab and foreign), stabilised the currency, increased the pace of privatisation, and activated the stock market. All in all, the government went far towards building a functioning market economy.

The second factor driving economic growth is the huge surplus in capital in the Gulf countries from oil revenues. Many Arab investors, reluctant to invest in the US and Europe due to political risks, decided the keep their money in the region. And a number of them are investing heavily in Egypt. Also, more Egyptian expatriates in the Gulf and elsewhere are sending their remittances back to Egypt. Some of this money is going to investment in new factories and companies, which provides a boost for employment; some is going to real-estate, which energises the construction sector and its feeding industries, another a significant source of employment; and some is going into leisure and consumption, which also translates into jobs in the services sector such as restaurants and entertainment.

So why aren't these reforms trickling down? Why is poverty and income inequality increasing so fast?

First, the usual suspects: the population is increasing, and if we want to keep everyone employed, the economy needs to generate roughly a million new jobs every year. Also, the higher the unemployment rates, especially among low-skilled jobs, the lower the wages. This has been the case for the past 50 years or more -- nothing new here. However, the numbers are continually growing. Up until the early 1990s, the government tried to absorb most of this unemployment through government employment, which led to a bloated and ineffective public sector. With current levels, it is virtually impossible to continue doing the same.

The second factor, which often gets most of the blame, is the government's liberal policies. Social subsidies for food and medicine, and services such as healthcare, transportation and education, are shrinking. Public sector companies, which used to deliver low-cost products, are now privatised and operate under a for- profit model. And to make matters worse, global commodity prices are skyrocketing. Over the past two years, the global price of wheat has increased by 143 per cent, corn by 101 per cent, and of course oil by 44 per cent. These price increases go mostly unabsorbed through government subsidies, being rather passed on to consumers. Most of these commodities impact the most basic needs of poor families in food and transportation.

The third factor involves the labour market and education. The quality of Egypt's educational system has declined to the point that many recent graduates are deemed unemployable. Many schools do not equip their graduates with basic skills for the rapidly growing manufacturing sector. Similarly, universities are not equipping students with the necessary management and other "soft" skills needed in the emerging corporate sector. It is ironic that at the time when we have severe unemployment in Egypt, we import Asian labour to work in new factories because of a lack of qualified workers.

What is compounding all of these factors is the fragile nature of Egypt's poor. With 40 per cent of the country making less than five LE per day, any change in the cost of living translates into a big effect on people's livelihood. For example, if the cost of food increased by four LE per month (ie, 13 pesetas per day), 1.4 million people would be pushed below the poverty line. One can imagine the impact of all the recent price hikes in 2006-07: a huge portion of Egypt's struggling middle class that were trying to keep their head above water have fallen into poverty while those who were already below the poverty line have descended further into absolute poverty.

So what does all this mean? Putting aside factors beyond our control, such as global price hikes and population growth, the rest represents policy choices that we make as we transition from a planned to a free market economy. The fundamental question is: Are these liberal policies fundamentally opposed to equity and social justice? Or can we still have rapid economic growth and a free market while maintaining equity and social justice? Personally, I believe the answer is yes; we can grow our economy, move towards a free market, and at the same time maintain a sense of social justice and equity. But this requires a commitment to social and economic policies that support equitable income distribution, social services and social justice -- policies that are hard to implement and are often controversial. Here are some examples:

First, changing the tax system to be more equitable. It doesn't make sense that the salary of an employee or worker is taxed while the profits from capital gains are not. Income taxes currently target the middle and lower income segments of our society while the capital gains of the wealthy go untaxed. Capital gain taxes on profits from the stock market and real estate investments are common in the US and Europe. This type of tax is particularly needed in Egypt to increase the government's ability to support social subsidies.

Second, focusing on low-income housing. Some figures estimate that there is an unmet need for six to seven million low-income housing units, while there is a surplus of two to three million luxury units. Finding a new home is the biggest challenge for young people creating new families. Current land prices and construction costs make it uneconomic for any private developer to build housing for the poor. Meanwhile, government-built low-income housing is not much better than informal housing. To be sure, the mortgage law and associated institutions were recently introduced and may take a while to become fully operational, especially with the highly informal nature of the economy. Until then, the government needs to support low-cost housing through measures such as initiating public-private partnerships, allocating subsidised land, or providing targeted tax exemptions and mortgage guarantees.

Third, the informal sector is often treated as if it is a black market that operates outside of the law. The reality, however, is that it represents around half of the Egyptian economy and is the largest provider of jobs and low-cost products and services. The government needs to integrate it into the formal economy in a way that enables it to continue to function. Small and medium enterprises (SME's) that constitute the informal sector cannot afford to comply with all current complex regulations, so any attempt to formalise them must start by simplifying these regulations, or possibly creating a separate unified law for SME's that exempts them from the majority of these regulations.

These are but three examples of pro-equity policies that can be implemented within a free market economy.

Back to our main question: while I would argue that, yes, we can we have rapid economic growth and a free market while maintaining equity and social justice, I believe this is only possible if we commit to the proper pro-equity policies as part of the economic reform package. Many of the countries that preceded us in the liberalisation process faced the same challenges. Those who ignored them, such as Mexico and Chile, suffered from set backs and social unrest, while those who made social policies an integral part of their development process, such as India or South Korea, maintained a steady and equitable growth.

So why aren't these pro-equity policies on the top of today's economic reform agenda? One possible reason is that this government has been overwhelmed by the daunting task of quickly opening up the economy and implementing their reform programme. Another possible and more likely reason is that nobody is representing the poor, the growing bottom 40 per cent of the population, as a constituency in the policy-making process. Traditionally, the interests of the poor were represented by left-leaning organisations, labour unions and socialist parties. These groups are strongly opposed to the policies and politics of the current government, so their voices are excluded. However, maintaining the balance between rapid liberalisation on the one hand and social justice on the other will never happen unless these voices are heard and represented in the policy process. The challenge for the current government is how to make that happen.

My personal conviction is that there is no fundamental contradiction between equity and social justice on the one hand and markets and free economies on the other. But equity doesn't come of its own; it requires deliberate actions towards balancing market liberalisation policies with pro-equity and wealth distribution policies. It is our choice what to do for the bottom 40 per cent of society; ignoring them is something we cannot afford to do.

Ayman Ismail is a PhD candidate in International Economic Development at the Massachusetts Institute of Technology. He is also co-founder and a board member of Nahdet El-Mahrousa, an Egyptian youth and development NGO