Socially conscious growth
Ahmed Galal is managing director of the Economic Research Forum (ERF), a regional research institution covering the Arab countries, Iran and Turkey. Before that, Galal was executive director of the Egyptian Centre for Economic Studies (ECES), another independent think-tank focussed on economic development in Egypt. He has also worked at the World Bank for 18 years. In an interview with Niveen Wahish
, Galal discusses why growth is unsustainable if democracy and a social agenda are lacking
How do you view the results of the 25 January Revolution?
What happened is overdue. You cannot have economic development without political liberalisation. You can have it for a short period of time, but it is not sustainable. For a long time, I have been convinced that Egypt is going to make the transition to a regime that looks like most Latin American countries, but I never knew when or how that was going to happen.
What has happened is extraordinary. I am not surprised by it as it was inevitable, but I am surprised by how rigorous it has been. The capacity of these young people to do extraordinary things is mind-boggling and heartening.
What do you think triggered it?
It is the result of a combination of the use of technology in ways that are quite innovative, the desire for change and increased inequality. More importantly, we have a serious problem in Egypt, that of poverty. Depending on what the cut-off point is -- either $1.25 or $2 per day -- either 20 or 40 per cent of the population lives on less than that a day. That translates into 16 to 32 million Egyptians. All that, combined with the fact that Egypt has a young and increasingly educated population, is explosive.
You say that economic development cannot happen without political freedom. What about the Asian model?
The majority of countries that are rich and have succeeded are democratic. The best thing for an investor is to have the conviction that the rules are not going to change haphazardly. This certainty is very important for investment, domestic or foreign, because investment, by definition, is an expense you make today and whose benefits you reap tomorrow or the day after. If an investor does not believe the benefits are going to accrue tomorrow or the day after, he is not going to invest in the first place, or he will invest in return for a very high premium.
A dictator anywhere can change his mind to please one supporter or another. In a democratic set-up, there are checks and balances, and any promises made are more credible as they cannot be easily overturned. This reality helps ensure more credibility in the eyes of an investor, and thereby a sustained flow of capital. Brazil, for example, is obtaining around $30 billion a year in foreign direct investments.
But during the past three weeks, investors have been feeling much uncertainty. Please comment on this.
This is understandable but it is myopic, as it is a perspective based on the short-run versus the long-run. Even if Egypt loses a few investors now, they are probably not the ones it wants to keep anyway. The real investors are further down the road, and they are both greater in number and also more of the kind that Egypt really does want to attract.
So you are optimistic?
Very much so.
These days there is a tendency in society to consider all businessmen corrupt and all previous reform policies a mistake...
From 1991 until recently, the government focussed excessively on investment, the private sector and growth, while paying almost no attention to who is reaping the benefits of growth. That is the social side of the story. But it would also be a mistake to focus on social needs and ignore growth. Without growth you cannot really achieve your social goals.
What Egypt needs is a combination of policies that promote growth and private initiative, while simultaneously making sure the benefits are shared widely.
So you do not think the trickledown was going to happen, as we were being told?
What must policy-makers keep in mind while implementing a social agenda?
The first anchor of social policy is making sure economic growth has a social conscience. The social and economic agenda should be well integrated. Distribution of the benefits should happen at the time you are actually generating the benefits.
New policies for reform should take into consideration how that distribution is taking place. It needs to involve having wage policies that make sense, based on a policy of minimum wages, linking productivity to wages, how much taxation you subject firms' profits to and whether it's progressive or not, and whether it is a flat rate of 20 per cent or otherwise. You can also design policies that influence which sector is likely to grow faster.
The second part of the social agenda is about the delivery of services such as education, health, sanitation, road and water. This agenda lagged enormously behind in the previous governments.
Third are safety-net policies. There will always be in Egypt a group whose members cannot fend for themselves, such as the handicapped, jobless female household heads and the elderly. You need to have a social safety-net for these target groups that makes sense. What we have now is the leftovers of many policies that are unsuccessful. We are relying on subsidising commodities, which is the wrong formula.
It is never a good idea to have two prices for any product. It causes leakage, corruption and waste. But the removal of subsidies should not be done blindly.
How long could tackling these reforms take, especially bearing in mind the widespread discontent with social conditions?
It is going to take time. We are harvesting the results of misguided policies that have been in place for quite some time, and this will not be resolved overnight. You need to move forward on all fronts. You need to have a clear idea of where you want to go and actively come up with initiatives, subject them to social debate and begin adopting them, because clarity of thinking and accountability are fundamental to progress.
But people are intelligent and they know what is meaningful and what is not. The best way is to come out clearly with a sum-up of what the nature of the problem is, the alternative solutions, and engage in a discussion about these solutions and come up with something that can be implemented. The idea of offering solutions to each group that complains may calm the flame, but it is still an incoherent and unconvincing approach. In fact, such a tactic could result in igniting more demonstrations.
In a year, you must develop your idea about what you want to do in the long or medium-run, have an orientation that you can explain to yourself and to everybody else. Second, you have to restore confidence. You build credibility slowly as it is a cumulative process. Third, you begin action according to your coherent plan.
In the meantime, we must make sure we do not get away with imbalances. There is a temptation early on to increase budget deficit to satisfy a few groups. This can backfire. The policy- makers have to explain what they can and cannot do at the moment. They have to make sure that economic conditions are not destabilised. What the current government does can make life difficult down the road, or it can stick to fundamental principles and thereby make it easier to carry out further reform later.
What is your view regarding the current pressure on the value of the pound?
It should not be overly supported. We should be using a combination of policies, not one. We should support the pound's value partially, while also allow it some flexibility, and thirdly adopt measures such as taxing capital flows of the hot kind so as to provide a disincentive, motivating people not to move in and out of Egypt too easily. Chile and Malaysia have done it.
What should Egypt look up to as a benchmark?
We should not imitate one country or another. Each country has its own unique characteristics and initial conditions. Our benchmark is to benefit from collective wisdom rather than from one country.
First came Tunisia, and then Egypt. What does that mean for the Arab world?
Egypt is different from Tunisia or any other country. Historically, Egypt has been a leader. When Egypt was socialist in the 1950s and 1960s, quite a few countries of the region became socialist. As Egypt began opening up economically, quite a few countries in the region started opening up as well. The political change that is happening now in Egypt is going to serve as a model. Every dictatorship in the region must be a little concerned right now that the people are not going to take it lying down. The spillover effect of what is happening in Egypt is likely to be large. It is likely to have a greater impact on the region than Tunisia, although I give Tunisians much credit for setting off the spark.
There are limits to the survival of regimes that are not open and democratic. The idea of buying off the consent of the population through distributing [oil] rent or the provision of government jobs has its limits as a policy.
People reach a stage where, with education, exposure and looking at the joneses, they just rebel. I see that spreading. The change might differ from one country to another in the region but it is coming. It is just a question of when and how.
Does that include Gulf Cooperation Council (GCC) countries?
The GCC countries are likely to survive a bit longer because they have more rent to distribute. There are three things that make a difference. First, education, for when people are educated, they demand things their parents and grandparents did not. They are also not only satisfied with money. The region is becoming increasingly educated.
Second is the idea of distribution of rent and the inequality of the distribution of rent. For instance, some people in the Gulf countries may see that they are doing fine but they see that too much of the money is being taken by a certain group. The inequality element may be an important factor.
Third is the youth bulge as the region has the youngest population in the world. All these factors are powerful, and with connection, spill- over and contagion, it is not going to stop.
What about educational reform?
Educational reform will take 20 years. But it is better to start today. Countries live much longer than individuals. What is important is to start on the right track. We should not be demanding change now. That is bound to fail. There are things that can be done now and things to be done over time.
The easiest part of educational reform is the physical part such as text book, schools, teacher compensation and teaching methods. We can start on these issues right away. The part that will take time is to figure out how to motivate the educators at all levels, and to align the incentives of these people to deliver good quality education.
The third point, which is even more difficult, is public accountability -- or making sure citizens have a voice and can influence what goes on in schools and how education policies are formulated by the government. This is the part that will take longer because it will be part of the process of democratisation, and that process needs to take its course.