The need to act now
Armed with lessons from past reform efforts and grasping the opportunities offered by the global economic crisis, Egypt is well positioned to face up to future demands if it moves promptly, writes Samir Radwan *
"The Economist as a Saviour was the title chosen by Robert Skidelsky for his monumental biography of Keynes. The choice was deliberate. He wanted to distinguish Keynes from those economists who spend all their time on "diagnosis" and remain thin on "prognosis".
The art of prescribing what to do is a rare commodity, and this article is an attempt to swim against the current by addressing the twin issues of where the Egyptian economy will be in 10 years' time from now, and what does it take to get there. It will be argued that by 2020, the Egyptian economy can join the lower ranks of the advanced countries' club, the OECD, providing certain conditions are satisfied.
Let us start by sketching the initial conditions of the Egyptian economy on the eve of 2010. The story of the recent past has been one of successive booms and busts -- the pattern of the global economy since the Great Depression of 1929-32. The oil crisis of the 1970s put an end to the post-war boom; the real estate crisis in the US triggered the recession of the 1980s; regional crises in Latin America and Asia earned the 1990s the title of the "Lost Decade"; others were caused by the avian flu crisis and the food crisis; and finally the global financial and economic crisis of 2008.
A change in the government in Egypt in July 2004 triggered a wave of reforms that enabled the economy to emerge from the recession of the previous two years. These reforms centred around four pillars: a thorough reform of the tax system introducing a flat rate of 20 per cent, which is half of the previous rate, designed mainly to stimulate private sector investment; reform of the antiquated customs system; improving the climate for investment and doing business; and launching sweeping reform of the monetary and banking system while asserting the authority of the central bank.
This economic reform drive has resulted in an upsurge in almost all macroeconomic indicators. GDP growth rates have been experiencing a quantum leap. In only four years, GDP growth accelerated its pace from an annual rate of four per cent in 2003 to 7.2 per cent in 2007. International reserves have been steadily increasing from $14.9 billion in 2004 to $34.7 billion by July 2008, or the equivalent of nine months of imports. Similarly, the balance of payments has been showing signs of improvement, particularly due to sustained increases in income from services and transfers. The end result has been a surplus of $5.3 billion, more than four per cent of GDP. All this together with judicious fiscal and monetary policies has been reflected in remarkable stability of the Egyptian pound.
A distinctive characteristic of Egypt's growth performance has been the role of investment as the main driver of growth. Domestic investment has increased by almost 60 per cent during the recent period, and this increase has been driven primarily by private sector investment that grew by 96 per cent. Foreign direct investment (FDI) increased from $400 million in 2000/01 to $13.2 billion, or about nine per cent of GDP, in 2007/08 with half of it being new or "Greenfield" investments. In fact, Egypt was ranked as the top country in Africa, and the second in the Middle East and North Africa region after Saudi Arabia in attracting FDI, according to the UNCTAD World Investment Report 2008. These testimonials have contributed to Egypt being the first country in the region to be accepted in the OECD Investment Committee last year.
Moreover, Egypt has been doing well in enhancing the ease of doing business. According to the World Bank/IFC Doing Business Report 2009, the country has continued to appear in the top 10 league of reformers for the fourth year running. In 2009, it ranked 114th compared to 125th in the previous year (out of 181 countries).
An apparent paradox may be observed in the opposite directions suggested by these reports when compared to the analysis of the country's competitiveness indicators. According to the World Economic Forum's Global Competitiveness Report, Egypt's rankings have on the whole been low, and in fact declining. The latest Global Competitiveness Index (GCI) shows Egypt going down from 71st position in 2006/07 to the 77th in 2007/08 and to the 81st in 2008/09. The question is: How can the coexistence of fast growth, fuelled partly by increasing FDI, be reconciled with declining competitiveness indicators?
The explanation of this paradox lies in a number of challenges that continue to vex the Egyptian economy. Prominent among these are some aspects of macroeconomic instability, especially: high public debt and budget deficit; inflation; rising unemployment and inadequate quality of human resources; low productivity; and unbalanced sectoral sources of growth where employment-generating sectors like agriculture at 28 per cent of employment gets five per cent of investment and therefore contributes only eight per cent of GDP growth, while manufacturing that employs only 13 per cent, gets 25 per cent of investment and contributes 26 per cent to GDP growth.
The global financial and economic crisis has negatively been transmitted to the Egyptian economy particularly since mid- 2008. The impact has been more pronounced on the real economy than the banking sector. The impact of the crisis has been mainly reflected in the decline in almost all macroeconomic indicators, representing almost a reversal of the impressive performance of the previous four years. Real GDP growth amounted to 7.2 per cent in 2007/08, then declined slightly by the end of that year, reaching 6.7 per cent in the last quarter. But with the onset of the crisis, GDP growth declined to 4.7 per cent at present.
The impact of the crisis began to show on the different sectors of the real economy by the middle of 2008. Most of these sectors registered a pronounced decline in growth starting with Suez Canal revenue, which declined to a negative growth of - 7.2 per cent, followed by tourism which dropped to -3.2 per cent, ass well as manufacturing (where growth was halved) and building and construction (which dropped from 14.8 per cent to 11.4 per cent). The only sectors that escaped this fate were communications and petroleum. In other words, the growth of employment-intensive sectors declined, thus aggravating an already serious unemployment situation.
This performance has serious implications for the future growth of the Egyptian economy as well as the welfare of the population. The prolonged labour market recession and consequent social deterioration are the most serious aspects of the global financial and economic crisis as it reflects on Egypt. The most immediate impact of the crisis has been the inability of the labour market to adjust, thus exacerbating the problem of unemployment and accentuating the position of different groups -- particularly women and youth. Unemployment, which has been a chronic problem even with the rapid growth of the pre-crisis period, is on the rise. Open unemployment increased from 8.4 per cent in 2008 to about 10 per cent in 2009, mostly affecting youth and women.
There is no denying that the resilience of the Egyptian economy under the pressure of the crisis has been due to the reforms that have been introduced since 2004. GDP growth for 2009 is established at 4.7 per cent, which is respectable by international standards, but the question remains as to whether this performance is due to the crisis or to inherent structural problems that need to be addressed when looking at the next 10 years.
There is no doubt that this is an opportune moment for serious reflection on the future of the economy. The overriding goal should be the doubling of GDP from its 2009 level of LE1040 billion, and creating between 950,000 to one million jobs a year.
What is needed is a paradigm shift from the policies of the 1980s and 1990s, which gave the place of honour to economic growth through deregulation, with the objective of fighting inflation superior to employment creation, to a new development paradigm that endorses growth with equity as the ultimate goal to be achieved through full employment.
Taking this as a point of departure, the crucial question is: What does it take to get there?
First of all, Egypt has to regain fast growth through a return to a seven per cent GDP growth rate, essential for employment creation and poverty reduction. Available forecasts suggest that this is possible. The Economist Intelligence Unit (EIU) predicted that by 2013 Egypt could regain its pre-crisis level of 7.4 per cent growth .
Achieving high growth requires a serious restructuring of the economy. The crisis provides Egypt with a unique opportunity to restructure its economy, benefiting from the upheaval that has taken place at the global level, and that will certainly result in a new configuration in production and trade patterns. Signs are already clear that the advanced economies of the OECD are embarking on a process of transformation of their industries and other activities. This will result in the relocation of some of these industries and activities to the developing world, and especially emerging markets. Countries like China and India have already started to explore the possibilities of benefiting from this situation, and Egypt should position itself to participate in that process.
An obvious endeavour will be the restructuring of Egyptian manufacturing industry in two strategic directions: first, the deepening of manufacturing activities in order to fulfil growing demands of the domestic market, and being able to compete through exports to the global market, benefiting also from its unique geographical proximity; second, expanding the process of industrialisation through joining Global Production Chains. This would require far-reaching structural changes in order to reach what UNIDO (United Nations Industrial Development Organisation) has termed "breaking in and moving up", which means enhancing competitiveness in order to occupy the manufacturing space vacated by developed economies, or even by some of the dynamic emerging markets such as China.
There are several preconditions for this structural transformation to take place. Important among these are: the removal of remaining obstacles to investment in general and FDI in particular; providing incentives to investors through availing land and infrastructure; and achieving a breakthrough in improving the skills of the Egyptian labour force that has consistently been cited as the main constraint on productivity and competitiveness. There is consensus here in particular. Egypt's educational and training systems are not sufficient for the creation of skills suitable for the domestic labour market let alone meeting the demand for Egyptian labour from other countries. The world is heading towards greater integration of labour markets similar to that of capital markets. Projections for the year 2050 suggest that the internationalisation of production of goods and services, reduced communications and transportation costs, and global demographic developments, will lead to higher international mobility of labour and jobs in the coming decades.
Within this perspective, Egypt can adopt a proactive approach to prepare for these global changes, seize opportunities and address risks head on. Recognising the urgency to invest massively today in order to increase the future pool of medium-and-high skilled workers is a precondition to participating in the global recovery and beyond. The task is all the more urgent in view of the projection that future demand for skills -- both domestically and abroad -- is not likely to be satisfied given the present skill profile of the labour force. A crash national training programme must top the agenda if the objective of great transformation is to be achieved.
Finally, the question of distribution of income is crucial to undertaking this transformation. Distributive justice, based on higher productivity, is justifiable not only on moral grounds but out of economic rationality. Higher incomes for the majority translate immediately into market expansion, a precondition for enhanced productivity. These reflections are not dreams, but they require a pursuit of the future with a "beam in our eyes".
* Senior economic advisor to the Egyptian Supervisory Authority (EFSA).