Monday,18 December, 2017
Current issue | Issue 1227, (1-7 January 2015)
Monday,18 December, 2017
Issue 1227, (1-7 January 2015)

Ahram Weekly

On investment and employment

World Bank Chief Economist for the Middle East and North Africa Region Shantayanan Devarajan gave Niveen Wahish his take on government efforts to reform the economy on a recent visit to Cairo

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Al-Ahram Weekly

What are your views of the economic summit scheduled for March?

It is great that they [the government] are having it. The way they are approaching it I think is the right way. This is not about a dollar figure of how many billion dollars they need investors to put in; it is about Egypt showing the world the programme that it has designed for itself and saying feel free to come and invest if you like but we are going to go ahead with this programme anyway.



By programme are you referring to something that Egypt will agree upon with the IMF?

No, it is a programme that the Egyptian government actually wants to undertake, a combination of policy reforms and some investment projects. I would think that that programme would be consistent with the IMF’s assessment, however.



What would be the ideal programme that investors would be looking for?

Investors are looking for a programme that provides a certain level of certainty about policies. Investors want political stability, but they are also looking for a programme where Egypt will bring its fiscal deficit down over time to a point where they can have confidence that the government has enough fiscal space to withstand an external shock.



Would investors be interested in tax breaks and exemptions and the like?

I do not think so. A lot of governments think they need to give tax breaks to attract investors, but the experience is that these tax holidays never work. Say you give a tax holiday for 10 years, investors come in and when they reach year nine they start demanding an extension, so basically the government has lost a lot of revenue, maybe forever. The shrewder investors think that if the government is giving them tax breaks it means that it is not a responsible government because that is going to increase the deficit and they would much rather have a government running a prudent fiscal policy even if that means they have to pay more in taxes because that gives them stability.



When investors come to the conference and hear the programme, will they believe the government’s word or will they have to see something within a certain amount of time before they start acting on it?

It is a little bit of both. Not only will they need to see but they will be looking back at what has been happening over the past year as well. I think it is fair to say that the government has managed to bring down the deficit in the past seven months, and projecting out to June 2015 it is going to be a lower deficit: there is a track record. But the test is whether what the government is saying is internally consistent. Are the projections for growth consistent with the policy reforms they are doing? The document that the government puts out is critical because it has to be a credible story otherwise investors will get nervous.



Some reforms to the subsidies system have taken place. Where do we go from here?

Fuel subsidies even after the subsidies reform of July 2014 are still huge. The subsidies bill is about six per cent of GDP, so there is a lot more left to do. I would suggest that they get on a path to gradually reducing the subsidies over time. They have to work towards it because the subsidies are really corrosive to the economy.



Some pilot work has been done in the area of cash transfers. What should the government keep in mind when implementing this?

That too is potentially prone to capture: there is a long history in other countries of cash transfer programmes being manipulated so that the money does not just go to the poor. In my country, Sri Lanka, which is considered a paragon of social welfare, they have a cash transfer programme for poor people but 50 per cent of the poor do not receive money from it and 50 per cent of those receiving it are not poor. There is research showing that the districts that get the largest amount of cash transfers are the ones where the party in power is more popular. It is really frustrating the amount of capture that takes place of programmes intended for the poor.



Should the government do without them?

No, but keep in mind that that this too can get politically captured: politicians will seize whatever they can to promote their interests. The way you get around it is to have a simple and transparent formula. The Progresa Oportunidades transfer programme in Mexico had a simple formula published in the newspapers stating the criteria that made someone eligible for cash transfers. And the government asked the public to inform on anyone who could be getting transfers without being eligible.



What other reforms are needed?

There is a need for reform in competition policy, a reform that the recent report on Jobs or Privileges brought out in sharp relief.  It is not just a simple question of the laws, but one of whether Egypt has a mechanism in place to make sure that those laws are implemented. If we want to resolve the unemployment problem we have to promote competition.



How do we make competition easier?

Level the playing field and allow equal access for everybody, foreign and domestic. And even within the domestic field, give small enterprises and large enterprises equal space. Right now there are more incentives for bigger enterprises. The problem with Egypt, as opposed to lots of other countries, is that small enterprises stay small and do not grow: we find 20-year-old small and medium enterprises (SMEs) that had five employees 20 years ago and still have five employees today. The regulations might be the same for small and large enterprises, but they are implemented very differently and small enterprises face many more restrictions.



We have seen the poverty rate climb in Egypt recently. What is your opinion on that?

It is not surprising that it has gone up because growth has been slow and there has been a revolution and political turmoil. Nonetheless, looking at the bottom 40 per cent of the population in Egypt, their per capital income has been growing faster than the average or declining more slowly than the average. But looking at people living on $4 or less per day, we find that the percentage has been constant at around 70 per cent since the 1990s. And the population has been growing so the number of people living on $4 per day or less has been growing too. The same goes for $5 per day: these are 80 per cent of the population. These people are poor, not extremely poor, but poor all the same. The middle class, those between the 40th percentile and the 80th percentile of the income distribution, they are the ones that are getting squeezed.

What can be done to help them?

For one thing develop a dynamic private sector to create jobs. The other thing is that many of these people have university degrees or have finished secondary school, but the quality of that education has been poor so we need to improve the quality of education. That can be done by strengthening the ability of students and parents to hold teachers accountable. Right now there is no accountability. We need to give parents the means to do that.



What are these means?

Give parents vouchers. The parent takes the voucher and chooses which school to enrol their kids into. The school then takes the vouchers and redeems them for cash. The vouchers can be used to pay for any school parents like. What you find is that public schools then begin to respond. They improve their quality and get better teachers. This system would work for better health services as well.



How is the reduction in oil prices affecting the Middle East and North Africa region, Egypt included?

In general it is going to be favourable on the oil importers like Egypt, Morocco, Jordan, Tunisia and Lebanon for two reasons. First, the import bill just got cheaper, so the current account improves. The other is that the fiscal deficit is helped because all of these countries subsidise fuel so their fuel subsidies bill will be cheaper. It is going to have the opposite effect on oil exporters, many of whom subsidise oil even more domestically, particularly in the Gulf. It could slow down growth.



Some have said that it could affect Egypt negatively because of how it could affect the income of the Egyptian General Petroleum Corporation and thus its ability to repay debt…

That will have a small effect on GDP. The government is going to make enough money to be able to cover that.



Will it affect Gulf financial transfers to Egypt?

I do not think it is going to have a big effect on the transfers. My sense is that the Gulf gives money to Egypt for political reasons. If that does not change, they will keep giving the money.

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