Friday,24 November, 2017
Current issue | Issue 1317, (27 October - 2 November 2016)
Friday,24 November, 2017
Issue 1317, (27 October - 2 November 2016)

Ahram Weekly

A national strategy for economic reform

Egyptian economist Said Al-Naggar identified the roots of Egypt’s economic problems in a book first published a quarter of a century ago. We should all take note, writes Sayed Moawad

Al-Ahram Weekly

At times of economic problems, even if short-lived ones such as those Egypt faces now and then, the term economic reform becomes familiar to the public and intelligentsia alike. In such circumstances, we should consult experts to provide us with the right prescriptions. One of these is Said Al-Naggar, notably in his valuable book Towards a National Strategy for Economic Reform published in 1991.

Al-Naggar has a strong conviction that economic freedom is the best system to achieve welfare and progress, and that the best economic policy is that where government intervention is at a minimum level. Government intervention is basically to keep public order and enforce the law, to prevent monopolies, and to correct the misallocation of incomes through progressive taxation. The government should also provide public utilities where the private sector is reluctant to do so.

He calls for allowing market forces to work freely in determining prices, allocating investment, selecting production techniques, determining the volumes of both employment and unemployment and determining savings and investment. In the same vein, trade, whether internal or external, should be free. The exchange rate, even in the most critical circumstances, should work freely according to market forces as it will correct itself and come back into balance.

Al-Naggar spent much of his life working in regional and international organisations. He worked for the United Nations Economic and Social Commission for Western Asia (ESCWA), the United Nations Conference on Trade and Development (UNCTAD), as a vice-president of the World Bank and as a panelist at the World Trade Organisation (WTO). He was a professor of economics at both Faculty of Law and Faculty of Economics and Political Science at Cairo University. He founded the New Call Association (Al-Nedaa Al-Gadid) to spread liberal thought. He passed away in April 2004.

Al-Naggar shed light on the roots of the economic problems in Egypt and tried to formulate an effective national strategy for economic reform to overcome the current economic problems and put Egypt in the place it deserves among the nations. He proposes that the way to solve the country’s economic problems is to transform Egypt’s economic system. This depends to a great extent on the political leadership and its commitment to implementing economic reform. It also depends on not giving in to pressure from interest groups who are the beneficiaries of the current conditions.

These views were presented in 1991 when Egypt was starting its Economic Reform and Structural Adjustment Programme (ERSAP). But 25 years later the country’s economic problems are still the same. Al-Naggar in 1991 introduced the idea that certain issues must be dealt with in order to overcome the country’s economic problems.

First, central planning should be abandoned, and there should be a reduction in the role of the state in economic activities. The right planning system is one in which the government’s intervention in economic activities is through the formulation of economic and financial policies in a manner that leads the national economy towards goals that meet the requirements of development. Planning that permits market mechanisms to operate and decreases bureaucratic decision-making is the correct one.

It should be noted that adopting this type of planning does not mean the absence of the state from the economic arena and letting matters go. This type of planning is more concerned with the content of the government's intervention rather than with the principle of intervention per se. The government will basically focus upon the execution of macro-economic policies and the correction of market failure whether it results from the absence of effective competition, or as a result of negative or positive externalities.

While such planning requires the reform of the administrative apparatus, this does not necessarily mean getting rid of civil servants or shouldering them with the mistakes of the past. Economic reform will not go ahead if we shoulder civil servants with the mistakes of the past.

Second, there should be a reconsideration of priorities to deal with economic problems by focusing on overcoming the shortage of foreign currency and investments through high productivity. The tourism sector should receive more investment so that Egypt becomes the leader in this sector in the Mediterranean area.

Third, there is a need to reduce the volume of the public sector to the sphere in which it can serve development goals. The public sector is one of the causes of the economic problems in Egypt, and it constitutes a huge burden on the Egyptian economy. This is evidenced by the losses suffered by its units and by the sharp decline in its returns on capital. It contributes to increasing the country’s budget deficit.

Some may say that the public sector is owned by the public, but in reality it works in the interests of a limited number of people, whether by legal or illegal methods. Overcoming the current economic problems depends on the manner in which Egypt specifies the role of the public sector. There must be a clear-cut policy for the role of both public and private sectors in the economy. It is necessary to privatise firms whose activities are outside the natural public sphere.

Fourth, the social dimension should receive due attention. No strategy for reform can be truly national unless social justice is part and parcel of it. A national strategy for reform should open room for the private sector to perform its role in development. The success of the private sector, whether in Egypt or in any other country, depends to a great extent on striking a balance between rights and duties and between freedom and responsibility. Furthermore, in the private sector there should be the recognition that in return for profit there should be a commitment towards society through a fair share of taxation. The private sector should aim to gain the confidence of employees and invest long-term in productive activities.

There must be a reconsideration of the state budget, giving priority to basic services such as healthcare and education. If the government seeks to reduce the budget deficit through reconsidering its subsidies system, it should not raise the price of basic consumer goods. If this is an imperative, it should consider the alternatives. The author stresses that inflation is the main enemy of social justice and there can be no reform without containing inflation and then reducing it.

 

FURTHER ISSUES:The fifth issue is inflation, where Al-Naggar proposes that controlling it is the right approach for economic reform, since high rates of inflation abort any attempt at reform.

Inflation is like a disease in the entire economic body. Controlling inflation has many positive aspects. First, the main target of any reform is the social dimension, and inflation is the number one enemy of social justice. The reduction of prices contributes to redistributing incomes in favour of the low and fixed income segments of society, and this in turn retains a balanced relationship between wages and the cost of living without the need for repeated increases in monetary incomes.

Second, controlling inflation reduces the pressure on both interest rates and exchange rates, meaning that there should be no need to devalue the pound or raise interest rates and thus no need for the corrective measures currently called for by the International Monetary Fund (IMF). Third, regaining confidence in the local currency leads to positive effects on saving, investment and incentivising individuals.

To overcome the problem of inflation, Al-Naggar proposes reducing the country’s budget deficit through increasing public revenues and reducing public expenditures. In order to increase public revenues, he calls for dealing seriously with tax evasion and reconsidering the tax exemptions that result in losing a considerable part of public revenues. One of the ways to increase public revenues is by imposing new taxes such as the value added tax (VAT) and imposing a tax on the volume of business.

As for public expenditures, he says that these are composed of a highly complicated set of items, most of them of contractual nature and unable to be touched including salaries, pensions and interest on local and foreign debts. The reduction of public expenditures can only be made through non-contractual expenditures such as subsidies and investment expenditures.       

Sixth, there is industrial strategy. Industrialisation is the cornerstone of Egypt’s economic future. Egypt has been knocking on this door for 60 years (85 years taking into account the fact that the book was published in 1991), at first under the leadership of Talaat Harb who built the first national industry. Egypt preceded most other developing countries in this regard, among them the East Asian nations and India. Like many other developing countries, Egypt adopted an import-substitution strategy for industrialisation, normal in the early stages of development. Unfortunately, contrary to other developing countries that succeeded in shifting from import-substitution to an export-oriented strategy, Egypt failed to do the same for the following reasons.

Since the end of the 1950s, Egyptian industry has been established under the umbrella of the public sector, which has not been able to compete in international markets in respect of types of goods, specifications and punctuality in delivery. These things negatively affected the confidence of consumers in importing countries. Moreover, the country’s industrial policy since its inception did not distinguish between industries in which Egypt has a comparative advantage and those in which it has no comparative advantage. The slogan “from the needle to the rocket” was not the proper approach.

The application of a strict protectionist policy also led to separating the domestic market from the global market regarding production efficiency and both cost and price levels. Macro-economic disturbances made the domestic market more profitable and did not permit the growth of export industries.

Seventh, there is the investment climate. This is defined as the “set of conditions, policies, economic and political institutions that affect investors’ decisions and convince them to direct investments towards a certain country and not to others.” There are five factors that affect investment decisions, including, first, public-sector control over the economy (at the time the book was written), macro-economic policies particularly towards inflation, interest rates and exchange rates, and laws and regulations relevant to investment decisions, particularly the taxation system.

Al-Naggar refers to a study by Hanaa Kheireddin of the Faculty of Economics and Political Science in Cairo on the investment climate in which she states that privileges and exemptions are merely one of the factors that affect the investment climate and that there are also economic and non-economic factors. The economic factors include macro-economic policies, particularly interest rates, exchange rates, and the taxation system, and most importantly they include the market forces that determine prices without the government’s intervention.

Non-economic factors include political and security stability, the existence of an effective legal and judicial system that protects investors from arbitrary measures, and fair labour laws that regulate relations between workers and entrepreneurs.

Eight, there is the private sector and privatisation. Al-Naggar says that the gradual shrinking of the public sector and the shift to privatisation will lead to the creation of a conducive environment for a committed and productive private sector. The private sector in Egypt is capable of carrying out its responsibilities through implementing long-term investments and paying its tax obligations. It can play an important role in economic development.

However, the prevailing perception of privatisation is that it transforms the ownership of projects from the public sector to the private sector, which is a misleading perception. Privatisation may take many forms, among them selling public companies to the workers in these companies or to the private sector, or privatising the management and keeping the public companies in the hands of the state, or giving some activities that the state performs to the private sector, such as cleaning, transportation and construction. Finally, privatisation may take the form of granting the private sector privileges to use natural resources such as mining and fisheries.

Ninth, there is the issue of external debts. These are one of the complex challenges facing the Egyptian economy. External debts put Egypt in the presence of a bitter choice in which paying debt installments and their respective interest puts pressure on foreign currency availability and can negatively affect imports. The author refers to some successful experiences in dealing with external debts that have allowed investors (local or foreign) to buy debts and turn them into local currency to be used as direct investments in the debtor country. He refers to Mexico as an example of a country that has managed to sell its foreign debts.

 

CONCLUSIONS:In conclusion, Al-Naggar clearly identified the roots of Egypt’s economic problems 25 years ago and introduced prescriptions for them. We should take his advice seriously, particularly as the causes and the symptoms are still the same.

Of course, much water has passed beneath the bridge since this book was published; for instance, at the time of writing the public sector represented 70 per cent of economic activity in Egypt. Today, the situation is reversed, and the private sector represents 70 per cent of activity. However, some of the remnants of the public sector still mount up huge losses, and this requires the intervention of the government to stop the depletion of public resources through privatising these units regardless of the form of privatisation.

The author states that it is unfair to blame a certain person or a certain government for the current problems simply because they are the accumulation of many years and no one has a magic wand or can claim to solve such problems overnight. He says that at this point in its history, Egypt needs to see clarity in thinking, honesty in speech and sincerity in volition, abandoning the false slogans of the past and seeing things in their true form. It should be clear that the cost of reform is minimal when compared to the repercussions of non-reform, and the status quo should not be allowed to continue as it increases the suffering of the people due to inflation and unemployment. It also increases the country’s dependence on foreign debts and threatens political decision-making.

Al-Naggar sets out the conditions that are necessary for implementing his comprehensive strategy of economic reform. These include enhancing constitutional institutions, supporting popular participation, reconsidering the privileges of some segments at the expense of the public interest and the national economy, ensuring an efficient legal and judicial system, and guaranteeing the fair distribution of reform burdens where the rich participate before the poor.

He says that the political leadership must be committed to economic reform and have the courage to tell the people the truth of the economic situation, and he says that the political leadership must give an example of sacrifice in order to lift Egypt out of its current problems. I remind readers that this book was written in 1991. Today, President Abdel-Fattah Al-Sisi speaks frankly about the country’s economic challenges and he sets an example when he gives up half his salary for the sake of the state.

Finally, on religious extremism, Al-Naggar says this is “an imported phenomenon that does not have its roots in Egyptian soil. Egyptian society is by nature moderate and fair according to Islamic teachings.” The religious extremism we see today is merely the result of the actions of a tiny minority. Equal citizenship, not religious affiliation, is the basis of rights and duties in the modern state. Egyptians are equal in their political and civic rights regardless of their religious belief. However, religious extremism continues to be a risk for Egypt’s future from both the economic and political perspectives.

In his book, Al-Naggar sent a message to the then president, Hosni Mubarak, saying that “Egypt is on the threshold of the 21st century and in a position that no one would wish for it.” He said that Mubarak had a historic opportunity to reform a corrupt and inefficient economic system, making it into an economic system based upon efficiency and social justice. He had the opportunity to reform the political system, making it based on real willingness, and most importantly he had the opportunity to reform the social system, giving it clear goals in an environment of peace and progress.

It seems that the then president did not read this message. Today, I direct the same message to President Al-Sisi, and I am confident that the president will read it carefully and record his name not only in the pages of history, but also in the hearts of all Egyptians, by working to realise it.

The Egyptian economy is a very resilient economy. We should consider the opinions of Al-Naggar, considering that the Egyptian economy will perform very well if the government is more committed to small businesses, industrialisation and encouraging exports. A comprehensive strategy for economic reform should be based on sound grounds accompanied by sound development goals.

Overhauling the subsidies system, liberalising the exchange rate, and controlling inflation are the cornerstones of any strategy of economic reform. It is high time that we work on the radical transformation of the Egyptian economy in order not to wait another 25 years before beginning it again.


The writer is in charge of anti-dumping policy at the Ministry of Trade and Industry.

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