NS 4053 Spring Term 2017 Economic Development of

NS 4053 Spring Term 2017 Economic Development of Egypt

Arab Socialism: Egypt I • Egypt first Middle Eastern country in postwar era to adopt a strategy of radical transformation • In 1952 Egyptian monarchy overthrown by military coup led by Colonel Nasser and a group of his colleagues • From 1952 -56 Egypt promoted public sector growth as in Turkey • Either by helping the private sector or • Undertaking projects the private sector could not finance or manage, . • Not until the Suez War of 1956 that the pubic sector grew at the expense of the private sector 2

Arab Socialism: Egypt II • Because of the participation of Britain, France along with Israel in the attack, Egypt took over all their assets • In addition, failure of private sector to maintain levels of investment provoked wave of nationalizations through Socialist Decrees of 1961 • In one fell swoop Egyptian state took over most large-scale industry, all banking, insurance and other private assets • Bulk of agricultural property remained in private hands • First Five Year plan – straightforward ISI strategy • Problem – was the economy’s ability to earn foreign exchange • Although firms needed to import capital goods and raw materials to function, they could not generate the foreign exchange to pay for them 3

Arab Socialism: Egypt III • Nasser died in 1970 and successor Sadat pursued policy of economic liberalization aimed at • Reforming and streamlining the public sector • Stimulating the private sector • Attracting foreign investment and • Promoting exports • Public sector enterprise was sharply criticized for chronic inefficiency and large scale operating deficits • Still, Egypt’s public sector continued to grow throughout the 1970 s • Entering the 1980 s it included 391 companies, employed about 1. 2 million workers with a wage bill of over 20% of GDP • The return on its total investment was only 1. 5% per annum 4

Arab Socialism: Egypt IV • Counting the public authorities that ran everything from • The Suez Canal to • The Aswan High Dam, • Along with the civil service, • The public and government sector in the early 1980 s before structural adjustment began • Had 3. 2 million employees – more than 40% of total workforce • Total public expenditure in 1980 represented 61% of GDP • Total Government revenues were 40% of GDP and • The public deficit was 20% of GDP – an extraordinary large imbalance by international standards. 5

Egypt in the 1990 s I • On eve of First Gulf War the Egyptian economy in shambles • Growth had turned negative in the late 1980 s • Real wages of unskilled workers had fallen by 40% in four years, while civil servants were earning only about half their 1973 salaries • The level of open unemployment roughly doubled in the decade • Quality of government health, transportation and educational services had declined 6

Egypt in the 1990 s II • By 1990 • The country's debt-GNP ration of roughly 150% arguably the highest in the world • Debt service payments consumed over 25% of exports • Situation in early 1990 s characterized as • One of crisis in which foreign exchange for wheat imports was hard to locate • An American aid freeze for failure to service military debt. • At core of Egypt's macroeconomic crisis were three macro imbalances -- gaps between • Domestic savings and investment • Imports and exports and • Government revenues and spending 7

Egypt in the 1990 s III • In the 1980 s • Total public expenditures were 60% of GDP • Total revenues were 40% of GDP and • The public sector deficit was 20% of GDP • Few if any developing countries with such high proportions • By 1991 • Expenditures had begun to be cut back but • Revenues also fell with the collapse of oil receipts 8

Egypt in the 1990 s IV • Spending was downwardly inelastic for usual political reasons: • Blockage by vested interest groups that feared losing cushy jobs and economic rents, and • Dread of popular wrath over subsidy removal • As new foreign lending dried up in the latter half of the 1980 s, the deficit was increasingly financed by the local banking system. Resulted in: • Crowding out of investment and • Rising inflation. 9

Egypt in the 1990 s V • Moreover investment was • Inefficient and • Capital-intensive • Result in • Few formal sector jobs and • The mounting losses of public-sector companies undermining public savings. • Inflation had the usual results • Distortion of price signals • Sharply negative real interest rates that further exacerbated the saving investment gap • Steadily overvaluation of the exchange rate 10

Egypt in the 1990 s VI • Underpricing of increasingly scarce foreign exchange • Discouraged the production of traded goods • Favored imports over exports • Widened the trade gap. • Negative interest rates fueled capital flight. • First Gulf war created an entirely new situation. • Government struck a bargain: in exchange for massive debt relief, the government would adopt a reasonably conventional IMF stabilization and structural adjustment package • Reduction of up to US $20 billion in debt • Cut yearly interest payments by $2 billion 11

Egypt in the 1990 s VII • Reforms envisioned by the World Bank and IMF were intended to shrink the twin deficits and start • Moving Egypt's economy from central planning toward more reliance on market-based mechanisms. • Bringing down the fiscal deficit down through a substantial reduction of public investments. • Other elements included • Reduction of consumer subsidies • Elimination of the multiple exchange rate system • Tax reform • Liberalization of interest rates and removal of limits on lending to private and public sectors • Greater autonomy to public sector enterprises 12

Egypt in the 1990 s VIII • On surface reforms looked extremely successful • Macroeconomic stabilization was achieved • International reserves increased to nearly $20 billion by the mid 1990 s • Government deficit cut to 2%GDP • Inflation came down • GDP grew at an average rate of almost 5% between 1994 and 2000 • Reforms looked like a poster child for the Washington Consensus 13

Egypt in the 1990 s IX • Reality more complex • First, Washington Consensus projected macro-stability and deregulation would stimulate export led growth. • Egyptian growth was largely driven by public investment in large infrastructural projects. • Second, the growth of exports -- particularly job-creating manufactured exports was unimpressive • Partly because of sluggish reform efforts • Private investment remained around 10% of. GDP and exports stayed flat at around 21% GDP • Job creation continued to lag behind additions to the labor force • Employment became increasingly informalized. 14

Egypt in the 1990 s X • Third the balance of payments remained dependent on old sources like Suez Canal revenues and workers' remittances • By the early 2000 s, balance of payments difficulties had arisen again due to a series of external shocks • East Asian crisis • Falling tourism revenues due to insecurity following 9/11 attacks • Slowdown of world trade in 2001 • Shortages of foreign exchange resulted in a cumulative devaluation of more than 30% by 2003 • As a result of rising imbalances economic growth fell to 2. 4% in 2003 15

Egypt in the 2000 s I • Following the Second Gulf War aging Mubarak empowered his son Gamal to lead a new drive to get economic growth going by opening up economy further. • Plan included a push to create an internationally competitive corporate sector in midst of renewed effort at • Privatization that included the banking sector • Trade reforms, • Drastic cuts in income tax rates and a streamlining of tax administration and • A costly financial sector recapitalization and liberalization in 2005. 16

Egypt in the 2000 s II • These policies coupled with an improved external environment have contributed to • Higher rate of growth -- 6 -7% per annum (2005 -08) up from 3% 2001 -03 • Large FDI inflows -- 8. 1% GDP in 2008 which went principally to energy, real estate and tourism sectors • The privatization program gained momentum and was extended to the banking sector • Reserves were at over US$36 billion in 2011 on the eve of the Arab uprisings. 17

Egypt in the 2000 s III • By 2010 clear that the big push was not delivering the expected results • Growth was not trickling down • Poverty-defined as income of less than $2 PPP a day was still high at 40% • Unemployment rates not coming down in spite of sharp reductions in real wages following the 2008 global crisis • Employment in formal private sector barely grew -- in 2010, 25% of the labor force worked for government as compared to 35% a decade earlier • Only 12% worked in the formal private sector, barely more than the proportion a decade earlier • Real wages in the late 2000 s were at the same level as in the late 1980 s • Labor unrest was beginning to rise sharply 18

Egypt in the 2000 s IV • Lackluster economic performance has been attributed to the crony nature of private sector development in Egypt, constraining the growth of the private sector • The 1990 s had seen the emergence of a new class of capitalists connected to the state • After the mid-2000 s a few well-established insider firms were joined by new enterprises more closely connected with Gamal Mubarak • These connected firms took on the modernization of the economy • Backed by state favors and international and Arab finance 19

Egypt in the 2000 s V • Not only were the rising businessmen well connected but they also occupied important posts in • Government • The ruling party • Parliament and • Various boards and committees • Connections allowed them to influence economic policy directly 20

Egypt in the 2000 s VI • Critics increasingly came to realize that reforms were not proceeding as expected • Although the liberalization of banking and interest rates did lead to an increase in household savings to 18% • Bank lending patterns became extremely concentrated as they were more interested in lending to the government and to large firms rather than SMEs • The twin deficits rose again under the weight of rising energy subsidies, rising fuel and food prices and anemic exports • Although tariff rates were reduced, nontariff barriers rose to replace them, especially in the industries dominated by connected businesses 21

Egypt in the 2000 s VII • Crony capitalism was clearly not a part of the Washington Consensus plan but in Egypt as elsewhere seems to have been the outcome of the policy changes in the 1990 s. • Mubarak regime successfully utilized strategic rents (location, anti-Saddam position) to jump start an economic reform process • Reforms proceeded at the government's own pace • Market mechanism was more widely utilized and there was improved economic growth to show for it, but it was not inclusive. • At same time exports responded sluggishly as globally uncompetitive crony capitalism became entrenched. • Reforms provided neither • Needed jobs to rapidly rising number of young job-seekers nor • The foreign exchange needed to sustain macro imbalances 22

Egypt Post 2011 I • Between the uprisings in Egypt in 2011 and 2014 the political scene became particularly volatile • Six parliamentary, constitutional and presidential elections marked by • Economic populism and • A lack of serious reforms • Political instability and deadlock blocked the adoption of serious efforts to chart a way out of mounting economic and social problems • Generated further political instability that put Egypt at risk of becoming locked into a transition trap. 23

Egypt Post 2011 II • State of economy in 2014 resembled that of the early 19990 s • The government deficit was approaching 15% GDP and • Reserves had reached a record low of US$13 billion, reflecting sustained efforts to defend the national currency • Currency had depreciated by only 20% despite significant drop in foreign exchange earnings 24

Egypt Post 2011 III • Foreign currency deposits made by Gulf countries of around $15 billion since may 2012 had helped stabilize the situation. • The government deficit had expanded due to increased public-sector hiring and a rising energy subsidy • As a result • Public debt had risen to 70% of GDP • Debt financing by domestic banks, this constraining their capacity to lend to the private sector • Owing to the size of the debt and rising sovereign spreads, public debt service consumed one third of government expenditures • Public investment was low and private investment anemic. 25

Egypt Post 2011 IV • The crony capitalists were heavily indebted to the banking system, but most lived aboard awaiting better times to come back • Most Egyptians continued to move to the informal sector to scrape out a living 26