The 25 January revolution is set to bring about a broad shift in Egypt's administration, away from the Mubarak regime whose policies kept the country in the realm of lagging, underdeveloped nations. One of the most important elements in the shift of will be on the economic front.
While reforms in the mid-1970s and early 1990s helped liberalize its economy in a way that brought more nominal growth, Egypt still counts itself a relatively poor country. The deceptive 5 percent growth figures have been made negligable by the inequitable distribution of wealth and opportunity, poor government services, as well as the fact that the oppressive political system led to massive brain drain from the country.
The attempt to steer Egypt in a new direction will require a swift democratic shift, as well as a concerted effort to reverse many of the policies and norms that have arguably held the country back from fulfilling its potential. Economists are optimistic regarding the post-revolutionary prospects of the country.
Ahmed Galal, former World Bank economist and Managing Director of the Economic Research Forum, is one of them. He sat with Al-Masry Al-Youm to discuss his views on steering Egypt along a sound economic path.
Al-Masry Al-Youm: How would you describe the revolution we went through?
Ahmed Galal: Egypt is no longer going to be the same after 25 January. It is going to join a crowd of developing countries that are making the transition, not only the economic, but also the social and political transition.
Al-Masry: Can Egypt emulate the successes of certain other countries that have experienced similarly drastic shifts? Where do you see the similarities?
Galal: We Egyptians like to think we are very distinct, and indeed we are. However, since the second World War until now, Egyptian modern history is very similar to what has happened to countries in Latin America. Most developing countries after WWII went for the so-called import substitution strategy where you basically protect your domestic industry to industrialize and diversify. Governments had a heavy handed role in the economy and in social provision services. In most countries that strategy has produced enormous benefits, but it also had its limits. The inefficiency of bureaucracy and limits of social programs without enough economic growth resulted in these countries pretty much giving up on it. They moved on and liberalized on the economic front, and frequently on the political front… The Latin American model is what I have in mind. Egypt has done exactly that, although we lagged behind a little bit.
Al-Masry: How so?
Galal: The opening that we started in the mid-70s was a partial opening. It generated some of the disadvantages of capitalism, and the old disadvantages of socialism remained. Up until 1991 we had a system that combined the disadvantages of both (capitalism and socialism). In 1991 we started a process of economic liberalization that continues today. However on the political front we really lagged behind. Now we are completing a story that was inevitable. The only question was how it will happen.
Al-Masry: What made Egypt ripe for this kind of a revolution?
Galal: The society is very young, around 60% are younger than 30. The population is becoming increasingly educated, and educated people don’t accept less than full rights. Three, the technological revolution: the world has become much smaller. People don’t compare Tanta and Cairo, now we compare Cairo to Rio de Janiero.
Al-Masry: Some say that after 1991 we had the correct economic direction, but the wrong implementation…
Galal: No, it was flawed. It focused on policies that would promote private sector and economic growth, and did not do much on the social front or on the distribution of benefits. Nor did it do enough on the political liberalization side. It was a wrong strategy, and it produced the revolution.
Al-Masry: What would you think the ideal economic strategy should be in the coming period, short-term and long-term?
Galal: If I were to figure out the strategy in the coming period, the next ten years or so, I would say the following: Egypt needs to continue its economic reform agenda to maximize the benefits from private initiatives. Capitalism can be bad. You want to encourage creative capitalism, not crony capitalism, or the kind based on ripping off somebody else.
Then comes the distribution of as well as generation of wealth. We should make sure to reward effort and that no one is left behind. The government’s responsibility is to equalize opportunities for people of different socio-economic classes. We have to make sure that kids who can’t afford to go to school go and are able to get health services, etc.
The third part is making sure those can’t participate in the economic process–or example, the disabled–have a safety net.
Finally, accountability and political liberalization is fundamental to achieving the objectives of growth. Without accountability, policies will be made to benefit the few. At the end of the day we would get neither growth nor distribution.
Al-Masry: One of the things that incited demonstrations before and after Mubarak resigned was the figures floated of how much certain people in the government make or have stolen. These drove many to ask, if the money is there, why would it be difficult to implement certain policies such as a higher minimum wage in the short run?
Galal: I am all in favor of subjecting those who violated laws to legal persecution. If you push that too far, so as to punish anyone with wealth now, you are punishing yourself. That would lead to eventually having to cope with fear and lack of investment, so one has to be careful when tackling these issues.
The issue of income policies cannot be collapsed to the minimum wage. First, if the minimum wage is too high it will cause unemployment. The discussion should focus on how we go about setting the minimum wage to not increase unemployment, while giving wages for people to live easily. This is not easy. It needs careful scrutiny, and an increase in wages has to accompany productivity.
Al-Masry: Labor productivity has recently been a great weakness in Egypt. It has been calculated at around 28 minutes per day for government employees. How should the coming government rectify this?
Galal: The government can implement policies to encourage productivity. One thing that increases productivity is competition. Another thing the government can do is link productivity to rewards. I should have a system so that whoever is working harder is the one getting recognized and promoted. When you and I are working for the same place, and are both making the same amount of money and I get promoted on seniority basis, there will be no increase in productivity.
Al-Masry: What can be done to fix the inefficiencies of Egypt’s notorious bureaucracy?
Galal: It is probably one of the hardest challenges facing this government, the next government and the one after. It has faced the government since 1991. There are too many Egyptians locked into government bureaucracies essentially not making enough money to sustain their living. People need second jobs, or get involved in petty corruption, and then get promoted based on seniority…
It needs to be reformed, but it will take time. A few things like this will take a lot of time to fix and this is one of them. Education is another one.
Al-Masry: As a former World Bank Economist, what has been and do you foresee as being their reaction–as well as that of the International Monetary Fund (IMF)–to the situation in Egypt?
Galal: The World Bank and IMF are two international financial institutions among many others that we can benefit from. From an Egyptian development perspective we should be using all instruments to achieve all we want. It’s not about them, it’s about us. It would be a disaster if we let them come and tell us what to do. I don’t worry too much about what they think; I worry about what we think. They actually offered help. I heard that some in power were reluctant to accept some World Bank support right now, because they didn’t want the stigma… That maybe they’re coming to help Egypt and Egypt is falling apart. That might scare investors.
We are not going through a crisis of the kind that the IMF and the World Bank have to come rescue us from. We are going through a serious transition, and the bulk of the work is going to be ours, it isn’t going to be somebody else’s. We should be using all the help we can get, provided we know what we want.
Al-Masry: How do you think fiscal and monetary policy should be used in the coming period, and to what ends?
Galal: In the short-run–by which I mean the next 6 months to a year–we should be careful not to jeopardize national stability. We should be careful, vigilant and prudent in responding to popular demands or getting panicky in response to capital flight if and when it takes place. We should stay cool and collected, and make sure we don’t push the wrong policies into higher inflation, pressure on the pound, and runaway budget deficit. Prudence is the name of the game in the short run.
The priority right now is the political transition. Economic policies should be in the business of making sure we remain stable, much more than figuring out what to do in the long run. The next government will figure that out.
This short period is for political reconciliation. This includes making sure that those who have stolen are penalized and ensuring that economic welfare is not shifting too dramatically in one direction over another. The government should basically adopt a “do no harm” policy.
Al-Masry: Which of the previous regime’s policies have had a positive effect and which have been detrimental?
Galal: We moved halfway on the economic reform agenda. On the social side we went for “let things be as they are,” and dealt with those things on the margin. This formula didn’t take us very far. On the political front, we started with a little bit of openness in the media. It was too partial, too timid, and too unreal. It didn’t allow for a full-fledged democracy.
Going forward, we need to do more, with equal force on all three fronts. We have not fulfilled our full potential. Justin Lin, a chief economist at the World Bank always asked me, “Can you tell me why isn’t Egypt doing X, Y, or Z? They look like a country who can, they have all the components.” I think the political context, the policies made, the lack of attention to social cohesion, were responsible. Now you are unleashing that, I think Egypt has enormous potential for the future. That is why I am very optimistic about what’s happening.
Al-Masry: Which sectors should the government focus on propping?
Galal: I think the government should be in the business of setting up the rules equitably and fairly. They should be encouraging all activities and let people be innovative and creative. Maybe for reasons of distribution the government should intervene. They should provide infrastructure more in Upper Egypt and rural areas, as is provided in urban areas. The government may also want to engage in training activities so that young people can meet the demands of the labor market.
There is much the government can do, but for it to come in and say “I want to promote agriculture at the expense of tourism… or cement at the expense of soft drinks”–I am not sure. Historically, governments who have done so have failed. I am not against selective-intervention, but we have to be very careful.
Al-Masry: Should formalizing Egypt’s large informal sector be a priority?
Galal: The informal sector is at least 30% of GDP and close to 50% of employment. Neglecting this group was one of the biggest mishaps of the previous era. They essentially introduced economic reform that excluded the informal sector. The informal sector is seen as residual. Despite that whenever the economy experienced a shock, it is the informal sector that absorbed that shock. If you’re laid off from a job at a factory in 6th October you can go work in Khan al Khalili or someplace like that.
When I worked for the Egyptian Center for Economic Research, we produced a draft law on the notion of creating a set-up where it would be beneficial for Egyptians in the informal sector to be integrated into the formal sector, and [the government] really didn’t pay it any attention. By helping the informal sector you are helping reduce poverty.
Al-Masry: Another huge problem that has been a talking point is internal revenue–can the majority of the country be persuaded to pay taxes and have faith in the system soon?
Galal: The problem with taxes is that for the higher brackets they were seen as being too high. The other problem is that they didn’t really see the benefits of the taxation. Third, the increasing inequality in society also enforces that sense that paying taxes is not so beneficial. Then there was the sense of arbitrariness: a frequent problem was that a tax collector would not be convinced by a statement from a business owner and so indicate an arbitrary figure to be taxed.
We need to address these concerns, by first introducing a just, progressive tax rate. Arbitrariness should be removed. You have to have clear rules. Then people have to see the money collected from taxes spent wisely. People see tax revenue as misallocated and benefiting a few.
Al-Masry: What kind of guarantees should the military give to investors, internally and externally to guard from capital flight, and ensure long term economic stability? How can we convince investors of our commitment to correct and consistent policies?
Galal: The credibility of commitment is a very interesting topic. It is very much a function of the institutional set-up of each country. There is no one way of building credibility. For example Jamaica and Chili wrote commitments into law to guarantee investors. It didn’t work in Jamaica, it did work in Chili. In Jamaica every election would bring in a whole new regime that would take over the parliament. When one would takes over, they override the commitments made by their predecessors. In Chile, they had more groups competing politically and so it was not as easy to change based on majority or power, so there is consistency in policies and agreements.
Investors like checks and balances and predictability regarding what’s happening in a country. I think if you have a democratic set-up you are more likely to be predictable. Investors have their political analysts for their investments in other countries. Political and economic multiplicity, checks and balances, and openness are likely make your country more attractive for them.
In Egypt you have really good investment opportunities on the one hand, and the potential to build credibility through a democratic process. I think we are going to be in better shape than we were before.
