international analysis and commentary

Egypt’s economic transition: a new role for the state

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The Egyptian economy is under great strain as the country is trying to shed the skin of its long standing dictatorship. After the revolution that led to the ousting of Hosni Mubarak and his regime, the country finds itself scurrying to define its new identity. As a result, some major questions about Egypt’s future have surfaced including the role of Islam in state affairs and the extent to which the military should exercise power. Secular groups find themselves weak and disorganized and have recurrently returned to Tahrir Square demanding change that, according to them, is more in line with the liberal values of the Arab Spring.

However, ever since the onset of the revolution the Egyptian economy has been in decline. The IMF expects growth rates to rebound at a meager 1.5% in 2012 after a strong drop the year before due to social unrest. Inflation rates are estimated to be at 9.5% for the remainder of 2012 and are expected to increase to 12.1% in 2013 due to increased government spending. Unemployment rates are forecasted to remain at around 25% amongst the youth in the next two years, a dangerous situation in a country where 60% of people are under 30. Despite these disappointing economic results, little is said about the economic priorities of the new government and few protests have been organized around impending economic themes. In this respect, in as much as the country’s political fate is at stake today, the fate of the economy is much more important and can have much more disastrous effects if left unchecked.

There have been several attempts of economic reform in Egypt ever since the Infitah or “Open Door” policy of the Sadat regime in the 1970s. The structural adjustment and economic stabilization programs of the 1990s in addition to some market reforms in the 2000s have led to a series of economic liberalization programs including widespread privatization of key sectors in the Egyptian economy. While these reforms have stimulated the Egyptian economy and allowed it to post a 5% growth average in the last two decades, little has been done in terms of the upward mobility of the average Egyptian citizen.

Today the opportunity arises for true economic reform that can provide inclusive growth levels and can move the country towards a new social contract that is based on citizenship and civic liberty. However, what are the main impediments to such reform?

Although Mubarak resigned, the economic paradigm set in place by his regime still governs the country. This paradigm is based on widespread market liberalization spearheaded by privatization that fostered a crony relationship between the state and the business elite. After the ousting of Mubarak, the Egyptian courts became highly involved in a series of cases regarding preferential treatment and the establishment of crony enterprises that monopolized the Egyptian economy. Key industries such as steel, energy production, financial services and infrastructure development were captured by such activities. The investigations led to the discovery of a wide network of privileges and preferential treatment towards individuals close to the regime in power such as the Egyptian business tycoon Ahmed Ezz who was sentenced last September to 10 years in prison. Ezz was sentenced along with the former Minister of Commerce Mohamed Rachid and the former head of the Industrial Development Authority Amr Assal. The establishment of such crony networks allowed the regime to consolidate its power over the economy under the guise of market liberalization and reform. But aside from Ezz and his compatriots, such opportunistic power networks remain deeply entrenched in the Egyptian political economy. Clearly much more needs to be done in dismantling the very raison d’être of cronyism in Egypt.

But why was it so easy for the regime to use market liberalization as a means to establish covert control over the economy? The main reason behind this is due to the weakness of Egyptian public institutions responsible for the regulation and oversight of the economy. Egypt ranks very unfavorably in terms of regulatory quality and government effectiveness when compared to counterparts such as Turkey, Saudi Arabia, the BRICS and emerging Asia according to the World Bank Governance Indicators. The regulatory environment in Egypt is characterized by high levels of bureaucracy in which multiple government bodies assume overlapping mandates over various economic sectors. This regulatory environment exhibits arbitrary decision making processes that are backed by a weak and unresponsive commercial court system.

Furthermore, if cronyism is supported by weak governance standards, why are these standards so unfavorable in the first place? This is due to the nature of the public sector in Egypt which has been used as an instrument of state patronage and thus maintains oversized levels of employment with little efficiency. In 2011, the public sector employed around 6 million civil servants whose salaries constituted 23% of total government spending and amounted to 7% of GDP. This has been a defining factor of the economic paradigm set in place by the Mubarak regime. The oversized public sector exhibits high levels of redundancy in which employees are increasingly inefficient and unproductive. University graduates find themselves queuing for government jobs since they often are associated with better social services, job security and in some cases even higher salaries. As a result, the sector has become a large sponge that costs the government tremendous amounts of money, prevents it from effectively carrying out its designated tasks and overshadows the activity of the private sector.

Cronyism, state governance and regulatory standards, and public sector performance have lead to a triangular relationship that enforces an economic paradigm which is at the detriment of the Egyptian people. In as much as the secular-religious identity of the state is in question, little is being asked about the new role the state should be playing after the revolution. Answering such a question is key to dismantling this vicious triangle.

A recent package of economic reforms has been proposed by the interim government in order to secure an IMF loan of around $3.2 billion which is highly needed in Egypt due to depleting levels of foreign reserves. The program outlines measures to increase public revenue by means of increasing taxes and containing expenditure especially in the area of state subsidies. The program has been slammed by many members of parliament for various political reasons. In reality, such a program is spurious in nature and it is nowhere close to the true economic reforms needed in Egypt.

The political revolution has succeeded in Egypt but when it comes to the economy little has been done. The government along with the People’s Assembly should start thinking very seriously about defining a new role for the state in Egypt by dismantling widespread cronyism, enforcing better regulatory environments and reforming public sector performance. More importantly, the raison d’être of the state in Egypt must be more geared towards institutionalization, better governance standards and transparency in order to create an economic environment that is conducive to inclusive growth levels that can benefit every Egyptian citizen and empower the notion of upward mobility in Egyptian society. This should be a central theme of any constitution to be drafted in the near future.