Over the past few years, Egypt’s economic conditions have been deteriorating. The country’s rising inflation rate, in combination with several other factors, is putting severe pressure on the various strata of the population, particularly those living under the poverty line. This agony, which has continuously escalated since as early as the late 1970s, suggests that the underlying complications remain deeply engrained in the edifice of the Egyptian economy, taking the country from one crisis to another.
The aim of this article is to put forward the longstanding circumstances that have culminated in the current crisis and puts forth the idea that the solution lies not in an economic strategy but rather in the reform of policies that have persisted for years.
In the 1950s, President Gamal Abdel Nasser’s idea of a “self-sufficient Egypt,” which he referred to in many of his speeches, led to policies such as subsidizing inefficient internal producers and tariffing imports to force them out of the Egyptian markets. Although the decision to adopt the Import Substitution Industrialization (ISI) doctrine instead of an Export-Oriented Industrialization system is more than half a century old, the policy remains in place today. A recent campaign the government launched tells Egyptians, “Egypt imports zippers and you can take out a loan to build a zipper industry and stop that.”
These policies and the propaganda promoting it are inefficient, particularly as the rhetoric ignores the opportunity-cost of using Egyptian resources in industries that Egypt is more competitive in. In addition, the industries supported by these policies, generally, depend on raw materials exported from abroad, thereby creating a toxic system where the central bank is tempted to maintain an overvalued exchange rate to further maintain low costs for these producers.
A famous trilemma in macroeconomics suggests that the fiscal policy pursued by any central bank can only serve two out of three choices: Fixed exchange rates, independent monetary policy or freedom of movement of capital. Most countries in the world accept a form of capital freedom as essential, leaving a choice between the former two options. A fixed exchange rate stops the central bank from pursuing a monetary policy that responds to changes in output and unemployment. Consequently, sustaining an overvalued currency (as is the case in Egypt) requires higher interest rates, which discourage small and medium enterprises (SMEs) from taking out loans. When the Central Bank of Egypt found itself unable to cede both a fixed exchange rate and an independent monetary policy, it decided to instead introduce limits on hard currency withdrawals outside of Egypt.
Corruption and the lack of rule of law is another policy – or perhaps the lack thereof – that has further exacerbated the situation. Egypt’s recent history tells numerous tales of failed businesses that couldn’t survive the inferno of corruption, which factors in as a hefty cost of operation. This corruption drives many entrepreneurs to work around the system, therefore limiting their own growth prospects and raising the country’s tax evasion rates.
The picture becomes even grimmer when we consider governmental policies that encourage the monopolization of markets, particularly with the militarization of many industries. Why would any entrepreneur decide to enter a market in which his competitor has free land and free labor?
However, many youths find themselves attracted to entrepreneurship due to a lack of access to other job opportunities. This issue of employment is exacerbated by the swelling of the government body due to its absorbing hundreds of employees each year without a real need for them, simply to reduce unemployment rates. The swelling of governmental institutions is caused by the government’s inability to secure a health environment for independents entrepreneurs to allow for the self-creation of jobs. In a cyclical fashion, this then further stimulates corruption because no one can audit the large number of employees and, in the long run, the government becomes incapable of paying employees fairly and instead chooses to reduce their real wages. This is precisely the point at which the seed of corruption is planted and the fruit can be seen when you, as a citizen, enter a governmental institution to issue a document and the employee demands his “cup of tea” or bribe. More significant is when a potential entrepreneur decides to give up his business idea after a series of failed negotiations to lower the bribe a senior employee demands in return for necessary papers and licenses.
Finally and by far the largest hurdle of all in Egypt’s way is the political incapacity to address all the above-mentioned issues. Some solutions are difficult to implement given the lack of trust in the government, never mind the fact that the government is, in fact, untrustworthy. Consider, for example, the package of economic reforms recently introduced. Economic theory suggests we only have two options when faced with such a crisis: Reducing investment, which will affect our growth and future generations; or reducing consumption, which will affect our current economic conditions. Any sensible government would choose to reduce consumption, which, thankfully, is the choice our government opted for, signalling its sanity. However, there is another choice to be made, namely which social category (poor or rich) will be chosen to foot the bill. Although many governments point to the poor when this choice arises, Egypt’s attempt at levying indirect taxes and cutting back on essential consumption subsidies led to multiple uprisings in Cairo.
Giving up ISIs will further drive up unemployment rates until labor effectively moves in the direction of export-oriented industrialization and is a move that will be combated by the powerful businessmen in the Egyptian market. Floating the currency will spur instantaneous inflation, causing political unrest and forcing ISIs to shut down. Fighting corruption and securing the rule of law will reduce the standard of living of government employees, whose dismissal from their superfluous jobs will lead to the destruction of many families and possibly lead to systemized crime as a means of survival.
The correct path forward is therefore not a batch of textbook-economic medications that address the policy instruments of the government; rather, it is based more on how to reassemble the Egyptian society and its welfare state such that it is able to make the right choices when prompted.
Restructuring the state must involve a sustainable consensus among Egyptians. The solution to this prolonged economic problem is how to politically renovate the institutions that this country is based upon. Henceforth, the economic efforts of the current government, although already dubious, are ephemeral.