Introduction
After the tribes of the Prophet Moses suffered from a lack of
food in the desert, God sent down quail while water sprang out
of the rocks, according to Surat Al-Baqara of the Holy Quran.
Verse 61 relates that they still complained, "Oh Moses, we
cannot endure one kind of food all the time. So beseech thy God
to produce for us what the earth grows, its herbs and cucumbers,
its garlic, lentils and onions." He said, "Will you
exchange the better for a lesser…go land in Egypt and you
shall find what you want."
While Egypt of the past was recognized as a land of plentiful
variety of agricultural products and abundance of food, it is
currently heavily dependent on imports of wheat, flour and other
products to feed its people. This would not in itself constitute
an economic problem if Egypt's exports could pay for its imports
of food. However, its exports lag behind its imports and the gap
between them keeps widening over time.
The complicated and interrelated sets of economic problems facing
Egypt's economy go beyond inadequate agricultural production and
balance of payments deficits. In spite of recent efforts to ameliorate
Egypt's economy, these problems have compounded in the last twenty-five
years. They include a population explosion, high rates of open
and disguised unemployment, a crushing debt service burden, high
rates of inflation, substantial budget deficits, widespread price-cost
distortions, low productivity and acute external imbalances.
It is not the purpose of this study to examine the economics of
every sector. The purpose of this study is to analyze inhibiting
factors that are crippling Egypt's economic growth and are hindering
its long-promised take-off stage. For a more accurate assessment
of Egypt's economy, this study also estimates the country's vast
informal economy on the basis of a savings function derived from
a direct questionnaire survey of 500 Egyptian households conducted
in December 1988. This survey found Egypt's informal economy to
be even larger than the country's officially announced national
income. The present study also indicates that before Egypt's open-door
policy in 1974 and after 22 years of Nasser's socialism, the maldistribution
of income in Egypt was worse than in three capitalist nations:
the United Kingdom, Japan, and even the United States of America.
Other estimates made in this study are for the following parameters:
(1) Egypt's rate of unemployment; (2) Egypt's foreign exchange
earnings; (3) Egypt's housing shortage as of 1990. A new term,
"rentalism," is introduced to indicate and analyze the
economic consequences of government control of property rents
since Nasser's regime.
Egypt's Economic Accomplishments in the 1980s
During the political campaign for the presidency of Egypt and
prior to the re-election of Presdient Mubarak for another six-year
term, the January 1988 issue of al-Ahram al-Iqtisadi made
a detailed list of economic accomplishments and financial reforms
undertaken during his firs term.
From 1981 to 1986, agricultural land increased from 5.7 to 6.3
million feddans; the number of factories more than doubled; oil
production increased by 40 percent; the number of harbors increased
from four to seven capable of handling 19.1 million tons of merchandise.,
in comparison to only 1.8 million tons in 1981; the road network
increased from 26,000 to 42,000 kilometers; the number of trucks
more than doubled; the number of telephone lines increased from
18 billion kilowatt/hours to 45 billion. As a result, electricity,
which had been connected to 5.2 billion homes in 1981, was connected
to 8.2 in 1986; and townships supplied by fresh water increased
from 4200 to 4500 towns. Furthermore, to encourage tourism, hotel
construction increased by 20 percent, while new modern facilities
increased airport capabilities more than threefold.
Even though the above figures represented real growth in the sectors
mentioned, they are by no means indicators of per capita real
growth because of the substantial increase in Egypt's population.
The performance of the economy should not be measured by such
partial indicators as the number of bridges built or the kilowatt
capacity installed. It can only be measured by macroeconomic indicators
such as the growth of real per capita gross domestic product,
the reduction in the rate of unemployment, the level of price
stability and improvement in the external balance. In the al-Ahram
al-Iqtisadi study, all figures denominated in Egyptian pounds
are misleading because of the failure to adjust them to take into
account the official rate of inflation. In Table 1,
a comparison of the al-Ahram al-Iqtisadi statistics with
statistics adjusted by myself to reflect a reasonable 20 percent
annual rate of inglation reveal the opposite of what the study
presented. Columns 1 and 2 were quoted from the study of al-Ahram
al-Iqtisadi, while column 3 shows my adjusted figures for
the year 1986. It is, therefore, apparent that al-Ahram al-Iqtisadi's
monetary comparisons of Egypt's economic performance in 1986 vis-a-vis
1981 were inaccurate, misleading, and highly inflated. In fact,
the performance of the Egyptian economy on all counts during the
period 1981 to 1986 left much to be desired.
Population
Even if we take into consideration the real growth of some of
its infrastructure, Egypt's economy is seriously affected by a
population growth outstripping many economic gains. Given the
existing constraints of an inhabited area of only 34,000 square
kilometers out of a total area of one million square kilometers,
Egypt's high birth rate, coupled with a high but declining death
rate, make it one of the most densely populated countries in the
world. Based on an area of only 214.2 square miles, my estimate
of Cairo's density in 1990 was 42,000 inhabitants per square mile,
the highest in the world.1
It is worth noting that Egypt's population increased fourfold
in the nineteenth century, from 2.5 million in 1800 to 10 million
in 1900.2 By comparison, another fourfold increase
materialized in the first three quarters of the twentieth century.3
While Egypt's population was in excess of 54 million inhabitants
in 1990, its annual growth rate ranged between 2.8. and 3.0 percent,
one of the highest in the world. In the midst of this population
explosion, Egyptians are living under intolerable conditions of
overcrowdedness in the narrow band of Egypt's habitable area of
3.4 percent, the remainder of its territory being predominantly
desert. In spite of the existence of a Supreme Council on Population
headed by the President of Egypt, no systematic policy is being
adopted. In 1956, a program for a workable birth control policy
likely to achieve effective results within fifteen years was presented
to President Nasser, according to the unpublished memoirs of his
Minister of Finance, Abdul-Galil al-Imari. Nasser refrained, however,
from taking any measure to curb Egypt's high population growth
because, in my opinion, he feared fighting two difficult uphill
battles at the same time-income redistribution, which was then
a priority, and the curbing of people's right to have children
as well.
With the shrinkage of the per capita area under civilization,
the need to import food increases while the ability to export
agricultural products is reduced. An increase in exports is necessary
for the service and payment of Egypt's foreign debt. With high
rates of population growth, the same pressures apply to the production
levels of industry and of other sectors in which the satisfaction
of internal needs will have to be at the expense of exports. Furthermore,
with an acute shortage of housing, an annual increase of one and
a half million inhabitants compounds an already critical situation,
as the lack of shelter could also be politically destabilizing.
In addition to the problem of limited resources and a depleted
infrastructure, pressures are mounting because of the high population
growth rates have not been matched by either new discoveries of
natural resources or an increase in marginal productivity. In
spite of strenuous efforts to conquer the desert in an attempt
to cultivate parts of it and in spite of the establishment of
cities such as the "Sixth-of-October," "Tenth-of-Ramadan,"
and "Sadat," there is neither a realistic plan for the
establishment of sufficient new cities, nor is there a known breakthrough
in technology which could substantially increase production. Without
a full commitment of the Egyptian government to the implementation
of a comprehensive population program, including the form of deprivation
of subsidies to which they would have been otherwise entitled,
the pessimistic outlook of Thomas Malthus in his Essays on
the Principles of Population (1798) may be applicable to Egypt.
The intolerable population situation threatens to worsen, as more
than 40 percent of the inhabitants are less than 14 years of age.4
Agriculture
In contrast to the more than fivefold increase in its population
since the beginning of the twentieth century, Egypt's cultivated
land has increased no more than one fifth during the same period.
Agricultural production per capita has declined both because of
a declining land-to-labor ratio, and because of a host of other
factors. For example, the policy of taxing the agricultural sector
by pricing export crops, such as cotton and rice, at levels well
below international prices for the purposes of raising public
revenue, has resulted in a serious weakening of incentives. Other
factors which have adversely affected agricultural production
in Egypt include: a) price/cost distortion in relative prices,
such as wheat prices compared to those of clover or other such
agricultural commodities which are not subject to strict government
control or equally subsidized; b) the system of forced delivery
of underpriced crops; c) the lack of competition among the public-sector
companies which have monopolized the supply of seeds, fertilizers,
pesticides, and credit; complete government monopsony in the purchase
of principal crops such as cotton from farmers; and e) the monopoly
of the Egyptian government of the marketing of such products.
Per capita agricultural production has, therefore, declined, while
imports of food have been on the rise. As Egypt imports most of
its needs of what and flour from abroad, the call for food security
has arisen. The Specialized National Councils, an advisory institution
to the President of Egypt which has included top experienced talents
such as former ministers Abdul-Galil al-Imari, Ali al-Graitli,
Ibrahim Hilmi Abdul-Rahman, Fuad Kamil Hussein, Hamid al-Sayih,
Mastafa al-Gabali and others, formed a Council of Production and
Economic Affairs. In its report to the President of Egypt, the
Council issued its call for food security through an expansion
in the areas under cultivation for food production, an increase
in the productivity of the existing cultivated areas and an expansion
of new arable lands. In evaluating Egypt's system of trade agreements,
the Council had also called for an improvement in the existing
inefficient system of exporting agricultural products. The final
recommendation included the development of exports from non-agricultural
sectors and an attempt to increase foreign exchange earnings from
tourism and exports of processed industrial products.5
The Council's report outlined in detail the means of achieving
the goals it spelled out without neglecting the theory of comparative
advantage.
Unfortunately, such studies and recommendations are seldom taken
into account in the Egyptian decision-making apparatus. In most
cases, ministers are either too busy promoting their own political
ambitions or are preoccupied with ensuring their continuation
in the cabinet. They tend to be engaged in bureaucratic matters
which could easily be delegated to subordinates. With a few remarkable
exceptions, the majority of Egyptian ministers since the time
of Nasser's regime have had no time to think of an innovative
approach to problems they are facing or to plan a strategy for
implementation and follow-up. In certain instances a minister
may be reluctant to adopt a certain valuable idea for fear that
he might be replaced by whomever recommended it in the first place.
The failure to carry out structural reform in agriculture, however,
is only partly a matter of overburdened, overambitious or overcautious
ministers. The main reasons are fiscal and ideological. When President
Mubarak came to power in 1981, he was constantly reminded by the
Prime Minister, Fuad Muhiedden, and other top officials, of the
political disturbances of January 1977 (known as the food riots),
which might, they argued, be repeated if any policy for a structural
reform was proposed. After being commissioned by the President,
two prominent Egyptian economists, Abdul-Galil al-Imari and Ali
al-Graitli, made recommendations for structural reforms of the
country's economy in December 1981, but Muheiddin convinced the
President that the proposals were politically destabilizing and
kept the report in an inactive file. Ironically, the Prime Minister
did not disagree with the findings, particularly with the need
to allow for gradual increases in prices of subsidized items.
However, it was decided to go about it indirectly and, hopefully,
in an unnoticeable manner. For example, the contents of gas containers
sold to Egyptian households were reduced, while the same price
was charged! From time to time, train riders are confronted with
a sudden steep rise in the price of train tickets without an prior
announcement. The one piaster loaf of bread was reduced in weight
and worsened in quality while the two piaster loaf was introduced
in the market. The same method was applied when the current five
piaster loaf replaced all others.
In spite of efforts for Egypt's industrialization since the 1930s,
the agricultural sector still remains important to the country's
economy, as is evident from figures provided in Table 2.
In should be noted, however, that if the service sector is divided
into its constituent sub-sectors-transportation, communication,
and storage; Suez Canal; trade, finance, and insurance; foreign
trade; housing; tourism; and other services-agricultural ranks
first both in terms of contribution to gross domestic product
(GDP) and in terms of employment. Furthermore, almost half of
Egypt's industrial production is based on agricultural output.6
In addition, many items of the service and export sectors revolve
around agricultural production. Egypt's exports of cotton still
remain one of its major sources of foreign exchange, as shown
below. In spite of its relative importance to Egypt's economy,
agriculture has deteriorated, as has been shown in Table 1 and
other studies.7 This decline in Egyptian agriculture
runs counter to the historical trend. In the nineteenth century,
in the time of Muhammad Ali, the cultivated area increased by
33 percent, from three million feddans in 1813 to four million
in 1852, and the water resources of the River Nile were more efficiently
utilized than ever. By 1900, the overall cultivated land had increased
to 5.3 million feddans.8 With the near quadrupling
of cotton prices resulting from shortages in the world market
caused by the American Civil War, Egyptian export prices of cotton
increased from 12 riyals per kantar in 1860 to 45 in 1864.9
In realizing their comparative advantage, Egyptian framers allocated
the bulk of their land to the cultivation of cotton. Cotton remained
the backbone of the Egyptian economy as well as the main source
of Egypt's foreign exchange earnings until the 1960s.
Egypt's cultivated land has increased by no more than 19 percent
in the twentieth century, in spite of the construction of the
Aswan Dam in 1902 and the Aswan High Dam in 1970. Notwithstanding
this, Egypt has been producing a variety of agricultural products,
mainly cotton, maize, wheat, berseem, beans, barley, rice, sugar
cane, and onions. Indeed, the foreign exchange earnings from the
export of cotton until the 1950s were in excess of the country's
needs to pay for its imports. The Egyptian balance of payments
was favorable, while the Egyptian pound, whose value was freely
determined in world markets, was exchanged at 1.02 pounds sterling
or 5 dollars in the 1940s.
One of the major developments in Egypt's agricultural system after
the Nasser revolution was the implementation of the Land Reform
Law of 1952, which placed a ceiling on the size of the individual
ownership, expropriated and redistributed land in excess of the
statutory maximum to landless peasants (as shown in Table 3),
fixed land rent at seven times the amount of land tax, and abolished
the right of the landlord to terminate tenancy, making tenancy
perpetual so that it would pass from one generation to the next.
Finally, Egypt's land reform legislation organized all agricultural
producers in so-called cooperatives which are, in effect, public
sector companies with a monopoly of the marketing of the principal
crops and the supply of seeds and basic inputs.
One of the favorable outcomes of the 1952 Land Reform Law was
a reduction in the inequality of land distribution. It does not,
however, seem to have significantly affected the inequality of
income distribution, in spite of Nasser's socialism, as is shown
in even more detail below. Furthermore, the Law created built-in
rigidities, such as the fixing of land rents at seven times land
taxes, which have been kept at the same level ever since. It also
guaranteed permanent tenancy. As the real value of rent became
negligible over time due to an average rate of inflation of 20
percent annually, a tenant could afford to pay rent indefinitely
with a minimum amount of work. Lack of incentives and mismanagement
led to the deterioration of the single most important sector of
the Egyptian economy. In the early 1970s, Bent Hansen candidly
summarized the situation in the following statement:
Rents on land (but not land prices) were fixed by
the land reform of 1952 on the basis of tax assessments from 1949,
and have not been changed since [and still had not been changed
by the date this book was published]. Immediately after the breakdown
of the Korean boom, the official maximum rents were probably in
line with what free market rents would have been, but since then
a large gap has grown between official [fixed] rents and hypothetical
"market rents." Moreover, the relative rents on different
lots of land are becoming increasingly out of line with relative
supply marginal-value productivities because of changes in water
supply, patterns of production, land improvements, and the like.
As a result, absentee landowners (who still own substantial areas,
albeit in smaller plots) have become increasingly uninterested
in making land improvements; this may have been offset, however,
by government efforts by tenants who have obtained more secure
and longer-lasting terms of tenure. Probably the most serious
allocation effect of the fixed rents is that there is no longer
any mechanism (aside from the black market) to ensure that the
most competent people cultivate the land.10
Without an overall reconsideration of the built-in rigidities
that the Egyptian government has created over the years and without
adoption of a program to institute structural reform, the agricultural
sector is likely to stagnate further in the future. Before an
expensive program of expanding agriculture in Egypt's desert is
launched-given the very limited capital the country has-a priority
has to be given to raising the economic efficiency of the six
million feddans under cultivation. In his study of Egypt's agricultural
sector, while referring to the country's productivity in agriculture
measured by output per hectare. Richard Adams concluded that
The Egyptian rate of growth in output per hectare
for major food crops far exceeded that of 36 other developing
nations [before Nasser's revolution, in the period 1948-52]. However,
after 1963-67 Egypt's rate of yield growth for major food crops
dropped sharply, while that of the average of the 36 other developing
countries rose considerably. Between the periods of 1963-67 and
1978-82 the 36 developing countries averaged a much higher rate
of growth in output per hectare than Egypt.
No wonder Egypt is heavily dependent on food imports, especially
from the United States.
Income Distribution
Due to distortions created by the worsening of income distribution
in Egypt, particularly after Sadat's open-door policy, conspicuous
consumption rose sharply and merchant trading increased, while
investment and growth in production lagged behind. Even before
Sadat's open-door policy, inequality of income distribution in
Egypt had turned out to be worse than in the capitalistic nations
of France, England, Israel, Japan or the United States of America.
This was the case in spite of Egypt's 1952 Land Reform Law (later
amended to put an upper limit of no more than 50 feddans on land
ownership), and in spite of Nasser's socialism, taxation, and
rent controls. While there are methodological problems with cross-country
comparisons of income distribution, it may serve a purpose to
compare figures for income distribution in Egypt prior to its
open-door policy in 1974 with those in other nations (Table 4).
In analyzing the data, it can be observed that the households
in the upper 20 percent of income brackets had almost half of
Egypt's national income, while in other capitalistic nations their
share was approximately 40 percent. The richest 10 percent of
Egypt's households had one third of the country's income, in comparison
to less than one quarter in the case of England, France, and even
the United States.
While it may be argued that income maldistribution in many Third
World countries is worse than that of the capitalistic nations,
it would have been reasonable to expect Egypt to be different
since it has adopted socialism as its economic system since the
1952 Revolution.
It is difficult to assess the maldistribution of income in Egypt
during the 1980s because of the growth of an unaccountable informal
economy in which earnings are neither taxable nor invested but
rather lavishly spent on weddings and luxurious items, or otherwise
saved or invested abroad. However, inequality in Egypt's income
distribution has certainly worsened in comparison to 1974 as a
result of Sadat's open-door policy.
An Estimate of Egypt's Informal Economy
Several studies have been conducted on the nature and extent of
the informal economy. Henry (1978)12 called it "the
hidden economy," but Portes and Sassen-Koob (1987)13
preferred the phrase "the underground economy." Gershuny
(1978)14 used the term "self-service economy,"
and Feige (1979)15 chose the "irregular economy,"
while Hansen (1981)16 used yet another phrase, "the
border economy." All of the above terms and other similar
ones, such as "off-the-books economy," mean more or
less the same phenomenon. The phrase "informal economy"
has become the most widely used. Among the many definitions offered
in this regard is the following by Castells and Portes: "The
informal economy…a process of income generation characterized
by one central feature: it is unregulated by institutions of society,
in a legal and social environment in which similar activities
are regulated."17 Even though such a definition
may seem appropriate, the use of the word "process"
may give an ambiguous meaning to the phenomenon of informal economy.
I define the informal economy as that which encompasses all economic
activities unknown to established authorities-or unadmitted by
them even if known-and all incomes generated thereof but not reported
to the government and not included in the country's national income
accounts. The total of such may be referred to as the "informal
economy." Furthermore, a labor market operating without the
knowledge of the authorities and without adherence to existing
laws and regulations may be called "the informal labor market."
Similar terms apply to capital markets and to all other informal
economic activities.
It should be noted, however, that all sources of informal income
are not necessarily illegal. An informal income may be lawfully
earned, such as that derived from certain cash payments to physicians,
lawyers, tutors, plumbers, mechanics, nightclub operators or otherwise
obtained from unreported remittances. In addition to these legal
sources of an informal economy, there are other illegal sources
such as trading in illegal drugs and unlawful black market transactions
in commodities or in foreign currencies. Whether the source of
an informal income is lawful or unlawful, the act of concealing
it from the authorities is itself illegal. Moreover, there may
be different reasons for not reporting a legally earned income
to the authorities such as an attempt to evade taxes or a fear
of confiscation, sequestration and/or nationalization of an economic
activity, or any other precautionary purpose.
To estimate an informal economy, Gutmann (1979), for example,
[compared] the ratio of outstanding currency to demand deposits
in 1978 with the average for the years 1937 to 1941, a period
when underground activities were assumed to be close to zero.
Increases in the ratio were imputed to growth in these activities.
On the basis of this method, Gutmann estimated that the informal
economy represented about 10 percent of the currently measured
Gross National Product, or $177 billion, in 1978. This approach
has been employed with variations by other authors. Spitznas (1981)
applied Gutmann's formula to the Second Federal Reserve District,
which includes New York City, and estimated the city's underground
economy at $16.2 billion in 1978. He also estimated that these
activities had been growing rapidly.18
Gutmann's methodology has led to a wide range of estimates of
the informal economy in industrialized societies, despite the
criticism by Castells and Portes that there is no assurance that
the base period had no informal economy. It does not, however,
appear to be appropriate for Egypt.
In my attempt to evaluate Egypt's informal economy, I did not
rely on official figures for my estimation. A questionnaire was
devised for a stratified random sample of five hundred households
in Egypt in December 1988 in an effort to estimate first the ratio
of income that Egyptians are accustomed to allocating for savings.
It should be noted that the sample is indicative of aggregate
savings, as a large number of Egyptian households have a zero
or even negative net rate of savings.
With an estimate of a savings ratio (s), and with an estimate
of total savings (S), I then estimated Egypt's Gross National
Product (GNP) in 1987.
The result of the sample indicates with 95 percent statistical
confidence that the savings ratio in Egypt is somewhere between
9 and 11 percent of income. This result was found to be significantly
different from the 19.9 percent which was derived from applying
regression analysis to a thirteen-year time series of published
official data as shown in Appendix 1.
It would have been inconceivable for Egypt to have a savings ratio
of 19.9 percent in 1987, at a time when a country such as the
United States, with a much higher per capita income than Egypt,
only had a savings ratio of 12.4 percent (gross savings was $566.4
billion out of a Gross National Product of $4486.2 billion).19
Even in applying regression analysis to the case of the United
States for the same period of thirteen years, the savings ratio
was found not to be significantly different from that based on
the figures from 1987.
The estimates are consistent with that of Robert Mabro, whose
analysis of the data for the period 1952 to 1970 concluded that
Egypt's savings ratio is between 9 and 14 percent.20
Such a contrast-between results obtained from primary data and
those derived statistically from published official data-should
not be surprisingly. Official data on Egypt's savings and national
income do not reflect the actual performance of the country's
economy. As total savings (S) are unknown I attempted to estimate
them in spite of institutional and cultural difficulties. Since
certain financial institutions, such as the Islamic capital investment
companies, do not report actual deposits of savings to Egypt's
Central Bank in spite of their significance, the official figures
on national savings are definitely unrealistic. Furthermore, Egyptians
save in many different forms, some of which cannot be fully accounted
for, such as hoarding in the form of cash or else in the form
of gold, jewelry, or other such objects bought with the intention
of "saving" for possible future sale for investment
or needed expenditures. Thus, actual total savings is undoubtedly
more than any recorded or estimated figures.
The methodology I used to estimate Egypt's aggregate saving was
based on the following premises. First, official figures for savings
are to be avoided. I found out that these turned out to be only
the sum of net sales of savings certificates21 in addition
to post office savings deposits. By mid-1987, net sales of savings
certificates amounted to E.P. (Egyptian Pounds) 3.1 billion,22
while post office saving deposits were half a billion Egyptian
pounds,23 the total of which represented the official
figure for Egypt's total saving (S)! Second, I used the published
figures of time deposits in banks as a relatively more reliable
base for (S) since all of those among the stratified sample of
500 who had savings defined in their time deposits as savings.
Third, I estimated savings deposited with non-bank institutions,
mainly the Islamic capital investment companies, since they are
not a fully integrated part of Egypt's banking system. As there
was no access to the accounts of the twelve major Islamic capital
investment companies, I used an estimated figure of the total
dividends of E.P. 2.5 billion they distributed in 1987 (d), which
was given unofficially by Egypt's Central Bank, as the numerator
in the following equation:
d (estimated)/total deposits (unknown) = Annual yield
Since the annual yield was advertised by the Islamic investment
companies as ranging between 20 percent and 25 percent, I conservatively
took the lower percentage of 20 percent to estimate the unknown
total deposits made with such institutions, which turned out to
be in the neighborhood of ten billion Egyptian pounds.
My estimate of the total deposits wit h the Islamic capital investment
companies is conservative in comparison to other estimates. Al-Ahram
al-Iqtisadi, for example, estimated deposits at the two largest
of them, Al-Rayan and Al-Saad Islamic Investment Companies, at
E.P. 11.7 billion in 1987.24 Muhammad Dowaidar provides
two estimates of the total deposits with the Islamic capital investments
companies, between E.P. 5 and 14 billion, or between E.P. 13 and
48 billion.25 Furthermore, some of those deposits wer
made by Egyptians working abroad and denominated in U.S. dollars,
as well as in other major European currencies. Whatever the amounts
of money deposited with the Islamic capital investment companies
may have been, the fact remains that they were substantial, even
though such institutions were not under any banking supervision
or control (as shown in Appendix 2).
Assuming that the E.P. 10 billion in total deposits with those
companies were the result of accumulated savings over their period
of expansion of five years, a conservative estimate of E.P. 2
billion may be regarded as annual savings deposited with those
institutions.
In 1987, therefore, Egypt's total savings (S) can be estimated
at E.P. 10.3 billion, representing the sum of times deposits with
the country's banking system of E.P. 8.3 billion26
plus the savings deposited with the Islamic capital investment
companies at E.P. 2 billion.
Using the savings ratio (s) derived above, which was found to
have been in the range of 9-11 percent, and given the estimated
(S) at E.P. 10.3 billion, my estimate of Egypt's national income
in 1987 would be somewhere between E.P. 94 and 114 billion.
Even if the lower limit of E.P. 94 billion is to be considered,
then Egypt's informal economy in 1987 may be estimated at a minimum
as E.P. 50 billion, i.e., the difference between the E.P. 94 billion
figure and the official one of only E.P. 44 billion. In other
words, Egypt's national income in reality was at least more than
double the official estimate in 1987.
Regardless of how the above estimates reflect Egypt's, my conservative
approach indicates the existence of a substantial informal economy
in the country, which complicates the implementation of structural
economic reforms.
With an informal economy even larger than Egypt's reported national
income, it can be presumed that the income maldistribution of
the country is even worse than that shown in the available statistics.
The wealth and most of the purchasing power are highly concentrated
in the hands of a small percentage of the country's population,
while the majority live under extremely tight budgetary conditions,
where basic needs cannot be met among the poor and middle class
alike. The dilemma of policy makers of structural reform which
necessitates a rise in prices, bringing further economic hardships
to the majority of Egyptians, as this could lead to frustrations,
riots and political instability. Yet, in the absence of any reform,
economic problems keep worsening at a compounded rate, while rates
of inflation keep increasing because of a decline in productivity,
an increase in the government's printing of money, the substantial
purchasing power concentrated in the hands of the few, and the
high rates of growth in Egypt's population.
Egypt's Contemporary Economic Problems
Apart from the complicated issue of population, Egypt's contemporary
economic problems may be classified under three main headings:
(1) external economic factors, (2) internal economic factors,
and (3) government policies, laws, and regulations.
The exogenous, or external, economic factors which have compounded
Egypt's economic problems in recent years can be attributed to
the decline in the main sources of its foreign exchange earnings
since 1983, when the price of oil was substantially reduced, declining
to less than $10 a barrel in 1986. With the subsequent economic
recession in major Arab oil-exporting nations, there was a decline
in the remittances of the three million Egyptians working in those
countries, which constituted the highest source of foreign exchange
earnings for the country. The relative contributions of sources
of Egypt's foreign exchange earnings are shown in Table 5.
There are, however, other sources of foreign exchange not listed
in Table 5. They are classified as a) other food and raw materials
(onions, potatoes, oranges), b) semi-finished goods, and c) finished
goods (Table 6).
If the figures for a), b), and c) are added to the last column
in Table 5, we get the total foreign exchange earnings in billions
of dollars consecutively in the years above as follows: 6.8, 5.9,
6.9, 7.7, 7.3, 6.6, and 3.8, adding up to $45 billion for the
seven-year period.
It is to be noted that, with the drop in the price of oil in 1986,
the relative contributions of remittances and oil exports were
significantly reduced, while the absolute amount of Egypt's total
foreign exchange earnings dropped by about three billion dollars.
After 1987, however, as the price of oil rose, the Egyptian government
decided to increase both the production and the export of crude
and refined oil.
The inability of Egypt to control external factors affecting its
economy makes structural internal economics imperative. Domestic
economic problems at present include the rise in both disguised
and open unemployment, low productivity, high rates of inflation,
government facing deficit financing, unaffordable subsidy programs,
deficits in the balance of payments, accumulating public debt,
the lack of adequate domestic investments, the acute shortage
in housing, price disequilibria, and, in general, low rates of
real economic growth, often even leading to negative per capita
real growth rates.
Unemployment
According to official statistics, there were more than two million
Egyptians unemployed in 1986 out of a labor force of 13.7 million,27
representing a rate of unemployment in the neighborhood of 15
percent. My estimates indicate, however, that there were 2.8 million
unemployed while the labor force was 14.5 million, representing
an unemployment rate in excess of 19 percent in 1986. Since half
of Egypt's population, according to published official age distribution
data, is of labor force age, I used the figure of 24.2 million
Egyptians of both sexes as the basis for estimating the size of
the labor force. Traditionally, however, approximately 20 percent
of females are in the labor force. Thus my estimate of Egypt's
labor force in 1986 was 12.1 million males plus 2.4 million females,
representing a total of 14.5 million, of whom 11.7 million28
were employed, according to official statistics. The remaining
2.8 million can thus be estimated to have been employed.
This estimate represents only those who were unemployed and does
not take into account underemployment. Many work places in the
Egyptian government and public sector companies are staffed with
people beyond work needs, and some employees on the payroll have
little or no work at all. This phenomenon of disguised unemployment
has increased over time because of Nasser's unemployment act,
which obligated the government to provide employment to all. As
labor offices assign people to vacancies on the basis of "first
listed, first served," a backlist of more than five years
of university graduates is still awaiting employment.
Inflation
The official rates of inflation are downwardly biased because
of the rigidity of prices in certain items, as in the case of
subsidized goods and fixed rents which enter in the consumer basket
when prices are compared from one year to another. Inflation rates
as measured by consumer price indices (CPI) are shown in Table 7.
The average annual rate of inflation computed from the above statistics
is approximately 16 percent. In previous research I estimated
Egypt's annual rate of inflation at 23 percent,29 which
is in line with most estimates of the World Bank. Even if we take
a conservative estimate of 20 percent, this rate of inflation
imposes an unbearable burden on the majority of Egyptians who
are poor, and even those who are middle class.
While there are other economic, social, and political implications
of such high rates of inflation, it is important to assess the
root causes of Egypt's substantial increase in its consumer price
index. One of the main sources of inflationary pressure in Egypt
is the high budget deficit and the way it is financed. In the
most recent estimate by the International Monetary Fund, Egypt's
budget deficit was about 17 percent of the country's Gross National
Product (GDP). Roughly half of this deficit is financed by borrowing
from the public or from publicly owned institutions such as pension
funds and social security funds. The other half, amounting to
eight to ten percent of GDP, is financed by printed money. This
monetized part of the budget deficit is the main cause of inflation.
The government's policy of excessive printing of money is shown
in Table 8.
While the monetized part of the budget deficit is the major source
of the "demand-pull" inflation in Egypt, other sources
include (1) imported inflation, which is becoming increasingly
important following depreciations of the Egyptian pound; and (2)
the raising of the price of principle commodities to reflect the
increasing cost of labor and other inputs. These fuel the flame
of "cost-push" inflation. The decline in marginal productivity
is a further cause of inflation.
Budget Deficit
As the government has not been able to track down the vast untaxable
underground economy, its total public revenues have increased
modestly from E.P. 8.3 billion in 1981/81 to E.P. 13.5 in 1986/87.
Its expenditures meanwhile have increased from E.P. 13.2 billion
to E.P. 22.2 billion. The overall budget deficits have therefore
increased from E.P. 4.9 billion to E.P. 8.7 billion in 1985/86
to E.P. 8.7 billion in 1986/87. Furthermore, the relative burden
of the budget deficit as a percentage of the country's national
income, even though still high, has been reduced from 23.5 percent
in 1981/82 to 19.9 percent in 1986/87. Most of Egypt's budget
deficit, however, was internally financed by its banking system,
social security surplus, development bonds, savings certificates,
postal savings, government bonds for public sector companies,
and by the printing of money, the total of which covered up to
83 percent of the deficit. The remaining 17 percent was foreign-financed
from credit facilities for the development plan (mainly project
loans), grants for the development plan, cash and commodity loans
such as the PL 480 and other U.S. loans and grants, and European
and Japanese loans and grants.30
In summary, the three methods of financing the budget deficit
in Egypt are (1) borrowing from public and savings institutions,
which is essentially non-inflationary although it crowds out private
investment; (2) borrowing from the banking system through the
printing of money, which is highly inflationary; and (3) foreign
borrowing, which is non-inflationary but creates external debt
with far-reaching implications for the balance of payments position
and the prospects of economic growth.
Two of the most prominent and internationally respected Egyptian
economists, Abdul-Galil al-Imari and Ali al-Graitli, have concluded
that the root cause of Egypt's economic problems is deficit financing.
Having been commissioned by President Mubarak to present a study
on Egypt's structural reform, they presented an important dfrom landlords to tenants. Whatever the reasons for rentalism,
it led to one of the most serious economic problems that Egypt
is currently facing-an acute shortage of rental housing. This
shortage has been compounded over the years as the government
has not had the financial ability to fill the needed gap in spite
of its large construction programs.
Based on an average household of 4.9 individuals,38
and with 54 stay is
only temporary because, with few exceptions, Arab countries do
not allow the permanent settlement of foreign workers. With no
appreciable effect so far on Egypt's birth rate or on migration
from the country, the acute housing shortage remains a threat
to social and political equilibrium. Overcrowdedness in apartments
has created a variety of social problems and crimes39
in addition to its negative effect on the overall productivity
of the country and also on hygiene and sanitary conditions. In
the meanwhile, the lack of adequate housing for the majority of
young Egyptians, who are also faced with an unemployment rate
of at least 19 percent, leads to frustration, hopelessness, possible
mass disturbances and political instability.
Obviously the current status quo is untenable. To improve the
situation, there are only three possible options, in addition
to an increase in housing construction by the government: (1)
to encourage the private sector to increase its investments in
housing construction, or (2) to pursue a less efficient system
by socializing Egypt's housing sector in its entirety so that
at least the existing buildings may be properly maintained so
their lifetime can be extended, or (3) a combination of both.
Due to the government's problem of bureaucracy and its budget
deficits, and for other cultural and practical considerations,
the last two options may be ruled out. The only viable solution
to Egypt's acute housing shortage is, therefore, the first option,
yet it cannot be achieved without a gradual elimination of rent
control. The phasing out of rentalism over a specific period of
time is a necessary condition for a long-term solution to one
of the most pressing problems that Egypt is currently facing.
Government Bureaucracy
As in the case of the housing laws which led to the current acute
housing shortage in shelter, several other laws and regulations
have created myriad economic imbalances and problems. With the
decision to move quickly along the road to industrialization,
the Egyptian government interfered in the relationship between
prices of industrial products and those of agricultural goods.
Bent Hansen has candidly observed that "there has been a
clear tendency to let the terms of trade of agriculture deteriorate
as a means of financing industrialization….Before World War
II, fertilizers were imported duty free. Although this policy
was dictated by the wishes of landlords, it obviously had positive
allocation effects. Since the 1950s the government has sold fertilizers
to peasants at prices generally above import prices, probably
as a device to tax agriculture."40 As the sole
purchaser, the government of Egypt also established the rule of
buying cotton from its growers at a price less than that of world
markets as a means of raising public revenue.
Bureaucratic inefficiency, a characteristic of governments, especially
in the Third World, has had negative effects on the country's
economy. Ironically, the system of long bureaucratic procedures
requiring several approvals, signatures, stamps and the like for
the simplest government authorization was established by the British
authorities upon their military occupation of Egypt in 1882. The
system has remained in place ever since in spite of all attempts
to overhaul it. In a major policy speech on November 11, 1989,
President Mubarak acknowledged and bitterly criticized Egypt's
suffocating bureaucracy "which seeks to make the easy difficult
and the possible impossible."41
A case study of a tourist project of Arab Misr Investment Company
in Cairo revealed that it required 18 different steps to obtain
the final license needed to operate, as shown in Appendix 6.
It is little wonder that it took five years after the full completion
of the project for the license to be issued. During that period
all capital and investment expenditures were frozen, as there
were no returns to for a closed-down project. Meanwhile, there
were financial obligations to banks on the borrowed money, in
addition to the depreciation of capital assets and the payment
of all financial obligations throughout the long-awaited period
for the necessary final license. Financial hardships to investors,
some of whom were small investors committing the savings of a
lifetime, crippled the company financially, prevented it from
further expansion and investment, and finally forced it to close
down.
Because of the problems of bureaucracy, several other projects
have not been completed after their start. A feasibility study
of a project might rely heavily on certain privileges allowable
under existing regulations, such as duty free imported machinery
for the project allowable under the open-door policy and the issuance
of Law 43 in 1974. However, during project construction in the
early 1980s, companies were faced by an unmanageable situation
when the government reversed its position and decided to impose
a heavy duty retroactively on the imported machinery for an already
approved project which had not yet been completed. Through such
unexpected actions, some projects were forced to declare bankruptcy,
or at least stop short of completion after having spent all of
their paid capital, as well as all sums of money borrowed from
banks. No estimates have actually been made of the total of such
sunk capital but it is believed among the accountants whom I have
interviewed to be more that ten billion Egyptian pounds.
Some Egyptian and private companies, therefore, have devoted their
activities to short-term trade, reaping high cash profits that
have largely been diverted to an expanding informal economy. These
high cash profits have often been hoarded in the form of cash
or jewelry, or spent on unnecessary luxuries, lavish consumption,
or otherwise invested or saved abroad. The effects of Egypt's
inefficient bureaucracy were limited when the role of the government
in the economy was small. With Nasser's move towards more centralization,
which meant more consolidation of government power and centralization
of decision-making, the role of Egypt's government in the economy
was substantially increased, particularly after the 1961 socialist
laws. Under these laws private companies, such as Mahalla al-Kubra,
Kafr al-Dawar Textile Companies, and others, which were efficient
and able to compete in world markets with high-quality products,
became public sector companies that show profits under the control
and management of an inefficient bureaucracy. Even some of those
public sector companies that show profits in their published annual
budget are in fact operating at a loss, once an allowance is made
for subsidized inputs such as energy, raw materials, and others,
for which the companies do not pay the actual economic cost. As
a result, in the 1980s, there has been a call for the denationalization
or privatization of Egypt's public sector companies.
In fairness, there have been good managerial talents in charge
of some of the public sector companies. Unfortunately, they have
often been caught in the cobweb of bureaucratic procedures and
an overlapping of conflicting jurisdictions among several different
ministries. Their capabilities are not properly utilized. Constraints
on their action and limits on their budget have prevented Egypt
from taking advantage of the world's substantial technical progress
since the 1950s. After almost forty years of assembling cars in
Egypt, the industry has not been able thus far to produce a fully
manufactured Egyptian car. In comparison, South Korea, which had
almost the same economic and demographic characteristics as Egypt
in 1952, has successfully been able to penetrate world markets,
even those of the United States, with its inexpensive Hyundai,
a fully manufactured Korean car.
The Root Cause of Egypt's Contemporary Economic Difficulties
There has been a decline in per capita real income in Egypt throughout
the period 1983-87. During this period, the rate of increase of
real GNP, according to the official data, was one percent per
annum42 while the population rate averaged 2.9 percent.43
This meant that the annual decline in per capita income by 1.9
percent in spite of the amelioration of some of Egypt's infrastructure
during the period. Some economic progress in 1989 may, however,
lead to an agreement with the International Monetary Fund as a
prerequisite for the possible rescheduling of Egypt's foreign
debt and the continuation of US aid.
In analyzing data on the Egyptian economy I have concluded, contrary
to the views of al-Imari and al-Graitli, that the financing of
the budget deficit was not the root cause of Egypt's contemporary
economic difficulties. Rather, it was the result of the government's
mismanagement of economic problems. However, it has worsened real
economic conditions, as it has been a major source of inflation.
The results of my research on the root causes of internal economic
problems in Egypt indicate that the single most important factor
has been a steady decline in productivity in comparison to other
nations.44 With the exception of the first phase of
Egypt's open-door policy in the period 1975-1980, I observed a
continuous decline in the marginal productivity of Egyptian labor
since the mid-1950s. A decline in the marginal productivity led
to further deterioration in Egypt's balance of payments and a
further deficit in the government's budget and has pushed inflation
in an upward spiral.
Concluding Remarks
Egypt's economic reforms will have to be part of a long-term strategy
covering ten to 15 years, during which time there should be no
stop-gap measures or short-term remedies which could obstruct
long-term structural reform. In addition to an implementation
of new medical technologies in the field of family planning, there
must be a full state commitment to a reduction of the current
high birth rate. Disincentive measures may be used, such as the
removal of subsidies, and other benefits after a second or third
child is born. As to the root cause of internal economic problems
in Egypt, namely the decline in marginal productivity, a policy
for reform goes beyond what any government itself can do. In recognizing
these serious problems, some recommendations have urged efforts
to increase managerial abilities or to reform educational and
training systems.45 Others have called for an overhauling
of all emergency laws and regulations and of existing labor laws
to provide more effective incentives for talented and highly productive
workers. Furthermore, it has been argued that either a substantial
reform of Egypt's ailing public sector be made, or else a systematic
policy of privatization be implemented.46 As a start,
it may be recommended that shares of ownership of public companies
be given to talented and highly productive workers as a bonus
and an incentive be provided by the end of every budget year to
increase marginal productivity.
There exists, however, a vicious cycle of cause and effect that
may have led to the deterioration of Egypt's marginal productivity.
The reasons include over-crowdedness, the lack of adequate housing,
hardships in public transportation, poor or crippled management
and the existing labor laws which led to a system in which the
inefficient is subsidized through equal earnings, treatment and
opportunity while the efficient is penalized in the absence of
adequate recognition, compensation and promotion.
In my opinion, a reform of the decline in marginal productivity
is a national issue in which the state can only play a role by
initiating a new system including incentives and disincentives
for labor as well as an effective and continuous public awareness
program. A change in people's attitudes toward increased marginal
productivity will have to include a deepening of their sense of
belonging through more active political participation and the
removal of existing political impediments currently obstructing
the freedom of choice of people's representatives in Egypt's Peoples'
Assembly. The requirement inserted by Nasser in Egypt's constitution
that no less than 50 percent of the parliament should have a working-class
or peasant background should be removed. After all, Nasser himself
declared that "in my opinion, this clause [the amendment
providing for 50 percent] will be discontinued. This clause is
temporary until we pass through the current transitional period,
after which we will give up our control over elections and stop
saying 'this group is workers' and 'this group is peasants, etc.'
In fact, our country is the only country to have adopted such
a principle."47 Overall political reforms which
enable greater political participation will safeguard each individual's
basic human rights. They may also have a positive effect on the
people's attitude toward increased productivity by encouraging
them to accept temporary hardships accompanying structural economic
reforms. There is no doubt that some progress has been made in
this context in recent years under Mubarak's regime.
The process of political liberalization and reinforcement of democratic
institutions are necessary conditions for generating an atmosphere
of confidence and long-term political stability.48
These, in turn, could encourage capital owners who have invested
in Egypt's vast and expanding underground economy to invest in
long-term projects in the country. As the role of an economically
efficient private sector is increased in an environment of competition,
marginal productivity will necessarily increase. Otherwise, a
continuation of the status quo-low productivity and an increase
in population-will undoubtedly make Egypt more dependent than
ever before on outside sources.
While economic assistance to Egypt from Arab countries, the US
and other industrialized nations is sizable, it should not be
regarded as a continuous flow in the future. Even if it does,
there is an economic and/or political price tag to it. Currently,
Egypt is the second largest recipient of US aid after Israel,
yet this aid was the consequence of the signing of the Camp David
accords with Israel and the continuation of that treaty. The vulnerability
of foreign economic assistance to Egypt and its possible discontinuation
in the future leave no choice for Egypt other than to devise a
consistent policy for self-reliance through increased productivity.
Among badly needed reforms are a restructuring of Egypt's public
administration to minimize the crippling conflicts of jurisdictions
and authority among different ministries, a series of continuous
training and retraining programs, and an amelioration of the educational
system, especially those parts of it which develop managerial
capabilities. The proposal to reward highly productive and talented
innovative workers with an equity share in the capital of the
public sector companies in which they work could be an added incentive
to increased productivity.
As a policy of liberalization of both political and economic reform,
it has to be consistently pursued with vigor. Rentalism should
be gradually abolished over a period of ten to 15 years. Emergency
special laws for security purposes should be canceled as a means
to of generating an atmosphere conducive to attracting money now
circulating in Egypt's informal economy for long-term investments.
Futhermore, the current costly subsidy system, which has been
a failure in helping the poor,49 has to be totally
eliminated and replaced with another that is less costly but more
directly geared to helping the poor through such means as food
stamps or direct cash payment according to need. With a reduction
in subsidy expenditures and with a comprehensive overhaul of Egypt's
tax system, the government's budget deficit could be substantially
reduced. Every attempt should be made to rest public revenue on
a solid base of progressive income tax, which would also serve
as a means of reducing the current and eventually unsustainable
degree of income maldistribution.
Export-oriented industrialization should be encouraged as a means
of identifying the country's comparative advantage, as well as
a way to reduce its balance-of-payments deficits. An analysis
of a subset of import-competing industries in Egypt found them
to be mainly operating at an economic loss or producing at a far
lower level than their capacity. While such losses may in some
cases be justified on the basis of non-quantifiable national security
considerations, in others there is no justification for the continued
depletion of the country's limited economic resources, which could
be better utilized and more efficiently allocated. Other than
their generally known economic advantages, such as efficiency
in allocating limited resources, export-oriented industries would
also be attractive because of the increase in the size of export
markets resulting from recent moves towards regional economic
integration. For example, Egypt, Iraq, Jordan and Yemen formed
the Arab Cooperation Council on February 16, 1989.50
Historically, the benefits of Egypt's integration with other Arab
countries were analyzed by Charles Issawi as far back as 1954.51
Egypt can overcome most of its economic problems in the long run
if it can identify its comparative advantages not only in its
reservoir of special human talents but also in such fields as
tourism, which has been barely utilized in spite of the country's
world-wide unique features, and agriculture. Tourism, for example,
had witnessed substantial progress by the end of the 1980s because
of a strong policy against red tape and inefficiency. The Ministry
of Tourism established direct links to several inland airports
in Egypt for foreign carriers at a time when the only tow international
airports were in Cairo and in Alexandria. In the agricultural
sector, a removal of rent and price controls while retaining the
1952 law of land reform is a necessary but not sufficient condition
for expanding the agricultural output from the existing six million
cultivated feddans. Special emphasis should be placed on sound
pricing policies, while there should be no bias against agriculture
in favor of industrialization. In the meanwhile, a scientific
utilization of underground water reservoirs in Egypt's vast deserts
to expand the area under cultivation should be pursued on the
basis of cost-benefit economic principles.
In spite of the multiplicity and complexity of economic problems
that Egypt is currently facing, there is room for optimism so
long as there are possible solutions. Benign neglect of problems
will only complicate them more. Solutions become much more difficult
with the passage of time. If there is no firm commitment by the
state to a reduction of the current high birth rates, and if the
pace of economic reforms is too slow to be fundamentally corrective
of the accumulated problems of the past, pessimism and alarm will
be justified.
Notes