What now after Sharm El-Sheikh?

Adel Beshai* argues that the donors' meeting windfall provides a great opportunity to think again about how we run the economy
Some six years ago, during a meeting at the Egyptian Centre for Economic Studies, organised by my respected colleague, Ahmed Galal, I made some remarks about Egypt's economic condition.
In those days, loud hymns of praise were sung to our economic achievements. In public finance, Egypt's gains were remarkable: a budget deficit that had stood at 22 per cent of GDP reduced to a mere one per cent; a surplus in the balance of payments; a successful de-dollarisation of the economy, after so many years of "dollarisation." In addition, inflation had fallen and foreign exchange reserves had increased dramatically.
During my remarks then, I acknowledged those achievements, even adding that they had materialised in a shorter span of time than anyone expected. But for all my praise, I had serious reservations to raise. "I do not jump for joy at all these achievements," I said. Firstly, I pointed out that, yes indeed, the government budget deficit had shrunk dramatically. But I explained that the deficit is calculated by subtracting spending from receipts; and that it can shrink for any of three reasons, not all of them cause for joy. Those reasons are: lower spending, (with receipts staying constant); higher receipts, (with spending staying constant); or a simultaneous rise in receipts and fall in spending. In Egypt's case, the deficit had shrunk for the second of those three reasons: viz a rise in receipts, with spending constant. In my view, the main villain is government spending, and since nothing there was achieved, our success was a qualified one at best, and did not augur well for the future.
Next, I came to the balance of payments figure. Again, our surface achievements appeared less fabulous when examined in detail. Yes, for three or four years, Egypt had a surplus in its balance of payments -- a decided success when so few countries achieve it. But my argument then was clear: look at the "Balance of Trade" -- a component of the balance of payments figure. Egypt's performance there had been most "unfavourable" to use the common economic jargon, with merchandise imports far exceeding merchandise exports, roughly by a factor of four in value terms. I argued that Balance of Trade is the key indicator of economic health.
Thirdly, the de-dollarisation of the economy: Yes, Egypt had succeeded in that. But I drew attention to the implications of high interest payments on Egyptian pound holdings for "public debt," both current and for future generations.
This tale holds an important lesson. In its bid for "stabilisation," Egypt had made remarkable gains. But stability is different from growth. The former is "static" in nature; the latter "dynamic." In a dynamic context, i.e. through time, it is myopic to cling to each stabilisation gain as if it is a sacred untouchable. Trade-offs are necessary. And the success or otherwise of these trade-offs depends on the difficult and delicate task of economic management.
It is this economic management that should concern the policy-makers after the Sharm El-Sheikh Consultative Group meeting. I did not attend that meeting, but the key issues are clear. We all know that at that meeting, pledges for aid and grants were more than twice what Egypt thought would be forthcoming. In some ways, there was nothing new about that meeting, which is regularly held every few years. But a key difference this time is that Egypt, like the world, is suffering a recession. We should not necessarily despair: History tells us that turbulence like this has its good side. Major breakthroughs in economic thought and policy usually come about during troubled times -- think David Ricardo and the Napoleonic wars; John Maynard Keynes and the Great Depression. Countries are shaken and have to develop sound economic policies. One may recall that in 1986, Egypt's receipts from oil exports fell dramatically when the world oil price plummeted to $8 or $9 per barrel. That same year, tourism receipts fell, too. But it was that year and those adverse circumstances that wrought vital change to our farming policies. Pricing was liberalised for 11 crops, and output increased; this marked a real step towards reform by the Ministry of Agriculture. The issue for us now in 2002 is precisely what we should do to make full use of the Sharm El-Sheikh windfall in a dynamic setting, and whether we can establish sound economic policies again.
In considering this question, I believe that Egypt has to realise that it has made great strides in developing its infrastructure, that its economic potential is immense, but that the major impediments are mainly institutional and administrative.
First and foremost, the government needs to take a new approach and consult more widely before making policy; with NGOs, academics, business people and so on. It is no secret that day-to- day business in the executive branch is deeply onerous; consultation with others every now and then on long-term policy is, therefore, useful.
Next, we must stop framing our discussions simply in terms of generating employment or creating jobs. Yes, employment is a sacred goal; but when thinking about how to achieve that goal, we need to look deeper: to the real factors that inhibit job creation. Those factors are a low level of savings, low investment and low output. I do not intend in this essay to list all the obstacles to investment (and I mean investment in productive enterprises). I am sure the government is aware of them. But our approach must be to tackle those underlying obstacles; and monitor and report their removal or non-removal in a transparent way. Currently we seem to concentrate on the symptoms at the expense of the illness. The tax regime is a case in point. The current concession of tax holidays for five or 10 or 15 years is undesirable for at least two reasons: it implies that there are deeper obstacles about which nothing can be done and, secondly, in the longer term, it will make it impossible for the government to earn adequate tax revenues. Better by far to develop a healthy investment climate under which I am sure business people would be happy to pay their taxes.
Another concern is Foreign Direct Investment (FDI), which has been meagre in this country. Looked at globally, Egypt should be a strong magnet for FDI. China's levels are fast approaching saturation point; other countries already have a good share. FDI is most useful when linked to exports (the foreign firm produces components or parts locally on a big scale for export). This should, in no way, exclude a drive in this country towards generating an indigenous "export culture;" but that can only thrive if the appropriate institutional infrastructure is in place. Here, I specifically mean that exporters should not suffer high transport costs; lack of airport facilities; high import tariffs on intermediates and raw materials, etc.
There are arguments against FDI. Some maintain that it tends to be capital-intensive, and so won't help solve unemployment, and that Egypt actually needs labour-intensive investment. The debate is finely balanced. While labour-intensive enterprises are undeniably desirable, capital-intensive projects should not be discarded. The two are not mutually exclusive. We already have a huge and healthy informal sector which is mainly labour-intensive. On the other hand, FDI enterprises, however capital-intensive, usually employ workers and train them. And on a wider scale, not only do FDI enterprises employ a great many, but their activities may also increase demand for the output of Egypt's existing informal sector, thereby creating more growth and jobs. A good lesson comes from the history of the industrial revolution in England. At its outset, men built machines; later machines built machines. Some labourers were displaced (so- called technological unemployment), but over time, the use of machines allowed an increase in output which eventually created more jobs for people. The point is driven home when it is realised that from 1740 to 1860 in England, with all the industrialisation that took place, real wages (not just money wages) climbed.
It appears from what I have said that the current problems of the Egyptian economy will never be solved by ad hoc measures. Our vision must first be clear and a long-term strategy formulated. And that strategic vision must encompass some key elements.
Confidence can only be built if a consistent and predictable government policy is laid out, open to everyone. There is a role for each sector of the nation; the private sector especially should be informed where it stands so it can realise its responsibilities and begin to mature. Privatisation should be seen as a means to an end -- the functioning of a market that is not monopolistic. Government has a huge role -- and a difficult one. Institutions -- legal, administrative or the like -- have to be developed by a proactive government. We all know that the role of government in a privatised economy is more difficult than in a command economy. While the private sector does the rowing, the government has to steer the boat. The Ministry of Planning has a crucial task in indicating how sectors and activities are to be prioritised.
In the end, success and development will depend on productivity, not speculation. For example, if the government wants to create "economic zones," it must look at the land tenure system in the desert and consider long-term leases of land to prevent would-be owners preferring instead to speculate.
There is no room for conflicting and paralysing policies. It is ruinous, for example, to apply a 10 per cent tariff on an imported commodity but charge an exporter who makes a similar commodity a 40 per cent tariff to import raw materials. We must be mindful of an often forgotten fact: that as exports increase, imports will also increase; in virtually all countries of the world, exports have an import content. But the net result is in our favour.
The government also needs good public relations for its policies -- when it presents ideas, it must acknowledge the problems, list them, explain which have been solved, and how, and list those for which solutions are yet to be found. It is always difficult to outline a long- term perspective. But a regular, consistent and honest public relations effort is a must, and should embrace all sectors of the economy. A rise in oil exports or a big increase in natural gas exports in 2005 should not be presented as a panacea.
We all hope to live to the day when we will not hear the blame for our difficulties thrown on to the impediments of a creaking bureaucracy or on to exploitation of our weakness by rich countries. For us, the great economic rivalries will be with the rest of the developing world, not the rich world; and only the best-managed developing countries will be able to compete. The "Wealth of Nations" of Adam Smith of 1776 will ultimately depend on the "Work of Nations" of Walter Reich of the 1990s.
* The writer is professor of economics at the American University in Cairo. He is also a member of the Shura Council.
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