Economic Growth is Making Many Egyptians Poorer
(Bloomberg Opinion) -- If Egypt is the Middle East’s fastest-growing economy, why are so more and more Egyptians becoming poorer? The question has exercised economists since the country’s statistics authority released figures on poverty rates indicating a 5% rise over the past three years. This is a period in which growth has spiked, thanks in no small part to a continuously rising foreign debt.
It is easy to interpret the poverty numbers as the social impact of the International Monetary Fund-prescribed reform program that kicked off in November, 2016, including the massive devaluation of the pound, followed by rounds of subsidy cuts and increases in consumption taxes. These measures, some commentators argue, have impoverished many Egyptians, despite the stable macroeconomic indicators—for instance, inflation is under control, interest rates have been reduced, and the exchange rate has been steady.
But the trend in the poverty data long precedes the recent IMF program. Official statistics show that poverty rates have increased steadily since the early 1990s; the rate has almost doubled since 2000. The recent hike is a continuation of an older and consistent trend that either went untouched by rounds of fiscal and monetary reforms under the auspices of the IMF and the World Bank, or was exacerbated by them.
Those who focus on the role of the IMF austerity program to explain growing poverty are missing some other contributing factors.
The first is the sectoral composition of economic growth. In Egypt, the sectors that have generated the most growth and created economic value are traditionally capital- and energy-intensive, and create relatively little employment—such as oil and gas, banking, and telecommunications. Some growing sectors like construction have generated jobs, but these were of low quality, requiring low skill and paying low wages. The same can also be said of tourism.
Sectors that might create jobs characterized by high productivity and wages—such as skill-intensive services and high value-added manufactured exports that require skill and technology inputs—have not grown, certainly not at a rate to influence the overall poverty data. These sectors require large public investments in education and vocational training, and in research and development, as well as an institutional infrastructure friendly for innovation and entrepreneurship. None of this has been prioritized by Egyptian governments.
Much of Egypt’s employment, at least since the 1980s, has been in the informal sector, either through self-employment or in microbusinesses that produce jobs that pay subsistence income. An International Labor Organization study in 2009 showed that 91% of the employed young people in Egypt worked informally, in jobs characterized by low productivity, low wages and no social protection. According to the World Bank’s vulnerable employment indicator, the average proportion of vulnerable employment in Egypt between 1997 and 2007, as a percentage of total employment, was as high as 24.09%.
The second factor contributing to the spike in poverty numbers has to do with redistribution. With a rudimentary capacity to collect wealth and income taxes and historically low—and declining—tax to GDP ratios, the Egyptian state has been in chronic fiscal crisis since the 1980s. This malaise has often been treated by episodic austerity measures, often under the auspices of the IMF, cutting public expenditure and raising indirect taxes on consumption. Both measures have usually resulted in throwing the brunt of fiscal-crisis management unevenly on the shoulders of the poorer and more vulnerable populations.
International financial institutions have been at least complicit in the recurrent use of these impoverishing policies as necessary reforms for stabilizing macroeconomic indicators and relaunching the economy. For decades, their so-called reforms—in Egypt as elsewhere in the Global South—have focused on stabilizing macroeconomic signals as a necessary and sufficient condition for market-led development.
The trouble is, aggregate indicators like the budget deficit, GDP growth rates and foreign reserves are too abstract, too economistic to capture the social and political dimensions and implications of the economy. The challenge is to enable more and more people, especially women and men of working age, to take part in the generation of economic value.
Instead of focusing primarily on economic growth, the IMF and other international lenders—as well as the managers of Egypt’s economy—should care more about where growth occurs, and how growth is redistributed through state expenditure and revenues.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Amr Adly is an assistant professor at the American University in Cairo. He is the author of "State Reform and Development in the Middle East."
©2019 Bloomberg L.P.