The economy and income distribution of Egypt

Introduction

Egypt’s economy was highly centralized during the rule of late President Gamal Abdel NASSER but has opened up considerably under the previous President Anwar EL-SADAT and continued under President MUBARAK. Cairo from 2004 to 2008 have pursued aggressive economic reforms to attract foreign investment and ease the GDP growth. The global financial crisis has slowed down the reform efforts but has not stopped them. The international economic downturn slowed Egypt’s GDP growth to 4.7% in 2009 from around 7% in the two previous years, predominately affecting export-oriented sectors, including manufacturing, tourism, and Suez Canal revenues yet the growth in domestic sectors, including energy, transportation, telecommunications, retail trade, and construction kept the economic growth from falling further in 2009. The government announced three separate stimulus packages between the end of 2008 and the end of 2009 totaling $6.3 billion, but it is not clear how much has been spent. Despite high levels of economic growth over the past few years, living conditions for the average Egyptian remain poor.

Income inequality seems to be in the very nature of any process of growth: economic, social or even of natural phenomena. Perfect economic and social equity may not even be a very desirable state of affairs, once the basic needs of everyone are satisfied. We have every reason to be concerned about the failure to satisfy basic needs of anyone, but why should equality be such a cause of concern once this goal is achieved?

Well, the real reason of concern about income distribution is the concern about poverty, but we know that the two are very different issues. Poverty may prevail in a highly equitable society and may vanish in a very inequitable society (as may be nearly the case in some Scandinavian countries). Once basic human needs are satisfied, an increase in inequality may even be a good thing, since some degree of inequality is conducive to progress in the arts and sciences, to greater initiative and to a less dull and monotonous life.

Egypt Economies:

Egypt represents a consistent model of development which has attempted to blend the neoclassical concepts of a market economy with those of a highly socialist orientation. This model was notably adopted by many of its neighboring countries, with similar repercussions on performance. Halfway through the period under study, Egypt inaugurated its Open Door Policy (October 1973), with a partial liberalization of the incentive and institutional structure. However, the three underlying themes characterizing the Egyptian model have persisted throughout the period:

An import substituting strategy imposed through central planning and macroeconomic policies

A dominant state-owned sector in key sectors of economic activity, itself dominated by a top-heavy bureaucratic structure;

An extensive institutionalized system of welfare transfers operating mostly via implicit and explicit subsidies and guaranteed employment.

The standard neoclassical model – with its focus on market orientation as an essential

to the efficient allocation of resources – ignores the major role which institutions play in

reducing (raising) uncertainty and promoting (impeding) the acquisition of knowledge. Just as efficient institutions can provide an enabling environment which enhances competitive behavior and standard neoclassical analysis is based on the rational maximizing behavior of individuals and firms, with a focus on the functioning of markets to bring about equilibrium where all marginal conditions obtain.

Egypt Income Distribution:

To shed the light on the wealth distribution across the inhabitants in Egypt, we need to understand that the number of poor people in Egypt and the average quality of life of Egyptians depend on how equally or unequally income is distributed across the population. In Brazil and Hungary, for example, per capita income levels are quite comparable, but the incidence of poverty in Brazil is much higher. In Hungary the richest 20% of the population receives about four times more income than the poorest 20%, whereas in Brazil the richest 20% receives 30 times more than the poorest 20%.

Gini Index:

This index measures the degree of inequality in the distribution of family income in a country.

The more nearly equal a country’s income distribution, the lower its Gini index, e.g., a Scandinavian country with an index of 25. The more unequal a country’s income distribution, the higher its Gini index, e.g., a Sub-Saharan country with an index of 50. If income were distributed with perfect equality, the index would be zero while if income were distributed with perfect inequality, the index would be 100.

Egypt is ranked number 90 across the world in income distribution disparity having a Gini index of 34.4 (as of year 2001 statistics). See Appendix-A for complete list. Whereas 20% of the population are below poverty line, the lowest 20% share of the global income/consumption is 10% and the highest 20% is 39% (as of year 2000 figures, see figure below).

An eye on the Income Inequality of Egypt?

We do not have any satisfactory explanation of why income distribution in one country is more or less equal than in another, or what makes distribution move towards or away from equality over time. Behind the development of equality and inequality lie a variety of forces that do not guarantee that this development necessarily continues in the same direction, towards either a greater or smaller degree of equality. At the heart of this combination of forces that shape income distribution lays the key factor of the nature and rate of technological progress. But technology is not the only factor. There is also the nature of power structure, the rate of population growth and the degree of integration with the outside world, the degree of education and availability of information and educatory materials.

If we ignore the terrible eight years that followed the 1967 military defeat, in which nothing seemed to happen neither in terms of GDP growth nor to equity (both largely as a result of the military defeat), the next ten years (1975 – 85) was a period of very high growth rates, rapid increase in inequality but also a significant improvement in the state of the poor. The greater integration with the world (and regional) economy, as a result of Sadat’s Open Door Policy, brought about all the three results, but it must be emphasized that the favorable impact on the standard of living of the poor was the result of a particular, and unusual form of such integration, namely massive migration of Egyptian labor to the oil-rich Arab countries. This time, greater ‘globalization’ seems to be good for the poor, even though inequality also increased.

The following twenty years (1985 – 2004) saw deterioration on all fronts: GDP growth, equity and the state of the poor. The explanation is not hard to find. The degree of integration with the outside world was hardly less than that of the previous ten years, but it was now not as favorable to the poor as it had been during the first ten years of the Open Door Policy. Migration rates declined because of the decline in oil prices and the change of policies of the Arab oil-rich countries, while the structural adjustment policies imposed by the IMF had severe impacts on the life of the poor. Meanwhile increased corruption and the continued monopoly of power by a few at the top, allowed a rapid growth in the gap between income levels which was made even wider by the continued high rate of population growth. During those twenty years, industrialization did not proceed at a sufficiently high rate to prevent a big rise in unemployment.

During the last four years (2004 – 2008) some change seem to have happened, as far as the rate of growth of GDP, largely as a result of even greater integration of Egypt in the world economy (the big rise in private foreign investment, tourism and greater export efforts) but it is very unlikely that this was accompanied by an improvement in equity. In fact, all evidence suggest that the opposite is the case, since there is no improvement in power structure, no decline in corruption, no significant rise in the rate of industrialization and no significant decline in unemployment.

The process of economic growth modifies income distribution depending on the forces behind growth.

Fully general model suggests many exogenous factors may simultaneously affect growth and distribution: technology, international prices, trade protection …

Things that Egypt does not do and hence does not help in minimizing income disparity

Increasing current earnings through growth & employment

Conduct macroeconomic and structural policies so as to increase private sector investment.

Raise poverty-oriented investments for Upper Egypt.

Ensure availability of critical inputs for micro and small business.

Reduce regulatory obstacles to starting, operating and dissolving small businesses.

Support agricultural development.

Increasing future earnings through education

Combat adult illiteracy by using civil society groups more actively and adding a parental education focus to literacy programs.

Enhance access and reduce costs of education for the poor by offering conditional stipends for attendance, etc.

Improve quality of basic and secondary education for the poor, through improving teacher skills, instituting evaluation processes and improving technical skills of both teachers and students.