The rebirth of Egypt

If macroeconomic indicators are to be believed, Egypt’s economic growth has ground almost to a halt over the past three years.

Inflows of foreign direct investment have dried up, and GDP growth rates have plummeted from as high as 7 per cent in 2008 and 2009 to merely 2 per cent in 2013.

But are the indicators to be believed?

The answer is yes and no. Though GDP should never be taken as an accurate representation of a country’s economic health, in Egypt, the figures do reflect the collapse of the country’s entire productive capacity in the years following the fall of Hosni Mubarak’s regime in 2011.

The major ratings agencies, which previously regarded Egypt as one of the region’s most promising emerging markets, have slashed the country’s credit scores, deterring foreign investors.

Moreover, the anti-Mubarak revolution led to massive capital flight, which has halved the country’s currency reserves.

And the bad news does not stop here. There have already been seven governments since 2011, with social turmoil pushing policy makers into a defensive mode that has stifled any reformist impulse.

With unemployment running at 30-40 per cent, the government faces a disenfranchised and increasingly bitter population.

Meanwhile, crony capitalism fuels income inequality, impedes rural development and erodes the education system.

Worse, however, the past three decades attest to the failure of conventional macroeconomics to guide policy makers in managing development.

A misguided focus on GDP has neglected the costs of natural resource depletion, pollution and other externalities, and the asymmetrical distribution of growth in predetermined economic sectors, all of which have long been associated with emerging economies like Egypt.

Policy makers commonly assume that what cannot be easily measured statistically is either inconsequential or irrelevant.

But applying the static, linear, and closed analyses of conventional macroeconomics to open, non-linear, dynamic, and interconnected systems is bound to yield flawed results.

The British economist E.F. Schumacher argued that human institutions, as complex structures with dynamic governance, require broad systemic analysis.

Likewise, a country’s prosperity can be measured properly only by including elements of moral philosophy and sociology, which fall outside of the boundaries of wealth creation and individual rationality that form the domain of conventional macroeconomic analysis.

When looking through this lens, Egypt’s economy is not as moribund as the country’s GDP and other indicators suggest.

In fact, Egypt is on the right track, undertaking a transition to a resilient economy oriented towards enhanced competitiveness. But, because the relevant changes are not captured or adequately reflected in national-accounts data, perceptions are at odds with the activity that is unfolding beneath the macroeconomic level.

In addition to the injection of $12 billion into replenishing the country’s foreign-currency reserves and enacting new market-oriented policies to encourage competition, President Abdel Fattah Al Sisi’s government has introduced some far-reaching measures. For example, the authorities have built up the micro-financing industry to grant credit to the poor and under-banked population.

Equally important, the government has slashed woefully inefficient energy subsidies and unveiled a new mega-project: widening the Suez Canal to accommodate the ever-increasing amount of traffic.

But perhaps the most dramatic step has been to formalise many parts of the economy. With the informal economy worth an estimated $360 billion, new policies aim to add all of this underground activity to Egypt’s recorded output. 

This project has received wide acclaim from officials, economists, and entrepreneurs, reflecting a widespread belief that boosting growth and competitiveness starts at the grass-roots level.

In short, the outlook for Egypt’s economy is not as gloomy as many believe. With the revolution now over, the world has heard little about how the country is rebuilding itself. As a result, there is a tendency to assume that Egypt has reached an economic impasse.

The reality, however, is that the country is marching, slowly but surely, away from the omnipresent and omnipotent state that has dominated Egyptian economic life for many decades.

The authorities have started to use all of the levers at their disposal to increase competitiveness and unleash the potential of Egypt’s people.

Egypt’s government has the ability to create a favourable and inclusive environment for growth, innovation and entrepreneurial change. 

All it takes is a little more will to challenge large incumbents whose position rarely yields optimal social and economic outcomes. If that will is found, Egyptians may finally gain the prosperity they deserve.

Merit Al Sayed is an economist and strategic projects implementation manager at the Arab African International Bank in Cairo. Mark Esposito is a member of the teaching faculty at Harvard University Extension School, an associate professor of business and economics at Grenoble Graduate School of Business, and a senior associate at the University of Cambridge-CISL. Terence Tse, an associate professor of finance at ESCP Europe, is the head of competitiveness studies at the i7 Institute for Innovation and Competitiveness. ©Project Syndicate, 2014. www.project-syndicate.org