Sunday, November 19,  2017

Economy

Egypt's Daunting Economy

BY Adeel MalikandTy McCormick

The Brotherhood must rid Egypt of crippling sources of inefficiency if it is to be a serious political contender in the future, and it must not alienate its core constituency if it is to be a political force today. This is an unenviable quandary, to say the least.


It's easy to be distracted by Egypt's super-charged political combat. But the struggle for post-revolutionary Egypt isn't a high-stakes game of political chicken so much as an economic marathon that has no clear finish line. 


Meeting the public's understandably high expectations will require balancing short - and long-term economic goals while simultaneously navigating all manner of vested interests including its own - which have heretofore kept Egypt's economy mired in inefficiency. This is a tall order for an organization whose economic discourse has been notoriously vacuous. What should we expect?

The Muslim Brotherhood has embraced a pragmatic approach, renouncing all controversial measures that might scare away investors. In fact, if there is one unifying mantra in the Brotherhood's discourse, it seems to be "don't worry; we're not going to change anything overnight."


Thus far, the Muslim Brotherhood has embraced a pragmatic approach, renouncing all controversial measures that might scare away investors. In fact, if there is one unifying mantra in the Brotherhood's discourse, it seems to be "don't worry; we're not going to change anything overnight." Indeed, Brotherhood officials have gone to great lengths to guard against fears of nationalization -- promising that no restrictions will be placed on tourism, foreign direct investment, or banking. They have also indicated willingness to sign a deal with the International Monetary Fund (IMF) -- although Bloomberg reports that such a deal may not materialize before 2013.


There is thus little apprehension that the Brotherhood will renounce the prevailing modes of doing business. Ideologically, it has looked to Islamic economics for a middle way between free market ideology and command and control systems. Practically, this has meant accommodating all the eminent objectives of growth, liberalization, and respect for property rights, but softening them with an emphasis on charity and social justice. The bigger question, then, is whether it can translate its rhetoric into actionable items that can bring genuine change to the lives of ordinary Egyptians. It is one thing to advocate for a progressive income tax and a restructuring of subsidies, quite another to implement it. 


Arguably, one of the thorniest issues on the docket is to reduce subsidies on fuel and food, which have historically consumed around 10 percent of gross domestic product (GDP) and more than a quarter of total state expenditures. (Available evidence suggests that 90 percent of Egypt's subsidies are directed at the top 20 percent of the population.) If Egypt is to remain solvent, the incoming government will need to trim such spending -- perhaps moving to more affordable (and progressive) targeted cash-transfers on the Iranian model. But slashing subsidies is more of a political than an economic challenge. Even if there is broad agreement that the restructuring of subsidies is economically desirable, this does not come without political costs. Policy makers face a similar political challenge in strengthening the tax effort, extending it to cover individuals and firms who use political leverage to slip through the tax net. Presently, Egypt raises only 15 percent of GDP through taxes.

The bigger question, then, is whether it can translate its rhetoric into actionable items that can bring genuine change to the lives of ordinary Egyptians. It is one thing to advocate for a progressive income tax and a restructuring of subsidies, quite another to implement it.
Already, it seems, the Brotherhood is balking at implementing some $4.4 billion in fuel subsidy cuts, which were written into this year's budget and passed when legislative authority reverted back to the military. According to the Financial Times, one Brotherhood official has already said the budget must be revisited, calling it "a deliberate" attempt to undermine any Brotherhood-led government. Likewise, Morsi's "100-day" plan, which promised to make low-cost fuel and food widely available, hints at the Brotherhood's unwillingness to change the discourse on subsidies. 


Egypt's massive (and untaxed) informal sector also presents opportunities and risks that could factor into the Brotherhood's long-term political success. According to a recent IMF estimate, Egypt's informal sector accounts for some 35 percent of all entities operating in the economy and employs roughly 40 percent of the labor force. This, as economist Hernando de Soto (who estimated the assets in Egypt's informal sector at $240 billion) has argued, represents a massive impediment to economic development because off-the-books assets can't be leveraged into capital. Such a large informal sector is also a manifestation of an arbitrary and unpredictable economic regime that creates a lopsided playing field for small businesses that are pushed into the informal sector. 


But like potential gains from subsidy cuts, the promise of regulating the informal sector might prove too costly in the short-term for the Brotherhood to capitalize, thereby lowering its long-term political outlook. Little research exists on the precise relationship between Islamist movements and the informal sector, but anecdotal evidence suggests that unregulated economic actors form an important constituency for the Brotherhood. It is, after all, the poor that rely the most heavily on the Brotherhood's myriad charitable operations. Yet political support from this sector is not guaranteed and might easily be withdrawn if the Brotherhood's policies translate into increased taxes and little in return.

According to a recent IMF estimate, Egypt's informal sector accounts for some 35 percent of all entities operating in the economy and employs roughly 40 percent of the labor force. Economist Hernando de Soto estimated the assets in Egypt's informal sector at $240 billion.
These dilemmas underscore the difficulty of the Brotherhood's position. It must rid Egypt of crippling sources of inefficiency if it is to be a serious political contender in the future, and it must not alienate its core constituency if it is to be a political force today. This is an unenviable quandary, to say the least. But part of transitioning from social services organization -- which the Brotherhood has been for much of its 84 years of operation -- into a governing political party requires thinking about long-term policy consequences, something the Brotherhood's ideological and geographic neighbor Hamas has learned the hard way. If Morsi can't get Egypt's state finances in order and kick-start the economy, which grew at paltry 1.8 percent in 2011, his continued reliance on subsidies and appeasement of the informal sector will make him roughly as popular as past governments that have used these as a crutch. That is to say, he will be roughly as popular as Mubarak.


This suggests that Egypt's future will turn less on high level political machinations and more on the nitty-gritty of economic policy. In this, timing will be everything for the Brotherhood. Egypt's iron-fisted rulers have long relied on the discourse of stability: Authoritarianism delivers a predictable environment for economic activity. So when tourism revenue declines, foreign investment dries up, and the investment climate remains marred by uncertainty, this plays to the forces of status quo. Thus, Morsi needs to spend more time focusing on his economic plan. Any delay augurs for the ultimate triumph of the military and other elements of the old regime. 

Adeel Malik is the Globe Fellow in the economies of Muslim societies, lecturer in development economics at the University of Oxford and a research fellow in economics at St. Peter's College, Oxford. His core areas of research are: causes and consequences of economic fluctuations in developing countries, political economy of institutions and development, and the relationship between finance and development.

Ty McCormick is assistant editor at Foreign Policy. He is a former freelance Cairo correspondent.  His writing has been published by Newsweek, The New Republic, Foreign Policy, Huffington Post, Al Jazeera English, NPR, CBS News, the San Francisco Chronicle, the Boston Herald, the Washington Post, and the Cairo Review of Global Affairs, among others. Follow him on Twitter at @TyMcCormick.



READ MORE BY:  Adeel MalikandTy McCormick

 

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