Saturday, October 21,  2017

Economy

Political and Economic Freedom Go Hand in Hand

BY Ahmed Kouchouk

After the political success of the January 25th Revolution, questions began to arise about the extent to which the predominant economic direction of the country is appropriate. This question is being asked because of the country’s inability to realize the ambitions of numerous sectors of Egyptian society - as reflected in a number of economic and social indicators such as high unemployment (particularly among the youth with university degrees), the huge income gap, and the systematic spread of corruption. In light of these negative indicators and the commensurate logical need to question the existing economic strategy and direction of the country - two chief competing economic options face decision makers. They are continuity of “the free market” principles adhered to in previous years and intensified during the government of Dr. Ahmed Nazif; or, the return to the economic system described as “central planning and the dominance of the state over the production process” as practiced in the Nasser era. Supporters of each ideological camp are now trying to influence public opinion regarding the importance of adopting the economic system that they believe in. Each group proclaims their ability to finally realize and deliver the desired results - long awaited for  years or actually decades. To realize this aim, each camp draws on the previous failings (and they are many) that Egyptians lived through during the implementation of both systems, and they do so in a manner that dismisses any recollection of the positive results achieved during either economic era of Egypt. 


It should be pointed out that in this conflict, the pro change (non free-market) camp have a significant advantage as a result of how easy it is to remind citizens of the failures of recent years, in addition to the evidence that has surfaced which implicates and condemns the symbols and figureheads of the present economic system. In the context of this ongoing conflict, citizens stand dreaming of a better future for themselves and their children. However, they remain unable to determine and evaluate clearly and realistically the components of an economic policy that should assure them of a decent life. Therefore, this article aims to clarify some of the economic truths and basis that can serve as a reference to evaluate and determine a better economic direction for Egypt in the near-term. 


The success of a system (economic or otherwise) is measured by the extent to which it realizes its desired objectives in the shortest time while utilizing the least resources. 


Here, it is important to clarify some important economic truths:


1. There is no single economic system that suits all people and all times.
In general, all systems develop in light of actual and accumulated experiences of people with their priorities and peculiarities. Similarly, it should be pointed out that economic systems do not carry absolute sanctity. Thus, they could suit one particular developmental phase or the needs of one period and not another. 


2. There is no magical prescription that guarantees the successful realization of the desired results.
The economy is different than many other domains in the large number of factors contributing to and influencing economic indicators, and the dynamic interactions of these factors.   In the context of multiple variables, the process of forecasting final outputs of the policies in practice becomes very difficult. 


3. The effectiveness of an economic system should not be measured in isolation from its environment.
In particular, the political framework in practice at the time in addition to the social and educational governing policies and directions along with the reigning global economic system undoubtedly affect the national economy. Likewise, the applied implementation mechanisms, the skills of the monitoring parties, and the governing institutional framework all affect the economic results and outcomes of all policies put into practice. 


 

In light of the aforementioned determinants, I find the logical sequence of events forces us to choose an economic system that fits the chief goals of the January 25th Revolution which were echoed by the people in the concentrated chant – “Freedom, Dignity, Social Justice.” This is to ensure that we avoid repeating the previous mistake of implementing an economic system that is not in line with the internal political orientations of the country. The clarity of vision of the political direction in Egypt calls for political freedom in the form of a political system that allows for the handover of power by means of the ballot box, places checks and balances on the separation of powers, and preserves the rights of all citizens in a legal framework. In my view, the proper transition to political freedom must be accompanied by a fitting economic system that guarantees citizens the freedom of work and investment and expenditure while at the same time demanding that they fulfill their work obligations and observe all governing legislative codes. In light of these assumptions, I believe that “the free economic system” remains more fitting for the priorities of the forthcoming period as well as being aligned with the principles of the global economic system. However, the choice is strongly qualified by the need for the formulation and application of a package of policies that guarantee more justice in wealth and income distribution and erecting a system of incentives to promote work, proficiency, and innovation. 

 


The Egyptian experience, along with numerous international examples indicates the need to consider  the marginalized classes that cannot benefit from economic growth in a natural manner due to their lack of basic skills. A most efficient social safety net is required to protect them. The three following points provide the technical reasons and basis upon which I have built my opinion strongly recommending the continuity of “free market” policies while inoculating them with a package of relevant protective social policies.


First: “free market” policies naturally include analytical frameworks that allow for evaluations of the effects of policies and measures that are put into practice. Two competing economic options face decision makers – continuity of free-market principles, or the return to central planning and dominance of the state over the production processThis is an important issue that guarantees the presence of permanent channels of supervision and corrective measures that are known in economic literature as the “invisible hand” of the market. This corrects policies continuously without having to wait for long periods of time which can aggravate and raise the costs of implementing corrective measures. To clarify, allow me to share with you a realistic and recurring scenario: in general the government confronts popular pressures to increase spending - be it to finance projects or to implement policies. This encourages many politicians to adopt expansionist policies which add to their popularity, particularly before elections. Assuming this scenario takes place in the context of the “free market,” leading expenditures to increase beyond sustainable levels (determined based on the capacity of the economy and financial markets) so that the “invisible hand” raises interest rates on government debt instruments (bonds and treasury bills) which ultimately sends a message to the government that its financial policies are not in order and not sustainable. Conversely, the centralized economy allows interest rates to be determined by decree which seems at first glance to be a solution to the problem. However, in reality, it is a postponement of the problem, if not actually contributing to aggravating it. This artificial and arbitrary policy, in the end, factors prominently in state and state-owned-asset bankruptcy and forces drastic and painful reform measures later on.

From this point on, it becomes clear that one of the main advantages of the free market lies in its ability to find a mechanism for market participants to uncover fair prices for goods and services in accordance with the prevailing determinants of supply and demand. It is a transparent and precise mechanism that simplifies the ability for early discovery of economic imbalances and to direct resources in a skilled and fair manner. However, for this system to work well, a framework must be devised that guarantees the availability and speed of the exchange of information for all, in addition to the presence of a commercial environment characterized by its competitiveness and free trade.


Second: the basic and essential idea of “specialization” underpins the modern state and advanced management systems where every individual and institution manages a package of activities that suit their skills and abilities. On the one hand, this allows these activities to be managed by the best possible talents while on the other, it allows for supervision and accountability. Given the difficulty for the state to know the skills and abilities of all individuals, the free market remains more suitable to realizing this aim. Likewise, the mechanisms of the free market as opposed to other systems are more aligned with creating a competitive environment as well as creating true incentives for individuals and institutions - driving them to attain new skills, enabling them to expand their circle of influence in society and their shares of generated profits. Thus, the system constantly encourages innovation and development. However, practical experience has made clear that this economic system does not work well in the absence of proper regulatory frameworks such as complete separation of powers, restricting the intermarriage of money and (political) power, and the rule of law. In the absence of that proper regulatory framework and infrastructure, the system loses one of its main advantages as it replaces the monopoly of the state over economic activity with a comparable monopoly carried out and controlled by giant economic entities owned by a small number of businessmen, leading to the institutionalization of a system characterized by enormous and unjust income and wealth distribution gaps - as is prevalent today in Egypt.

In addition, this flaw leads to a corrupt system that controls the affairs of governance and directs decisions towards its own interest to guarantee the continuity of its influence and its dominance over the sources of wealth. Therefore, free market economic policies must coincide with a true democratic political system that allows for fair competition, encourages innovation, and that links the rewards of production and its benefits with work and development without favoritism. 


Third: the free market system is distinct in clarifying the role of the state and limiting it to specific functions which strengthen the state’s ability to carry out its duties in a proper manner. This also helps ensure accountability of consecutive governments in an efficient manner. In a system that adopts the free market, the role of the state is as follows: policymaking, legislation, monitoring performance, tracking results without interference in management, offering public services that cannot be provided by the private sector such as defense and security, investment in necessary infrastructure, the erection of a social safety net that works to protect those that have low incomes and limited skills and abilities. Thus, this system allows for fair sharing of the financial costs associated with the development process, whereby the state directs resources to carry out the aforementioned tasks and the private sector finances the production cycle and various economic activity in the context of the law and governing legislation.

 

Finally, successful international experiences indicate the importance of the state creating an incentive system to encourage the private sector to carry out its economic role in parallel with its social responsibilities, which guarantees the unity and cohesion of the society and creates a stable environment that in turn allows the private sector to invest in an environment of security and sustainable development. 


In conclusion, my chief motives for advocating the adoption of free market policies are to meet the January 25th Revolution’s clear political demands for the proper organization of the affairs of governance, and the presence of supervisory bodies that work in a qualified and independent manner. It is a direction that in my view fits with the desired political freedom and is able, in the presence of a proper infrastructure and solid economic and social policies, to achieve comprehensive and sustainable development for Egypt. Propelling the country, within a short period of time, to achieve a high economic rank commensurate with the country’s huge resources and capabilities and of the greatest benefit to all its citizens.

 

Ahmed Kouchouk is the Deputy Director and Executive Manager of the Macro-Fiscal Policy Unit at the Egyptian Ministry of Finance



READ MORE BY:  Ahmed Kouchouk

 

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