Egypt’s Revolution: The Road to Economic Reform
Why Not Magazine Interview with Dr. Fatma El-Hamidi – March 1, 2011
After 18 days of mighty endurance, the Egyptian people were able to bring down their old regime in the hopes of a better future. Why Not Magazine had an interview with Dr. Fatma El-Hamidi who enlightened us with her proposed solutions for a successful economic reform which can secure a good standard of living for the Egyptian people.
Dr. Fatma El-Hamidi, Ph.D. teaches courses at the Graduate School of Public and International Affairs (GSPIA), and the Department of Economics, at the University of Pittsburgh, Pennsylvania. She received her graduate studies from The University of Pittsburgh, Pennsylvania in 1996, and her undergraduate degree from Cairo University in 1984. Fatma El-Hamidi's research has been published in academic journals. Her research interests include Middle East economies and Egypt’s, among other research interests. She is a member of several economic associations in and out of the United States.
Q1) Can you introduce us to the main economic problems that have plagued Egypt over the past years?
There are many problems in Egypt, economic and otherwise, that have been accumulating over the last 30 years. Poverty and unemployment are two key urgent concerns. Regional development is uneven and intermittent in Egypt, with rural areas (particularly upper rural) having fared fewer economic growth opportunities than Lower Egypt. There are serious attempts now to reverse this trend.
There exists a large government and public sector employment by international standards, even though it has been declining in recent years, (in fact, the share of government employment actually increased from 22 to 26% in the last five years).
The private sector is still incapable of shouldering development strategies and its anemic growth is not helping the masses of laid off workers from public and state owned enterprises nor the ever growing fresh entrants in the labor market. Most of jobs created in the last five years are in sectors characterized by low productivity. Statistics show that while the share of employment in the agriculture sector dropped from 40% in 1990 to 30% in 2003, the comparable share in manufacturing also dropped from 14% to 11% during the same period. Conversely, employment share in services sector rose from 22% to 27%, with trade and tourism alone experiencing the largest increase from 9% to 13% during the same period.
A bulky informal sector is acting as both a shock absorber and a lifeline for low educated, low-wage workers. Some estimates put the contribution of the informal sector to one third of the GDP, while employing over half of the private sector workforce (~ 7-8 million workers).
The issue of subsidy has important economic and social ramifications: on the one side, terminating or reducing food subsidy programs have high social and political costs, on the other side, international financial institutions do not permit the government to keep the status quo for its enormous strain and heavy cost on the state’s budget.
A high illiteracy rate ranges between 26-30%. An alarming dropout rates from basic education, coupled with a rising number of working children between the ages 6-14 where conservative estimates put their number at 3 million.
These are immediate concerns. The new government ought to heavily invest in finding long term solutions. We should not ignore other crucial problems such as: exports that are highly dependent on natural and energy related resources; large FDI but limited to communications fields or low employment content, as well as high inflation; large public debt; and of course rampant corruption.
Q2) To your knowledge, what is the current rate of unemployment, and poverty in Egypt?
Unemployment and poverty are two impediments to any growth strategy. In Egypt, overall unemployment rate has been declining in the last five years which currently stands at the 10% range. This decline may not be good news. The reason is that the frustrated and disappointed unemployed may have decided to drop out of the labor force (women are more likely to do that) or go back to school. In both cases they are not counted as part of the labor force and therefore the reported is less than the actual unemployed.
Of all unemployed workforce in Egypt, 92% are below the age of 30.Therefore, in discussing unemployment, the central issue is youth unemployment (ages 15-29). Youth unemployment rates reached 23% in 2009. The majority of unemployed youth are females in their 20s, representing 36% of the unemployed. Several studies have shown that young females are four times as likely to be unemployed as their male counterparts.
Youth unemployment in Egypt is not necessarily associated with poverty. The majority of young and educated unemployed can afford a long time job search thanks in part to the social living arrangement that dictates living with the family until reaching adulthood stage that culminates with marriage. The poor on the other hand, is expected to start working as soon as possible to help the family, and thus don’t have the luxury of long term search for employment and may resort to working on the margin in the informal sector at low wages.
Turning to poverty, poverty is widespread in Egypt. A large chunk of the population can afford very little beyond their basic needs. Estimates range between one third to one half of the population living below the international poverty line of $2 a day, with a little over half of them working in the agriculture sector. Extreme poverty, at international poverty line of $1 has risen from 17% in 2000 to 20% in 2005. Inflation, especially food prices, resulting from devaluation of the currency is the main suspect.
Q3) In your opinion, what are some of the major faulty economic policies that should not have been pursued in Egypt?
This is not how I’d look at it. It’s more important to ask: given these problems, what can we do?
Q4) What strategies and solutions do you propose to solve the priority economic problems in Egypt and strengthen the economy?
It’s a fact that the Egyptian population is forecasted to rise by 2% a year in the next 5 years. It’s also a fact that more than 50% of the population is under 24 years of age - a number large enough to strain any budget from education to health to job opportunities. Previous reform efforts have focused on macroeconomic and monetary/financial issues with little or no attention
to social matters: unemployment, poverty, illiteracy, and regional disparities. This lack of tuning to the individual needs left the citizen distrustful and skeptical of these reform efforts.
The new reform strategies should involve all relevant stakeholders in a comprehensive development dialogue.
Education, especially literacy education, should be on the forefront of the agenda. It’s inconceivable to talk about development in a country where almost one third of the population is illiterate, where 2/3 of them are women.
There are 650,000 new job seekers each year in addition to a large backlog of unemployed. Rates of growth of 6-8% are required to reduce the number of jobless. Adopting labor intensive development projects such as infrastructure, and social projects as education and have the potential of stimulating domestic demand, curbing unemployment and eventually reducing poverty.
There is a need to emphasize vocational education and other skill building training. The private sector must be given incentives as well as assume some responsibility to train and absorb new entrants into the labor market. Active labor market policies such as employment offices, career counseling, and training centers to match demand with available supply are needed.
One of the pressing issues in this regard is to shift from the practice of “certificate pricing” where wages are determined in the government and public sectors by governmental decrees, to an effort-based and job evaluation practices. This system of wage determination is likely to restore equilibrium to the average wage level in the labor market, eliminate any distortions from the public sector, and ultimately reduce the long queue on public sector jobs. A key safety net is setting and enforcing a realistic minimum wage that protects low end workers from exploitation and guarantees meeting basic needs of living.
We should also not ignore the lost revenues from taxes on informal sector businesses. Reducing high cost of formalities, as well as granting low taxes in the first 3-5 years may be required. Microcredits are important policies in a country like Egypt. They have two main objectives: reducing unemployment and lifting people from poverty.
It is essential that Egypt grows consistently over a long period, intermittent and inconsistent growth sends the wrong signal to investors.
Finally, a healthy business environment conducive to promoting the new market-led economy ranging from eliminating incompetent bureaucracy and useless expenditures to developing effective laws and enforcing processes in a transparent way is required.
Q5) Egypt is a popular destination for millions of tourists from around the world who love and admire the country. Do you believe that Egypt will be able to receive tourists immediately after the current occurrences and incidents?
What happened in Egypt recently is not just a series of occurrences or incidents it is a revolution in every respect of the word, a revolution that is probably a turning point in modern history because of its civility and peaceful cry for freedom. But, turning to your question, absolutely, I have no doubt about it. Once the tide calms down, tourists WILL go back and enjoy what Egypt has to offer to everyone.
Dr. Fatma El-Hamidi, Ph.D. teaches courses at the Graduate School of Public and International Affairs (GSPIA), and the Department of Economics, at the University of Pittsburgh, Pennsylvania. She received her graduate studies from The University of Pittsburgh, Pennsylvania in 1996, and her undergraduate degree from Cairo University in 1984. Fatma El-Hamidi's research has been published in academic journals. Her research interests include Middle East economies and Egypt’s, among other research interests. She is a member of several economic associations in and out of the United States.
Q1) Can you introduce us to the main economic problems that have plagued Egypt over the past years?
There are many problems in Egypt, economic and otherwise, that have been accumulating over the last 30 years. Poverty and unemployment are two key urgent concerns. Regional development is uneven and intermittent in Egypt, with rural areas (particularly upper rural) having fared fewer economic growth opportunities than Lower Egypt. There are serious attempts now to reverse this trend.
There exists a large government and public sector employment by international standards, even though it has been declining in recent years, (in fact, the share of government employment actually increased from 22 to 26% in the last five years).
The private sector is still incapable of shouldering development strategies and its anemic growth is not helping the masses of laid off workers from public and state owned enterprises nor the ever growing fresh entrants in the labor market. Most of jobs created in the last five years are in sectors characterized by low productivity. Statistics show that while the share of employment in the agriculture sector dropped from 40% in 1990 to 30% in 2003, the comparable share in manufacturing also dropped from 14% to 11% during the same period. Conversely, employment share in services sector rose from 22% to 27%, with trade and tourism alone experiencing the largest increase from 9% to 13% during the same period.
A bulky informal sector is acting as both a shock absorber and a lifeline for low educated, low-wage workers. Some estimates put the contribution of the informal sector to one third of the GDP, while employing over half of the private sector workforce (~ 7-8 million workers).
The issue of subsidy has important economic and social ramifications: on the one side, terminating or reducing food subsidy programs have high social and political costs, on the other side, international financial institutions do not permit the government to keep the status quo for its enormous strain and heavy cost on the state’s budget.
A high illiteracy rate ranges between 26-30%. An alarming dropout rates from basic education, coupled with a rising number of working children between the ages 6-14 where conservative estimates put their number at 3 million.
These are immediate concerns. The new government ought to heavily invest in finding long term solutions. We should not ignore other crucial problems such as: exports that are highly dependent on natural and energy related resources; large FDI but limited to communications fields or low employment content, as well as high inflation; large public debt; and of course rampant corruption.
Q2) To your knowledge, what is the current rate of unemployment, and poverty in Egypt?
Unemployment and poverty are two impediments to any growth strategy. In Egypt, overall unemployment rate has been declining in the last five years which currently stands at the 10% range. This decline may not be good news. The reason is that the frustrated and disappointed unemployed may have decided to drop out of the labor force (women are more likely to do that) or go back to school. In both cases they are not counted as part of the labor force and therefore the reported is less than the actual unemployed.
Of all unemployed workforce in Egypt, 92% are below the age of 30.Therefore, in discussing unemployment, the central issue is youth unemployment (ages 15-29). Youth unemployment rates reached 23% in 2009. The majority of unemployed youth are females in their 20s, representing 36% of the unemployed. Several studies have shown that young females are four times as likely to be unemployed as their male counterparts.
Youth unemployment in Egypt is not necessarily associated with poverty. The majority of young and educated unemployed can afford a long time job search thanks in part to the social living arrangement that dictates living with the family until reaching adulthood stage that culminates with marriage. The poor on the other hand, is expected to start working as soon as possible to help the family, and thus don’t have the luxury of long term search for employment and may resort to working on the margin in the informal sector at low wages.
Turning to poverty, poverty is widespread in Egypt. A large chunk of the population can afford very little beyond their basic needs. Estimates range between one third to one half of the population living below the international poverty line of $2 a day, with a little over half of them working in the agriculture sector. Extreme poverty, at international poverty line of $1 has risen from 17% in 2000 to 20% in 2005. Inflation, especially food prices, resulting from devaluation of the currency is the main suspect.
Q3) In your opinion, what are some of the major faulty economic policies that should not have been pursued in Egypt?
This is not how I’d look at it. It’s more important to ask: given these problems, what can we do?
Q4) What strategies and solutions do you propose to solve the priority economic problems in Egypt and strengthen the economy?
It’s a fact that the Egyptian population is forecasted to rise by 2% a year in the next 5 years. It’s also a fact that more than 50% of the population is under 24 years of age - a number large enough to strain any budget from education to health to job opportunities. Previous reform efforts have focused on macroeconomic and monetary/financial issues with little or no attention
to social matters: unemployment, poverty, illiteracy, and regional disparities. This lack of tuning to the individual needs left the citizen distrustful and skeptical of these reform efforts.
The new reform strategies should involve all relevant stakeholders in a comprehensive development dialogue.
Education, especially literacy education, should be on the forefront of the agenda. It’s inconceivable to talk about development in a country where almost one third of the population is illiterate, where 2/3 of them are women.
There are 650,000 new job seekers each year in addition to a large backlog of unemployed. Rates of growth of 6-8% are required to reduce the number of jobless. Adopting labor intensive development projects such as infrastructure, and social projects as education and have the potential of stimulating domestic demand, curbing unemployment and eventually reducing poverty.
There is a need to emphasize vocational education and other skill building training. The private sector must be given incentives as well as assume some responsibility to train and absorb new entrants into the labor market. Active labor market policies such as employment offices, career counseling, and training centers to match demand with available supply are needed.
One of the pressing issues in this regard is to shift from the practice of “certificate pricing” where wages are determined in the government and public sectors by governmental decrees, to an effort-based and job evaluation practices. This system of wage determination is likely to restore equilibrium to the average wage level in the labor market, eliminate any distortions from the public sector, and ultimately reduce the long queue on public sector jobs. A key safety net is setting and enforcing a realistic minimum wage that protects low end workers from exploitation and guarantees meeting basic needs of living.
We should also not ignore the lost revenues from taxes on informal sector businesses. Reducing high cost of formalities, as well as granting low taxes in the first 3-5 years may be required. Microcredits are important policies in a country like Egypt. They have two main objectives: reducing unemployment and lifting people from poverty.
It is essential that Egypt grows consistently over a long period, intermittent and inconsistent growth sends the wrong signal to investors.
Finally, a healthy business environment conducive to promoting the new market-led economy ranging from eliminating incompetent bureaucracy and useless expenditures to developing effective laws and enforcing processes in a transparent way is required.
Q5) Egypt is a popular destination for millions of tourists from around the world who love and admire the country. Do you believe that Egypt will be able to receive tourists immediately after the current occurrences and incidents?
What happened in Egypt recently is not just a series of occurrences or incidents it is a revolution in every respect of the word, a revolution that is probably a turning point in modern history because of its civility and peaceful cry for freedom. But, turning to your question, absolutely, I have no doubt about it. Once the tide calms down, tourists WILL go back and enjoy what Egypt has to offer to everyone.