Tag: egypt

El-Sisi the Reformer?

Is Egypt’s economy taking a turn for the better? The government is hosting an economic summit in February next year, aiming to attract foreign investment, with the participation of not just private investors but also of the International Monetary Fund.

[Christine] Lagarde said Egyptian authorities’ “recent reform efforts” were “encouraging” and expressed her hope that participants in the upcoming summit will see how these reforms can “help restore durable economic stability and sustainable growth to Egypt.”

On the surface, it appears that Egypt’s government is making tangible progress addressing the country’s fiscal problem. The planned energy subsidies cuts are under way, although these are also accompanied by tax increases, mainly through a planned introduction of a value-added tax, hikes to tobacco and alcohol taxes and a new tax on capital earnings.

Experience from other countries, most notably from Europe in the aftermath of the global financial crisis, shows that fiscal consolidations that rely on revenue increases lead to worse outcomes than consolidations that consist of permanent reductions to government spending.

But, whatever one thinks about this particular question, there are two additional reasons to be skeptical. First, putting aside the fuel price hikes that have already occurred, much of the praise directed at the Egyptian government presupposes that it will deliver on its promise to slash subsidies by one third in the fiscal year 2014/2015. That would be welcome news but it is worth remembering that similar reform targets were set in the past and were systematically missed:

According to the budget for the past fiscal year, 2013–2014, the subsidies to oil materials were already supposed to be close to EGP100bn ($14bn). Yet, the actual spending was drastically higher, perhaps by as much as an additional EGP70bn ($10bn)

Second, it is deceptive to look at the fiscal question in isolation, as a technocratic problem that can be solved by clever tweaks to existing policies. Egypt’s economic problem is political in nature, and will continue to plague the country as long it is governed by a kleptocratic, unaccountable elite.

The government – more specifically its military forces – own and run a large part of the economy, shielded from competition, and generating rents. The military coup last year led to the strengthening of the opaque network of cronyism that has long characterized military-run enterprises. Some estimates suggest that as much as half of last year’s stimulus, worth around $4bn and funded predominantly by funds from the United Arab Emirates, has been directed at military-controlled enterprises that became involved in road construction and other forms of infrastructure works, displacing the traditional construction companies.

Just as it was a mistake to see Vladimir Putin as a market reformer in the early 2000s, notwithstanding some of the real policy shifts (such as the introduction of a flat tax), it would be a mistake to see President Abdel Fattah el-Sisi as somebody aiming to open Egypt’s economy to competition and raise the living standards of Egyptians through increased economic freedom. If economic reforms occur, they will occur with the narrow goal of strengthening his hold on power and satisfying the material needs of the generals backing him.

In Egypt, as in other countries of the region, economic and political oppression go hand in hand and are mutually reinforcing. Nothing is a bigger threat to a military dictatorship than an economically empowered citizenry. For this reason, we should not expect genuine reforms to be very high on Mr. el-Sisi’s list of priorities.

Coping with the Legacy of Arab Socialism

Countries of the Arab Spring suffer from many economic, social, and political ills. At their center lies the unfortunate legacy of Arab Socialism, which established itself in the region during the 1950s and 1960s. One of its features, besides the ideology of Pan-Arabism and international ‘non-alignment,’ was an emphasis on government ownership and industrial planning. Far from generating prosperity and economic growth, these policies resulted in large, vastly inefficient government-operated sectors in several Arab economies. My new Cato Policy Analysis provides a sense of the magnitude of the problem and of its evolution over time:

In Egypt, for example, the share of government investment fell from around 85 percent in the late 1990s to below 40 percent in 2012. Over the same period of time, the share of government investment in Algeria doubled, from around 30 percent to above 60 percent. Throughout much of the same period, the average for lower-middle-income countries hovered under 30 percent.

Some Arab governments, most prominently Hosni Mubarak’s regime in Egypt, attempted to put in place large-scale privatization programs. However, these were perceived (and rightly so!) as attempts by the political elites and their cronies to simply seize publicly owned assets, without much regard for the future restructuring of the companies and their exposure to competition. My paper reviews the experience of privatization in other countries and tries to provide some practical lessons to policymakers in countries such as Egypt or Algeria.

First and foremost, privatization needs to be perceived as fair and transparent. Bidding should be competitive and open to a large spectrum of potential bidders, domestic and foreign. Second, private ownership of the financial sector is a requisite for successful privatization and restructuring of the rest of the economy–otherwise Arab countries risk creating a dangerous nexus of cronyism through which the state-owned banks and financial institutions would provide funding to newly privatized companies. Third, in order to avoid the danger of simply replacing government-run monopolies with privately-run ones, privatization should be far-reaching and accompanied by broad economic liberalization and opening up both to trade and investment.

Privatization is not very high on the agenda of Arab policymakers or foreign experts, and is typically eclipsed by the more immediate political concerns about the region. It is not, however, an issue that can be simply ignored.

It is a mistake to think that economic reforms can wait until Middle Eastern countries address their internal political and economic problems. There are not many examples of countries that have transitioned successfully to a representative constitutional government while maintaining economic rules that deny opportunity to large segments of the population. State ownership, accompanied by regulations that favor existing state-owned incumbents, are a critical part of the problem facing countries in the MENA region, most notably Egypt, Libya, Algeria, Syria, and Yemen

Can Egypt Cure Its Subsidy Addiction?

Egypt’s government spends more on subsidies of consumer products—most prominently energy and food—than on health and education combined. Subsidies distort markets, lead to waste, and are largely ineffective in helping Egypt’s poor. Therefore, it should be heartening to see the government tackling the problem, as part of its effort to bring down the country’s fiscal deficit.

According to Finance Minister Hany Kadri Dimian, in the new fiscal year 2014–2015, “[T]he allocation for fuel subsidies has been cut from around EGP144bn ($20bn) last year to EGP100bn in the new budget.”

On the surface, that appears to be a bold step, slashing spending on fuel subsidies—which are by far the biggest fraction of the total subsidy bill—by almost a third. But there is a catch. According to the budget for the past fiscal year, 2013–2014, the subsidies to oil materials were already supposed to be close to EGP100bn ($14bn). Yet, the actual spending was drastically higher, perhaps by as much as an additional EGP70bn ($10bn)

And, similarly, in the preceding fiscal year, 2012–2013, the budget for fuel subsidies was to be EGP70bn, in what was seen at the time as an attempt to bring spending under control, especially relative to the previous fiscal year. But again, the actual spending on fuel subsidies during the year was drastically higher. Some of the Finance Ministry’s revised estimates were at EGP100bn, while others claimed the real numbers were even more sizeable.

In short, in recent years the government of Egypt systematically—and quite substantially—underestimated the planned spending on fuel subsidies. One can blame that on many factors, most prominently on the political turmoil, but this track record gives little guarantee that this time will be different.

Although the awareness of the problem, as well as the wider use of smart cards to allocate subsidies, are both encouraging, one needs to keep in mind that the most recent announcement is a far cry from a genuine reform plan. Even if actual spending on subsidies were exactly equal to the amount allocated in the budget, in nominal terms that would only bring Egypt back to the spending levels of fiscal 2011–2012, which were already unsustainable. As I argued in an earlier paper, what Egypt needs is a plan to phase out fuel subsidies altogether and replace them with targeted cash transfers. Alas, such a plan is nowhere in sight.

How Political Repression Breeds Islamic Radicalism

Following the decision upholding numerous death penalties for Muslim Brotherhood members accused of a 2013 attack on a police station, Egypt has recently seen the conclusion of another sham trial, resulting in harsh sentences for three al-Jazeera journalists, accused of aiding terrorists.

While it is obvious that trials like these move Egypt further away from freedom, could they also be inadvertently helping Islamic radicals? My new development bulletin argues that political repression of the kind we are seeing in Egypt creates incentives for Islamists to use violence in order to attain their goals.

Iraq, where ISIS is making continual progress fighting the government of Nouri al-Maliki, is an extreme example of where things can end when political elites exclude a significant part of the population from democratic politics. Al-Maliki’s premiership has been marked by a strengthening of his own hold to power, progressively alienating the country’s Sunni population.

My paper argues that the electoral successes of Islamists in Arab Spring countries have relatively little to do with religion but rather with the organizational characteristics of Islamic political groups, which were typically active in the provision of local public goods and social services. Instead of seeing the rise of Islamic political organizations as a pathology that needs to be countered – possibly through repressive means – we should note that,

[I]n transitional environments, the electoral success of Islamists is a natural result of the political environment, which can be mitigated only by an increase in the credibility of alternative political groups. The electoral advantage enjoyed by Islamic parties can be expected to dissipate over time as competing political groups establish channels of communication, promise verification for their voters, and build reputation over time.

Furthermore,

There is no denying that religion and politics do not always mix well. However, the appropriate answer to the ugly side of religious politics is not political repression of the kind we are seeing in Egypt but rather open, competitive democratic politics.

Egypt’s Shambolic Constitutional Process

Don’t let yourself be fooled by the overwhelming approval of the new Egyptian constitution in the referendum held earlier this week. While, according to preliminary results, the vast majority of roughly 37 percent of Egyptians who showed up at the polls backed the proposal, very little about the document itself or about the process through which it has come about is consistent with the idea of liberal democracy and limited government. Yesterday’s Bloomberg View editorial summarizes all one needs to know about the new constitution:

The armed forces would for at least the next eight years be independent of civilian control, including over their budget, as they were under former President Hosni Mubarak, himself an air force commander. Military courts would remain autonomous and would have jurisdiction over civilians in many instances. The hated police would also get greater independence, while the Supreme Court would be able to decide its size and membership for itself.

Neither should there be any illusions about the events leading to the adoption of the document. The referendum followed months of a deliberate crackdown on the opposition and disbanding of the largest political force in the country – not to speak of the arrests of activists of the ‘no’ campaign.

In short, Egypt seems to be coming full circle to where it was before the events of the Arab Spring, particularly if General Abdel Fattah el-Sisi announces his candidature for the country’s highest office. The question is how long the Egyptians are willing to put up with it.

As a side note, the constitutional process in Tunisia looks much more encouraging, although as Emmanuel Martin and I argue here, the new constitution is unlikely to be a an impetus for the badly needed economic reforms.

Egypt’s Subsidy Nightmare

If you think that Western welfare states are in a pickle, imagine what they would look like if, instead of transferring money, governments tried to help people by giving all of them free or cheap stuff. One does not need to be an economist to see the inefficiency of in-kind transfers, but many countries use redistribution of stuff – typically in the form of commodity subsidies – as the main tool of redistribution and social assistance.

In Egypt, the government subsidizes the prices of fuels and certain food products at artificially low levels. Obviously, the wealthy – who can afford to consume more of the subsidized commodities – are the largest beneficiaries of the subsidy system. In urban areas of Egypt, for example, the top quintile of the income distribution receives eight times as much in energy subsidies as the bottom quintile.

As I argue in a new Cato Policy Analysis published today, commodity subsidies are behind Egypt’s fiscal meltdown – the country is currently running a deficit of 15 percent of GDP, while being kept afloat only by the inflow of funds from the Gulf countries. To avert a looming fiscal catastrophe, Egyptian policymakers need to act now. The paper, which I also summarize here, provides a list of recommendations about how the reform should be approached:

Nothing New on the Egyptian Front?

Four months after the military takeover in Egypt, the country’s economy is still a train wreck. With growth well below government forecasts, the budget deficit in 2013/2014 may get to 15 percent of GDP, bringing Egypt into truly dangerous territory, unless the inflow of aid from the Gulf countries continues indefinitely. And instead of reforms, there are discussions of a new stimulus plan, worth $3.6 billion.

Nor are there many reasons for optimism in the political arena. Mohamed Morsi appeared in court on Monday, charged with inciting violence and murder. If convicted, he can face the death penalty. Unsurprisingly, the trial, alongside with the ongoing crackdown on the Muslim Brotherhood, has fostered further violent protests in Cairo.

However, if instead of following the news, one listened to U.S. officials, one could not avoid the impression that everything is going swimmingly. Today’s Washington Post has a brilliant editorial describing the state of denial in the administration:

Not surprisingly, a Freedom House report released Monday concludes that “there has been virtually no substantive progress toward democracy … since the July 3 coup,” despite the military regime’s supposed “road map.” But that’s not how Secretary of State John F. Kerry sees it. “The road map is being carried out to the best of our perception,” he pronounced during a quick trip to Cairo on Sunday. A liberal constitution and elections? “All of that is, in fact, moving down the road map in the direction that everybody has been hoping for.”

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