Tag: energy subsidies

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.

Egypt: It’s the Economy, Stupid

As Egypt descends into violence, it is worth remembering that the origins of its current predicament are largely economic. The events of Arab Spring were as much about access to economic opportunity as they were about democratic governance. After all, Mohamed Bouazizi, the Tunisian fruit vendor whose death triggered the mass protests in the region, self-immolated after being constantly harassed, fined, and mistreated by police and local authorities, unable to find other source of employment than selling produce.

In Egypt, the popular support for last week’s military coup is related to the disenchantment with the previous government dominated by the Muslim Brotherhood’s Freedom and Justice Party, which failed to even begin to address the country’s economic problems: unsustainable public finances, rural poverty, and youth unemployment.

In June, the country’s foreign exchange reserves fell by $1.12 billion to $14.92 billion. The outflow is driven by the imports of subsidized commodities, most notably fuels. To avert insolvency, the government will have to put in place a credible reform program that will phase out subsidies – or perhaps replace them with a less wasteful and more targeted social assistance program. Subsidy reforms are tricky, both technically and politically, and the present political environment will make them more, not less, difficult.

The current political uncertainty also adds to a long list of institutional deficiencies that make Egypt a tough place to do business. Many of these can be addressed aggressive reforms expanding economic freedom. Many low- and mid-income countries, including Rwanda, Botswana, Mauritius, or Thailand, have made rapid progress in cutting red tape and scrapping unnecessary regulation, with remarkable economic results. Can Egyptians generals follow their example?

The future of Egypt hinges on whether its new leadership – regardless of whether it is chosen democratically or not – will be able to make rapid and sustainable progress in reducing public debt, restoring the rule of law, and improving the business environment. While one hopes for the best, there are reasons to be wary – not only are the country’s economic problems growing more severe every day, but also the divisive authoritarian politics and the rise of violence are hardly conducive to clear-headed economic reforms.

GOP Conservatives Propose Spending Cuts

Last week the conservative House Republican Study Committee released its Spending Reduction Act of 2011, which would cut federal spending by $2.5 trillion over the next ten years. Sen. Jim DeMint (R-SC) will introduce it in the Senate.

The vast majority of the savings, $2.3 trillion, would come from freezing non-defense discretionary spending at fiscal 2006 levels over the next ten years. The rest would come from cutting the federal civilian workforce, privatizing Fannie Mae and Freddie Mac, repealing the state Medicaid FMAP increase, repealing remaining stimulus funds, and immediately reducing non-security discretionary spending to fiscal 2008 levels.

Of the $2.3 trillion over 10 years that would be saved by freezing nondefense discretionary spending at fiscal 2006 levels, only $330 billion in savings are actually specified, or about $33 billion annually. That’s only about 5 percent of nondefense discretionary spending, and nondefense discretionary spending only accounts for about 17 percent of total federal spending.

The RSC targeted an array of small and silly programs such as $17 million in subsidies for the International Fund for Ireland. They would eliminate mohair subsides saving $1 million, but that’s tiny compared to the needed termination of all farm subsidies. And proposing to eliminate “duplicative education programs” is fine, but the Department of Education doesn’t need house cleaning – it needs to be cleaned out.

The plan does include some good cuts that have been proposed at Downsizing Government:

However, most of the RSC’s savings are generated by a largely amorphous promise to keep domestic spending flat for years to come at 2006 levels. Unfortunately, this evades the needed national conversation on closing down major agencies and departments.

Another disappointment with the RSC plan is that there are no proposed cuts for the Department of Defense. That could be a major political error as more and more conservatives have been coming to the conclusion that it needs to be downsized. And by failing to include the Pentagon, any chance of support by congressional Democrats is killed.