Thursday, September 4, 2014

Can the poor survive economic reform?

Political change comes with a cost. The economic and social burdens that follow are usually not shared equally. Particular groups may incur a relatively higher burden than the rest of the society. Egypt is an interesting case to consider in this regard.
The decade before the 25 January Revolution saw major policy changes directed towards creating a more open and competitive market. The aim was to attract more foreign direct investment (FDI), which has always been seen as the main route for economic growth.
The decade saw relatively high rates of economic growth, which averaged around five per cent, and even exceeded seven per cent, just before the financial crisis in 2008. But economic growth is only one side of the story. The fruits of this growth were not necessarily shared fairly across the society, in a way that could create economic and social sustainability, as well as political sustainability.
As a result, despite the impressive economic growth of the last decade, people went out into the streets in 2011 to demand bread and social justice, reflecting the economic challenges faced by a significant portion of society. For a comprehensive picture of overall economic performance, one cannot look at the GDP growth rate alone but must include other indicators as well.
The first indicator is the unemployment rate, which measures the percentage of people unemployed within the labour force. This showed slight progress across the last decade, dropping from around 11 per cent in 2000 to around nine per cent in 2010. This was seen as a positive sign, though more had been hoped for in this regard.
The second indicator is the inflation rate, which measures the increase in prices of main goods and services in the market. This averaged around seven per cent across the decade but reached 18 per cent in the wake of the global financial crisis in 2008. Such a high inflation rate affected people’s purchasing power and their real standards of living, with the result that though their nominal income might be increasing, in reality people were getting poorer.
The third indicator is the poverty rate, which measures the percentage of people living below the poverty line. This saw a significant increase, from around 16 per cent in 2000 to around 22 per cent in 2010, which in itself should have been a major source of alarm about the deteriorating economic and social situation of an increasingly large portion of society.
While the 25 January Revolution was an attempt to rectify this unsustainable situation, it marked the beginning of a turbulent political phase that has aggravated the economic situation of underprivileged groups.
Looking at the same set of indicators, one finds that the unemployment rate exceeded 13 per cent earlier this year. This was the result of the slow economic growth that has stagnated at two per cent since the revolution. The poverty rate exceeded 26 per cent in the middle of last year, while the inflation rate, which has remained around 10 per cent since the revolution, has also started to show large increases, based on official monthly data, as a result of higher energy prices.
Such deterioration clearly shows how bad the situation has become for the poor in Egypt. And despite the high hopes of early 2011, the last few years have made it harder for the poor to lead a decent life. This has been aggravated by the government’s adoption of an austerity programme to cut energy subsidies and decrease investment. The government wants to get the budget deficit down to an acceptable level. If the deficit and local debt are brought under control, Egypt will be eligible to receive financing from international institutions.
But government austerity can lead to stagflation, or stagnation plus inflation. If we add to this the debatable move of the Central Bank of Egypt (CBE) to raise interest rates to control inflation, one may draw the conclusion that economic stagnation is inevitable in the short and medium terms. Given the expected future waves of austerity to get the mounting budget deficit under control, stagnation may also stay on the agenda over the long term.
Moreover, despite high hopes of Gulf support, it is becoming clearer by the day that this will mainly take the form of FDI. This will certainly be important, but it will probably be less than what was expected and will be dispersed over a longer period of time than is needed to get the economy out of stagnation in the short term.
Looking at the CBE’s move, many believe that this will also not be effective in curbing inflation, given that this results from higher energy prices and not from increased demand in the economy. As a result, commentators believe that higher interest rates will have only a slight impact on managing inflation, especially given the expected further devaluation of the Egyptian pound as Gulf financial support slows down.
Thus, the larger picture of the economy shows a state of stagflation where one can expect economic growth to stay low, close to two per cent as over the last few years, with the unemployment rate going steadily upwards to reach some 15 per cent in a couple of years. The poverty rate is likely to increase beyond the current levels and may reach the 30 per cent mark by the end of the decade, with inflation continuing to rise and probably settling around 15 to 20 per cent.
What matters now is to work to prevent the situation from getting worse. As for solutions, they are numerous and need to be considered. The government needs to direct a bigger part of the budget, especially from the savings on energy subsidies, to the poor. They can do this by increasing social spending and increasing the coverage and amounts of direct monetary support programmes. Improving healthcare services to the underprivileged and increasing the content and coverage of the food subsidy programme are important areas as well.
Another aspect that needs to be tackled is the role of NGOs, which have been playing a major role in the past decade but have been targeted since the 30 June Revolution. The work of NGOs should not be discounted, especially since they could help to cover gaps in the porous social safety net.
The bottom line is that poorer groups in Egypt have suffered over the last decade, despite the high economic growth. In addition, the political turbulence of the last three years has made the situation for these groups worse. As a result of the current wave of economic reform, the challenges facing the poor may become intolerable. Becoming more aware of this situation and its potential implications for society is a priority that shouldn't be ignored by those in power.
As much as reform is needed in Egypt, it is important to focus on curbing its effects on the poor. National policy should be working towards creating a more homogeneous and fairer society, one where the rich can earn large incomes and the poor can earn a decent living.
Omar El-Shenety
This Article was published on "Al-Ahram weekly"

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