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Challenges and Performance 1952–2016

Egypt’s policymakers face a number of challenges that are sui generis to the country and others that are generic and appear in most developing countries. Some of these challenges, such as the scarcity of water and the resulting difficulty of enlarging the cultivable land, are imposed by nature; others, such as population growth, result from a combination of nature and human agency; while still others, for example, weaknesses in the country’s international competitiveness or the insufficiency of domestic investment and savings, are the consequence of inappropriate policies.

This chapter provides a bird’s eye review of Egyptian economic performance between 1965 and 2016, with forays to earlier years. It surveys the most critical economic issues that Egypt’s policymakers confronted since 1952 and offers a brief discussion of the politics and economics that went into dealing with them. Of course, political decisions affecting the economy are taken almost every day; the intent in the chapter is not to be encyclopedic or to offer a day-to-day commentary, but to focus on those whose effects were durable. The chapter thus provides an overview and a context for the discussion in the rest of the book. In order to be meaningful, the discussion must describe examples from different periods in Egypt’s experience; thus a degree of overlap between this and chapters 4 through 7 is unavoidable. The issue of population is particularly important, not least because population is both a consumer of the GDP as well as a producer, and is discussed separately in chapter 3.

In assessing economic policies, this book takes as its point of view that the fundamental duty of a government is to improve the life of its citizens and to reduce the country’s vulnerability to external pressure. A key (but of course not the only) element in a better life is a higher income, because it enables persons to obtain greater command over goods and services that help them to live a life that they value. A main responsibility of Egypt’s policymakers, therefore, is to adopt policies that would expand the country’s production of goods and services, that is, its Gross Domestic Product (GDP), while keeping its external debt within manageable bounds. Moreover, in the interests of political harmony, there must be a socially acceptable distribution of this GDP and the incidence of poverty minimized.

Economic Growth

Gross Domestic Product

One cannot make bricks without straw, and one cannot formulate evidence-based policies without accurate, timely, and consistent data. The quip of the Nobel laureate George Stigler, that “the plural of anecdote is data,” may not be entirely applicable, but one must recognize that the quality of economic data in many developing countries, including Egypt, can be variable. Some numbers, such as exports, imports, tax collections, the main categories of public expenditure, public debt, and monetary data are generally reliable. However, some of the most common measures of economic performance, such as the Gross Domestic Product (GDP) in real terms, which measures the value of all goods and services produced by the economy after adjusting for price changes, or the country’s savings and investment, are less robust and have larger margins of error. These figures have to be used, because they are the best that we have and they are continually being improved. However, it is well not to obsess over decimal-point differences in the performance of these indicators from year to year. A short note on the estimates is annexed to this chapter; a more detailed discussion of Egypt’s economic data will be found in Ikram (2006, 108–16).

The GDP growth story is broadly as follows. Between 1947 and 1952, the economy grew rapidly as it recovered from the effects of the Second World War; Hansen and Nashashibi (1975, 11–15 and table 1-1) estimate the growth of real GDP in this period at 5 percent a year. Growth slowed between 1952 and 1955, dropping to about 2 percent a year. After the Suez war of 1956, the government’s emphasis on development aided by expansionary fiscal and monetary policies drove up the growth rate to almost 6 percent a year. These estimates are also in line with Mead (1967, tables I-A-6 and I-A-8), who puts the average growth of the GNP between 1945 and 1963 in constant 1954 prices at about 4.3 percent a year. Thus, Egypt’s economy looks to have expanded at an average rate of between 4 and 4.5 percent a year in real terms between 1945 and 1965, with of course significant year-to-year variations. Pushing the figures back to earlier years requires a number of conjectures. On the basis of some generally plausible assumptions, Hansen and Marzouk (1965, 3, table 1.1) estimate that real GNP per capita in 1914 was about the same as in 1952—roughly LE45 in 1954 prices. The average Egyptian was probably no better off in 1952 than in 1914.

The behavior of the GDP from 1965 to 2016 is shown in figure 2. Measured in constant 2005 prices, the GDP increased from $13 billion in 1965 to more than $140 billion in 2016. The growth rate over this entire period averaged about 4.7 percent a year, but the year-to-year fluctuations were substantial. The coefficient of variation (a measure of the fluctuations in relation to the average) for the five decades as a whole was 57.9 percent.

Decomposition of growth on the supply side shows that it was based primarily on low value-added output consumed internally. The most dynamic sectors in Egypt were nontradables, with the exception of the manufacturing sector. The sectoral composition of growth also indicates that modern technology was not incorporated in significant amounts, except perhaps in some manufactures. Data on the allocation of investment by sector are patchy, but the high growth in construction suggests that this sector may have been the beneficiary of significant amounts of such funds. The World Bank (2001a, 11) also suggested that the country’s investment went predominantly into new buildings rather than retooling or investment in plant and machinery. See also Mohammed (2001) and World Bank (2014a).

Figure 2. GDP and growth rate, 1965–2016; $ million in 2005 prices and percent

Figure 3. Growth rates of GDP per capita in 2005$, 1965–2016, percent

Per Capita Income

Developments in income per head are affected by both the growth of the GDP and that of population. Hansen and Nashashibi (1975, 14) estimate that between 1947 and 1952 GDP per capita may have increased by about 3 percent a year. From 1950 to 1956, per capita income probably fell slightly, while from 1957 to 1964 it increased at 3.0–3.5 percent a year.

GDP per head in constant 2005 prices increased from $406 in 1965 to about $1,630 in 2016. This series takes into account changes both in prices and in the population, and its growth rate should show greater fluctuation than that of the GDP. Indeed, in certain years—such as 1966, 1967, 1973, and 1991—real per capita income fell, creating negative growth rates (that is, rates of decline). For the period as a whole, the coefficient of variation was 97.6 percent, much higher than that for the GDP growth series. Figure 3 shows the growth rates for per capita GDP between 1965 and 2016 as averages for five-year periods.

Structural Changes

Growth in the GDP was accompanied by changes in its structure, a natural result of the sectors’ growing at different rates over the fifty-year period. The biggest change between 1965 and 2016 was a halving in the share of agriculture from 29 percent of the total to 15 percent, and a corresponding increase in the share of industry from 27 percent to 39 percent. A substantial part of the increase represented the emergence and growth of the petroleum sector. The share of the services sectors fluctuated a little between 45 percent at the start of the period and up to 52 percent in some years, but by 2016 had more or less returned to its share in 1965. See figure 4.

Figure 4. Structure of GDP, 1965 and 2016, percent

Investment and Savings

Economic growth is driven by a combination of investment, financed mainly by domestic savings, and improvements in productivity. Between 1947 and 1957 gross fixed investment remained low, accounting for only 12–13 percent of GDP, and from 1957 to 1964 it increased to about 19 percent. Starting in 1964, the cutbacks in demand required to curb inflation and improve the balance of payments substantially decreased the share of investment in the GDP, while the June 1967 war intensified this fall. At the end of the 1960s, the share of investment in GDP was almost as low as in 1947 (Hansen and Nashashibi 1975, 14–15).

For about two-thirds of the period between 1965 and 2016, the investment rate remained below 20 percent of GDP; see figure 5. This rate was much below that sustained for periods of three or more decades by fast-growing countries in Asia. Thus, to put matters in perspective, South Korea, Taiwan, Malaysia, Singapore, and Hong Kong maintained investment rates of around 35 percent of GDP during their decades of rapid growth, while the rate for China was frequently in the 40–45 percent range. The discussion in the introduction showed that improvements in total factor productivity, representing the efficiency with which factors of production are combined, played a minor role in the growth of Egypt’s GDP. The insufficiency of the quantity of Egypt’s investment was not compensated for by improvements in its productivity.

Figure 5. Investment and savings, 1965–2016, percent of GDP

The financing of investment raised its own problems for policymakers, as Egypt’s domestic savings consistently fell short, frequently by a large margin, of the investment rate. Over the fifty-year period as a whole, the average ratio of investment to GDP was 20.2 percent, while the domestic savings rate averaged 13.5 percent. This savings ratio might make the picture look a little worse than it probably was. Largely because of remittances from expatriate Egyptians, the country’s national savings are higher than its domestic savings.¹ However, there still remained a large gap between total savings and investment. Moreover, national savings, that is, savings generated by Egyptian nationals working outside the country, are vulnerable to political interference (including the expulsion of Egyptian workers) by the host country. This has happened on more than one occasion: for example, after President Sadat’s trip to Israel; during the mid-1980s when oil prices fell and development programs in the major oil-producing states slowed; during the two Gulf wars; during Egypt’s conflict with Libya in 1977; and during the political unrest in Iraq and Libya following the collapse of the “Arab Spring.”

The shortfall was financed through inflows of foreign aid or by commercial borrowing from abroad. The borrowing obviously added to Egypt’s external indebtedness, as did the amount of foreign aid that was not provided as a grant. The failure to mobilize sufficient domestic savings meant that Egypt’s economic growth remained critically dependent upon the willingness of foreign institutions and countries to provide resources, while the buildup of external debt preempted an increasing amount of the country’s foreign-exchange earnings to service this debt and was thus not available to pay for essential imports. Figure 5 illustrates the behavior of investment and savings from 1965 to 2016 as a percent of GDP.

Population, Labor Force, and Unemployment

Population and Labor Force

Egypt’s population increased from about 26 million in 1960 to 90 million in 2016. The growth rate of the population of course fluctuated from year to year; the average over the period as a whole works out to about 2.3 percent a year. The labor force is estimated to have increased from 7.8 million in 1960 to 30.8 million in 2016. The bulk of the labor force is male; roughly 75 percent of males between the ages of 15 and 64 participate in the labor force, compared with only 23 percent of women. Issues relating to Egypt’s population are elaborated in chapter 3.

Unemployment

Figure 6 shows the unemployment rate for selected years from 1960 through 2017. Although the data are continually being improved, and the analyses of employment deepened (in which the work of Samir Radwan, Ragui Assaad, Caroline Krafft, and Nader Fergany figures importantly) the reliability of the figures for the earliest years may be suspect, and the IFIs tend to use data chiefly from the 1990s.

Figure 6. Unemployment, 1960–2016, (percent of labor force), selected years

Sources: 1960–2000 (except 1982) Ikram (2006, table 4.3 and sources cited there [with 1976 corrected]); 1982 from Ministry of Planning; and 2005–2016 from the IMF/World Bank database.