Egypt’s heartless economic growth

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 By Osama Diab

Economic growth in Egypt has mainly benefited the well-off, with many of the poor falling off the tightrope of the poverty line.

18 October 2010

Two and a half years ago, a usually hectic Cairo became quiet and empty. It was the afternoon on a working day, when streets are normally congested with endless queues of cars. Government officials blamed the lull in activity on a sandstorm. But it wasn’t sand that kept people at home – it was a storm of anger, sparked by textile workers in the Nile Delta city of Mahalla.

On 6 April 2008, Mahalla carved out its name as a centre of labour resistance. A hundred kilometres away, much of Cairo went on a general strike in solidarity with Mahalla’s textile workers. Many across the nation also went on strike at home or protested in solidarity with them. And many have continued to commemorate the date of 6 April in the years following by staging demonstrations. There is also a prominent opposition youth movement named after the 6 April events.

While the city of Mahalla was literally set on fire due to clashes between the police and the public, government officials in Cairo were busy concentrating on their goals of achieving high economic growth rates and attracting foreign investment. The Egyptian cabinet prides itself on recent signs of economic wealth. Egypt’s economy (nominal GDP) has tripled in less than 10 years, from LE373.6 billion in 2001 to LE1,008 billion in 2009. All economic performance indicators have been positive, especially since the appointment of Prime Minister Ahmed Nazif’s cabinet (aka the ‘businessmen cabinet’) in 2004. 

Investment has also been flooding into the country in large amounts, making Egypt a major destination for foreign direct investment (FDI) in the Middle East and Africa. In 2001, Egypt received US$500 million in FDI, which increased 24-fold to US$12 billion in 2007, according to the World Investment Report.

It wasn’t long before the new money became visible. North Coast resorts, Italian designer shops, international high-end cuisine from all over the world, and mansions and luxury compounds springing up in New Cairo and 6 October City are all signs of this newfound wealth. Ahmed Ezz, businessman and National Democratic Party secretary-general for organisational affairs, famously argued that the increasing sales of luxury cars are living proof that Egypt is much more prosperous now than before. But, more accurately, these increased sales are living proof that the 1% of Egyptians who can now afford luxury cars are more prosperous.

No one can deny the rapid expansion of Egypt’s economy in the past decade. Egypt saw high growth rates of 7% for three consecutive years prior to the global economic downturn. The government is proud, but is the average Egyptian also proud?

Not really, because it was only when Egypt was witnessing this impressive yet questionable growth that labour strikes spread like wildfire. Social tension, if not social unrest, is on the rise, and political stability is at stake. 

Despite significant growth and the flow of large amounts of cash, many Egyptians still struggle to put food on the table. Labour strikes have been increasing in number as a new way of demanding change. It is obvious to any observer that something has gone wrong: the new money was not enough to stabilise the country socially and politically. On the contrary, an increase in negative social and political vibes have coincided with positive growth, an irony many experts and analysts are trying to grasp.

“We want to reach the poverty line”

Hundreds of strikes have been calling for the settlement of overdue payments or an increase in extremely low wages. A climax was reached on labour day this May when Egypt’s workers collectively demanded a minimum wage of LE1,200. Their slogan was “We want to reach the poverty line.”

With all the ostentatious signs of wealth and prosperity surrounding Egypt’s poverty-stricken, and with high inflation triggered by rapid economic growth, LE1,200 seems to be only just adequate for workers to survive. But the government does not agree.

It seems that Egypt’s government suffers from its businessman mindset. It is happy that the country is making profit, but fails to recognise there are other aspects to a country that need to be addressed: a nation is not just an enterprise.

The missing link in Egypt’s development formula is the social and political dimension neglected by the Nazif cabinet . The cabinet runs the country in the same way its members run the companies they own, where the only goal is to make profits on the balance sheet at the end of the year.

They also see a booming economy in the circles of the other businessman they are surrounded by, and it can be observed, from their statements – such as Ahmed Ezz’s pronouncement on luxury car purchases – how isolated they are from reality.

Trickle-down should not be left to nature

The government has been promising Egyptians that trickle-down will eventually happen and that citizens must wait and be patient before they can reap the harvest of economic growth, when the wealth trickles down to all layers of society.

We have been patient, but everything seems to be going in the opposite direction. According to the Human Development Report of 2010, Egypt ranks 123 out of 182 when it comes to income equality, with the richest 10% controlling 27.6% of Egypt’s wealth. Egypt ranked 111 out of 177 in the 2006 report.

According to Ahmed el-Sayed el-Naggar, economist and editor-in-chief of the al-Ahram Centre for Political and Strategic Studies’ annual economic report, there are two things that are vital if the whole of society is going to benefit from economic growth and if income is to be distributed more equally: taxes and wages.

One of the main objectives of taxation is redistributing wealth. In most tax systems, the more you make , the greater the percentage the government charges you in order to carry out its infrastructure projects and offer social services, such as pensions, healthcare, and so on.

In Egypt, there are only three tax brackets, with the highest starting at LE40,000 a year (LE3,333 a month). In other words, citizens making LE40,000 a year are positioned in the same bracket as those who make hundreds of millions. According to el-Naggar, the fewer tax brackets there are, the less efficient and the more unequal the system is. Imposing higher rates on upper-bracket income is a conventional and well-known way to redistribute wealth, he says.

Let’s compare the tax system in Egypt with that of other countries. In the United States, the bastion of capitalism, the highest income tax band is 35%, while it reaches 52% in some European countries, such as the Netherlands. In Egypt, Law 91/2005 reduced the highest income tax band from 42% to just 20%, as part of the government?s tax reform plan.

el-Naggar believes the current wage system in Egypt is one of the worst in the world. “It forces people to take bribes and steal, because it’s impossible to live off that income,” he says.

According to el-Naggar, the minimum wage in the government for a university graduate is LE108, which is only enough to buy 2.5kg of meat. In contrast, in 1979, the minimum wage for graduates was LE28, which was worth 35kg of meat. “So even if we have growth, the upper class is in total control of the newly obtained wealth,” says el-Naggar.

“The growth was more in the financial economy than the real productive economy,” explains el-Naggar. “The other thing is that growth is not real unless accompanied by social policies that improve the distribution of wealth through having a fair wage system, a fair taxation system, and a fair subsidy system.”

 This article was first published in the al-Borsa newspaper on 26 September 2010. Republished here with the author’s permission. ©Osama Diab.

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Tips for survival

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By Osama Diab

For many Egyptians, tip-based and street jobs are their only means of  survival.

21 October 2009

For 12 hours a day, seven days a week, Mohamed Ahmed sits in the bathroom of a Giza shisha bar handing out napkins to patrons. The job pays the teenager about LE900 a month, all of which comes from tips. It’s just enough to support his mother and four siblings. “I don’t like what I do, but I can’t find a job with a salary that pays even half what I make here,” says Ahmed.

Ahmed wasn’t always a bathroom attendant; he used to work in a brokerage office running errands, fixing drinks and cleaning. The job came with perks, like weekends, but he couldn’t feed his family on the LE250 monthly salary.

So he became one of a growing number of Egyptians forsaking the formal sector for better-paying, tip-based jobs, such as bathroom attendants and parking helpers.

While there are no reliable figures on the subject, experts say the numbers appear to be going up. Many blame the exodus on what they call the woefully outdated wage laws that govern Egypt’s formal economy (companies that pay taxes and register their workers in one way or another). Unchanged since 1984, the country’s minimum wage is LE35 a month, a number that has been made irrelevant by inflation. In the government, where employees are paid according to their educational level, the minimum monthly salary for a university graduate is LE108.

Even though no one actually makes that little, the law does not obligate employers to offer a decent wage, say experts. The outdated law and high unemployment — and, therefore, a large supply of eager workers — have conspired to keep wages down.

Official unemployment figures hover around 10% and are on the rise due to the economic downturn. Some academics say that the real unemployment rate could be as high as 40%.

Ahmed el-Sayed el-Naggar, an economist at the al-Ahram Centre for Political and Strategic Studies, thinks the wage system in Egypt is one of the worst in the world. “It forces people to take bribes and steal because it’s impossible to live off one’s income,” he says.

There has been a push over the last two years to have the minimum wage raised. In late 2007, President Hosni Mubarak ordered officials at the National Council of Wages to come up with a new minimum.

el-Naggar, a union consultant at the time, was a central player in that effort — he authored a proposal to raise the minimum wage to between LE600 and LE800. “Even that is very low,” says el-Naggar. “But [workers] could not hope to get all their rights at once.”

The drive unraveled less than a year later. Facing the possibility of nationwide strikes, Mubarak raised wages for government workers by 30%. The government financed the outlay by increasing the price of petrol, which in turn fed inflation across the board.

Public uproar prompted a spooked Finance Ministry to abandon the plan to raise the minimum wage — officials worried it could trigger runaway inflation, says el-Naggar. “The Ministry of Finance decided to fund the 30% increase in wages in the worst possible way,” he says.

On the road

The migration of workers from the formal to the informal sector can been seen all over Cairo’s streets. Alia el-Mahdi, a professor of economics at Cairo University and author of several papers on Egypt’s informal economy, estimates approximately 300,000 vendors try to make a living on the capital’s congested roads.

And then there are ubiquituous sayes, the self-appointed parking attendants who direct drivers into spots around Cairo. They usually operate where parking is tricky — in front of office buildings, restaurants, cinemas and clubs. They often demand between LE2 and LE5, depending on the value of the parking spot. Some even give out tickets to make themselves look official. And their numbers, say drivers, are on the rise.

“They are more distracting than helpful,” says Laila Ashraf, a computer science student. “I give them money because it’s common practice, not because I think they deserve it,” she adds.

Experts say the trend speaks to a much larger problem in the Egyptian economy: the gulf between the rich and the poor.

Egypt’s economic reform plan, which really kicked off in 1994 with the formation of a new cabinet, does not seem to have done much to help the millions of unskilled workers here.

Between 2006 and 2008, the country’s GDP grew at least 7% annually, and despite the recent global economic crisis, growth figures remain positive. But that wealth remained in the hands of Egypt’s wealthiest, failing to trickle down to most people. In fact, a landmark study recently revealed that 90% of the country’s people were left out of the boom. Most tellingly, according to the UN Human Development Report 2007/2008, 43.9% of Egypt’s population still lives below the income poverty line (an outdated figure that puts poverty at less than $2 a day). In 1991, the figures were around 20%.

“The growth was more in the financial economy than the real productive economy,” explains El-Naggar. “The other thing is that growth is not real unless accompanied by social policies that improve the distribution of wealth through a fair waging system, a fair taxation system, and a fair subsidy system.”

el-Naggar says the minimum government wage for a university graduate of LE108 is only enough to buy 2.5 kilograms of meat. In contrast, in 1979, a graduates’ minimum wage was LE28, which would buy 35 kilograms of meat at the time.

“So even if we have growth, the upper class is in total control of the newly obtained wealth,” says el-Naggar, who believes there is room to raise the minimum wage. He thinks the government could fund the increase by raising the tax rate for the country’s higher income brackets.

In Egypt, there are only three tax brackets, with the highest starting at LE40,000 a year (LE 3,333 a month). In other words, citizens making LE40,000 pay the same rate as those who make hundreds of millions. According to el-Naggar, the fewer tax brackets, the more unequal the system is. Imposing higher rates on society’s richest is a conventional way to redistribute wealth, he says.

People in the highest income tax bands in the United States, China, the Netherlands and France pay 35%, 45%, 52% and 48% of their incomes, respectively. Meanwhile, in Egypt Law no. 91 of 2005 reduced the highest income tax band to only 20% from 42% as part of the government’s tax reform plan.

Sawy Culturewheel’s latest campaign ‘La Faqr’ (No Poverty) asks people not to give money on the street, the idea being to redirect those funds to fight poverty in more effective ways. Mohamed el-Sawy, the founder of Sawy Culturewheel, includes street vendors in his formula. “I can’t say begging is bad but selling is okay, because then they will pretend to sell anything while what they do is actually begging.”

Advocates for the poor say it is time for Egypt to re-examine an increase to the minimum wage law and move away from band-aid solutions to poverty. “We keep complaining that there are hundreds of thousands of beggars, but we are the ones who created them,” says el-Sawy. “I am convinced that Egypt is a rich nation that would be capable of taking care of its poor people.”

This article first appeared in the October 2009 issue of Business Today. Republished here with the author’s permission. ©Osama Diab. All rights reserved.

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