Egypt’s heartless economic growth

 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.