The Challenges Facing the New Egypt

Feb 12

The challenges facing a new Egypt are legion, and too many to be detailed in one post.  Here, I highlight some comparative economic statistics to place the performance of the Egyptian economy in a wider global context, focusing on average output per worker (admittedly, quite a crude measure for productivity) and investment as a percentage of national output.  I obtained these figures from the CIA World Factbook.  I derived the output per worker figure by dividing gross domestic produce (purchase power parity GDP calculation rather than the exchange rate GDP).  The results are surprisingly encouraging from one perspective but also reveal some of the profound challenges facing the Egyptian economy.  First, the good news: Egyptian output per worker is not terrible.  Egypt’s comes in at $19,157 per worker; India’s is less than half of this at $8,459 and China’s is also less than Egypt’s at $11,225.  Brazil’s output per worker, which is $21,177, exceeds that of Egypt only by approximately 10%.  The Egyptian labor force is substantially more productive than Morocco’s, whose output per worker is only $13,224, and Jordan’s exceeds Egypt’s by only a few hundred dollars.  Turkey’s labor force, however, is twice as productive as Egypt’s, coming in at $38,785.

Investment as a percentage of GDP is comparable to Brazil and Turkey at approximately 18%.  By contrast, investment as a percentage of India’s and China’s GDP is a shockingly high 32% and 48%, respectively.

What seems clear is that the kind of poverty facing the 40% of Egyptians living on $2/day or less is a function more of the poor distribution of resources internally to the country rather than Egypt being poor in absolute terms.  I also suspect that there are vast gaps in the productivity of different sectors of the Egyptian economy that are responsible for the distributive problems within Egypt that have resulted in mass poverty that is incommensurate with the overall productivity of the Egyptian economy.

Indeed, economists have documented that the last twenty-years of Mubarak’s economic policy, while moderately successful in attracting foreign direct investment and generating some decent top-line economic growth, failed completely in reducing poverty, which might, in some respects, have become worse despite real top-line growth.

The new Egyptian government will need to address these problems by instituting redistributive policies and investing in improving the productivity of the Egyptian labor force.  Both will require substantial economic growth to succeed in the medium and long terms.  In the short term, there needs to be a dramatic expansion of the tax base.  Some ideas that come to mind: a property tax on all second homes, e.g., al-Sahil al-Shamali and all homes with a market value in excess of, e.g., 1,000,000 Egyptian pounds; a tax on the value of shares of companies provided the taxpayer meets certain thresholds, e.g., owns, directly or indirectly, 1% or more of any company, or has share ownership in the aggregate in excess of 1,000,000 Egyptian pounds.  Clearly, the new government must also institute a capital gains tax.  Although the stock market has appreciated more than 700% in the last ten years, there is no capital gains tax in connection with profits realized from the sale of securities.  Egypt has a surprisingly high corporate tax-rate of 40% which probably reduces Egypt’s competitiveness as a place to do business.  It would seem to make more sense to lower the corporate tax rate but subject individuals to taxation on dividends received and capital gains realized going forward.

I also have some ideas on how the government might sell new-government debt securities that are designed to be used specifically for investment in Egypt’s human capital base.  I will try to outline those thoughts in an upcoming post.

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