The Low-Hanging Fruit of the Egyptian Economy

Jun 29

It is hardly a secret that the Egyptian economy faces severe structural challenges in the near-term, and that a failure to address these problems could very well doom the prospects for a successful transition to democracy.  The economic legacy of the Mubarak regime is little short of catastrophic, particularly in the collapse of public goods such as education and health.  At the same time, there is a silver lining in the Mubarak regime’s economic incompetence: even a modicum of decent management of the economy has the potential to provide immediate and tangible efficiency gains for the Egyptian economy.  So, the good news is that many of Egypt’s most pressing economic problems do not require complex solutions; rather, they simply need political will to implement the need policy changes.  I call these reforms “low-hanging fruit,” and the extent to which post-revolutionary Egypt shows a willingness to solve these problems will be a definitive signal the likelihood of the revolution’s success.

One obvious irrationality that can and should be tackled immediately is the gasoline subsidy. The price of a litre of gasoline in Egypt is one Egyptian pound, or $0.17. The price in Canada for litre of gas, on the other hand, is closer to $1.20.  Not only is the size of the gasoline subsidy excessive (the government spends more on the gasoline subsidy than it does on both public education and public health),  it is regressive: most of those who enjoy the benefits of cheap gasoline are the relatively few Egyptians well-off enough to afford to purchase a car.  The Egyptian economy would enjoy a quick and relatively dramatic boost were this subsidy to be eliminated and the funds instead spent on public schools or public health, or to re-establish what had recently been a relatively efficient, if inelegant, public transportation system.

As my friend Ellis Goldberg pointed out in his recent posting, the Egyptian transportation system is, from the social perspective, a catastrophic failure, with donkeys proving to be a more efficient means of travel in Cairo than modern transport, at least for the several hours of the day that constitute Cairo’s “rush hour.”  Raising gasoline prices would immediately and substantially reduce demand for private cars, and result in a corresponding increase in the relative efficiency of travel times in Cairo, as well as other Egyptian cities.

Another area where the state could raise funds in a progressive fashion to finance the sorely-need public investments in education, health care and basic infrastructure is to impose progressive property taxes based on the value of the property.  Owners should be permitted to self-report the value of the property, but to combat the risk that owners will intentionally underestimate its value, legislation should be passed allowing the state to purchase any real estate in Egypt at a 10% premium to its reported price on the records of the taxing authority.  Such a program would have two benefits: first, it would raise badly need revenues for the state, and second, it would encourage the registration of all properties, including, those built in unregistered lands, the so-called “unplanned communities.”

The state should also begin to implement a plan to restore market pricing to rents, beginning in upper-class neighborhoods such as Zamalek and Maadi.  Many well-off Egyptians have the good fortune of living in a rent-controlled apartment in these prestigious neighborhoods for less than a couple of dollars a month.  Restoring market-mechanisms in the market for rental apartments would encourage substantial investment in, and restoration of, the Cairo urban real estate market. Renewed investment in the existing stock of urban real estate might not only increase employment, it could also lead to urban renewal.

Changing the three policies I identified would have a potentially large net benefit on the Egyptian economy; all it would take is political will to implement them.  At the same time, I recognize that powerful vested interests stand in the way of adopting any of these reforms.  Overcoming entrenched interests in order to accomplish the public good, however, ought to be more easily accomplished in a democratic regime than the kleptocratic regime of Mubarak, that could stay in power only for so long as it could bribe sufficiently large numbers of Egyptians into maintaining their silence.  We eagerly await elections so that Egypt has a sufficiently strong and legitimate government to implement the kinds of reforms Egypt needs against the screams of those who are benefiting from the status quo.

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