Bobby Ghosh at Time has a blog entry today disparaging the democratic skills of Egypti’s liberals and suggesting that, by contrast, the Muslim Brotherhood has a much better understanding of how democracy actually works.  There is little to disagree with in Ghosh’s post except that he perhaps understates the inability of the “secular” or “liberal” forces in Egypt to compete effectively in a democratic system.  The reason for this failing, I think, has little to do with the the inherent unattractiveness of liberal ideas in Egypt as much as it does with the class divisioins that are rife in Egypt, and that lead many of the liberal elite to believe — although they will never say so explicitly — that they are entitled to rule because they are the “best” of Egyptian society, the “awlad al-nas,” so to speak.  Parties that are actually popular are dismissed as demagogues or as exploiting the ignorance of the Egyptian masses.  Indeed, one prominent Egyptian liberal, a justice on the Egyptian Supreme Constitutional Court, no less, suggested that the votes of illiterate Egyptians should be weighted 1/2 of those of educated Egyptians.

Watch this great interview with the Egyptian commentator on business and economics, Wael Gamal.  As he points out, government-provided energy subsidies to crony-capitalists are essentially a policy to provide these businessmen with supra-competitive profits.  Egypt could save a $1  billion a year simply by reducing this subsidy  by 50%, not even 100%, and the global competitiveness of these firms would not be hurt, and we would reduce the power of the NDP crony capitalists, to boot!  More generally, I would add that increasing the income of the poor is not the only way to increase their standard of living: so too, by providing them with higher quality services, e.g., education and health, you effectively increase their income by reducing their expenses.  Future economic policy must, simultaneously, increase overall economic efficiency, including,  by attracting increased investment, and introduce effective policies of redistribution whose aim is not simply increasing the real income of the relatively less well-off, but by increasing their productivity by giving them greater access to education, health care, sanitation, etc.

According to the renowned economist Paul Krugman, the US is a “low-tax” jurisdiction, with aggregate tax receipts amounting to slightly more than 30% of US Gross Domestic Product. Unsurprisingly, the Scandanavian social democracies have the highest overall ratio of taxes to GDP, with tax receipts in excess of 50% of GDP.  In Egypt, taxes represent only approximately 15% of GDP.  Any economic reform will require raising the ratio of tax receipts to GDP so that the state has the resources to make the necessary investments in public goods such as health, education and infrastructure.  Hopefully, if Egypt evolves into a democracy with meaningful public participation, its ability to collect taxes efficiently will improve dramatically. Indeed, Greece, which is notorious for its citizens’ non-compliance with tax law, still manages to collect tax revenues approaching 40% of its GDP.  I note that perhaps the Egyptian state’s ratio of taxes to GDP somewhat understates its access to resources given the fact that it still owns substantial productive assets; nevertheless, I suspect that there is a lot of room for rationalization (i.e., expansion) of the tax base in a fashion that would be highly progressive.  I have suggested that a property tax be introduced instead of raising marginal income tax rates because of its relative simplicity.  Presumably, a relatively low property tax rate applied widely enough could raise a substantial amount of revenue, and functionally, act as a clawback for state-owned property that was privatized using less than optimal procedures.  In any case, unless the Egyptian state can improve the efficiency of its tax-collection, raise the overall ratio of taxes to GDP, and invest the additional marginal revenue in public goods, it will be very difficult for Egypt to attract sufficient private capital to generate substantial enough growth to solve the structural unemployment problem.

Some Egyptians are beginning a campaign to urge international creditors to forgive some of Egypt’s indebtedness on the grounds that it was used to benefit the previous ruling elite rather than the Egyptian people.  Debt relief for Egypt in these circumstances, however, would be a bit like giving more crack to an addict.  Certainly, some debts were questionable, but the real problem facing Egypt is structural: an inability to improve long-term domestic efficiency. Steps need to be taken to create a more equitable and efficient taxation system, and to develop and implement a realistic plan for investment in the capacities of the Egyptian people.   If that were achieved, Egypt’s debt position would not be so burdensome. In fact, Egypt is not a particularly over-leveraged country, with its overall debt representing 80.5% of its GDP, but its external debt amounting to only $30.6 billion, which puts it 65th in the world in terms of external indebtedness.  (To put it differently, that means that Egypt’s external debt to GDP ratio is about 15%, so the prospect of Egypt facing an immediate balance of payment crisis is remote.)  Egypt faces a long-term problem arising out of a chronic current account deficit which can only be remedied by increasing the productivity of its population.  This will require substantial long-term investments, however, and I hope that the new government turns its attention to figuring out how this can be accomplished.  Debt-relief at this stage, I fear, would only defer the pressure to make the needed structural reforms.