Is Non-Inclusive Economic Growth Sufficient for Stability and Competitiveness?

By Ali Kamel Ali

February 25, 2015   |   0 comments


In Egypt’s case, the short answer is no! Although it was the top reformer in 2008 and among the top ten reformers in 2009-10 as listed in the World Bank’s Doing Business reports, Egypt’s economic, social and political conditions were not ripe during the late 2000’s for spurring real economic stability and competitiveness.

Egypt’s potentially large market size, proximity to key global markets, location, natural resources, human capital and potential markets can significantly contribute to higher level of inclusive economic growth rates.

So why, despite these factors and its membership in many trade and investment organizations such as the Common Market for Eastern and Southern Asia (COMESA) and the Arab League, has Egypt not realized its economic growth potential?

Exclusion does not breed competitiveness

Prior to 2011, Egypt’s economy was not inclusive, despite enjoying relatively high growth. The non-inclusive nature of economic growth rates of above 5 percent was insufficient to both reduce poverty and create enough decent jobs. It also didn’t reach women, youth or disadvantaged groups.

During past decades, women and youth have suffered high rates of unemployment and less participation in the labor force. Moreover, disadvantaged groups in rural areas and Upper Egypt have even higher poverty levels. The national poverty rate in 2011 (25.2 percent) was actually higher than it was more than 10 years ago in 2000 (16.7 percent).

In 2012, official estimates of the unemployment rates for youth ages 15 to 24 were around 25 percent and rising, and higher among females—over 35 percent. The informal sector is a huge part of Egypt’s economy, constituting nearly 82 percent of the total number of firms and employing nearly 40 percent of the labor force.

Prolonged unemployment, marginalization of youth and women, huge informal economies, extreme poverty and an uncompetitive private sector, among other factors, were drivers of instability.

The Egyptian economy today

In the recent 2014-15 World Economic Forum ranking, Egypt dropped to a rank of 119 out of 144 countries in a competitiveness ranking. This reduced competitiveness has negatively impacted trade and investment in goods and services, and hence slowed economic growth even further.

Political and social transitions in 2011 and 2013 deeply impacted Egypt’s economy. Currently, Egypt faces substantial new challenges related to investment outflows, falling tourist arrivals, an unstable macroeconomic environment, an increasing informal sector and pervasive job loss.

These issues are compounded by pre-2011 economic challenges, many of which had been the driving forces behind major political shifts, including the ousting of the Muslim Brotherhood, a newly elected government, and a planned parliamentarian election in 2015 after a long-lasting non-democratic regime.

The country’s microeconomic policies, including the over-regulated and costly business regulatory environment, are binding constraints to private sector domestic and foreign trade and investment.

Trade and customs barriers, ease of doing business, tax policy, labor laws and regulations are current challenges. The higher the level of trade and investment in goods, the more opportunities emerge to help create jobs for the almost 800,000 new labor force entrants every year.

The macroeconomic environment has worsened over recent years because of a widening fiscal deficit, growing public indebtedness and continuing inflationary pressures. But Egypt’s macroeconomic policies seem to have had less of an impact on long-term political stability than typically attributed.

Though good macro-economic policies may be important for stimulating development, socioeconomic equality and inclusive growth are more influential long-term contributors to long-term stability.

How can Egypt change its course?

Egypt should focus on the inclusiveness of economic growth strategies by addressing employment issues of youth and women, supporting the informal sector and micro, small and medium enterprises and alleviating poverty, particularly in disadvantaged areas of rural and Upper Egypt.

It needs to put special focus on youth and women because they not only represent disadvantaged groups in terms of unemployment, but also represent largely untapped human resource potential. Supporting rural areas, Upper Egypt and other geographically disadvantaged areas will be a real challenge, but is critical for success.

The country also needs to foster a low-risk and low-cost business regulatory environment for both the formal and informal sectors in order to increase trade and investments, both of which will lead to the creation of new jobs.

Egypt will have to make it easier for businesses to operate, get permits and licenses, comply with laws and regulations and exit the market when they opt to—key factors to increasing productive economic engagement.

If Egypt can capitalize on its many advantages, accompanied by inclusive economic growth with a focus on improving labor skills and productivity, advancing micro, small and medium enterprises and entrepreneurship development, streamlining business processes, eliminating barriers to trade and investment and endorsing the formalization of the informal sector, the country will be able to create more jobs and provide for its continual flow of new entrants into the labor market with enhanced opportunities.

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