The geographic and demographic characteristics of Egypt define its basic economic problem. Although the country comprises nearly 386,000 square miles, only a narrow strip of 15,000 square miles in the Nile Valley and the Delta is usable. Crammed into the habitable area is 98 percent of the population, estimated in mid-2000 at nearly 64 million, giving a density of more than 4,000 per square mile.
The population of Egypt more than tripled from 19 million in 1947 to the estimated 64 million in 2000.1 Population growth reached its maximum between 1976–86, when it touched 2.8 percent per annum;
thereafter the rate fell, but by 2000 was still estimated at about 2 percent a year. Urbanization increased rapidly, but appears to have leveled off towards the end of the twentieth century, so that the proportion of the population said to live in urban areas had actually decreased. However, the definition of “urban” in Egypt is somewhat arbitrary, and depends less upon predictable criteria such as the pattern of land use or on the size of the population in the agglomeration, and more on administrative decisions, the application of which is not always consistent (Table 4.1).
Despite land reclamation, the cultivated area increased by only about 20 percent between 1947 and 2000. Intensive cultivation has to some extent moderated the effects of the deterioration in the man–land ratio, but even so the cropped area (the cultivated area times the cropping intensity) has increased only from 9.1 million feddans to about 12.8 million.2 A feddan in 2000 was expected to support nearly five persons, compared with 2.1 in 1947. These two themes – the relative fixity of the usable land and the rapidly growing population – resonate as leitmotivs in any discussion of Egypt’s economic development, and fix a lower limit to the increase in factor productivity required for the country to attain a meaningful level of per capita income growth.
Long-term trends in GDP
Any attempt to work with long-term data series is fraught with difficul-ties and the Egyptian case is no exception.3 Attempts at constructing
long-term series and detailed comments on Egypt’s national accounts are provided in Anis (1950), Hansen and Mead (1965), Hansen (1974), World Bank (1978), Ikram (1980), Hansen (1991), Ministry of Planning (1991, 1996), and Waite et al. (1998). The extent and coverage of the national accounts have frequently changed, and retroactive adjustments to data of previous years have not always been applied consistently.
Moreover, national accounts and other official data measure only part of the picture; in Egypt, as in most developing countries, a considerable part of output, employment, and investment is generated in the unrecorded “gray” economy. Hansen (1975: 203) also points out that Egypt’s national accounts tend to exaggerate the growth rate of the GDP because two important slow-growing sectors (agriculture and housing) are greatly underpriced and therefore underweighted, while a fast-growth sector (industry) is overpriced because of various protective devices and therefore overweighted. However, while the national accounts data may show biases and leave gaps, overall they are adequate to judge trends and broad aggregates. An extensive comment on data and methodologies is appended to this chapter.
Between 1965 and 2000, the growth of GDP at 1992 market prices aver-aged nearly 5.2 percent a year. This figure, of course, is subject to the dif-ficulties that arise in compiling a meaningful price deflator covering a long period and to the biases mentioned above in the construction of Egypt’s GDP series; however, it will do as indicating the order of magni-tude. Population growth over the same period averaged 2.4 percent a year, and annual growth in per capita income was of the order of 2.7 percent. This raised the level of real per capita income by 2000 to about 2.6 times its level 35 years earlier. The overall trend rate conceals wide Table 4.1 Population and urbanization, census years 1947–96
Population (000) Growth rate (% p.a.) Urban pop. (% total)
1947 19,022 30.1
2.38
1960 26,085 36.6
2.54
1966 30,076 39.8
2.00
1976 36,626 43.4
2.80
1986 48,254 43.3
2.08
1996 59,313* 41.8
Source: CAPMAS.
Note
*In addition, an estimated 2.18 million Egyptians were abroad.
variations, and in the long-term growth of the GDP one can distinguish several distinct periods (see Figure 4.1).
• 1965–70: low growth, averaging 3.4 percent a year;
• 1971–74: very low growth, averaging 2.2 percent a year;
• 1975–80: very high growth, averaging 9.7 percent per annum;
• 1981–85: high growth, averaging 6.8 percent annually;
• 1986–90: moderate growth, averaging 4.2 percent a year;
• 1991–94: low growth, averaging 3.1 percent per annum;
• 1995–2000: high growth, averaging 5.3 percent a year.
Hansen and Mead (1965) suggest that growth was high (over 5 percent a year) from about 1958, reaching a peak in 1965. Thereafter, the rate declined and remained low until 1974. From 1975 output growth expanded rapidly, albeit with fluctuations resulting from external shocks and major changes in domestic economic policies. GDP growth rates approached 10 percent in the late 1970s because of the return of oil fields and high oil prices, rising international use of the Suez Canal, a surge in remittances from Egyptians working overseas, large inflows of external assistance, and the “open-door” policies that brought in fresh investment and encouraged trade. These factors also provided both the incentive and the finance for capital formation, which increased at an average of 14 percent annually. The high investment and GDP growth continued until about 1986, but after 1982 was increasingly based on external borrowing.
In the second half of the 1980s, economic growth faltered following the fall in oil prices and by the late 1980s macroeconomic disequilibria, result-ing from the continuresult-ing expansionary monetary and fiscal policies, became
Percentage per annum
12
0 2 4 6 8 10
Growth of GDP at 1992 market prices (percent per annum)
1965–70 1971–74 1975–80 1981–85 1986–90 1991–94 1995–2000
Figure 4.1 Average growth rates of GDP at 1992 market prices, 1965–2000 (percent per annum) (source: Mohammed (2001); World Bank LDB).
apparent. The government addressed these difficulties through a program of stabilization and structural reform beginning in 1991. After a slowdown in economic activity in the early 1990s, growth resumed in the mid-1990s.
Subsequent sections in this chapter identify the factors that under-pinned Egypt’s growth trajectory by analyzing the sectoral, factor, and demand contribution to growth.
Structural changes in GDP
Economic growth in Egypt has been associated with significant changes in the structure of the economy and the relative importance of the various economic sectors; these are shown in Figure 4.2. Throughout 1965–2000, the services sector accounted for at least about 50 percent of GDP and its contribution to GDP growth was more than commensurate with its size.
Within the services sector, trade, government and personal services, trans-portation, and tourism were the most dynamic sub-sectors. The share of agriculture declined steadily. The contribution of manufacturing moved around, but did not exceed 20 percent of GDP. The share of the petro-leum sector fluctuated widely, depending on movements in world oil prices.
The national accounts probably understate the size of the services sector in the economy, in particular by not fully reflecting the contribution of the tourism component to total output. Value-added in tourism is measured in the national accounts by the contribution of hotels and restaurants. Com-puted according to this methodology, tourism is estimated to contribute 1 percent of GDP, 1 percent of total employment, and 28 percent of foreign exchange earnings. More detailed investigations by Tohamy and Swinscoe (2000) showed that when the indirect effects of the sub-sector were
70
Percentage
60 50 40 30 20 10 0
1965 1970 1980 1990 2000
Services Manufacturing Petroleum
Agriculture
Figure 4.2 Structure of GDP, 1965–2000 (percent) (source: World Bank LDB).
included, the contribution of tourism spending exceeded 4 percent of GDP and in certain years reached nearly 10 percent of GDP.
The share of the industrial sector in Egypt’s total output remained con-stant – at about a third of GDP – throughout the last four decades. Within that sector, however, the share of manufacturing increased to 18.5 percent of GDP in 2000 from less than 15 percent in the early 1980s. The contri-bution of the manufacturing sector to GDP growth has been more com-mensurate with its share in total output. The oil and construction sectors each contributed about 6 percent of GDP in the late 1990s.
The share of petroleum in GDP after the return of the oil fields in Sinai and the Gulf of Suez after the 1973 war was modest in the first years.
However, it rose sharply and peaked in the early 1980s, when it reached more than 18 percent of GDP. Oil prices fell from 1982; this was not com-pensated for by increased production and the share of the sector con-tinued to decline in the subsequent period. It fell to about 4 percent in the late 1980s; recovered slightly in the early 1990s, and again started to decline from 1993, reaching about 5 percent of GDP in 2000.
The importance of oil to the economy of Egypt, especially after about 1976 when production had reached a significant level, can be seen in Figure 4.3, which shows how closely movements in the growth of GDP tracked movements in oil prices.
As in many other middle-income countries, the contribution of agricul-ture in Egypt’s total output continued to decline, dropping to about 15 percent in the late 1990s from about a third of GDP in the 1960s. Agricul-ture’s contribution to GDP growth also declined to about 10 percent, mainly as a result of the slow growth of the sector. Agricultural growth averaged only 2.7 percent annually during 1965–2000, just a little ahead of the population growth. Much of the expansion in agricultural value-added resulted from intensive cultivation, although land reclamation did some-what extend the boundaries of the cultivated area. Total area under culti-vation represents about 4 percent of the total land area of Egypt.
Growth rates (percentage)
16 Oil prices (US$ per barrel)
40
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Figure 4.3 GDP growth and oil prices, 1974–2000 (source: World Bank LDB. Oil
prices (Gulf of Suez Mix crude) from the Egyptian General Petroleum Corporation).
Contribution of demand components to growth
How much of the growth of Egypt’s GDP resulted from domestic factors and how much did it owe to foreign demand? In general, Egypt’s growth was based on low value-added output purchased by internal consumers. In the period 1965–2000, domestic demand (consumption plus investment) absorbed about three-quarters of total output and contributed about the same proportion to GDP growth. During the first 20 years, except for the quinquennium 1970–75, the growth of domestic demand exceeded that of total output. In the next decade, the growth of foreign demand was faster than that of domestic demand, but the roles were reversed during 1995–2000. Domestic consumption had the lion’s share in total domestic demand throughout this period. The growth of both domestic and foreign demand slowed in the early 1990s as the economy adjusted to the program of structural reforms and stabilization. Domestic demand picked up by the late 1990s as investment spending began to recover (Table 4.2).
Investment
The factor chiefly responsible for the growth of Egypt’s GDP was capital formation. Even allowing for difficulties in measurement, it is clear that the investment rate over the 35-year period 1965–2000 fluctuated consid-erably. The reasons behind these variations were the availability of domestic savings and the very different amounts of foreign resources that could be accessed at different times. The availability of domestic savings varied with the economic philosophy prevailing in the country: whether it was “socialistic,” or whether the private sector felt adequately safeguarded.
Another important factor for much of this period was the political Table 4.2 Demand decomposition of growth, 1965–2000
Period Average annual growth Ratio to GDP Contribution to
rates (%) GDP growth (%)
GDP Domestic Foreign Domestic Foreign Domestic Foreign demand demand demand demand demand demand
1965–70 3.3 4.6 0.2 0.72 0.28 99.3 0.70
1970–75 3.5 3.0 4.8 0.74 0.26 62.3 37.7
1975–80 9.8 9.9 9.6 0.71 0.29 74.7 25.3
1980–85 6.7 8.5 1.5 0.77 0.23 90.0 10.0
1985–90 4.2 3.0 8.2 0.76 0.24 54.2 45.8
1990–95 3.4 2.7 5.2 0.72 0.28 61.2 38.8
1995–2000 5.7 6.3 4.3 0.74 0.26 78.8 21.2
1965–2000 5.2 5.4 4.8 0.74 0.26 74.3 25.7
Source: Mohammed (2001).
situation in the Middle East, which determined the amount of resources devoted to defence (which meant increases in government consumption).
Variations in the investment rate during 1965–2000 are shown in Figure 4.4. For the most, investment hovered at around 17–20 percent of GDP. Immediately after the opening of the economy in 1973 by the rapid inflow of foreign aid, worker remittances, and earnings from oil exports sharply raised gross investment so that it touched 35 percent of the GDP.
Even after international oil prices began dropping from 1982, the invest-ment rate remained high, but especially after 1987 was increasingly financed by external borrowing. By the early 1990s the situation could not be sustained and the investment rate declined sharply. By 2000, invest-ment had recovered somewhat but was still well below its earlier heights.
A caution is in order when considering rates of investment. Bruton (1983: 684–5) argues that (a) a significant part of what is described as
“investment” in Egypt would be classified as “maintenance” in other coun-tries; and (b) that investment in the 1970s was heavily concentrated in a small number of projects, and that net investment, over much of the economy, was negative for many years before and after 1974.
Decomposing the investment series into fixed investment and changes in inventories shows that the spike in aggregate investment in 1975–76 resulted partly from a surge in inventory accumulation following the opening up of the economy. Another boost in inventory accumulation occurred in 1997–99. During the latter period, inventories initially were increased as a deliberate measure with importers taking advantage of exchange rate devaluations by the East Asian countries hit by a financial crisis in July 1997. Towards the end of the Millennium, Egypt went through a liquidity squeeze; this reduced aggregate demand, and by 2000 much inventory accumulation was involuntary. I need hardly warn that figures for changes in inventories need to be viewed with even greater caution than those for fixed investment.
Percentage of GDP market prices
40
0 5 10 15 20 25 30 35
1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 199519971999 GDI/GDP (market prices) GDS/GDP (market prices)
Figure 4.4 Investment and savings, 1965–2000 (percent of GDP) (source: World Bank LDB).
The gap between investment and savings observed in Figure 4.4 under-lines the role of external resources. During the entire period 1965–2000, the investment rate was higher than the savings rate – at times very markedly. The overall domestic savings rate seldom exceeded 20 percent of GDP, mainly because the public sector saved very little or was a net dis-saver. Private savings over the 35-year period fluctuated between 10 and 30 percent of GDP.
During 1965–2000, the relative shares of private and public investment changed significantly. Not surprisingly, the period of Arab socialism saw a substantial increase in the share of public investment in the total. Private investment increased with the liberalization of the economy after 1973, and assumed the dominant role following the structural adjustment reforms of 1991. These developments are illustrated in Figure 4.5.
The foregoing discussion must be regarded only as indicating the approximate trend. Egypt’s national accounts do not disaggregate invest-ment into private and public components; hence, capital expenditures from government finance statistics must be used as a proxy for public investment. The residual is considered to be private investment, even though this may somewhat overstate the actual level. This issue is particu-larly important for the data of the 1990s, because of a semantic confusion.
In 1991, the 314 public enterprises that were being prepared for privatiza-tion under Law 203/1991 were classified as “private sector.” By 2000, only about half the enterprises had actually been privatized, but the others were still considered as belonging to the private sector even though they remained in public ownership.
The determinants of private consumption
An investigation by the World Bank (1993a, vol. 1: 57–9; vol. 3: 21–7) of the determinants of private consumption behavior in Egypt during
100
Percentage of GDFI
0 20 40 60 80
1970
1965 1975 1980 1985 1990 1995 2000
Public investment Private investment
Figure 4.5 Public and private investment, 1965–2000 (percent of Gross Domestic Fixed Investment) (source: MOP).
1960–90 suggested that private consumption was heavily dependent on current private disposable income (including worker remittances) and rather weakly on permanent private disposable income. Broad money holdings exerted a positive and very significant influence. This indicated the dominant influence on consumption of liquidity or borrowing con-straints. The availability of foreign saving also played an important role in constraining private consumption; about 40 percent of any increase in foreign saving went to private consumption, while the remainder went to finance either government consumption or gross investment.
The study found a strong positive relation between government savings and private consumption (and hence a strong inverse relation between government and private savings): private saving declined by LE 0.63 (i.e.
private consumption increased) for each additional LE 1 in (permanent) government savings.4The report attributed this result to a direct “crowd-ing-out” of private savings by public savings because of a combination of financial repression and controls on consumer imports and on private capital outflows. This crowding-out effect was stronger if higher public saving came from lower public expenditure. It was weaker when the higher public saving resulted from higher taxes.
Private consumption did not respond much to domestic inflation, domestic real interest rates, or foreign real interest rates. The non-significance of both domestic and foreign real interest rates was consistent with other cross-country studies, which showed that consumption in devel-oping countries was interest-insensitive. These findings suggested that a financial reform that raised domestic real interest rates might not be effective in raising private saving. The role of interest rates was more important for the better allocation of resources. The study compared the results for Egypt with those for a representative group of developing coun-tries and found that the marginal propensity to consume out of perman-ent income was slightly lower in Egypt than in other developing countries, while the marginal propensity to consume out of current income was slightly higher.
The study provided in some measure a test between the Keynesian hypothesis in which only current income determines private consumption, and the Friedman permanent income hypothesis, under which only permanent income is relevant for the determination of consumption. The result showed that the propensity to consume out of current income was significantly higher than out of permanent income. This suggested that con-sumption was not smoothed and that in Egypt, Keynesian-type or liquidity-constrained consumers tended to dominate aggregate consumption.
The study also rejected the presence of strict Ricardian equivalence.5 Under Ricardian equivalence, a rise in public saving will not induce changes in private consumption if it results from a tax increase, while it will induce a rise in private consumption if it stems from a reduction in government expenditure. However, as the paper pointed out, if the
government can extract resources from the private sector directly, for example through financial repression and/or foreign trade restrictions, crowding-out of private consumption will occur directly. The results from the model suggested the occurrence of direct crowding-out of private saving by public saving, not ultra-rational forward-looking behavior by con-sumers.
Economic growth and employment
The creation of productive employment is the main challenge for eco-nomic policy in developing countries since it is the most effective method of reducing poverty. However, it is not easy to obtain an accurate picture of long-term developments in labor force and employment in Egypt. The data come from different sources, time periods are not always uniform, and definitions and concepts have changed over the years. A detailed review of the data and literature will be found in Chapter 8; here only a general overview is provided. Developments in population, labor force, and employment between the years 1960–2000 can be seen in Table 4.3.
The broad trends shown in the table are probably accurate, but the data for specific years (particularly the employment figures for 1976 and 1986) might be suspect; some work by Fergany (1991) and Assaad (1997) suggests an unemployment figure of two million in 1986. The data suggest that open unemployment was not a problem in the sixties (although this may largely be just a definitional artifact); it then increased steadily, and started to come down from about the middle of the 1990s (Figure 4.6).
The broad trends shown in the table are probably accurate, but the data for specific years (particularly the employment figures for 1976 and 1986) might be suspect; some work by Fergany (1991) and Assaad (1997) suggests an unemployment figure of two million in 1986. The data suggest that open unemployment was not a problem in the sixties (although this may largely be just a definitional artifact); it then increased steadily, and started to come down from about the middle of the 1990s (Figure 4.6).