Archives for category: economics

(Updated on 4th Jan to correct all values expressed as % of GDP and to add job estimates)

Change Britain, the pro-Brexit outfit some members of which are behind, amongst other things, the NHS Brexit bus debacle, released a study claiming “that a huge £24 billion a year prize is on offer if the UK Government pursues a ‘clean Brexit’ and decides to leave the EU’s single market and customs union.” The full report does not seem to be available on the website but a brief summary is presented highlighting the basis of this claim. It is good news in the sense that it is the first detailed estimate of the economic impact of a clean (i.e. hard) Brexit I have seen from the pro-Brexit camp.

If you don’t want to go through the full analysis below, here’s the key points:

  • Change Britain does mention that a hard Brexit will result in a decline in trade with the EU and, consequently, total GDP. They ignored the point in their analysis and claimed that the new trade deals the UK could sign with non-EU countries, will result in increase in GDP. The analysis below will show that even this possible increase will not match the probable decrease in GDP from leaving the EU. Once we add this up, a total of 233,000 jobs could be lost, compared to a gain of 400,000 estimated by Change Britain in a complementary analysis.
  • The benefits of getting rid of EU red tape are equivalent to 0.07% of annual GDP. Whether this independence is worth jeopardizing goods and services exported to the EU, worth 12% of the UK’s GDP, remains a value judgement.
  • Because the UK exports services as much as it exports goods, future prosperity will depend on level of integration (with EU and non-EU countries) beyond the scope of free trade agreements, which tend to focus mostly on trade in goods and tariffs. Enabling trade in services largely depends on ensuring freedom of mobility of people and capital, therefore the UK will need to harmonize its regulations to that of other countries or block of countries (through things like TTIP or, heaven forbids, the EU single market). Leaving aside for a moment the important aspect of political feasibility and desirability of this, the matter of fact is that if the UK is to keep a strong export-driven service sector, it will need to give up some sovereignty (to the EU or anyone else) in order to remain competitive.

The post-truth analysis

When you have got partisanship, opinions and passion who needs an expert? Experts are so 2015, right? In this case, I’d like to give you my post-truth analysis: half as a professional economist and half as a pro-EU progressive (who is about to move to London in February, hopefully before Article 50 is triggered). So now that you know all of my biases, let us debunk the analysis.

The analysis of the analysis

The £24 billion a year prize from leaving the EU, equivalent to 1.2% of GDP, is calculated as follows:

  • UK net contributions to EU budget: £10,353 mil (o.46% of GDP, based on 2016 from ONS). Following the link on their website, I could not find the figure in the source they cited. Based on fact-checked Treasury figures, the more likely impact will be around £8,473 mil – unless their higher figure is the result of converting the 2015 EU contribution from the 2015 euro amount using today’s exchange rate, which has dropped significantly because of the Brexit referendum.
  • Scrapping EU red tape (net): £1,220 mil (0.07% of GDP). This figure represents the net impact (benefits minus costs) of the 100 most cumbersome regulations for British businesses. Change Britain excluded regulations that Britain will be bound to because of international agreements that will remain after Brexit, as well as those regulations that are also government priorities. A big argument of the pro-Brexit campaign has been to take back control by rejecting EU intrusion in domestic affairs. Guess what, that control is only worth 0.26% of GDP, and that’s without taking into account the bureaucratic cost of preparing for the great disentanglement (a leaked memo estimates that the civil service will need to hire up to 30,000 employees to deal with the over 500 Brexit projects)
  • Predicted impact on exports: £12,294 mil (0.67% of GDP). This assumes that the UK manages to negotiate free trade agreements with India, Mercosur, China, Canada, Korea and the USA. The table below summarizes the expected impact based on the Change Britain study vs. the length of negotiations for similar agreements.

 

Key statistics on free trade agreements (FTAs)

FTA agreement Impact
(
£ mil)
Impact
(% GDP)
Negotiations started Agreement signed Years Reference
India FTA 1,500 0.08% 10/2003 8/2009 5.9 ASEAN-India FTA
Mercosur FTA 1,800 0.10% 5/2010 12/2016 6.6 EU-Mercosur FTA (not concluded)
China FTA 200 0.01% 11/2004 4/2008 3.4 NZ-China FTA
Canada FTA 1,900 0.10% 5/2009 10/2016 7.5 CETA
Korea FTA 3,200 0.17% 5/2007 10/2009 2.5 EU-Korea FTA
USA FTA 3,800 0.21% 4/2001 1/2004 2.8 US-Australia FTA

Source: Change Britain and a variety of sources for the timelines (mostly Wikipedia)

Barring a sudden influx of post-truth optimism, there are a number of issues with these assumptions:

  1. The feasibility of concluding all of these agreements quickly is very slim. Also, it must be noted that the UK lacks the large bureaucratic infrastructure to negotiate trade deals, given that for the past thirty years all trade negotiations were handled by Brussels. There are approximately 600 trade negotiators in the EU and 300 in Canada but apparently close to zero in the UK civil service.
  2. How do you deal with a problem called Donald: if the Trump administration officially designates China a currency manipulator, politically it would be difficult for the UK to sign a trade agreement with both China and the USA. Granted coherence is not Donald’s strongest suit, but rushing to sign a FTA with the UK might be a lot from a man who has publicly promised to dismantle the North American Free Trade Agreement. Canada and Mexico are likely to close ranks in on Trump (see their recent visa liberalization). If Trump decides to weaken NAFTA and sign a FTA with the UK, one could expect the Canadians to be less than enthused about signing an agreement with the UK as well. So it looks like a China-US-Canada impossible triangle is lurking. Finally, timelines for a FTA with the US will be long. The 3 year timeline for the US-Australia FTA happened against the backdrop of Australian support to the war on terror. NAFTA took years to sign, ratify and over a decade for all of its provisions to fully come into effect.
  3. Negotiating a trade deal with India is notoriously difficult: it was Indian opposition that derailed the last round of global trade negotiations and PM May’s visit to the country seems to have tied the negotiations to the future of the ever shrinking number of visas issued to Indian workers and students. Hard to see how to square that with the pro-Brexit immigration control promises.
  4. You could have already gotten a lot of this at no additional cost: had the UK stayed in the EU or opted to stay in the customs union, it would already benefit from the Canadian and Korean FTAs, which represent half of the gains from new trade deals that the Brexit camp is projecting.

What is missing from the analysis.

First, it does not take into account the negative impact of trade losses by losing access to the European single market. Secondly, it counts the savings from EU membership as an increase in GDP – this is misleading.

Trade losses

Without extensively nitpicking the study presented by Change Britain, its main flaw is that it does not weigh the gains from a hard Brexit against the loss in European trade arising from losing access to the single market. Thankfully, the US Congressional Research Services compiled estimates from a variety of studies. The table below summarizes the impacts on UK GDP by 2030 of hard Brexit and of signing a FTA with the EU. I have also added a study from the London School of Economics.

Estimate of the impact of signing a FTA agreement with Europe compared to current EU membership scenario

Highest estimate Lowest estimate Mid-point estimate
LSE * -6.20% -6.20% -6.20%
HM Treasury ** -7.60% -4.60% -6.10%
IMF ** -5.60% -1.40% -3.50%
Confederation of British Industries** -5.50% -3.50% -4.50%
OECD** -7.70% -2.70% -5.20%
Average -6.52% -3.68% -5.10%

 Source: * Centre for Economic Performance at the London School of Economics (link) and** US Congressional Research Services (link)

Even assuming that all the benefits from cutting red tape and new FTAs are accrued as quickly as the loss of trade from the EU materializes, this would leave the UK 4.4% poorer than when it was in the EU. Update: Change Britain estimates that “2,503 new UK jobs [are created] for each €-billion of extra-EU exports”. A contraction of 4.4% of GDP would be equivalent to € 93.4 billion loss, or 234,000 jobs. This is against 400,000 additional jobs created by new trade opportunities that they estimated in a follow-up post to the one analyzed here.

Source: Change Britain’s estimates of gains from leaving the EU vs average of estimates of impact from leaving the EU

slide1

Source: own analysis based on mid-point estimate of GDP loss from five scenarios and Change Britain’s estimate of gains from leaving the EU (excluding value of EU contribution, see below).

The cost of admission

Of course there’s the matter of the 0.46% of GDP that Britain contributes to the EU budget. Even if the government spent all of this on the economy, it would not translate directly into GDP (the reasons are a bit tedious, but in a nutshell, for the contribution to translate into GDP it would need to be spent on locally-sourced goods and services and the expenditure needs to go mostly towards salaries and profits. For instance, spending the full 0.46% to give a raise to NHS staff will stimulate GDP more than importing foreign-produced equipment for defense or infrastructure purposes). Because the EU contribution is a budgetary measure (the government could theoretically pocket the amount), the gains from not paying the EU contribution should be measured against the losses from tax revenues that would result from the GDP contraction after leaving the single market. These effects are difficult to disentangle, but a simple correlation analysis of the 1998-2014 trend shows that when GDP goes down by 1% in a given year, total government debt goes up by 2.56% (i.e. the annual deficit in that year is equivalent to 2.56%).

Correlation (not causation!) between change in UK GDP and change in government debt

slide2

Source: own analysis based on GDP and UK total debt in pounds, source data World Bank database for the period (1997-2014)

One needs to be careful when extrapolating the correlation. But as a very rough estimate, if by 2025 GDP is 4.4% smaller, then government deficit could be 11.3% (= 4.4 x 2.56) larger. One needs much more sophisticated tools than that to do a proper analysis. Unfortunately, Change Britain did not provide their own estimates so we’ll have to go with the Treasury estimate of £36 billion loss in revenues, after taking into account a zero contribution to the EU budget. That is equivalent to around 7.6% of GDP. Because the Treasury analysis uses a counter-factual scenario (all things being like what they were before the referendum, excluding access to the EU single market), the estimate excludes the benefits accruing from the hypotherical additional FTAs.

Beyond the tactical critique

I am hoping to write a follow-up post on the politics of Brexit, so this concluding arguments will be about economics. By this, I am not implying that economics should trump politics, it’s just that politics deserve a detailed discussion of its own.

The matter of the fact is that tariffs on goods have been declining globally. This is thanks to negotiations through WTO and the rise of regional trade agreements like the EU, ASEAN and NAFTA. Because the UK at the moment faces the same external tariff as the EU, its average tariff rate is 1.6% (i.e. a weighted average of categories by country of origin by rate applied). The EU has the lowest applied rate but other major economies also have low rates. As a consequence, the margin for improvement in tariffs post-Brexit are very tight: for most of the things that the UK will want to buy, it will realistically pay low tariffs, maybe slightly above what EU countries pay, if the US and Australia are a good benchmark of the UK’s negotiating power going forward.

Tariff rate applied, unweighted mean (%)

slide3

Source: World Bank database

The UK exports £225.5 bil worth of services (and £284.9 bil worth of goods) according to the UK Pink book (2016, Chapter 9). Trade in services is equivalent to 12.3% of GDP – service exports to the EU are equal to 4.9% and service exports to the rest of the world are equal 7.5% of GDP. In order to promote exports, the UK needs to pay attention to the service sector if it wants to bring in some additional revenues to its economy after it leaves the EU.

 

The problem with enabling trade in services is that it needs a level of trade integration beyond what is traditionally offered by free trade agreements. Even a relatively expansive FTA like the Canada-EU Trade Agreement (which took 7 years to negotiate) only has limited provisions concerning services and does not cover financial services. The main obstacles to trade these days are so-called non-tariff barriers, things such as different regulatory requirements, health and safety standards, etc.

Non-tariff barriers to the EU are significantly lower for the UK than say Canada and Korea, both countries that recently signed a FTA with the EU. In the graph, the value of 97 for the UK in 2014 means that it cost 97% more to sell from the UK to the EU than it would cost to sell within the UK itself. Whereas the UK faces significantly lower non-tariff barriers of trading with the EU than Korea or Canada, the UK faces significantly higher cost of trading with European countries that are not in the EU, in line with Korea and Canada.

Non-tariff barriers for UK, Canada and Korea – by trade partner

slide5

Source: Non-weighted average of non-tariff barriers estimates from World Bank UNESCAP Trade Cost Database (2016 release). 

So what?

Recapping the analysis so far:

  • The possible increase in UK’s GDP from signing free trade agreements with other countries is unlikely to match the probable decrease in GDP from leaving the EU single market and opting for a free-trade agreement. The net of the two effects is a contraction of 4.4% of GDP, equivalent to 230,000 jobs lost.
  • The benefits of getting rid EU red tape are equivalent to 0.07% of GDP. As a comparison, the value of goods and services exported by the UK to the EU is equivalent to 12% of the UK’s GDP.
  • Membership in the EU has meant that non-tariff barriers faced by the UK are half as costly as those faced by countries like Canada and Korea that have currently signed a FTA with the EU. If the UK wants to become an export-led powerhouse, it will need to give up some sovereignty to negotiate with other countries on issues of mobility of labor and capital.

In the end, none of this matters right? The experts were wrong in predicting a recession right after the referendum vote, so surely this is just some more scaremongering. So why should we care about the numbers now?

The analysis by Change Britain only came months after the campaign and it is patchy and subject to a long list of objections. It is not even based on Change Britain’s primary analysis, but instead it relies on third party studies, such as Open Europe or the European Commission. If Change Britain wants to lead this sort of momentous change, the least they owe their constituencies is a better attempt at preparing for the change.

There’s of course the political angle. But that deserves a post of its own.

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Interrupting the three-year long hiatus as some friends have asked for a quick run-down on the result of the Italian referendum.

How did we get here?

The long story (the context is important, but if you want the short story skip to the parts in bold at the bottom):

  • The end of Silvio: in November 2011, Italians took to the streets to sing the Hallelujah from Hendel’s Messiah to celebrate the fall of the third Berlusconi government. The resignation came on the back of a shrinking parliamentary majority as the Euro debt crisis became acute.
  • The technocratic government (2011-2013): on November 9, the President of the Republic appoints Mario Monti (a former EU Commissioner) as a senator for life, a title reserved for Italians of notable accomplishments, such as Nobel prize winners. In a somewhat undemocratic turn of events, after the fall of the Berlusconi government, Mario Monti (a university professor who had no previous political career) is asked to form a technocratic government to steer the country out of the crisis and enact structural economic reforms. After passing austerity measures and pension reform, Mario Monti announces that he will step down at the end of the legislature in 2013 and seek re-election. His party obtains 10.5% of the vote.
  • The Italian Grosse Coalition (2013-2014): the results of the 2013 elections were remarkable for two reasons. First, they mark the end of left/right politics as the country’s vote was split into three blocks, the Centre-Left (29.5%), the upstart 5 Star Movement (29.1%) and the Centre-Right (25.5%)  with a bunch of small centrists and fringe parties making up the rest. Secondly, in order to stave off a 5SM-led government, Enrico letta from the leftist Democratic Party agrees to a Faustian pact with Berlusconi’s  party, giving birth to a unique Left-Right coalition government, probably for the first time in the history of the Republic.
  • Renzi, the change maker (2014-2016): after winning the primary elections for the leadership of the Democratic Party, Matteo Renzi, the 38 year-old mayor of Florence, Renzi proceeds to reassures Enrico Letta that he has no intention to unseat him from the premiership by launching the hashtag #Enricostaisereno (#EnricoWorryNot). In Feb 2014, roughly 10 months after the beginning of the Letta government,  Matteo Renzi unseats Letta and becomes PM, running on a platform of renewal and bringing vitality to Italy. Optimism is running high in the youngest and most gender-balanced cabinet in the history of the Republic.
    • At the European elections of May 2014 the Democratic Party wins 40.8% of the popular vote, the highest percentage of votes ever won by a leftist party in Italy and the highest absolute number of votes of any European party in the 2014 election.
    • Emboldened by the results of the EU elections, Renzi moves the constitutional reform to the front of the agenda. The complex constitutional reform primarily aims to make the legislative process more agile by  moving away from perfect bicameralism (the Italian lower and upper houses have the same powers and are elected in a similar fashion not like the federal German or US Senate). The reform makes it through Parliament but without the sufficient number of votes to avoid a referendum. PM Renzi has to call for a referendum.
    • As the honeymoon phase tapers over (and the 5SM wins municipal elections in Rome and Turin by a large margin while the Democratic party clings on to Milan), PM Renzi vows that he will resign if the referendum does not pass. Warnings from his allies that politicizing the referendum might have negative consequences are not enough, Renzi doubles down on the threat. Rather than scaring people into voting in favor of the reform, this tactic has the effect of encouraging all the opposition to pile into the no vote. This includes the old guard in the democratic party that had been sidelined rudely by Renzi, some eminent constitutionalists, the 5-star movement, the xenophobic Right, the extreme Left, and Berlusconi (who flip-flopped form his early support).
    • A complex question, coupled with flat-lined economic growth, political scandals tied to influence peddling and a Minister’s family ties to a banking scandal and a brewing banking crisis means that the reform is rejected by 60% of the popular vote, with a turn-out of over 68%. Analysis of the vote split, show that roughly 25% of voters affiliated to Renzi’s Democratic Party joined the no camp, alongside the almost totality of 5SM supporters and over 50% of supporters for Berlusconi’s party. In terms of socio-economic status, the no was popular among young people, poorer geographic constituencies, the Italian South and the outskirts of big cities. La Stampa newspaper shows some of these trends in a very cool infographics for Turin, the city with the best run 5SM administration.

Where are we going next?

Politics

Renzi has vowed publicly to resign immediately. It appears that the President of the Republic (who is the one in charge of naming Italian PMs) is not quite enthused at this prospect, and has asked Renzi to see through to the approval of the budget law scheduled for the coming weeks.

The big constitutional elephant in the room is the fact that the country’s electoral law for the Senate has been deemed unconstitutional by the Constitutional Court and the electoral law for the lower house passed last April is awaiting a ruling from the Constitutional Court in the coming weeks. For fans of constitutional debate in translation, this article explains the nitty-gritty of the situation, but, barring a surprise ruling from the Court, the two electoral laws could lead to different majorities in both chambers (and call for divergent electoral strategies). A particular point of concern is the fact that, in its current form, the law for the lower house assigns a majority premium to the coalition that wins the plurality of votes. This means that the coalition that wins most votes gets 340 seats out of 620. A slight complication is that if no coalition list wins 40% of the votes in the first round, then the 340 seats go to the list that wins a run-off election. As things stand now, in case of a run-off, the 5-Star Movement is posed to win a majority in the lower house.

This leaves the following scenarios:

  • Renzi backpedals on the idea of resigning and instead sees through the end of the term to 2018. This seems unlikely, but as you may have gathered, continuity and coherence is not the biggest strength of the Italian political system. It would also be political harakiri for the Democratic Party, so Renzi is likely to face pressure not to stay, even if he should change his mind.
  • Renzi resigns now and the country goes to elections. This seems a bit extreme, especially given that the country is awaiting the decision of the Constitutional Court on the electoral law. As highlighted above, at the moment, the 5SM is likely to win majority in the lower house and, riding on the post-referendum victory, could scrape by a majority in the Senate or could form a minority government  with Berlusconi’s party or the extreme right. Again, this would be political harakiri for the Left, so it is unlikely to happen.
  • Renzi resigns after passing the budget law. In my opinion this is the most likely option. In this case the following could happen:
    1. Elections after his resignation: again unlikely for the point highlighted above
    2. Care-taker government until end of mandate: A new PM is nominated and a cabinet reshuffle takes place with the mandate to see through the end of the legislature in 2018, revise the electoral law and push through some necessary reforms with cross-party support. It is not clear to me that there is any appetite for cross-party work, in particular given the insistence of the 5-Star movement to go for early election and Berlusconi’s eagerness to stage a comeback into the political limelight (yes, he could come back as the figure head though he is still banned from running for office). But then again, the Left and Berlusconi’s camp spat vitriol at each-other for 20 years only to come together in a grand coalition to avert a 5SM-led government. The Italian Parliament is a jungle full of chameleons.
    3. A care-taker government to reform the electoral law: a government of technocrats or, more likely, led by institutional figures such as the speaker of the Senate or the current Ministry of the Economy is put in charge of reforming the electoral law (and maybe fix our impending banking crisis) and then calls for early elections. The electoral law would probably have to be one that appeals to all sides of the political spectrum. This is likely to take time and will probably offer a possibility to opponents of the 5SM to show the movement up by creating infighting (something that the movement seems to have a strong  capacity for).

It pains me to say that in both of the last two scenarios, Berlusconi’s party (in disarray, with no leadership and with the figure head barred from running) is probably going to be the kingmaker, as they could tilt the balance by siding with the 5SM. Thankfully, history has shown that Berlusconi’s party is something that could be up for sale. My uneducated guess would be that the last option (a care-taker government to change electoral law) is the most likely option. It buys the Democratic Party and Berlusconi’s party time to regroup, as both have been hemorrhaging votes to the 5SM.

Economics

The markets seemed to have had already priced in a no vote ahead of the referendum. Except for some volatility, no major drama took place since the vote in terms of Euro exchange rate or Italian bonds and stocks’ performance. Europe might send strong signals to Italy that it needs to sort out its banking crisis and provide a modicum of political stability so that the investors that have been lined up to bail-in/bail-out/bail-around Monte Paschi di Siena do not run for the woods. And/or it appears that state aid might be ready as a stop gap measure as soon as this weekend, to fill in the 5 billion euro gap and save the world’s oldest bank from dragging down the Italian and European banking system. Perhaps the strong resistance for state bailout from the German side has evaporated in the midst of this crisis?

Sto leggendo un libro parecchio interessante, intitolato “Chissà come chiameremo questi anni” edito da Sellerio. Il libro (postumo) raccoglie le grandi indagini realizzate da Giuliana Saladino, una giornalista de “L’Ora” – quotidiano progressista pubblicato a Palermo fino all’inizio degli anni Novanta e che annoverò tra le sue firme Sciascia, Guttuso e Quasimodo (giusto per citare i nomi più famosi).

Il libro raccoglie una serie d’indagini sociali e reportage che raccontano con una voce estremamente limpida i cambiamenti sociali della Sicilia e dell’Italia tra gli anni Settanta e Novanta. Dalla speculazione edilizia, alle sperequazioni sociali e i delitti di mafia, il libro raccoglie quelle pagine di giornale che il giorno dopo sarebbero finite per incartare il pesce (come scritto nella prefazione) e che oggi sono conservate per riproporci uno spaccato di quello che eravamo in altri tempi. E come forse siamo anche oggi.

Da “Quanto spende, Signora?” (p.91)

Rivolgo la domanda alla moglie di un bigliettaio […]

Al primo del mese lei ha dunque in casa tutto il necessario [dopo la spesa allo spaccio aziendale n.d.r.] e 83 mila lire [dopo trattenute dalla busta paga n.d.r.]. Come le spende?  35 mila di casa, 30 mila la cambiale della macchina, 3.000 la rata della macchina da cucire, 10 mila di acqua luce gas, e ogni tre mesi il telefono. Faccia il conto… fanno 78 mila lire … mi restano 5 mila lire e ce ne devo aggiungere altre dieci per pagare il prestito di 100 mila che ci ha fatto una di queste casse per impiegati: su centomila se ne tengono 30 mila. Ladri. E’ stato l’anno scorso, che ho avuto un aborto: 40 mila lire. La cassa soccorso dell’azienda di mio marito mi paga solo la visita ostetrica più 5 mila lire, e abbiamo dovuto fare questo prestito a interesse.

Che fate la domenica? Ce ne andiamo al mare, dalle parti di Terrasini. Ci divertiamo moltissimo, arrostiamo la carne là stesso, abbiamo l’ombrellone e la tendina per spogliarsi, i bambini impazziscono di felicità.

I bambini chiedono soldi?  Sanno che non ce ne sono e non ne chiedono. Quando usciamo li avverto: non si compra niente. E il piccolo fa tutta la strada dicendomi “mammina io sono bravo, ciliegie non ne domando” poi vede le fragole: “mammina io sono bravo, non ne voglio fragole” E così per il cono, per le banane, per le noccioline.

Forse perché mi ricorda molto mia madre, il modo in cui faceva (e adesso, a quattro anni dalla pensione continua a fare) la spesa e quello che lei ci diceva prima che uscissimo di casa, però credo che questa storia di giugno 1969 rimanga anche oggi la storia di molte famiglie italiane, come si puo’ evincere dai dati Istat rilasciati qualche giorno fa.

Da “L’imprenditore diffidente” (p.132)

I nostri interessi – dice [S.M. piccolo imprenditore n.d.r.] – sono completamente diversi da quelli della Confindustria. Noi cerchiamo alleati, certi alleati, e a noi non può stare bene il discorso di Agnelli, presidente appunto della Confindustria, oltre che della Fiat, il quale porta avanti un discorso che secondo me è molto pericoloso. Cosa dice Agnelli? Partendo dal parassitismo, dagli sprechi, dalla disamministrazione imperante, finisce per sparare a zero sulle partecipazioni statali, mira a privilegiare il privato sul pubblico e a quei livelli il privato significa soltanto monopolio”.

“Che alleanze cercate? Intanto da un po’ di tempo a questa parte, fatto abbastanza recente, cerchiamo un dialogo col movimento operaio. Anche qui troviamo delle difficoltà. Non perché non ci sia una reale volontà d’intesa, ma direi che è un’intesa su basi sbagliate. Secondo me è da respingere il discorso totalmente paternalistico del movimento operaio nei confronti della piccola e media impresa. Vengono a parlarci di “momento privilegiato” della piccola e media impresa da parte del sindacato. E che vuol dire? Che pago di meno l’operaio? Che non mi faranno le lotte sindacali? È paternalistico nei nostri confronti, è rinunciatario da parte loro. I tempi cambiano, la società cambia, oggi il discorso serio e alternativo sarebbe quello di porre l’operaio come protagonista della piccola e media impresa, di coinvolgerlo in prima persona nella partecipazione alla programmazione. Questa oggi è la via nuova, il resto è demagogia di chi si accorge solo adesso della nostra esistenza e vuole “salvarci”.

Ora, questo articolo venne pubblicato il 7 giugno 1975. Non aggiungo altro, solo un link ad un articolo del Sole 24Ore sulle diatribe recenti sull’Articolo 18.

Piccolo bonus: una foto della chiesa di San Giovanni agli Eremiti a Palermo, giusto per ricordare che a volte nel nostro paese abbiamo la bellezza sotto gli occhi ma non ce ne accorgiamo.

I am still battling with jet-lag and catching up on the sleep that grad school has deprived me of for the past 5 months. It’s good to be home. Good-ish. After dealing with reading depressing news about Italy’s imminent implosion for months, now I get to be immersed in national hysteria 24/7. Awesome!

The other day some CEO from a big supermarket chain was on TV saying how sales in supermarkets have gone down by 6% from last year, marking the worst decline in 50 years (really? I did not know our nonexistent supermarkets collected statistics back in the 1960). In particular, sales of red meat have gone down while sales of eggs and beans have gone up, or so he claimed, suggesting that either Italy is on the cusp of a vegetarian revolution or Italians are buckling up for a very lean Christmas. His voice adds to the chorus line of customers in taped in shops while lamenting the pitiful state of the nation, entrepreneurs whining that the government is not doing enough, our trade unions that are living in some Dickensian parallel industrial universe when our factories are all shutting down by the minute, homeowners impoverished by having to pay 150 euros in yearly property taxes on their first house (the horror!) and on top of all, our beloved politicians from the left and right doing what they do best: crying “Social Butchery” (Italian for “We don’t know what to do or say and would rather not do anything about this”) from the travelling shit show that is the Italian Parliament.

It appears to me that Italians firmly believe that if we are deep in the shit it is either none’s fault or someone else’s fault. Some enlightened citizens have been all too quick to blame the political class for the mess we’re in, as if those got where they are by self-appointment. None seems to have voted for these politicians (although, truth be told, we actually did not pick candidates but had to vote for a list in the last election thanks to our new electoral law, called ‘the pigsty‘ by the same MP that sponsored it). Some other enlightened citizens like to say Berlusconi is the cause of all of this, and while I tend to agree to some extent, I cannot ignore that Mr B. is the toxic by-product of our dis-functional politics (this in and of itself could be the subject of a longer post, some background). I am also not deluded enough to think that if our left-wing politicians could not win an election and keep a government together for more than 15 months when the alternative was a philandering clown marred in sexual and corruption scandals, it must be that they are also not very capable. Everyone seems to agree, however, that the Euro must be the cause of all this, to which I like to point out that if we still had our own currency it would probably be worth less than toilet paper right now. In fact, we had a major speculative crisis in 1992. Let me fish out some news article from those days (11/09/1992):

Global recession apart, Italy has two major problems: a massive public debt (much higher than that allowed by the Maastricht treaty) and uncompetitive labour costs. Source: here

It seems that twenty years have passed and nothing has changed. Our political class supposedly went through some major regeneration (on paper) but still nothing has changed.

I was slightly irked by all of this. It seems that a large portion of the Italian population is engaging in a national competition to stick their head into the sand while also waxing lyrical about how someone else is the cause of their misfortune. If this crisis has done anything is to hold a mirror to our faces and revealed us for what we have become: a nation that is morally and financially bankrupt.

To have a proof that we are morally bankrupt, it is enough to watch this video shot the day after some model citizens torched a whole Roma camp, after a rumor (later revealed to be false) was spread that a local teenager was raped by two Roma men. Pogrom,  Italian style. Condemnation flew in from all sides (minus those scumbags that sit on the right-hand side of our Parliament and their sycophants) and this was archived as an anomalous episode. Until a couple of days later a neo-nazi shot two Senegalese street vendors dead in Florence. Clearly we seem to have found that someone else who is the cause for our problems.

It seems to me that we have become a society where none is ever at fault for things that go wrong, none is ever responsible, none ever wants to pick up the tab for fixing things, because our country is, in the end, not ours: it is some bottomless pit we can keep taking without putting things in. Suffice to say that Italy has the highest tax evasion rate in all of Western Europe, after Greece (YAY for Greece, for not making us look bad!):

Tax fraud is estimated to equal more than 20 percent of Italy’s annual economic output. From more than 41 million tax returns filed in 2010, fewer than 1 percent of Italians reported income greater than $135,000 (Washington Post)

According to the book “Soldi Rubati” taxes have gone up by 12.5 % in the past 30 years. If everyone paid taxes and we could cut payroll taxes, each salaried worker would get 275 euros per month (3300 euros in a year approx). Meanwhile:

There are 200,000 Italians who own luxury cars, but they’re telling the taxman that they have an annual income of between €20,000 and €50,000. One Italian claimed to have an income of €500 a year, but managed to run five Ferraris (source)

So where am I going with this? This debt crisis is not only a problem of economics and fiscal rigor, but a chance to turn ourselves around. We are either at the lowest point but looking up, or we are on an irreversible path towards global irrelevance and moral and financial impoverishment. Italian debt exploded in the 80s partly because of high global interest rates because of the various oil and global economic crises, partly because our political machine kept banking on macroeconomic tricks (currency devaluations etc…) to keep us going and beautify our deficit problems without having to come up with political solutions (for a more in-depth analysis, you can read here).

This crisis can be our way out of this vicious circle. If we got everyone to pay taxes (and apparently they have a game plan to do this) we might have a GDP that is 20% higher.  There is clearly a way out. Now that we are done with the economic austerity, we need moral austerity. The economic and moral case is clear and the solutions are all there, all it takes is responsible politics.

(Bonus track: advert on tax evasion currently running on national TV. Hint if you do not speak Italian: it shows different kind of animal/plant parasites and ends with a social parasite.)

I have enrolled in a graduate programme in public administration and, as a reward for having made the cut, I was invited (with the remaining 70 other admitted students) to a pre-course, also known as Math Camp, much to the amusement of my friends who now consider me irredeemably lost in the twilight zone between New Jersey and Nerd-land.

By day two of math camp, the daunting fear that the overachiever within me had made me pick too hard a math pre-course finally evolved into a fully fledged epiphany. Twenty minutes into the class the only intelligible thing on the blackboard was the acronym WLOG. Now, the fact that the acronym for the phrase ‘without loss of generality’ has already become part of my vocabulary should let you imagine what was on the rest of the board (it was a class on ‘real numbers’ yet there wasn’t a single figure on the board, just greek letters and other doodles).

The remaining two and half hours of the class had become a futile exercise of copying notation, as I had resolved to cut my losses and ask to be moved to the intermediate course the next day. In a sense it could have been a class on Urdu calligraphy in that what I was copying was totally unintelligible to me. My pride was not particularly hurt, as the PhD candidate (with an engineering degree) sitting next to me had the same facial expression as me, i.e. that of mild physical and mental discomfort just like a child with food poisoning sitting on a dentist chair.

My mind started wandering and flash backs of moments in my work life appeared. My work life usually revolved around managing personalities of colleagues, bosses and counterparts and the hardest conceptual part of my workday was keeping up with the ever-growing editing requests for my boss’ power point presentation.

I tried to think about the role of cartesian geometry and its elegant rationality in public policy, and struggled to find a real-life example.

I thought about the current US budget problem and how it could be (relatively) easily solved in an econ class, but how it has become a messy, byzantine turf war. Congress has access to the best economists in the world, yet the tone of discussion about the budget would fit right in an episode of Housewives of New Jersey.

And then I thought about how putting myself through the pain of math and econ course will make me a better professional bureaucrat at the service of the nation one day. I remembered a classmate from my undergrad days who made the most out of her uni degree and had a visible and sizeable impact on the welfare of the Italian population. After graduation, she became the poster girl for a famous lingerie company (see below – I am not making this up), thus doing more for the nation (oh well, at least half of the nation) than the whole of our Parliament’s Economic Commission put together.

Pyongyang’s Pizza Connection

The Dear Leader Kim Jong Il apparently is so fond of pizza that he decided, in his vast magnanimity, to ensure that the North Korean populace could also enjoy the privilege of having a pizza while in Pyongyang. He thus provided for the establishment of not one but two pizza restaurants in Pyongyang. We visited one and we learned that once a year two Italian chefs are flown in for refresher training for the staff. The restaurant we visited had a totally legitimate Italian feel with limoncello bottles for sale at 17 US$ and a margherita around 5 US$. I worked out that in comparison to the purchasing power of local salaries, a pizza and a beer cost the equivalent of 30 or 40 US$ in terms of European prices, so pizza is pretty much a luxury (shocker for a country with chronic food shortages), more or less like a sushi dinner in a fancy place is in Europe.

One of the guides asked about my opinion about the unfolding fiscal melt-down in Italy. I had caught the news on the BBC the night before so I explained the various measures that my beloved government has been taking to avert fiscal implosion. Leaving aside the slightly disconcerting fact that news of the Italian debt crisis had reached North Korea basically in real time, I will never forget the worried looks of our guide who, while living in the second happiest country in the world (according to Korean sources), seemed genuinely preoccupied with the prosperity of Italy and genuinely wished my country a speedy recovery from insolvency.

Revolutionary Art

Out of body experience. Feat. The Great Leader, Comrade Kim Il Sung
As instructed by our travel company, we wore our best clothes for the visit to the Mausoleum where the Great Leader, Kim Il Sung lies in state in Pyongyang. The dress code requires a shirt, tie and smart-ish shoes for the gents and a long skirts for the ladies. I had to purchase a shirt in China before leaving for the DPRK, which has now become my Kim Il Sung shirt. We were slightly disappointed to find out that the rigid rules did not seem to apply to two Russian tourists who showed up in their blue batik shirts and sandals. The horror, the horror. When we pointed out the fashion faux pas, our guide shrugged and mumbled something along the lines of ‘Russians, they are like that’.

You leave cameras and all other belongings at the cloak room of the mausoleum, before walking the one kilometre that separates you from the glass coffin of the Father of Our Nation, the Great Leader Kim Il Sung. Like tin soldiers we march with other visitors, mostly Koreans brought in by their collective farms and factories to pay tribute to the Father of Our Nation, the Great Leader, Comrade Kim il Sung. We enter a big room with a marble (or is it plaster?) larger-than-life statue of the Great Leader, Sun and Father of Our Nation, Comrade Kim Il Sung against a pink and sky-blue background (recreating sunset, we gathered). The faux-plaster/faux-marble statue is lit with a light coming from above and a celestial sound is spat out by the speakers in the room. As told, we march in groups of four, get to a line marked on the floor, where we bow in front of the statue of the Great Leader etc. etc. Kim Il Sung. Thus we proceeded towards the Hall of Lamentation, where we are handed Sony MP3 players (made by the Imperialist Swines in Japan) whereby we can hear the mourning sounds (translated in English) of crowds of Korean lamenting the death of the Leader Maximo. The Koreans are luckier than us because they get a live rendition of the sorrows of the Korean people, courtesy of one of the guides of the mausoleum with indefatigable performance skills (As an aside, imagine having a business card that reads “So and So, Live Performer at the Hall of Lamentations of the Kim Il Sung Mausoleum. Just a thought for your next high school reunion). We are then showed a big collection of honours and awards received by Our Great Leader Father of the … you get the idea Kim Il Sung. These include, inter alia, certificates of honorary citizenships from Italy, France, Belgium and various other Western nations. We learn that those have been bestowed in acknowledgment of the Great Leader’s contribution to modern tought through his Juche idea (in case you haven’t yet, you can educate yourself about Juche here).

Finally we reach the Sancta Sanctorum of the Mausoleum. We pass a door that is like a mini car wash booth, where the soles of our shoes are brushed and we are sprayed some air (containing disinfectant? or perhaps it is communist holy water from Leningrad?). Ahead of us, lies the mummified body of Our Great Leader, perfectly preserved in a glass coffin. We march in rows of four, like little toy soldiers, in what is a spectacle of choreographed mourning. After forty minutes of interminable corridors, halls of lamentations, celestial visions of plaster statues the propaganda machine starts to work its magic. As we bow four times (one time for each of the sides of the coffin), I am only one step away from thinking to myself  “Thank you Great Leader, Comrade Kim Il Sung, Sun of Our Nation. Thank you for being the  Liberator and Father of the Second-Happiest Country in the World. Our Glorious Nation. The Democratic People’s Republic of Korea”

Outside the Kim Il Sung Mausoleum, Pyongyang

Customs of the People’s Democratic Republic of Korea

Upon going back to my seat after lunch on the Pyongyang-Beijing train I found that my fellow travellers had indulged in a weird sort of packed lunch which included clams, bananas and pumpkin seeds. Pretending to find the crustacean lunch explosion and the remains thereof absolutely in tune with my expectations of what a Chinese packed lunch on a train might entail, I sat on my seat while filling the exit card and the custom declaration form of the DPRK.

I prepared myself for the two hours it would take to complete formalities. First an officer came, took all of our passports and walked away. As he left, I realised that my passport was now entrusted in the tender loving care of Korean authorities, much like it had been for most of my time in Korea. I had become again member of the international brotherhood and sisterhood of people whose passports are taken away from them and who are thus at the mercy of their sponsors or guardians such as minors and domestic workers in Saudi Arabia.

A second official came and our compartment began the hectic process of luggage inspection that had already caused considerable chaos all over our carriage. The process started shortly after the officer  expressed some mild disgust at the manner with which the lunch leftovers had taken over most of the space on the table where the paperwork would have to take place. Perhaps hoping to get over the painful bit first the officer started with me. I opened both of my bags for the officer to have a look while also fishing out the electronic items I had declared on my form. The officer took my camera and tried to place it in the narrow empty space between the gaping carcasses of clams and the carpet of spat-out pumpkin seeds and banana peals. Then he proceeded to unwrap my phone which had been sealed in a paper envelope, stamped across the seal and wrapped in tape before being entrusted to my guide upon arrival at Pyongyang airport. Upon seeing a keyboard-less mobile not bigger than 5×7 cm the officer made a perplexed face and called a colleague over to show how Sony had managed to produce a Lego toy that can handle internet browsing and international roaming.

After that, the other passengers went through their customs checks. The numerous suitcases of the two Chinese business men were opened while the rest of us watched the process for its sheer entertainment value (incidentally, based on a nationally-representative sample of two people, I have decided that all Chinese traders are messy packers). Everything went smoothly until an undeclared phone was found in one of the bags. Some commotion ensued as the real owner of the suitcase was brought in from the other compartment. A calm exchange ensued via a Chinese passenger who was also fluent in Korean. More officers were summoned and a thorough search of the compartment took place as the mobile phone smuggler was sweating profusely. While I was wondering if we would be regaled with a body cavity search performed live on the train, the officer found some souvenir posters of mine which I was asked to unpack. Those were replicas of propaganda posters that we were told not to parade around customs. A perplexed look later the officer carefully packed the posters away and dished out my camera from the food-ocean and handed it over to a colleague who would go through all my photos to ensure they were all kosher. As the officer went through my holiday artsy fartsy pictures absent-mindedly some kind of solution had been found to the sino-korean mobile phone debacle, although what exactly happened is unclear to me. I noticed that the officer suddenly a 100 Chinese yuan (10 euro) note had appeared inside the pocket of the officer.

Eventually the customs inspection process came to an end and we received our passports back as well. We thus completed the 10 minute journey to  Dandong, China where a life of free mobile phone usage and a bright future of clam lunches awaited us.

Get your vote out. It’s the DEMOCRATIC People’s Republic after all…

For more photos from the DPRK, check my Flickr account

I am writing this post on the topic of the minimum wage at the request of a friend (not sure what this says about my personal life :)).

The Egyptian government recently announced a plan to increase the minimum wage first to 700 Egyptian pounds and then to 1,200 EGP (200 USD) for some 1.9 million public sector workers. The plan was detailed in the economic programme released by the Egyptian government which was the subject of a previous blog post:

The government is committed to provide a fairer wage structure. To honor this commitment, we will introduce lump sum wage increases in entities with low levels of remuneration, to achieve a minimum gross wage of LE 700 per month for all workers in the public sector in 2011/12. It is our objective to increase this wage level gradually in the coming years to reach LE 1,200 by mid-2015. The partial wage increase in 2011/12 is expected to benefit some 1.9 million employees (about one third of the total public sector work force), mostly municipal workers. It will increase the effective wage bill by around 6 percent and cost the budget about LE 7 billion. Workers earning wages above this minimum in non-targeted entities will receive their standard annual increases to contain the growth in the wage bill while maintaining incentives for progression and skill differentiation.

So this is overall good news: 1.9 million people (and their families) will supposedly received a better salary soon.

However, like in many other countries including developed ones, the issue of minimum wage becomes a highly political one (for a good overview, check this). While public sector employment is a life-time guarantee (although this has proven not to be true for those workers in publicly owned manufacturing industries that have been privatised in the past decade), a large number of  workers are employed in the private sector where the minimum wage does not apply. Actually, make it the private sector where hardly any labour law is really applied. In my personal experience, with the exception of few friends who work for large Egyptian or foreign companies (e.g. companies that are listed on the stock exchange, multinationals etc…), most Egyptians do not have a work contract. And the few who do, are often asked to sign a dateless resignation letter in case their employer decides to lay them off at some point in the future. So, it’s clear that even if a minimum wage became mandatory for private sector employees, it will probably not be applied.

So how could the Egyptian government improve the wages of the million workers in the private sector? The labour market situation requires overall restructuring in Egypt, if nothing because the informal sector, while providing employment for a large share of the workforce, is also the sector where abuses such as withholding of wages, lay offs without compensation, lack of insurance and pension rights are hardly ever addressed.

My argument is going to be that trade unions could be part of the solution (but not the only solution) to the problem of low wages in Egypt. This paper details the impact of trade unions on wage of workers. The subject is at the centre of a long and complex debate but in a nutshell, the more unionised workers are there, the more unions have bargaining power over wages and benefits. This creates a ‘Trade Union Wage Premium‘ (for more info check here). The paper mentioned above shows that the difference in wages between (similar) unionised and non-unionised workers averages around 15-20% with peaks of 34% in places like Brazil.

There are also a lot of other issues when unions come into play, including creating a situation where those who are not unionised basically represent a pool of workers that can be employed informally to avoid paying higher wages to unionised workers etc… The paper linked above does a good job of explaining the various caveats.

The point I am making here is that the discussion around the minimum wage should not only be centred around public sector wages or declaring a minimum wage also for the private sector that will not be enforced just like most of labour laws in Egypt.

Giving workers the right of assembly, the right to be a part of independent unions (with different political affiliations) could do a lot more for Egypt’s workers by increasing their bargaining power, somehow going against the patronising idea that the state gives its citizens rights as concessions as opposed to empowering them to demand, campaign and hopefully obtain what they think is best for them. Of course empowering trade unions will also require an industrial policy that is based on consultation and dialogue between employers, workers and the state – perhaps an even harder cultural shift from the current dynamics.

On the subject of labour rights, a little bonus track material on corporations and interns:
The Corporate Social Irresponsibility of the Internship Phenomenon
– aka “the highly competitive race to the bottom of the corporate ladder”

I have been reading a lot of articles and posts about the IMF deal and Egypt. And while these articles/posts were almost universally well researched and well written, I felt a certain unease while reading them. I felt they were masterpieces of criticism of the IMF discourse that would only preach to the converted.

When I was doing my BA in International Economics, I often felt like an alien. I often felt that I was one of the few in my class who questioned the models we were given. When you have someone present you with an equation that proves that some theory is the ultimate truth, and that is done on repeat for 20 hours per week for three years, then you do think that economics holds the ultimate truth and right answers to everything. Once in a practice test we were given this question to answer “Prove, with the help of the models we have studies, that liberalisation is not necessarily bad for child labourers in developing countries”. Out of the five people in my study group, I was the only one who seemed to have some moral qualms about the way the question was phrased.

Back to the initial point, this well-written article on Jadaliya presents this salient argument:

“Egypt is, in many ways, shaping up as the perfect laboratory of the so-called post-Washington Consensus, in which a liberal-sounding ‘pro poor’ rhetoric – principally linked to the discourse of democratization – is used to deepen the neoliberal trajectory of the Mubarak-era. If successful, the likely outcome of this – particularly in the face of heightened political mobilization and the unfulfilled expectations of the Egyptian people – is a society that at a superficial level takes some limited appearances of the form of liberal democracy but, in actuality, remains a highly authoritarian neoliberal state dominated by an alliance of the military and business elites. “

I agree with a lot of the points raised. Except, I disagree with the way it is presented because it is the same anti IMF rhetoric every politics/sociology student/scholar reads about and is satisfied with. But guess what? the IMF people ain’t going to be worried about the same criticism they have been hearing since the 70s. And, whether I like it or not, the IMF is not going away any time soon and yes, it is a massive post-colonialist, capitalist archetype of an organization, but unfortunately this is the world we live in and these are the people that call the shots.

So if you want to win the debate, you have to ask questions in their own language. Personally, if Egypt were my country, I would want to ask the following questions:

  • Until after the announcement of the IMF and other loans were made, there was no publicly-available economic policy document that would outline how the loans were going to serve the broader objectives of Egypt’s economic policy. In a sense it is like an entrepreneur going to ask for a loan from the bank without a proper business plan. This document was released by the Ministry of Finance around the 5 June, while first news of the IMF deals were circulating as early as 17 May.
  • Why is a non-elected, transition government signing big loans with a long-term repayment plan? One reason could be that the budget year begins in the summer in Egypt, so the government has to make sure it has enough cash lined up to cover the expected 9-10% debt as proportion of GDP. However, reading the seemingly author-less policy document that appeared on the Ministry of Finance’s website on 5 June (link here) the following emerge:
    • “The budget includes a temporary allocation of LE 15 billion for additional spending—mainly investment–in education and housing. The housing investment is part of a broader initiative to fund the construction of one million low-cost, environmentally friendly housing units for the poor and young families over the next five years.” (P. 3)  So couldn’t this expenditure be delayed until an elected government can put in place checks and balances to make sure low-cost housing is not subject to the speculations some may make on the real estate market?
    • “We are also putting in place a program of 6-month training stipends to provide support for unemployed workers and new graduates, at a cost of LE 2 billion” (p.3) Again a very noble reason to take out loans, but investment in training only yields results in the medium to long-term – so why the rush?
    • “The budget includes a total allocation of LE 124 billion to finance food and fuel subsidies […] The budget includes policy funding of LE 13.5 billion to the Egypt General Petroleum Company and other
      4 economic authorities, as part of a longer-term process to restructure their balance sheets. This funding is conditioned upon improvements in operational performance, including clearing outstanding balances among public sector entities” so on one hand they increased the subsidy for petrol, on the other hand they pour 13.5 billion into an inefficient machinery whose end product they subsidise.

There are more points in the document that raise some questions, but in general, the way this policy document reads (in conjunction with the various media statements made by MOF so far) may push the semi-engaged reader like myself to wonder to what extent this outpour of money on spending right before the election is an opportunity to project an image of a transition government that is trying to fix in 6 months things that have not worked in 30 years, and on credit. I am not so much doubting the intentions of the policy, but rather the fact that an unelected cabinet is going to saddles the country with long-term debt to cover the current projected deficit and increase spending – when one may assume the IMF loans bankrolling the process to be contingent on budget cuts in the future.

Paraphrasing my previous post, it’s like when the state spends like a single man on a dinner date, putting everything on the credit card.

PS: Also on the previous post, this is what the economic policy document had to say about the inherent inequality of the current subsidy system

Subsidy reform: Reforming Egypt’s subsidies, in particular the inequitable and inefficient fuel subsidies, and replacing them gradually with better targeted income support and other social safety net measures will be critical to improve the effectiveness of public spending and support fiscal consolidation in the medium term. To get firmly on the way, we will prepare during 2011/12 a strategy to expand the social safety net, improve pro-poor and social programs, and undertake subsidy reform. One area that we plan to address early on is to improve the targeting of subsidized liquefied petroleum gas (LPG). The LPG subsidy has a very high cost and its benefits are largely captured by middlemen in the distribution chain, which has contributed to the emergence of a black market and shortages in the residential sector. Addressing subsidies will improve social justice (since benefits are mostly captured by the well-off), reduce waste, provide incentives for more rational use of the country’s natural resources, and create much-needed fiscal space.

Let me say that life has been rather hectic in the past three months, therefore I have not had enough time to write more econ-related posts, which was the original idea behind the blog.

Now that work life is a bit easier on me, I will start lecturing and pontificating about something most of you are not even interested in.

When I was working at a check out in a super market in Italy, I realised that there is a lot you can learn about a person’s life looking at how they spend their money on a daily basis. A single man going on a dinner date would buy wine, deodorant, a lot of food you cannot cook one single dish with and condoms. A working mother (with toddler) would rush through the supermarket on her way home and grab a disparate set of things such as baby food, comfort food, diapers, fruits, vegetable, staples, bottle of wine.

Because I do not have a life, I decided to apply the same approach to the Egyptian state so I went and downloaded the general budget final account data (available in Arabic for the year 2008/2009 here). The document looks at the budget commitments vs actual expenditures over the course of a fiscal year. So here’s some fun facts ( for comparison, 1 USD equals 5.9 EGP) :

On the revenue side:

  • Sales tax 64.5 million EGP (means on average every Egyptian pays less than 1 EGP per year in sales tax)
  • Taxes on employment 10.5 billion EGP (p.30) (on average 130 EGP p. capita p. year, but of course most of the people who pay employment taxes are those employed in the public sector and the few private sector companies that abide by labour laws).
  • Taxes on commercial and industrial activities 5.9 billion EGP (p.30)
  • Taxes on petrol agency and foreign partner (singular) 34 billion EGP (p.30)
  • Taxes on beer and alcohol: 330 million EGP  (p.59). This is higher than total sales tax (!) because places that sell alcohol are regulated as opposed to the rest of the economy.

On the expenditure side:

  • Subsidies to peasants committed 405 million EGP, spent 144.5 million (p.23). Maybe Egyptian peasants do not need subsidies – Meanwhile Egypt is reported to be the world’s largest importer of wheat. In 2010, the oil minister stated that Egypt imports 40% of its food, and 60% of its wheat (source: here).
  • Electricities subsidies 3 billion EGP committed, spent n/a ( considering it is one of the biggest line items one would expect a foot note but the document does not have an explanation as to why actual expenditure is not reported) (p.23)
  • Support to low-income housing 1 billion EGP committed and spent (p.23). (I wish I had the time to follow-up and see HOW these 1 billion EGP were spent).
  • Subsidies for Health and Drugs 399 million EGP (p.24)
  • Social security 1.2 billion EGP (p. 24) [compare with: expenditure on research and (feasibility?) studies for investment projects 1.5 billion EGP (p.27)]
  • Health insurance for the unemployed 14.4 million EGP (p24). With at least 2.3 million unemployed according to government sources, it’s an average expenditure of 7 EGP per person.
  • Subsidies for petrol resources 26 billion EGP (p. 24)
  • Subsidies for export promotion 3.2 billion EGP (p. 24)

This is of course a very superficial look at a complex issue such as expenditure allocation and social policy, however one could make a couple of observations:

  • Taxes revenues from sales are fairly low. This is partly because a lot of trade takes place in the informal economy. However, taxing sales (VAT style) means that does who consume more pay more – The same applies to tax revenues from employment which are much higher than tax revenues on industrial and commercial activities. At the same time, if you happen to be working in the formal economy or public sector, you will be paying a disproportionate amount of taxes on your income.
  • Expenditures seem to be geared towards subsidising consumption and the real estate market rather than, say, providing health insurance for the unemployed. Also electricity is subsidized – which is great, except these subsidies end up benefitting the ones that are better off .

For instance, let us look at petrol subsidies that absorb over 4.4 billion USD every year (incidentally you may wish to compare this to Obama’s offer of debt relief totaling roughly $1 billion “over a few years“). Let us imagine that on a given day a well-off expatriate (whom we shall call Mr Economic Revolution) fills his car with 30 litres of petrol. Now the price of each litre is 2 EGP half of which is subsidies (I am using a fictitious amount just to make the explanation simpler). Therefore the Egyptian state just paid 30 EGP towards the consumption of Mr Economic Revolution who happens to be a wealthy Italian expatriate working in Egypt. Ms Minimum Wage is an Egyptian mother who works as a public servant. She does not own a car so she uses public transportation to get around town. Because she shares the cost of a ride with many passengers her daily consumption of petrol is lower, say 1 litre per day (again, fictitious). Everyday, the Egyptian state spends 1 EGP ensuring that Ms Minimum Wage can get to work.

So basically, the morale of this blog post is that even a cursory look at the Egyptian budget reveals a regressive social policy (i.e. a policy that takes more in terms of percentage of income from the poor than the rich, check here). The expenditure pattern mirrors the one of the ficticious single man going on a date: i.e. one of instant gratification.

Of course the issue of subsidies and social policy is way too complex to be tackled here. However, one may only wish that the way public money is spent in Egypt is geared towards investment in public services (i.e. treating citizens as a resource) rather than towards subsidising consumption (i.e. treating citizens as consumers).

Of course I am not arguing for a blanket elimination of subsidies neo-liberal style, as some of them do play an important role in creating a safety net (especially food subsidies). What I am arguing for is a bolder vision of economic and social policy (an economic revolution, perhaps?). One way could be to eliminate some of the subsidies and redirect the savings towards better wages for public servants and conditional cash transfer programmes for the poor. I am including a link to a World Bank’s review of conditional cash transfer programmes to prove that I am not talking about sci-fi but mainstream public policy discourse spurred by socialist governments and embraced by the liberals as well.

I will conclude with two links. The first to a recent article on the Guardian on social policies and the second to the findings of a recent study of 750 Egyptian youth. Surprisingly (not), the youth interviewed viewed jobs and employment as their top priority. Corruption came second, followed by security with constitutional reform fifth and democracy/free elections at the bottom of the list (original link here)

Last night I was at a house party in Cairo. I believe the way house parties have changed after the revolution deserves a fully fledged ethnographic study. Suffice to say that the usual trite ice-breakers now feature a new acquaintance’s in-depth analysis of the scenarios for the military rule and/or the possible implication of this and that on the future of Egypt. Well, maybe it’s better than the usual ‘ohwhatdoyoudohere, howlonghaveyoubeenherefor, wheredoyoulive and sodoyouspeakarabic conversation combo.

Anyways, I am digressing. Since everyone is onto this revolution bandwagon I thought, what about me??! For sure I must have some half-arsed ideas I can share with the rest of humanity on this.

So here’s the thought process. I have no idea what is going to happen to the constitution, the military rule or the incumbent minister of water and irrigation. What I am really curious about is whether this revolution will eventually end up into decent-paying jobs, not having to struggle with double-digit inflation, not having to pay for private care because public hospitals are in shambles and why not, having the luxury of attending a protest where protesters are not out-numbered by police and/or harassed by misogynist fuckers.

A lot could be said about the dismal performance of the Egyptian economy. Let’s start with income inequality. According to the CIA factbook Egypt page, the poorest 10 % of Egyptian families hold 4% of the total income of the country, versus the top 10% who holds 28%. Of course there are worse cases.  In the US, the 10% of poorest families hold 2% of the total income, while the highest 10% hold 30%. What is interesting is to look at trends in the past 30 years. Data from the World Bank shows that in the past 30 years, despite economic progress on paper, the situation has not changed. If anything, the situation has marginally in terms of the wealthier becoming slightly more wealthy.

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