Archives for posts with tag: economic revolution

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.

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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)