Economic Developments in Egypt following the Arab Spring

In the process leading to the Arab Spring, Egypt was three decades behind the structural reforms that were needed to convert economically, socially and politically stagnant system to a dynamic system, which creates jobs and income and generates socioeconomic and political stability. In the last three decades, economic growth has been both considerably below the potential level corresponding to Egypt’s economic resources and erratic needs. Moreover, within this three decades, economic performance has been far below the level required to create jobs for the rapidly increasing population and solve the poverty of one third of the population. When evaluated within the scope of macroeconomic indicators such as per capita income, inflation, employment level of youth and women, budget deficits and foreign trade deficit, it can also be observed that economic performance is considerably inadequate. For instance, while per capita gross domestic product (GDP) has increased 50% in Egypt in the last decade, the average increase in the emerging market economies and developing economies has been 75%. While the populist incentive system without sound economic fundamentals led to very high levels of budget deficits and public debt stocks, the production system based on very low level of technology and imported intermediate and investment goods resulted in foreign trade deficits more than 10% of the GDP on average. Manufacturing industry is based on the processing of basic agricultural products and a low level of technology. Furthermore, compared to ten years ago, today manufacturing industry's share in GDP has declined from 20% to 16%. The economy maintains its agricultural characteristics to a large extent; the agricultural sector continues to create 15% of the GDP and one third of the total employment. The share of the service sector which constitutes a large share of modern market economies is below 50% in Egypt. The ranking of Egypt, a country which needs considerable amount of direct foreign investment for its economic development, is 110th among 190 countries due mainly to the inefficiency in the legal and institutive framework, bureaucracy, and corruption.

The political transition following the Arab Spring in Egypt has been extremely painful; President Mubarak resigned in February 2011, while in July 2013 Mursi was elected as  the President with a democratic election. However, he was overthrown by a military coup, and the leader of the coup, Sisi, was elected as the President in May 2014. Because the political structure determines the framework in which economic activity takes place, the economic performance in Egypt is also experiencing an unsteady transition period. The Arab Spring has clearly revealed that not only in Egypt but also in other countries of the region the time to transform the existing economic structure and institutions had already come. Yet, after 5 years, even though there is a certain degree of progress, we observe that basic structural problems continue to exist. One of the most important structural problems is the isolation from the global economy, that is, the absence of a production base capable of producing goods and services tradable at the global markets. As a result,  Egypt has very low levels of international trade volume and ever-lasting trade deficits. In addition, the isolation from the global economy prevents political transformation to overcome the slow-paced economic transformation and prevents modernization for generating technological advancement. This structural problem is at the heart of low productivity and low competitive capacity. The heavy share of the government in the economy and resulting inefficiency in the allocation of resources constitutes another structural problem. This political and economic setting also prevents private sector’s development, which is an important characteristic of modern economies.

Socioeconomic developments that emerged 5 years after the Arab Spring can be assessed on the basis of certain variables. As is well-known, one of the most important features of the region is the high population growth rate. Although there has been a declining trend in the population growth rate in the Middle East and North Africa (MENA) as a whole, in Egypt it was 2.44% in 1990, declined to 1.8% in 2000, but then increased to 1.96% in 2010 and 2.22% in 2015. In Egypt where unemployment, poverty, and low productivity are major problems, fast-paced increase in population worsens these problems. For instance, according to the estimates by the International Labor Organization, the unemployment rate increased to 13.2% in 2014 from 9% in 2010. Furthermore, according to the World Bank's (WB) data, while the share of population under the national poverty line constituted one fourth of the population in 2010, predictions in 2015 show that this share has risen to a level closer to one third of the population. The technological development and improvement in the skill level of labor force together with capital formation are the fundamental sources for a country to increase its production capacity and labor productivity, and thus, raise the income per capita and economic welfare. According to the WB's data, while the share of gross capital formation in GDP in Egypt was approximately 20% before the Arab Spring, it decreased sharply to 14% in 2014. It is certain that Egypt cannot solve its unemployment and poverty problem and raise its economic growth with this level of fixed capital formation rate. Direct foreign capital investments contribute considerably to the production capacity and growth performance of developing countries such as Egypt. According to the WB's data, while the amount of the direct foreign capital investments to Egypt was 6.4 billion dollars in 2010, there was an amount of 4.8 billion dollars capital outflow in 2011. The amounts of direct foreign capital were 2.8 billon dollars in 2012 and 4.4 billion dollars in 2014. As a matter of fact, while the average GDP growth rate was %5 in 2000s, it declined to 2% in last five years. Egypt's foreign trade has also been negatively affected during this period. While the share of foreign trade volume (defined as the sum of import and export) in GDP was 46.9% in 2010, it decreased to 37.4% in 2014. Also, the share of export in GDP decreased from 21.3% in 2011 to 14.4% in 2014, at the same time, the share of import in GDP declined to 23% from 26% in this period. Inflation is the main factor reducing the purchasing power of large share of population, and therefore, leading to a deeper income inequality. According to the WB's data, while the inflation rate in Egypt was approximately 10% in 2010, it increased to18% in 2012, and it was in 2014.

These macroeconomic figures indicate that political instability in Egypt has resulted in an even lower level of economic performance and welfare. That is, the transition has not fulfilled the expectations of the Egyptian people from the Arab Spring. Starting from this point, we can assert that for the Arab Spring’s promises to come true, before anything else, a democratic political setting with its institutional structures must be established and all the economic and social reforms supported by the majority of the population must be put in implementation.

This article was published in Ortadoğu Analiz journal with the title of "Economic Developments in Egypt following the Arab Spring”