labor 25 percent, and TFP growth 26 percent (World Bank 1993a, 60–70; Thorbecke and Wan 1999, 3–20; Kim and Hong 1999, 183, table 8-5; Stiglitz and Yusuf 2001, 16, tables 1.3 and 1.4).
The experience of China provides further confirmation of the importance of factor productivity to growth. The World Bank (1997b) estimated that TFP growth accounted for 30 to 58 percent of China’s growth during 1978–95. A more recent and very detailed growth accounting exercise by Yueh (2013) for three decades from 1979 estimated that about 45 percent of the country’s growth could be attributed to capital accumulation, and about 30 percent to TFP; the rest was contributed by increases and improvements in the labor force. A decomposition of the gains from TFP indicated that 8 percent of total GDP growth was explained by the transfer of labor and capital from public-sector enterprises to the private sector. About 20 percent of growth was explained by institutional improvements, such as providing greater flexibility for the internal movement of labor liberalizing the financial sector. This analysis therefore highlights the importance of the contribution of TFP to total growth, and within TFP, the importance of improving the efficiency of institutions (Yueh 2013).
The findings on Egypt’s TFP growth indicate that GDP growth in Egypt has resulted more from using additional labor and capital than from using these factors more efficiently—“the result more of perspiration than inspiration,” as Paul Krugman, another Nobel laureate, put it (Krugman 1997). If Egypt’s TFP growth does not step up substantially, generating the required growth of GDP will require rates of increase in capital, savings, and in the quality of human resources that may not be feasible (Ikram 2006, 314–15; Hevia and Loayza 2011, 21–25 offer estimates of increases in investment and savings rates that would be required under different assumptions of GDP and TFP growth; the rates are about double those sustained by Egypt in the last fifty years). Indeed, this underscores that Egypt’s major long-term economic challenge is to shift from a strategy based on factor accumulation (principally that of increasing the input of capital) to one that is based on productivity growth.
The failures of productivity growth inevitably impacted Egypt’s competitiveness in the world economy. Between 2007 and 2014, Egypt’s competitiveness ranking for the macroeconomic environment and major indicators deteriorated. Thus, compared with 148 countries, Egypt’s ranking fell from 115 in 2007 to 140 in 2014; for government budget balance, from 119 to 146; for gross national savings (as percent of GDP), from 65 to 108; for general government debt, from 109 to 122; and for the annual percentage change in inflation, from 106 to 129 (World Bank 2015, 35, table III.1).7
A little more elaboration of the central message might be helpful. Thus, sixth, the essential messages of the book would be on the following lines.
1. During the past two hundred years, Egypt’s policymakers have been confronted with challenges of which a surprising number have proved enduring and continue to resonate today. Some of these challenges have been dictated by nature, such as the relative fixity of the arable land and the declining per capita availability of water. Some are a combination of nature and human agency, such as the inexorable growth of the population. But many represent inadequate policy attention, such as the failure to strengthen institutions that would support the rule of law, boost competition in the economy, and mobilize more resources for development and thereby avoid the political and economic vulnerabilities associated with external indebtedness. The recurrent political-economy message from Egypt’s experience is that concerns about regime survival trumped considerations of economic vulnerability in policymakers’ calculations, and that economic reforms tended to be adopted only when a crisis had extinguished all other options.
2. If one were asked to sum up in a few words the reasons for Egypt’s failure to perform to its economic potential, one could do worse than to say that its roots lay in the fragile political legitimacy of successive regimes, who sought salvation by continually increasing public consumption expenditures—between 1965 and 2016, real public consumption expenditures increased at an average rate of about 4.4 percent a year, well ahead of the population growth rate. The survival strategy also required regimes to minimize resource mobilization from domestic sources. This meant that taxes, and in particular the personal income tax, could be touched only very gingerly. The ratio of tax revenue to GDP in 1952 was estimated at 14.8 percent (el-Edel, 1982, 140) and at 14.4 percent in 1965 (World Bank, 1977), rising to a peak of 26 percent in 1982, and declining thereafter to about 16 percent in 2016; over the period as a whole the tax ratio averaged about 16.2 percent. About two-thirds of the total tax revenue during 1965–2016 was provided by indirect taxes—on production, consumption, imports, stamp duty, and so on; another 30 percent on business profits; personal income tax provided only about 7 percent of total tax revenue. The reluctance to tap domestic resources for revenues in turn compelled rulers to rely unduly on external economic rents and exogenous resources, and heightened Egypt’s vulnerability to foreign pressures.
There is a close convergence between the explanations offered by many writers for the political-economy behavior of successive Egyptian regimes. The reasons provided by, for example, Baker (1978, 167–68), Cooper (1979, 482–84), Roy (1980, 3–9), McDermott (1988), Springborg (1989), Waterbury (1983, 1985), Hansen (1991, 116–17, and 250–54). Wahba (1994), Marcou (2008), Soliman (2011), Kandil (2012), and others essentially boil down to the following paraphrase.
Egyptian regimes have felt exceptionally vulnerable because they lacked the legitimacy of a democratic election. The basic political-economy element in their survival strategy was to placate the population by offering an abundance of consumer and other subsidies (at times even cigarettes and halawa [a dessert] were subsidized); free education and health care; guaranteed employment; controlled rents for housing; redistribution of landholdings; regular increases in bonuses, industrial wages, and government salaries; ceilings on interest rates, and so on. The regimes also could not risk antagonizing the population by increasing taxes; hence they mobilized much of their resources from economic rents, whose burden for the most part fell on foreigners. The strategy for regime survival tended to be short-termist: a continual search for band-aids, most of which were to be provided by foreigners, especially in the shape of external assistance and debt forgiveness or restructuring. The Churchillian mantra of offering one’s own “blood, sweat, toil, and tears” never caught fire among the regimes’ leaders.
The political-economy strategy was threatened by two factors. First, the rapidly growing population and its continuing expectations of subsidized items required a constant expansion of public consumption expenditure. Second, Egypt’s foreign policy initiatives, especially from 1952 to 1974, carried very substantial costs. Egypt had projected itself as the leader of the Arabs; a leader of the Muslim world; a leader of Africa; a leader of the “nonaligned” group of countries; champion of Palestinian rights; supporter of Algerian resistance to French rule; a bulwark of the Third World against the West. It had been involved in wars with Israel in 1948, 1956, 1967, and 1973, plus a “war of attrition” (March 1969 to August 1970) and a war in Yemen against Saudi Arabia from 1962 to 1967, and in hostilities against Libya in 1977. All these severely depleted Egypt’s economic, financial, and human capital. The cumulative effect of these factors came to a head in the early 1970s.
The growing demands of the different constituencies could be met only by a continuous enlargement of the economic cake, that is, a sustained increase in the GDP. But the country’s political-economic strategy contained two fundamental contradictions that caused it to founder. One, the rising consumption demands worked against the imperative of increasing domestic savings to pay for the investment that would propel GDP growth. This meant that Egypt had to look to external sources to finance the gap between investment and domestic savings. But, two, the anti-West stance adopted by Egypt until 1974 depleted Egypt’s political capital in the world’s biggest sources of finance and modern technology, and drastically restricted the country’s access to these resources, especially those available on concessional terms.
In sum, Egypt’s failure to perform to its economic potential resulted chiefly from internal political pressures to maintain
