domestic sources and, especially until 1974, foreign policy overstretch. Major economic reforms tended to be introduced only in the wake of a military or economic crisis that eliminated all other options.
Egypt was trapped in a “trilemma,” or a political version of the “impossible trinity.” The original version of the “impossible trinity” was formulated by Robert Mundell and concerns the pursuit of incompatible economic objectives. Mundell (1963) showed that it was impossible to simultaneously adopt an independent monetary policy, a fixed exchange rate, and free capital movements; policymakers could successfully pursue only two of these aims. The political version would say that Egypt’s policymakers could simultaneously pursue only two of a policy of rapid GDP growth, prioritizing consumption over savings, and an anti-West political stance.
The political-economy strategy had become unsustainable. The continual enlargement of the cake required resources much in excess of what Egyptian regimes were willing to extract internally plus what foreigners were prepared to provide. Economic growth would be unable to meet the demands of the political-economy strategy, and this could jeopardize the survival of the regime. At least one element of the trinity would have to be abandoned.
The anti-West foreign policy was jettisoned in 1974. The financial rewards that the change procured enabled the regime to maintain the economic elements of the former strategy. The surge in the “Big Five” (Suez Canal dues, oil exports, tourism earnings, workers’ remittances, and foreign aid) resulting from the greater political stability in the region, the return to Egypt of oil-producing facilities after the Arab–Israel war of 1973, the reopening of the Suez Canal, and the major inflow of Western economic assistance expanded the economic cake and made it possible to afford the subsidies and other benefits that formed the heart of the political-economy strategy.
But the increasing population and the policy of large-scale subsidization meant that consumption demands kept rising, necessitating more imports and also cutting into the exportable surplus of many commodities, especially oil. Moreover, the “kindness of strangers” has limits, and it was not possible for foreign aid to keep increasing. Indeed, between 1980 and 2015, annual economic assistance from the United States (Egypt’s largest consistent donor) fell from $815 million to $250 million (and to even less in terms of purchasing power). See Sharp (2010).
Egypt had not taken advantage of the good years to adequately step up the investment rate, to strengthen the performance of key institutions, and to improve the productivity with which it used inputs. Policies will have to facilitate the structural transformation of the economy, that is, moving inputs from low-productivity sectors to those of higher productivity. The fifty-year period 1965–2016 saw only a slow transformation of the economy. Thus, for example, the ratio of exports of goods and services to GDP was 17 percent in 1965 and 14 in 2016; that of imports to GDP, 21 and 23 percent; of taxes to GDP, 15 and 16 percent. A study by Galal and el-Megharbel (2008) that looked at two indicators of structural transformation—increases in product variety and total factor productivity—within the key sector of industry for the twenty-year period 1980–99 found that in fact variety decreased, while total factor productivity remained stagnant. They argued that policy during this period did not help new activities; did not make assistance to firms conditional upon specified concrete goals (such as export performance); and did not provide clear indications to firms about when assistance would cease, thereby leaving alive the suggestion that it could continue indefinitely.
Without paying attention to the foregoing matters, it would become progressively more difficult to sustain the economy’s expansion at the required rate, and the implicit compact—economic benefits in exchange for political quiescence—between the rulers and the ruled could unravel. This is not to suggest that purely political issues, such as the public’s desire for democracy and the problem of presidential succession, might not have been important, indeed perhaps even the dominant, factors in the revolution of 2011. The point is that fundamental contradictions in the political-economic strategy were showing up and will have to be addressed by whatever regimes are in power during at least the next twenty or thirty years. To add to the problem, perceptions of inequities in the distribution of incomes were rising, and had been ignored by the authorities. Thus, despite impressive economic growth in 2005–2008, social and economic factors were fermenting a politically menacing brew beneath the surface. The mixture exploded in 2011 in the form of a massive uprising against the rule of President Mubarak.
3. If one had the temerity to try to sum up in a picture and a few numbers the critical reasons for Egypt’s failure to perform to its economic potential over the last fifty years, they could be illustrated by figure 1 and the numbers quoted earlier for the contribution of TFP to Egypt’s GDP growth.
The message is clear. Egypt’s investment rate was insufficient to expand the economy at a rate that would fully employ the labor force; the domestic savings rate fell short of even the inadequate investment rate; and institutional weaknesses inhibited productivity increases from compensating for the investment shortfalls. The persistent gap between investment and domestic savings also measures the extent to which Egypt relied on foreign savings to finance its investment and to cover its balance-of-payments deficits, which explains the continual piling up of external debt and the resulting exposure of the country to external political pressure. Of course, behind the savings–investment performance lie deeper institutional issues, such as matters of governance, the structure of incentives, the working of the bureaucracy and the commercial judicial system, implementation capacity, and the shortcomings of the education and training system.
Figure 1. Investment and domestic savings, 1965–2016 (percent of GDP)
Source: World Bank, World Development Indicators
4. What about future prospects? In view of the growth and age structure of the population and the approximate relationship between employment and GDP growth, Egypt’s economy needs to grow at around 7 percent a year in real terms for at least the next two decades and probably longer in order to absorb the additions to the labor force and to reduce the rate of unemployment and underemployment from the past. This is particularly necessary in order to give the population, and especially the young, the possibility of fulfilling their capabilities and leading lives that they value.
The required GDP growth rate compares with a rate of about 4.7 percent that the country averaged over the fifty-year period between 1965 and 2016. The experience of fast-growing developing countries suggests that a sustained 7 percent growth rate is likely to require an investment rate in excess of 30 percent of GDP (compared with Egypt’s 20 percent average of 1965–2016), and most likely even higher as the economy becomes more complex and has to produce more sophisticated goods and services. Moreover, if Egypt is to reduce its dependence on foreign savings and finance most of the investment from its own resources, the domestic savings rate would have to be of the order of 25–27 percent of GDP (allowing a manageable deficit on the external accounts). Raising the savings rate to this level could pose a stiff challenge, as Egypt’s domestic rate of savings between 1965 and 2016 averaged barely 13.5 percent of GDP.
Seventh, while this might seem paradoxical in view of the shortcomings of past policies and economic performance that are discussed in this book, I would underscore that the most important message from Egypt’s experience of the last fifty years is that one must not underestimate the country’s resilience. Egypt has repeatedly surprised observers and confounded predictions of economic doom. As Hilmi Abdel Rahman, a former minister of planning who played a major role in devising economic strategies for the country, said: “Egypt will frequently not act on policy until the eleventh hour, but it will act. It would not have survived intact for more than five thousand years if it hadn’t done this.”
Consider some reasons for optimism. In 1947 the country had a population of some 19 million
