There’s a plethora of ideas out there right now about how to set Egypt on the right track to economic prosperity and democracy. Out with the old and in with the new is the easiest way to put it, but it’s not as easy as it may seem and the change won’t be coming as fast as some people might be expecting. A recent report by the World Economic Forum (WEF) ranks Egypt third to last in terms of economic competitiveness among 14 Middle East and North Africa countries, faring better than only Yemen and Syria. Ranked 94th globally, Egypt has fallen behind Lebanon and Algeria from WEF’s 2010 global rankings as a result of the institutional environment that the January 25 Revolution brought to light as well as the economic consequences of the revolution itself.

Released on October 22, the WEF Arab World Competitiveness (AWC) Report 2011–2012 characterizes recent popular uprisings in the region as a starting point from which competitive economies can now be built. Yet the report suggests that the dramatic political change that has rocked the region must be translated into structural economic reform in order to address the root causes of the ongoing revolutions.

The report finds that the economic competitiveness of Arab countries across the board, including oil- and resource-rich countries, is hampered by ineffective education systems as well as rampant corruption, a lack of transparency and trade barriers that distort markets and hinder competition and efficiency.

The report urges policy makers to deflate a bloated public sector, build a sustainable private sector, and decrease the national deficit amidst worrying macroeconomic conditions. However, the WEF issues these recommendations at a time when newly assertive Egyptian citizens are clamoring for their voices to be heard and expect immediate solutions to their long-standing grievances and demands for employment and higher salaries. As a result, the government has felt compelled to appease these demands by turning to the public sector and increasing spending.

Magda Kandil, Executive Director of the Egyptian Center for Economic Studies (ECES), a think tank which contributed to the AWC report, defends the report’s position by pointing out that such superficial public sector solutions are unsustainable.

“This short-sighted agenda has a lot of negative consequences for the medium-term outlook for the economy and it becomes even [questionable] from a social justice point of view,” she warns. 

Time of opportunity
Egypt’s economic growth for FY2010/11 has been the slowest in a decade; however, in the face of staggering economic challenges, the report offers an opportunity to look at Egypt as a testing ground for the ability of democratic governance to produce competitive prosperous economies. In a WEF conference held in Jordan following the release of the report, politicians and businessmen called for comprehensive reform that would tackle cronyism and corruption and allow a bulging young population to achieve their aspirations.

“Since I was born I’ve had the feeling that I have no future because I’m not the daughter of someone important in government or business. We have a right to be patient no longer,” said Yemeni opposition activist Nidaa Al-Qudsi, addressing the conference.

The uprisings have broadened participation in many Arab societies, formerly monopolized by autocratic regimes and those who benefited from their nepotism. “Achieving higher growth and employment will require that the different challenges be tackled through a coordinated and comprehensive strategy that involves governments, the private sector, civil society and the international community,” says the report.

Transparency International (TI) MENA program coordinator Omnia Hussein believes that Egypt is gradually moving along the path to doing so, citing increased cooperation between businesses and civil society organizations on various issues and, most importantly, a newfound sense of citizenship amongst the Egyptian public.

“There was a perception in Egypt that there are those who govern and those who are subjects. [Now] there is a sense of citizenship, rather than [being] subjects of the state,” she says.

Failing another generation
The AWC report analyzes the findings of the previously published Global Competitiveness Report (GCR), based on analysis of three categories: Basic Requirements, which includes institutions, infrastructure, the macroeconomic environment and health and primary education; efficiency enhancers, such as higher education and market size; and innovation and sophistication factors. Data for one third of the indicators are obtained from major international organizations, while the remainder is derived from WEF Executive Opinion Survey of business executives.

However, the report does not capture a complete picture of the economies in revolution-hit countries. The results are based largely on pre-revolution quantitative data, and although the Executive Opinion Survey was carried out between February and May 2011, assessments that might be accurate one day could vary dramatically the next. However, the available data and accompanying analysis clearly reveal challenging and varied obstacles for post-revolution Egypt.

According to the GCR, the top factors limiting Egypt’s competitiveness are policy instability, an inadequately educated workforce, access to financing, inefficient government bureaucracy, restrictive labor regulations and corruption.

Like most Arab countries, an ineffective education system remains the gravest, long-term concern for Egypt. This hardly comes as a surprise considering a World Bank estimate of Egypt’s adult literacy rate at only 66% in 2006. The report warns that failing to prepare students for employment in a competitive economy will hamper other efforts to improve competitiveness.

“Reforms must ensure high enrollment and must gear educational outcomes more strongly towards the needs of the business community, thus addressing a pronounced skill mismatch that hinders additional employment creation,” the report says.

While most Arab countries fared poorly in the quality of education system ranking, Egypt was left behind at 135th globally, beating only Yemen among Arab countries. There are wide gaps between Arab countries in internet access in schools with many Gulf states in the top 50, while Egypt came in at 107th globally, ranking higher than Yemen, Algeria and Syria. In the business and management school category, Egypt was ranked one of the worst in the world, again above only Yemen among Arab countries.

“It did not happen over a year or two, this is the outcome of decades of neglect,” says Omar Mohanna, chairman of Suez Cement and Pirelli Tyre. “Across the board, talking to people from many industries across Egypt, yes, there is a problem of matching the requirements of the labor market and education.” The lack of technical and vocational training has also hampered enterprises’ labor resource pool. To compensate, both Suez Cement and Pirelli Tyre focus on providing employees with continuous training throughout their careers.

“The technical schools in Egypt do not necessarily provide the right technical education, vocational training and so on that is needed to support the kind of development that Egypt needs,” says Mohanna. “We need to see that in many sectors, not just construction, but across the board.”

Mohanna points out that the free education system has resulted in even higher costs for Egyptian families, since many Egyptians turn to private tutoring to compensate for the education system’s failure to produce results. “Egyptians have lost [faith] in the public school system, even in the private school system,” says Kandil, who believes that education is one of many sectors that have suffered due to poorly prioritized budgeting that focuses on social spending and subsidies.

“Education and health together are less than what the government spends on fuel subsidies,” she points out. “But […] it’s not only about spending. I would argue that there is a lot of waste. Higher education in particular should not be free for everyone; that has created a big mismatch in the labor market because the government is spending on higher education for people to get a social status not to get a job.”

Rather than focusing on applied knowledge and curriculum that is sector-specific, the Egyptian university system focuses on preparing students for exams by means of overcrowded lectures. Like much of Egypt’s state sector, the public education system has become a means of providing secure but low-paying employment for teachers and staff, while students graduate without job prospects for themselves. “The format and the curriculum have lost touch with reality as far as the labor market is concerned,” concludes Kandil.

A culture of corruption
In addition to education, the AWC report identifies a deeply entrenched culture of corruption and cronyism as a severe constraint to economic competitiveness. While Egypt came in ahead of Algeria, Syria, Lebanon and Yemen in the diversion of public funds category (97th globally), it was left behind by the remaining Arab countries, particularly Gulf States, most of which were ranked in the top-20 globally. Egypt fared slightly better in irregular payments and bribes (74th) and ethical behavior of firms (90th), but was again left behind regionally with Gulf States leading the pack.

“The Arab Spring, and the reform process that it has unleashed in some countries, constitute an invaluable opportunity to fight corruption and to promote the rule of law,” says the report. However, the report’s recommendations to develop the private sector are being made at a time of high distrust not only towards the government but also towards corporate leadership due to pervasive corruption under the former regime.

Furthermore, the report tells Egyptians that “positive results cannot be expected quickly” because corruption is so deeply embedded. Hussein delves into the extent of corruption’s influence on Egyptian society: “There has been a development for a number of years in giving a religious covering to it,” she says. “There was a fatwa at one point by a sheikh, who said ‘what can we do with these poor government people who do not have enough? If I’m able and I give [a bribe] to the unable, then it is social solidarity’. That’s dangerous.” However, based on TI surveys, Hussein sees an increasing awareness of and willingness to combat corruption and cronyism.

Unlike under the former regime, TI conferences are no longer canceled at the last minute by state security without explanation and cooperation is increasing between NGOs and businesses. However, the government has yet to demonstrate that it is a partner in the effort to tackle corruption. “The government up [until] now has not made strong, firm change and [a] no impunity [policy] for corruption,” Hussein points out, adding that cronyism and corruption are not simply social injustices, but have been major impediments to Egypt’s economic competitiveness. Such practices distort markets and competition, discourage foreign investment, prevent government efficiency, and carry dangerous financial and legal risks as well as the potential to damage the reputations of enterprises.

Increased willingness and awareness has yet to translate into action, says Walid Nagi, Regional Network Manager for Europe and MENA for the UN Global Compact, a policy initiative for businesses that are committed to aligning their operations with ten principles in the areas of human rights, labor, environment and anti-corruption. “Few [businesses] are willing to make decisions under the current circumstances,” says Nagi. “The current state of uncertainty has caused businesses to hit the pause button. Rather than being proactive, companies are waiting to see what happens before making any substantive decisions.”

Mohanna agrees that fighting corruption should be a ‘joint effort’; however, he believes the nature and potential of the free market is enough to restore the public’s confidence in the private sector, as long as the right democratic mechanisms are in place. “It’s enough that the private sector is growing and the private sector is offering opportunities and offering [employment],” he says, adding that the companies he chairs focus on providing opportunities in economically undeveloped areas.

He also believes that much of the public’s distrust is due to negative press coverage. “It’s a wave that will pass,” he says. “Perceptions should not be formed by words; perceptions should be formed by facts on the ground.”

The promise of democracy
Though the elements of democracy — rule of law, transparency, and private sector and civil society participation — are essential ingredients to a competitive economy, the report warns that the task of the upcoming elected government will not be straightforward.

This predicament was brought to light in September, when thousands of teachers took part in a nationwide strike. They demanded a minimum monthly salary of LE 1,200 and the 200% productivity bonus promised but not delivered to all public-sector employees. The strikes coincided with similar movements on the part of public transportation workers, public sector doctors and others. In all such cases, the government responded that not enough funds were available to meet the employees’ demands.

Formulating policies that respond to the newfound voice of citizens while reducing a bloated public sector will prove challenging for the new government. As the report points out, the reaction of governments to the Arab Spring has been to increase salaries and jobs in the public sector, with Egypt announcing a 15% increase to the base wage of all civil servants.

This comes at a time when Egypt is facing a growing national deficit and accompanying inflation.

Kandil believes that the government can achieve superior results with less spending by gauging the value of social expenditures both from a fiscal and social justice point of view. She suggests starting with the elephant in the room — subsidies.

“I think if you look at public finance in Egypt, there is a marvelous opportunity [for] reform because they have a monster that has grown over the years called price subsidies, the largest component of which is fuel subsidies,” she says. “Who are the beneficiaries of the fuel subsidies? 80% of that is the well-to-do in this economy, because people consume more energy the higher the income they have.” Kandil warns that Egyptians’ patience will be tested and effective economic policies will require bold leadership, transparency and clear communication from policy makers concerning their intentions vis-à-vis the poor and working class.

“I would have liked for the first budget since the revolution to take more bold actions in that direction,” she says. “They did not do [this] because they rushed to accommodate the [protests] in the street, the heightened expectations. Now, because the fiscal situation has become direr, they’ve started addressing this. They haven’t taken bold actions yet but at least the rhetoric suggests that they are ready and they are informing the public that this is not sustainable.”

Because education reform is a long-term investment, a generation that risked everything for the sake of a better future now risks sharing the same fate as past generations as they wait for the reform to take effect. However, Kandil suggests that there are effective short-term solutions to keep their frustration from once again spilling out into the streets.

Vocational training programs should be developed, she advises, while the government could offer graduates volunteer positions that would allow them to gain on-the-job experience. An agency would then match their skill sets with positions in the private sector.

Only the results of the elections will tell us whether a nation that has become dependent on the state would be willing to elect policy makers committed to cutting the cord — or if the public’s distrust of the private sector is more than simply ‘a wave that will pass.’ bt