Economic Insanity: The Need for Radical Economic Reform in Egypt

Some of you have written to me in the midst of the current currency crisis to ask me about Egypt’s future. I’d like to begin my discussion on Egypt’s future from the premise that what is needed, not just to solve the currency crisis, is radical reform. After all, isn’t the definition of insanity doing the same thing over and over again and expecting different results? Isn’t this what we have been doing for the last fifty years? Trying to get our economy to be vibrant, but literally changing nothing? Worse yet, the economy is crumbling and no one seems to be presenting ideas for radical reform. The kind of reform that can change the country from its foundation, and can beckon a new and radical way forward. Below I present a different kind of vision, one predicated on fiscal decentralization that I believe gives Egypt the potential for the kind of economic turnaround it so desperately needs.

Let’s begin by attempting to answer a simple question for those of you reading this who are not economists. Can a country with 100 million people be managed centrally? Can it? The centralization model we have in place now has proven to be a catastrophic failure, and trying to manage 100 million people from one central system of control is not only implausible, it is likely impossible. Every successful economy in the World has understood this; and every economy that I know of that is lagging today has not.

The United States, now even China, manage their economies to various degrees of decentralization. In the US, the system of Governors and Mayors allows for each state, and virtually every city, to define its tax policies, the investment regime under which it will operate, its education policy, its health care programs, its welfare programs, and its infrastructure development schemes.

In New York for example, you see radically different forms of taxation, investment policies, education policies, and welfare programs that you see in a state like Delaware. Governors and Mayors are elected, and manage to hold on to their jobs, only if they usher in prosperity and employment. Failure to do so is likely your ticket out of office. Success, economic success, on the other hand, can propel you to an even higher office if you are so inclined.

Egypt, on the other hand, operates rather differently. We try and manage things centrally with rigid government structures. Fiscal policy is exclusively that of the Minister of Finance, investment policy sits with the Minister of Investment, and education policy for the whole country rests with the Minister of Education. Is this even a plausible way to manage government, with a population of 100 million people? Likely, not.

Just imagine the powers a Minister hoards in a country like ours. Imagine every investment in the country virtually being approved by one man? Imagine trying to implement a national exam system for high school seniors, Thanwaya Amma, for 5 to 7 million kids annually? Imagine trying to implement a system of national real estate taxes, rather than local ones, and the implausibility of this being an efficient manageable process.

But, imagine if you will, the map of Egypt’s governorates redrawn. Imagine also, giving fiscal responsibility to these governorates effectively giving them their own ability to raise taxes, create their own economic policies, and further still define their own regional priorities for things like infrastructure development, and how they plan to promote health care and education in their own state. They can determine what to fund, and what not to fund, what to promote and what to demote, what to build and what not to build, unless they are part of a larger state wide project like in infrastructure, and what to subsidize or not to subsidize. These governorates, and their cities, like the systems I helped to create in countries like Romania, can eventually have their own credit ratings, borrowing on their own for their priorities, and paying back what they owe with their own taxes. Their reliance on the state only comes when dire economic outcomes loom, or a national project requires that resources be pooled from the state and local government.

These governorates could be run by Egypt’s best and brightest, each having a Governor of exceptional education and development experience, with a mini-cabinet under him or her, filling key portfolios like education, health, infrastructure and finance. These governorates can be managed at first by appointment; however, a system of elections to create the checks and balances that are required would need to be quickly put into place. If people see the administration of their governorate failing, vote them out of office. Get rid of the Mayor too if the populous chooses. Have a sense that the Governor and the Mayor are corrupt? Replace them with people that you think you can trust. The ballot box is what will ensure that everyone in local government has their eye on the ball, employment creation, investment, infrastructure that works, and a government that works for the people, and only the people.

Yes, implement a system of proper decentralization, with fiscal decentralization at its core, and see what happens. Some of our governorates will take off quickly and undoubtedly you will see wealth creation in areas that have been devoid of it thus far. We can have our own Dubai, and yes, I sincerely believe that decentralization can make this possible. We can have our own Shanghai, our own Manhattan, this is all possible. But, it will take time, and some will try and fail, and some will try and succeed. It is from those success stories that we can build a cadre of professionals that can make their way into higher office. And, for those that fail, mandatory retirement is several hundred thousand votes away.

Decentralization will also allow different governorates to rethink national subsidy programs and what kind of welfare programs need to be into place. This is absolutely essential for Egypt given the country’s dismal labor productivity numbers. Productivity varies from country to country, and it isn’t simply because of technology. Take Turkey and Egypt for example. In the 1990’s Turkey had much higher productivity than Egypt did, even though the industrial base was eerily similar. But, today Turkey has a much higher level of productivity per worker than Egypt does; although the level of industrialization is radically higher in Turkey, not making for a fair comparison.

However, in my readings, I remember a sociology book that was focused on the principle of the “Protestant Ethic”. I read it when I was grappling with the question of why some cultures are more productive than others, why workers in one state simply worked harder than others. From my reading of sociology, I deduced a clear link between productivity and societies where only a small percentage of the populace gets a free ride. And, in these highly productive societies free rides are given only to the unemployed, or those on disability, discounting of course, those individuals that choose not to be in the work force. The unemployed in these societies only get a free ride for a short period of time, through unemployment benefits that usually don’t exceed two years.

But, in Egypt we have become a society living off free goods. Education is free, healthcare is free, bread is effectively free, and so many other things are subsidized to the point of being free goods, gas and electricity among them. President Nasser created a society of workers all of whom had entitlements. You graduate and get a degree that costs you nothing, to a job in the civil service where very little was expected of you, and you went home to the state-built apartment that likely also cost you nothing, and a palace it wasn’t. It was just a very humble home.

So, what happens in a country where over a period of 50 years everyone gets accustomed to living off the lamb? Free education becomes a right, even if it is effectively useless in teaching you a skill. Free healthcare becomes a right, even though you stand a very good chance of dying in public care because of medical incompetence. A Government guaranteed job becomes a right, even though you don’t get paid very much, LE400/monthly on average to be exact, roughly USD$80. And, how does $80 monthly feed the average family size of five in Egypt? That equates to each family member living on less than $2 dollars a day, with a disposable income of approximately $2.7 dollars a day for a Government employee.

But, you get benefits; you can probably go home at 2pm and have a second job in the private sector, get free education and free healthcare from the state, and likely free housing. Working only in the private sector you would not reap these benefits.

In the US by comparison, you have to work for everything you have, unless you’re on welfare. But, in Egypt everyone seems to be on welfare, including the rich and the middle class. They all get subsidized gas, and most well to do households still have ration cards so that they can buy subsidized foodstuffs. Yes, everyone gets some form of a free ride regardless of income level, and when it comes to fuel, I don’t mean that literally.

How can you get an entire society off welfare, and away from entitlements, and bring back a work ethic that is clearly being stymied by perverse economic incentives. That is, you give very little and get very little in return. I strongly believe that Egypt needs its own protestant ethic, “El Amal Min El Iman”, and to create a system where high productivity and high reward are the norm rather than the mirror opposite. To truly transform the Egyptian economy means unlocking the mystery of creating a highly productive society with real incentives for households to produce more, get paid more, spend more, and to create an economic cycle that will generate real jobs rather than virtual jobs.

For me, it now seems clear that we need to accept that the way in which we are managing the economy is wrong, and to move from centralization to decentralization quickly. But, we need to transform our society as well. Only then will we get it right, and my experience in working in over 22 countries has me convinced that this is the case. This is what Egypt’s brilliant minds need to focus on now, because clearly trying to maintain the status quo is simply untenable. Changing the structure of the Egyptian economy is one thing, changing the mindset of an entire nation is another. This is Egypt’s true challenge, and if we fail to understand this, the outcome is obvious, a society of entitlements that is not very productive, mired in poverty, and unable to foster any meaningful path to prosperity. Worse still, an economy that we try and manage centrally leading to the failure of national infrastructure, our education and health care systems, and our ability to govern 100 million people effectively.

Yes, the definition of insanity is doing the same thing over and over again and expecting different results. Until we understand this, the lives of every Egyptian will evolve around an existence of deja vu over and over again.