Tyranny of numbers

Egypt: between populism and subsidy reform

Posted in General, Inequality, Subsidy reform by Djavad on June 17, 2011

Cairo, June 14, 2011

This is my first trip to Cairo since the uprising that toppled the Mubarak regime.  The airport was unusually quiet and all Mubarak pictures are gone, but otherwise there are few signs of a country that has just experienced its most dramatic social upheaval since the 1952 revolution. Egyptians like to think of the uprisings as Revolution (“al thawrah”) which in Arabic signifies deeper social change than “enghelab,” the word Iranians use for revolution.  But what has transpired in Egypt’s first six months of “revolution” pales in comparison to Iran’s 1979 Islamic Revolution.  There have been no executions or mass exodus of the rich, and not even an overhaul of the high echelons of the bureaucracy, as happened in Iran. Egypt’s judicial system has taken the lead in calling the members of the ancien regime to account. So far it is moving cautiously; only 45 individuals are currently in jail or standing trial for their alleged crimes, including Mubarak and his two sons.  If the judiciary can satisfy popular demands for justice, Egypt has a good chance for a soft landing on this side of the uprisings, and its judicial system may emerge as a strong pillar of its future democracy. If it fails to do so, revolutionary justice may take over and all bets would be off about democracy and restoring the economy to its previously robust growth path. No one seems certain how Egypt’s revolution will end.  As de Tocqueville has said, “in a revolution, as in a novel, the most difficult part to invent is the end.”

In post-revolution Egypt, as in 1979 Iran, the overriding popular concern is with the economy rather than democracy, so it would seem that unless the former is fixed it will be difficult to achieve the latter.  A recent poll taken in April found that only 19% of Egyptians joined the protests because of lack of democracy whereas 64% joined it for lack of “low living standards/lack of jobs.”  Egypt is quite a bit poorer than Iran, with about 20 percent of its population under $2 per day, compared to less than half that in Iran.  Of course, that is not a surprise once you know that per capita GDP in Egypt is less than a third of Iran’s. Distribution of income is worse in Iran (the Gini index is about 0.42, compared to 0.34 in Egypt). In both countries the feeling of the general population is that inequality is much worse than these numbers from survey data indicate.  They maybe right, survey data in developing countries do not report wealth, which is far less equitably distributed than income or consumption, and are notorious even for under reporting the latter at the top.

The good news is that 77% of the Egyptians polled expressed confidence that their new government can address the main issues facing Egypt.  The bad news is that this confidence may be for the wrong reasons.  Just after the revolution, the new finance minister, Samir Radwan, asked for people without a job to send their resumes to him.  It is reported that 7 million people did so, of which one million were told they would be hired!  This is the last thing Egypt’s bloated and underpaid bureaucracy needs.

The poll also shows that only 28% of the Egyptians participated in the revolution, and most do not regard Iran as a model for which direction to go: when asked which of two countries they preferred Egypt to be close to, only 15% picked Iran over Saudi Arabia and 23% over the United States.

While these preferences might indicate that Iranian-style populism has low appeal in Egypt, the recent negotiations with unions and political parties and other opposition groups over the minimum wage suggest otherwise.  Nothing like a debate over the minimum wage to reveal lack of economic literacy. Ordinary people rarely acknowledge a relation between wages and productivity, and often think that governments can raise living standards by raising the minimum wage.  Egypt has a minimum wage only for its public employees, which was ridiculously low at LE 160 (Egyptian pounds) per month (less than $1 per day) and was raised to LE 400 last November, presumably to head off protests inspired by events in Tunisia.  Political parties and unions had asked for the minimum wage to be raised to LE 1500 (about $300), which is unsustainable given low productivity in Egypt. (Iran’s minimum wage is about $330 but then Iran has oil money and productivity is slightly higher in Iran.) The Egyptian government has announced a compromise at LE 700 per month (~$120), but who knows if it will last.  Demands for change continue in Tahrir square, pulling policy makers in different directions. The most widely attended are the protest to raise the minimum wage, but last week there was even a protest against “difficult questions in the secondary school examinations” (I am not making this up; it was reported in the Daily Egyptian, June 11, 2011, in Arabic).

The increase in minimum wage will have little real consequence for the Egyptian economy because it does not affect the informal sector where most low-wage workers are employed. It will affect the government salaries, which may be a good thing because very low public sector wages are a recipe for petty corruption.  Paying its public sector workers — those who actually work– a living wage will reduce such corruption.

The challenge facing the government at present is to find the money to pay for higher wages.  With tourism all but dead, and construction apparently slowed to a halt, government revenues are down substantially and foreign exchange is depleting fast.  One possible source of new money is removing subsidies for food and energy, estimated at about 10% of the GDP (about $20 billion).  Whenever I mentioned Iran’s (so far!) successful experience with subsidy reform to colleagues in Egypt, and heard a sigh –Egypt will never be able do that!  Perhaps Egypt and other Middle Eastern countries with heavy energy subsidies are the reasons why the IMF is giving Iran an easy pass on its subsidy reform, to encourage them to take the plunge.  It is interesting that most Iranian commentators are advising Egyptians otherwise.

Iran’s bold experiment with subsidy reform may not be easy to replicate in the Arab world, especially where revolutionary fervor and distributive sentiments run high.   But having an accurate account of what has happened in Iran and its impact on the poor is more important than ever.

Advertisements

7 Responses

Subscribe to comments with RSS.

  1. Masoud said, on June 29, 2011 at 12:46 am

    Djavad,

    You mention Iran has a Gini coefficient of 0.42. I it your belief that the subsidy redistribution has not affected this number?

    • Djavad said, on June 29, 2011 at 3:57 pm

      Good point. The Gini index of 0.42 is for before the subsidy reform. I am sure that with the reform inequality will decline, but perhaps not by much. The immediate effect of the subsidy reform before any price increase but with the cash distributed is relatively easy to calculate. My calculations show that it will fall to 0.34, as I stated in my Brookings piece on the subsidy reform. As the bills for higher energy prices come in, this should change but I am not sure in which direction. It may actually fall further (greater equality) on account of the fact that the poor face lower prices relative to the rich for most types of energy. But it is more likely to increase as time goes by because the adjustment to higher energy prices entails loss of certain types of jobs and the poor my lose proportionately more in the downsizing. Inflation, which has already increased, on its own is probably neutral for the poor who depend on unskilled work whose pay seems to keep up with inflation. The crude evidence on inflation and the poor, which I presented in an earlier post, suggests that the poor do not do too badly in times of inflation.

      • Masoud said, on July 5, 2011 at 1:14 am

        Thanks for the clarification Djavad.
        I was sure I saw you mention this back in December, which is why I asked.

        To my mind, this calls into question the utility of the Gini coefficient, or at least the way it is calculated. I am sure the cash subsidies in the end do turn out on the progressive side of things, but I think an overnight fall of .10 in the Gini index is in many ways nonsensical. The change in consumption after all, hasn’t been that drastic. I don’t think it would be too inaccurate to characterize the whole thing as merely being an accounting trick. To my min this raises the question of what else this measure of equality glosses over.

        Is there any strong methodological or practical reasons why Gini coefficient calculated on the basis of consumption, or of consumption minus debt incurred, isn’t used as the ‘goto’ method of measuring equality, rather than revenue distribution?

        What do you estimate the effects of 14% inflation on wealth distribution would be? I would guess that this would also in general be progressive for the poorest Iranians, but I’m not sure if middle class would be pinched harder than the wealthy.

        Masoud

  2. کیوان said, on June 21, 2011 at 2:50 pm

    Just got back from Tehran myself – where I saw that the incentives for driving a gypsy cab are now much lower! I am sure all those enterprising young men are doing something perhaps a little more productive with their evenings than sitting in traffic and using their remote controls to change their MP3 selections. For Egypt, I wonder the same for the tourism sector? I was always amazed at how much of the economy was linked to tourism in Egypt, but it seemed a lot less central to creation of backward and forward linkages than a place like, say, Turkey.

    • Djavad said, on June 23, 2011 at 9:47 pm

      Welcome back! Egypt’s toursim sector used to brings in $12 billion of foreign exchange each year but us now down to a trickle. No one is sure when the tourists are coming back, so for the time being rising energy prices will not affect tourism, if that is what you are asking.

  3. Mohammad said, on June 17, 2011 at 7:26 pm

    Great post, thanks a lot. Perhaps we should compare current-day Egypt with post-revolution 1979 Iran, where it was downright impossible to remove the subsidies! It took 30 years for Iranians to come to the maturity and conclusion that subsidies should be removed. Well, Egypt does not have vast amounts of oil money to waste, so I hope it will learn much faster than Iran.

    And this is something to quote from you: “Nothing like a debate over the minimum wage to reveal lack of economic literacy.”

    On that in 1979 Iran, the overriding popular concern was with the economy rather than anything else, may I ask about the reason you believe so? Do you mean corruption, inflation and inequality concerns, or lack of jobs and growth? Also, have you seen opinion polls conducted then? Thanks.

    • Djavad said, on June 23, 2011 at 6:09 pm

      Thank you! The depth of social and political change in Iran was much greater than in Egypt to Tunisia. For one thing there has been no redistribution of assets yet, such as we saw in the early days of Iran’s revolution–takeover of building, factories, and banks. So if the army can contain the revolution — and so far they seem to be doing well, having made an implicit alliance with the Muslim Brotherhood agains the secular forces– they may be able to begin with market reforms. But that is not on their to-do list as this time.

      The obsession with the economy in Iran is a very good question. I think inequality has a lot to do with it, but also inequality between generations is playing out. I think the fact that lifetime earnings have decline for generations born in the 1960s, who now also have to support their children in their 20s but without jobs, having paid for their education, must be a source of frustration. People think of economic growth as meaning that their children do better than themselves. That is not happening in Iran, so the economic growth that we had 2000-2007, which was not nothing, did not reverse the disappointment. I have a paper on lifetime earnings that is coming out in Economic Development and Cultural Change next month.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: