Chapter 2: Trade, Business Environment and Private ...
DRAFT
Arab Republic of Egypt
May 15, 2008
Social and Economic Development Group
Middle East and North Africa Region
The World Bank
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|Document of the World Bank |
Fiscal Year
July 1- June 30
Acronyms and Abbreviations
|AGES |Automated Government Expenditure System |
|ATM |Automated Teller Machine |
|BOOT |Build Operate Own & Transfer |
|CAO |Central Audit Organization |
|CAPMAS |Central Agency for Public Mobilization and Statistics |
|CBE |Central Bank of Egypt |
|CES |Constant-Elasticity-of-Substitution |
|CFAA |Country Financial and Accountability Assessment |
|CIDA |Canadian International Development Agency |
|CPI |Consumer Price Index |
|DFI |Direct Foreign Investment |
|DPR |Development Policy Review |
|EC |European Commission |
|EU |European Union |
|EdF |Electricity de France |
|EEA |Egypt Electricity Authority |
|EEHC |Egyptian Electricity Holding Company |
|ERA |Egyptian Electric Utility and Consumer Protection Regulatory Agency |
|ELMPS |Egyptian Labor Market panel Survey |
|ERF |Economic Research Forum |
|ERP |Effective Rate of Protection |
|ERSAP |Economic Reform and Structural Adjustment Program |
|FDI |Foreign Direct Investment |
|FSAP |Financial Sector Assessment Program |
|GAFI |General Authority for Free Zones and Investment |
|GCC |Gulf Cooperation Council |
|GDP |Gross Domestic Product |
|GER |Gross Enrolment Rates |
|GFMIS |Government Financial Management Information System |
|GFS |Government Finance Statistics |
|HIECS |Household Income and Expenditure and Consumption Survey |
|ICA |Investment Climate Assessment |
|ICR |Implementation Completion Report |
|IFC |International Finance Corporation |
|IFMCA | |
|ILO |International Labor Organization |
|IMF |International Monetary Fund |
|IPOs |Initial Public Offerings |
|IPP |Independent Power Producer |
|LPG |Liquefied Petroleum Gas |
|M0 |Reserve Money |
|M1 |Money Supply -1 |
|M2 |Money Supply -2 |
|MED |Ministry of Economic Development |
|MENA |Middle East and North Africa |
|MoF |Ministry of Finance |
|MW |Mega Watt |
|NBER |National Bureau of Economic Research |
|NDA |Net Domestic Assets |
|NFA |Net Foreign Assets |
|NIB |National Investment Bank |
|NPLs |Non-Performing Loans |
|OECD |Organization for Economic Co-operation and Development |
|PBDAC |Principal Bank for Development and Agricultural Credit |
|PC |Personnel Computer |
|PPA |Power Purchase Agreement |
|PPP |Public Private Partnership |
|QIZs |Qualified Industrial Zones |
|SAM |Social Accounting Matrix |
|SAL |Structural Adjustment Loan |
|SAT |Scholastic Aptitude Test |
|SFD |Social Fund for Development |
|SGB |State General Budget |
|SIF |Social Insurance Funds |
|SMEs |Small and Medium Enterprises |
|SPOs |Secondary Public Offerings |
|TAPR | |
|TFP |Total Factor Productivity |
|TIMSS |Trends in Mathematics and Science Study |
|TSA |Treasury Single Account |
|TVET |Technical and Vocational Education Training |
|USAID |United States Agency for International Development |
|VAT |Value Added Tax |
|WAP |Working Age Population |
|WHO |World Health Organization |
|WPI |Wholesale Price Index |
|Vice President: |Daniela Gressani |
|Country Director: |Emmanuel Mbi |
|Sector Director: |Ritva S Reinikka |
|Sector Manager: |Miria Pigato |
|Task Team Leader: |S. Ramachandran |
Acknowledgements
This Development Policy Review (DPR) was prepared by the Social and Economic Management group of the World Bank’s Middle East & North Africa region. S. Ramachandran led, and Homi Kharas advised, the team that comprised Moez Ben-Hassine, Sudhir Chitale, Sherine El-Shawarby, Daniel Lederman, SunYoung Lee, Norman Loayza, Claudia Nassif, Sheela Reddi, Hoda Selim, David Shand, Tihomir Stucka, Ruslan Yemstov, and Amira Zaky. Ragui Assaad of the Population Council in Cairo shared his many findings from the survey data that went into the chapter on employment. Radwan Shaban reviewed the final version of the report. Miria Pigato as Sector Manager and Mustapha Nabli as Chief Economist & Director oversaw the report’s preparation, and Ritva Reinikka as the incoming Director participated in the discussions with the Government. Shahrokh Fardoust and Roberto Zagha were the peer reviewers.
Emmanuel Mbi, Country Director, guided the team in its discussions with the Government. Several officials, particularly H.E. Mahmoud Mohieldin, the Minister of Investments and H.E. Osman Mohamed Osman, shared their views and their staff provided and checked the data the report analyzed. This DPR has also drawn on many Bank reports and staff working on the different sectors in Egypt at various times including Zoubida Allaoua, Jamal al-Kibbi, Alexander Berg, David Biggs, Andras Bodor, Ernesto Cuadra, Xavier Devictor, Anton Dobronogov, Samir El Daher, Jean Fares, James Hanson, Farrukh Iqbal, Arun Joshi, Sunita Kikeri, Alexander Kremer, Sahar Nasr, David Robalino, Roberto Rocha, John Speakman, Andrew Stone, Gaiv Tata, Robert Taylor, Paul Noumba Um, Jonathan Walters, Hisham Waly, Michel Welmond, and JaeHoon Yoo. Klaus Enders and Cyrus Sassanpour of the IMF shared data and views on macro-economic and labor issues. Egyptian academics and research centers were generous with their time and insights including Ahmed Galal, Director of the Economic Research Forum, and Hanaa Kheir-El-Din, of the Egyptian Centre for Economic Studies.
TABLE OF CONTENTS
executive summary i
Chapter 1: Changing Economic Structure & Investment 1
A. Changing Economic structure 1
B. Rising Productivity from Private Investment 7
C. Improving Investment 14
Chapter 2: Private Response to Trade & Business Climate Changes 19
A. Trade Reforms and their Effects 20
B. Privatization & FDI 27
C. Effects of Business Climate Improvements 30
D. So what does it all imply? 36
Chapter 3: Increasing Value Creating Employment 38
A. Main features of the labor market 39
B. Public Sector Employment and Wages 47
C. Private Employment and Regulations 49
D. Improving Education and Training 53
E. Challenges for the Future 56
Chapter 4: Savings & Intermediation 59
A. Savings and the Flow of Funds 60
B. Intermediation: Role of Banks and Capital Markets 64
C. Towards an Intermediation Strategy 70
Chapter 5: Economic Management & Institutions 74
A. Recent Economic Policies 75
B. Improving Budgetary Processes & Decisions 82
C. The Medium Term Outlook: Debt and Fiscal Sustainability 87
FIGURES
Figure 1.1: Sector Shares in GDP 2
Figure 1.2: GDP by Sector Constant 1992 LEb 2
Figure 1.3: Private (below) & Public (above) Shares 2
Figure 1.4: Egypt Private Sector 2
Figure 1.5: Correlation of OECD and Egypt’s GDP Growth 3
Figure 1.6: Increases in Population and the Poor by Governorates, 1995-2005 5
Figure 1.7: Real GDP per capita by Region 1992-2004 5
Figure 1.8: Improving Health indicators Everywhere 6
Figure 1.9: Investments to GDP 8
Figure 1.10: Investment Composition by Sector and Category over Time 9
Figure 1.11: Employment by Sector and Category over Time 10
Figure 1.12: GDP Composition by Sector and Category over Time 11
Figure 1.13: TFP Average Growth and Private Investment Share 12
Figure 1.14: GDP Growth Decomposition 13
Figure 1.15: Growth Decomposition – Public / Private Sectors 14
Figure 1.16: Investment versus Growth Rates (2000-2005) 15
Figure 2.1: Weighted Average Tariffs, Latest Year Available 20
Figure 2.2: Nominal and Real Effective Exchange Rate Index (2000=100) 21
Figure 2.3: Export composition and Real 21
Figure 2.4: Import Composition and Real 21
Figure 2.5: Herfindahl-Hirschmann Index of Export Concentration 24
Figure 2.6: Technology Content of Exports 25
Figure 2.7: Real Privatization Revenue (in 2006 LE m using GDP deflator) 28
Figure 2.8: Bankruptcy Rulings by Preliminary Courts 32
Figure 2.9: Bankruptcy Rulings by Appeal courts 32
Figure 2.10: Top 10 Constraints to Firm Investment in Egypt, 2006 33
Figure 2.11: Firm Ownership and Number of Employees 33
Figure 2.12: Firm Age (2006 year of establishment) 34
Figure 2.13: SMEs Proportion in Countries 34
Figure 2.14: Skill Composition of Sample Workforce and Number of Employees in the Sample 35
Figure 2.15: Factors That Affect Decision of Changing 35
Figure 2.16: Number of Manufacturing Firms by Size 36
Figure 2.17: Number of Employees by Firm Size 36
Figure 3.1: Age Distribution, 2006 39
Figure 3.2: Education Level of the WAP 41
Figure 3.3: Education Levels of the Unemployed 43
Figure 3.4: Education Levels of the WAP 43
Figure 3.5: Distribution of Employment by Institutional Sector 45
Figure 3.6: Average Annual Growth by Sector 45
Figure 3.7: Proportion of Informal Employment in Private 45
Figure 3.8: Remittances as a Share of GDP (1975 – 2006) 46
Figure 3.9: Real Wages in Public and Private Sectors, 1995-2004 48
Figure 3.11: Total Contribution Rates to Finance Pensions in Middle East 52
Figure 3.12: Gross and Net Enrollment Rates in Egypt by Level, 1996-2003 54
Figure 3.13: International Comparison of TIMSS Score (2004) 54
Figure 3.14: Flow Chart for Egypt’s Two –Track Education System 55
Figure 3.15: Technical Plus University Jobs Created and Job Aspirants 57
Figure 4.1: Currency Outside Banks 64
Figure 4.2: Banking Credit (outstanding stock, by sector) 65
Figure 4.3: Bank Lending to Private Investment 65
Figure 4.4: Interest rates, 2005–2008 66
Figure 5.1: Average annual Inflation and monthly range 75
Figure 5.2: Money and the Price Level 76
Figure 5.3: Money, Net Domestic & Foreign Assets (NDA& NFA) 76
Figure 5.4: Fiscal Revenue and Expenditure 77
Figure 5.5: Budget Balances 77
TABLES
Table 1.1: Percentage of Poor and Near-poor, by regions 1995-2005 4
Table 1.2: Children under 5, percentage stunted (low height for age) 1992-2005 7
Table 2.1: Nominal and Effective Rates of Protection (in percent) 23
Table 2.2: Improving the Business Climate 30
Table 3.1: Average Annual Population Growth Rate 40
Table 3.2: Employment & Labor Force 40
Table 3.3: Unemployment as a percentage of Labor Force 41
Table 3.4: Labor Force Participation for WAP, Market Definitions 42
Table 3.5: Gender composition of Public Sector Employment ,000 Persons 47
Table 3.6 Public Sector Employment and Real Wages 58
Table 3.7: The Labor Laws Compared 50
Table 3.8: Retirement and Pension Schemes, Total Contributions and Benefits 51
Table 3.9: Elasticities for Total Employment and Wage Employment wrt 56
Table 4.1: Estimated Flow of Funds 2005-2006 62
Table 4.2: Estimated Flow of Funds 2002-2003 63
BOXES
Box 1.1: Egypt’s Independent Power Projects 17
Box 1.2: Building Better Schools 18
Box 2.1: Trade Agreements & QIZs 26
Box 2.2: DFI to FDI: Changing Label & Views 29
Box 2.3 Recent Laws for Improving the Market Economy
Box 3.1: Measuring Unemployment 42
Box 4.1:Bank of Alexandria 67
Box 4.2: India's "a Hundred Small Steps" 78
Box 4.3: Lengthening Maturities 72
Box 5.1: Household wealth loss from inflation and low interest rates 78
Box 5.2: More Efficient Subsidies & Transfers 80
Box 5.3: Egypt’s Tax Reforms 81
executive summary
1. Egypt is transforming: over the last two decades the Government has moved towards more market-oriented policies and while the speed of this move has varied, the direction has been fairly steady. The resulting economic growth has been healthy but punctuated by episodes of macro-economic instability. After the last episode in 2003-04, the Government improved macro-economic management, lowered trade tariffs, and renewed efforts to promote the private sector. Since then, real GDP growth has risen to 7 percent, up from 3 percent in the three years before, and employment and private investment have also risen sharply. Ample foreign exchange reserves of over $33 billion now exceed its external debt (mostly concessional and long term) and help insulate the economy from adverse external developments. The rise in private investment and the surge in foreign direct investment inflows (FDI doubled to $6 billion in 2005-06, and again to $11 billion in 2006-07) suggest favourable market perceptions that augur well for the future.
2. These recent developments have kindled hopes that Egypt could join countries like Korea and Malaysia that doubled their incomes in a generation by growing steadily at 3.5 percent annually per capita. This is possible if Egypt continues to grow at current rates, but many are sceptical because similar spurts of high growth in the past faltered. Some wonder if current growth rates reflect unusually favourable global conditions rather than a fundamental change in the economy; others are concerned that the reforms are insufficient and/or that they may not continue, because some long delayed and needed reforms seem unpopular. A key challenge is the strong perception that benefits from recent economic reform and growth has disproportionately benefited the rich, with little improvement in the welfare of the lower classes. This challenge has been amplified by increasing widespread labour unrest demanding higher wages and recent public protests over clean piped water... On top of that, inflation has been creeping up to 15.8 percent in March 2008), despite efforts by the Central Bank, driven by global increase in energy and food prices and increased liquidity, while the unemployment rate was not coming down until recently.
3. Has the tide turned for Egypt? This Development Policy Review (DPR) examines the economy and salient policies through the economic lens of the Bank’s global development experience. Examining the developments in some detail and going back several years when appropriate, the DPR finds substantial benefits because of allowing a larger role for the private sector. It finds good reasons for optimism: Egypt is now better integrated with the world economy with stronger trade, investment, remittance and migration links that complement its historic and cultural ties. The current economic orientation and policies have been in place since 1991 and the DPR finds that the measures since 2004 were appropriate to the prevailing conditions. Economic growth, employment and investment have subsequently increased and broad swaths of the economy are thriving. Further growth could be expected when small firms grow increasing formality, change employment patterns, and reduce underemployment.
4. Current conditions require additional measures, and those needed to sustain growth largely overlap with those that would broaden support for the reforms, particularly keeping inflation low, improving education and other public services. In the medium term, government spending and staffing should become consistent with its different role in the changed economy, and the DPR identifies approaches the government could consider adopting. The main findings of the DPR’s five chapters are summarised before the policies are reviewed.
Main Findings
5. The DPR finds ample evidence that Egypt has prospered as a consequence of giving the economy a greater market orientation. While favourable global conditions have helped, the structural changes over the last two decades have been an essential ingredient for Egypt’s success: productivity rose more in those segments of the economy where the private sector’s share in investment and output grew most. Empirical estimates done for this report suggest that each dollar of private investment contributed four times more to output than a dollar of public investment, reflecting in part the poor choice and maintenance of public investment. Consequently, further increases in output, incomes and productivity may be expected from the recently rising share of private investment in the total. Public sector productivity has also increased in recent years, reflecting in part the increased importance of state owned firms in petroleum and natural gas. Egypt’s economic growth is also now more closely correlated with that of the OECD countries magnified by a factor of 1.25, and volatility has declined. This results from many links, not just the direct effect of oil and gas.
6. Trade, both exports and imports, has risen following the elimination of the parallel market premium in the exchange rate market after the 2003 currency devaluation and the subsequent reduction in trade tariff rates. The second round of tariff reductions in February 2007 has reduced the weighted average tariff rates to 6.9 percent, making Egypt among the world’s more open economies. The standard deviation of tariff protection across Egypt’s sectors is now only 5.1 percent (excluding beverages). But unlike in other countries, this has not levelled the playing field because Egypt’s sizeable energy subsidies (6.8 percent of GDP in 2006, 5.5 percent in 2007 and an expected 8.8 percent in 2008) have disparate effects across sectors. The standard deviation of the implicit effective protection (including the effects of energy subsidies) across sectors is still very high at around 130 percent (excluding beverages). Consequently, eliminating such subsidies would improve both resource use and the fiscal situation. The Government announced in August 2007 that subsidies for electricity and gas to the top 40 energy intensive industrial producers would be phased out over the next three years, and that subsidies for non-energy intensive industries would continue until 2013.
7. Despite recent reforms and increased trade, Egypt has a relatively low propensity to export. Put differently, the substantial growth of Egypt’s non-oil exports is less than other countries with similar GDP growth rates. Also, it exports few manufactured goods and at a less aggregated level, there is little evidence of greater integration into global production chains despite Egypt’s location and other advantages. This may be expected from an economy which has long had an anti-export bias and is precisely what recent reforms were designed to correct. The growth and diversification of non-oil manufactures is a litmus test for the success of Egypt’s trade reforms. Detailed data end in 2004 just when the tariffs were reduced and the currency depreciated; and while intra-industry trade may have risen since then, there is concern that Egypt’s unusually low proportion of mid-sized firms may hamper such integration. Smaller firms tend to trade less internationally and are less integrated into global supply chains that would make it easier for firms to adopt, adapt and diffuse superior technology and raise productivity. International experience suggests that it takes time and sustained effort for export orientation to take root in a business friendly environment.
8. Firms perceive improving business conditions. Surveys find that the 2005 reduction in corporate and personal income tax rates and better administration have improved the perceptions of firms that report fewer payoffs that often accompany inspections. The Bank’s 2008 Doing Business report notes that it is now easier to start a business and puts Egypt at the top of the “most improved business climate” list of countries; but it remains among the bottom third of the 178 countries, despite moving up to the 126th rank after being 165th for two years running. It is also note worthy that FDI inflows began to rise well before Egypt’s ranking did. The DPR finds that the recent changes have had detectable effects on larger firms, not smaller firms’ numbers and operations.
9. Privatization remains sluggish, despite considerable efforts by the government to find more capable owners for Law 203 firms, the group slated for privatization since 1991. Privatisation receipts have risen dramatically, and much of this was from the stock exchange floatation of minority equity stakes in state firms (e.g. 20 percent of Egypt Telecom) and from the sale of cellular licenses and banks. Selling the (Law 203) firms would allow their assets to be better deployed and reduce the likelihood that creditor banks would imprudently finance their shortfalls; but opponents play on public fears of unemployment, although the firms now employ fewer than two percent of Egypt’s workers, and employment would rise when firms are better run.
10. Employment has grown impressively, at 4.6 percent annually between 1998 and 2006, more than the labour force (3.9 percent) or the population (2 percent) despite the unchanged structural impediments showing the economy’s latent vibrancy. A large potential for growth remains: less than half the 14 to 65 year olds work (21.4 million workers of 44.9 million in the age group in a population of 76 million) and a third work at non-wage jobs (7.6 million). Data from labour market surveys show that most private sector employment is informal and that three quarters of all formal wage paying jobs are in the public sector. Public sector employment grew at 3.2 percent over this period, less than that of the labour force; but this desirable slowdown hurt educated women and young graduates. Private sector employment is increasing and these jobs are mostly for men, reward different skills, and few offer formal contracts. Consequently, several groups’ wages have changed disparately, although collectively public sector wages are higher and continue to rise more rapidly than in the private sector. Following a revision in the labor force survey questions of the in October 2006, the measured unemployment rate dropped to around 9 percent. Unemployment affects mostly the middle class in urban areas and a large part of it measures queuing for public sector employment. Some 85 percent of the unemployed are educated, a third with university degrees, and the duration of such unemployment approaches 7 years for some. Most of the unemployed are young, without families of their own; instead their parents support them while they search for well paying first jobs. Projections done for the DPR suggest that this group will continue to face challenges until formal employment increases more rapidly in the private sector.
11. The demographic transition in most developing countries strains schools and the government budget that pays for them. Remarkably, Egypt has schooled the rising numbers, even raising enrolment rates to around 86 percent and reduced gender disparities. But quality has suffered despite budget expenditures that are high by international standards: the Government spends over 5 percent of GDP and parents an additional 3.7 percent on textbooks and private tutoring. Distortions in both the supply and demand for skills and labour create considerable waste. Guaranteeing all graduates public employment has created a demand for credentials, not skills; and as graduates exceeded the budget’s ability to accommodate the resulting overstaffing, the national examination, thanawiya amma, became part of the rationing mechanism to limit entry into tertiary/quality education and public employment. The continued attraction of public employment inevitably has led to a derived demand for University degrees and hence to costly and private tutoring to improve students’ exam scores; but such tutoring is wasteful because it does not appear to increase cognitive skills. Education is further eroded when the tutors are moonlighting public school teachers who neglect their regular school tasks. The employment guarantee has been suspended since in the 1980s, but public employment remains attractive for several groups. Education and employment are inter-twined and their reforms must be in tandem. The Bank’s recent regional report on education suggests how this could be remedied[1].
12. There are far more workers (21.4 million) than entrants (about 700,000 annually) who would benefit from improved education; so considerable benefits would follow measures that increase worker productivity in the private sector. The 2003 Labour Law loosened some of the many restrictions that, although widely evaded, still have adverse effects. Firms avoid scrutiny by operating on a small scale and employing workers informally, and this discourages efficiency and staff training. The Government is considering lowering the effective wage tax rates as part of pension reforms that would also change the benefit structure and put the pension system on a sounder financial footing; and these would help increase formality of employment. Greater formality of both firms and employment would increase on-the-job training, worker productivity and hence wages as well increase firms’ access to finance.
13. Surveys consistently find that private firms, especially the smaller ones, rely mostly on retained earnings and owners’ funds to finance their operations. When finance limits the ability of firms to respond to profitable market opportunities, the welfare cost is especially high in an increasingly globalized economy where first movers gain an advantage that is difficult to overcome. The level of savings will rise when the budget deficit falls, and the allocation of savings and investment would improve when intermediaries operate better.
14. The DPR’s estimate of the flow of funds in two recent years confirms this absence of formal outside financing: households save over 16 percent of GDP (domestic plus foreign savings were almost 22 percent in 2006) much of it through banks that lend mostly to the public sector and hold almost all the Government’s outstanding domestic debt. Private firms invest about 11 percent of GDP but formal intermediaries (banks and capital markets) fund only about a fifth of this, some 2.4 percent of GDP. So although banks are large with 90 percent of GDP in deposits, they lend little to the private sector (flows) despite the sizeable stock of credit outstanding. Similarly, the equity market is large in value, having risen from under 30 percent in 2002 to equalling GDP in January 2008, but provides little financing to firms: there are few IPOs, and fewer still by private firms. Furthermore, the modest funding through the capital market in 2005-06 displaced an equivalent amount of bank lending.
15. The authorities have been improving banking, the most important of the formal intermediaries. Four state banks had dominated the system, both in size and through their control of joint venture banks. The equity holdings in joint venture banks began to be divested in 2004, and several unviable banks were closed through mergers. The Government privatised the smallest of the four state banks in December 2006 and in July 2007 announced its intent to also sell the next smallest state bank.
16. Banking reforms have two potentially competing objectives: making banks sound and lending to the private sector that is inherently risky. Egyptian bankers became especially cautious lenders after 1999, and banks now mostly finance the public sector holding almost all the outstanding government paper. This has made the banks more solvent and reduced the government’s contingent liabilities (stemming from implicitly guaranteeing all banking deposits); but economic growth and efficiency suffer when the private sector relies on informal markets for finance. The DPR finds aggregate credit flows to the private sector is low, although the decline over the past several years (as a fraction of both GDP and private investment) is recently being reversed. Disaggregated data were not provided to confirm whether the increase is from the privatised banks. Banking supervision will become important as such lending increases, and the 2007 FSAP update reports on the improvements and the remaining challenges.
17. Egypt would benefit from an intermediation strategy that recognises that some banks will develop their capacity to appropriately price and manage different risks before others do, and that these banks could prudently increase lending to the private sector. Banks slower to develop may have large deposit inflows because of their extensive network of branches, and having them hold safe government paper until they improve would provide an incentive for banks to improve while improving the overall allocation of credit. This would be the first of three elements in the strategy. Second, encourage intermediation by non-banks that have no direct access to household savers by allowing mutual funds retail access to household savings and/or wholesale access through banks. Even with such access, however, banks and capital markets are unlikely to serve small firms. The large spread between deposit and lending rates suggests that such lending is potentially profitable if lenders innovate and find ways of enforcing their claims cheaply. Such innovation is difficult in any heavily regulated industry; so the third element allows some room for small unregulated intermediaries — that now operate informally — provided they pose no systemic risks or infect the banking system. Formalising existing (and largely unseen) informal intermediation would allow successful techniques to be imitated, adapted and extended. Additional work is needed to flesh out the details, and such an intermediation strategy would improve the allocation of investment; the level of aggregate savings would increase when the budget deficit and government spending fall.
18. The DPR finds that economic management has improved in an increasingly open economy subject to market sentiments. Foreign currency no longer trades at a premium in a parallel foreign exchange market, although the nominal price of the dollar has been kept within a narrow band. Keeping monetary, fiscal and exchange rate policies consistent requires astute management, especially when capital flows are substantial. These capital inflows have benefited the economy overall, and keeping interest rates low has helped the fiscal position.
19. Such macroeconomic developments and policies have had significant distributional implications: when exchange rates are insufficiently flexible, capital inflows increase monetary aggregates and hence inflationary pressures. Inflation and low real interest rates benefit debtors — the largest being the Government, although larger firms also borrow from banks — while lenders (mostly middle class households with bank deposits) are hurt. The DPR estimates this loss in households’ financial assets — banking deposits and substantial currency holdings — at around 4 percent of GDP in several recent months, rivalling their income gains from economic growth. The surge of FDI also benefits larger firms and real estate developers. Consequently, Egypt’s recent prosperity may have bypassed some groups, such as the urban middle class and the poor, fuelling popular discontent.
20. Continued fiscal fragility despite tax reforms. The 2005 tax reform lowered corporate and individual income tax rates, broadened the base and improved administration: these measures have reduced distortions, and after a short lived increase, tax revenues have returned to around 15 percent of GDP, a level that compares well with Mexico’s 12 percent. Raising substantially more tax revenues will be difficult, because higher rates are inadvisable. With roughly 8 percent of GDP in non-tax revenues, total budget receipts are substantially lower than the roughly 33 percent of GDP in spending: grants, non-recurring receipts and borrowings bridge the difference. To improve economic decision making, the government widened the budget’s coverage and re-classified items in 2005, and the measured budget deficit rose as a consequence. The Government announced that this overall government deficit would be reduced by 1 percent of GDP annually over 5 years to 3 percent of GDP by 2010-11. These targets have been met for two years, albeit with the help of substantial non-recurring receipts and low interest rates (with the distributional consequences just mentioned).
21. The DPR finds little change in the broad patterns and levels of government revenues and spending; and the Minister of Finance’s April 2008 announcement that the deficit reduction target for 2008-09 cannot be met reflects this structural imbalance. This missing of the target should not, however, obscure recent improvements in budget planning, management and control. Parts of the institutional decision making mechanism are improving with the greater comprehensiveness and clarity of the budget, and improvements in financial management systems that monitor and control spending and borrowing (e.g. the Treasury Single Account). Much still remains to be done (e.g. internal audits and better public financial management): despite these improvements, cutting spending has proved difficult. Investments and even maintenance (with high rates of return) have been postponed for several years to the detriment of public infrastructure. Drastic spending cuts during a crisis rarely last: when pay increases are postponed, they more than catch up later. Wages have remained 7 to 8 percent of GDP for the last 20 years and although some civil servants earn less than they could elsewhere, the average level and annual increase of public sector wages are higher than in the private sector. Phased reductions in staffing over the medium term would reduce the fiscal deficit in a more lasting manner and raise private sector employment and productivity; but while civil service reforms are being discussed, as they have been every decade or so, they have not begun. The Government is also aware of the substantial benefits from cutting poorly directed spending (e.g. energy subsidies mentioned earlier), but Parliament and the public must consent to specific cuts.
22. Such consent has not been readily forthcoming. Some among the public and in Parliament know that subsidies are poorly targeted but may be reluctant to cut them for fear of hurting the poor. The Bank’s recently completed Poverty Assessment Update finds a complex picture that is easily misunderstood and misreported: the headcount measure fell from 51.4 percent (1995) to 42.6 percent (2000) and further to 40.5 percent (2005) using the upper poverty line (slightly below the international $2/day), but the percentage of the extremely poor (less than $1/day) rose slightly between 2000 and 2005. Such headcount measures are sensitive to the defined poverty line when large numbers are clustered around it. Other indicators such as the rise in consumer durables, access to telephones, etc. suggest that average living standards of the poor are improving. Direct measures such as stunting among children also show a welcome decline, and other measures of health show improvement.
23. The poor have benefited from growth, but despite improving averages, pockets of extreme poverty remain. To properly assess the distributional and poverty impacts of recent economic growth, the Government has requested CAPMAS to survey living standards (expenditure and incomes) every two years instead of the earlier five-year cycle. In February 2008 of the same households were re-surveyed and a full year’s consumption will be collected over April 2008-March 2009. Comparison of such data with earlier surveys will help identify which various groups benefited from growth. Public understanding and trust in the findings would increase if the data were made publicly accessible so others could replicate the results.
24. Subsidies are an increasing fiscal expense, and the Government setting prices of several items undercuts the functioning of markets. While a portion of the subsidies (less of the energy than the food) benefit some of the poor, the extremely poor get little because the subsidised items do not always reach the remote areas where they live and the poor also bear a disproportionate share of inflation’s costs. The extremely poor are deprived in many ways: they have no land, little or no education, and cannot find work. The poor would receive a higher share of the benefit form improving health care, family planning and education than from subsidies because such services cannot be easily purchased even with more efficiently administered cash transfers. Other countries have found that involving beneficiaries improves the design and oversight of both subsidy delivery systems and the provision of public services.
25. Collective decision making has been difficult although parts of the public oversight mechanism are improving: the budget is now clearer and more comprehensive and while such improvements permit better public oversight, for this to actually happen, entities outside of government must also develop. Collective decision making also requires an array of “institutions” that safeguard public interest: an informed public engaged in civic affairs, Parliamentarians who compete to represent the public, etc. These will develop with greater access to data, and trust in their accuracy. The Bank’s 2007 Governance Indicators put Egypt below the 50th percentile of countries; while the voice and accountability indicators put Egypt below the 20th percentile. Recent Government efforts to establish a “Transparency and Integrity Committee” with civil society participation, along with effort to ensure greater access to information and more broadly improve governance indicators are important initial steps.
26. The DPR finds that notwithstanding the high level of gross public debt (87 percent of GDP), Egypt’s net public debt (i.e. offset against assets such as the central bank’s foreign exchange reserves) is more modest and sustainable, especially if reforms and growth continue. With a large stock of currency in circulation (12 percent of GDP), the substantial seignorage that benefits the government is now augmented by negative real interest rates on its domestic debts. The large capital inflows have raised foreign exchange reserves and reduced net external debt. These favourable conditions allow the Government to take appropriate spending measures in a deliberate and well planned manner.
Development Policies Reviewed
27. The thrust of current economic policies is sound. Broadly speaking, these policies (1) allow the private sector a larger role and facilitate investment; (2) integrate Egypt globally through lower trade tariffs and a better business climate that continues to attract capital; and (3) improve macro-economic management. Egypt has never been isolated from the world — indeed, the Suez Canal, the large numbers of migrants sending sizeable remittances and capital flows make this impossible — and the recent reforms explicitly recognise the importance of allowing the private sector to fully participate in this global economy. Orienting these policies since 1991 has taken considerable effort, and the ensuing rewards from surging growth have been substantial. The 2004 measures rightly responded to the pressing needs at the time: eliminating the premium for foreign exchange in the parallel market that had developed have increased trade and capital flows; more large firms are being established after the Government made it easier to start a business, and so on. When other parts of the economy also change — greater formality of firms and employment — both growth and distribution would improve.
28. Egypt’s recent success has spawned other concerns: capital inflows with limited exchange rate flexibility increase monetary aggregates and inflationary pressures that in turn have adverse distributional effects because inflation and low real interest rates erode the currency holdings and banking deposits. Fortunately, there is a large overlap of additional measures needed to sustain growth and those that broaden support for continued reform.
29. Much remains to be done, especially with long gestation reforms that would have enormous benefits. Recent reforms are improving physical capital and investment, and similar efforts to improve human capital would both increase productivity and support for the reforms. With the demographic transition underway, the creation (education) and deployment (labour markets) of human capital are of great importance in the medium term. It is difficult for a large bureaucracy to deliver the necessary public services such as education effectively or efficiently, and improvements require a consensus over the need and broad support over the direction. A larger role for the private sector — rewarding individual initiatives and allowing prices to guide the allocation of resources — requires a different role for the government, and this transformation is still beginning. Policies that need some fine tuning are discussed before other issues to be addressed are mentioned.
Fine-tuning Policies
30. With lower trade tariffs, “behind the border” improvements such as better customs procedures and distribution logistics would help firms integrate more closely into global production chains and benefit from better technology. These changes are beginning and the efforts to improve the business climate should shift emphasis from starting a business to operating them. Identifying which of the many hurdles to remove first is not easy, and entities that convey business concerns to the government (e.g. investment or export promotion boards) have limited or short-lived success in many countries because they become vehicles for rent-seeking. As lenders become aware of smaller firms’ needs, they could channel this information to the government through the central bank that could monitor real sector developments as part of its oversight functions.
31. Banking reforms have begun well and provide the platform for an intermediation strategy to improve investment allocation (the level would rise with lower government spending that increase savings). Tailoring the strategy to Egypt’s current situation would (i) restrict a few identified banks to holding government paper until their credit culture and governance become sufficiently effective, (ii) increase non-bank intermediation by giving non-banks retail access to household savings and/or wholesale access to banks, and (iii) extend the protection of formality to unregulated intermediaries with safeguards against systemic failure. Detailing the strategy requires assessing the current capabilities of several entities including the central bank, but may not require any additional laws or authority to implement.
32. Privatisation (of Law 203 firms) has stalled despite the Government’s efforts, and their continued operations threaten the soundness of creditor banks that have financed their shortfalls. The government is considering instituting performance contracts to improve the firms, but international experience is not encouraging. Quickly resuming their privatisation would be better, and meanwhile subject each firm to a hard budget constraint (to avoid cross-subsidies within and across holding companies) and make their finances publicly transparent (including financial transactions within holding companies).
33. Despite these concerns, the Bank projects Egypt’s real growth to remain high, moderating to 6.5 percent by 2011, but there are many risks that current and future policies could mitigate. Regardless of nominal exchange rate flexibility, the recent real appreciation of the pound will likely continue because Egypt’s inflation is expected to be higher than its trading partners. Exports will continue growing, albeit more slowly than recently, helped by a rise in oil and gas exports as more fields become productive. Capital will continue to flow in, although at more moderate levels; but the turmoil in international financial markets since August 2007 underscore how quickly global conditions could deteriorate.
34. Lower government spending would reduce Egypt’s vulnerability and raise aggregate savings and hence investment. Future growth may be stymied by infrastructure bottlenecks because such investments have declined over the past decades, and renewals will use a sizeable portion of national savings. Public infrastructure must be adequately maintained, and despite the risks, PPP is a prudent approach until Government could ensure that increased spending translates into adequate maintenance and appropriate investments. The experience from transforming countries in Eastern Europe during the 1990s show that even after decades of socialism, greater public and beneficiary involvement helps institutions develop in different forms to ensure effective public spending.
35. A greater role for the private sector implies a smaller, and different, role for the government — and spending, staffing and what it attempts must all change accordingly. Put differently, structural reforms have not yet fully reformed the economy’s structure, particularly the government’s size as well as a shared understanding of the role of the state in a re-defined social contract with the citizens. Past reform attempts were short lived largely because these issues were not addressed.
Policies Needing Attention
36. The need to improve social policies is becoming urgent. Poverty reduction and improvement of living standards for the majority of the population is an ultimate outcome of sound economic policies. Poverty alleviation is consistently an overarching objective of Egypt’s development plans. The underlying logic of the Government’s policies has been spelled out in the Poverty Reduction Strategy for Egypt prepared in 2004. It laid out a three-pillar strategy: (i) increasing current incomes through growth, (ii) increasing future incomes through education, (iii) protecting the vulnerable through an effective and targeted social safety net. The thrust of the policy action so far focused on the first pillar of this strategy, and to a lesser extent on the second. Despite the difficulties discussed above, growth has increased, but the social safety net has yet to be modernized and improved. Only in 2008 the government announced plans to extend the coverage of the targeted social assistance from 1 million to 2 million families, - still a small fraction of Egypt’s poor population. Actions are urgently needed to reform the outdated, poorly targeted and inefficient subsidies system, whose costs expand with rising world prices fuelling popular discontent. The technical aspects strengthened social assistance system have been well studied, though not in this report, but the issue of political decision to act has yet to be made.
37. Energy and food subsidies are the two big spending categories, and the former is the more substantial and benefits the rich disproportionately more than the poor. Energy subsidies — at least 5.5 percent of GDP in 2006-07 and expected to be 8.8 percent in 2007-08 — keep the effective rate of protection high, reducing the benefits of lower trade tariffs. The government announced in August 2007 that energy prices to 40 energy-intensive industrial users would be raised over 3 years, and has reconfirmed this plan even after the recent increase in world energy prices and the turmoil in the global financial markets.
38. Reducing subsidies on food is more difficult because people observe the direct effect of raising controlled prices but not the poor paying for them indirectly through taxes and inflation. Having controls on prices makes it easier to mistake symptoms for the cause because raising the price directly affects the constructed price index. Unchanged domestic prices of baladi bread and other food items when world prices are higher increase scarcity and lengthen queues — but the adverse publicity of the very young and old being trampled upon in the scramble to obtain subsidised bread increases public pressure on the government to increase subsidies rather than to subsidise the items less. A better system would have a greater poverty reduction impact and simultaneously lower the budget.[2].
39. Keeping the prices of items in the consumption basket low only affects the inflation measure, and policies within the Government’s control can reduce the underlying inflationary pressures. The exchange rate has been insufficiently flexible to prevent an increase in money; but keeping exchange rate, monetary and fiscal policies consistent requires astute management that would be easier with lower government spending.
40. Public employment is a challenge that is best tackled in tandem with improving education. The wage bill of public employees who number 5.6 million (26 percent of the work force) has long been 7-8 percent of GDP — seemingly modest, but with complex effects. The many required changes must be sustained over long periods and a broad consensus on the direction is therefore indispensable. Education is one of the more important of the services the public sector provides, and improvements would have direct economic benefits and buttress public support for the whole package of reforms and allow additional measures that boost productivity and growth[3]. Productivity increases in the non-traded sector where many of the smaller firms operate on a small scale at the fringes of formality would improve both income and distribution. This applied in both urban and in rural areas where farmers contend with a plethora of restrictions (marketing arrangements, irrigation system) that limit their ability to increase their productivity and income.
41. Egypt’s current challenge is to reduce the size and scope of the Government without disruption, providing the private sector more room to invest, innovate and grow. This approach and the associated measures have the President’s support; public support may be more forthcoming when the people are better informed. Making the budget more comprehensive and comprehensible has been an important step, and greater confidence in the distributional fairness of government policies would increase support for better policies. This report outlines measures that help Egypt continue along this path to prosperity.
Changing Economic Structure & Investment
1. This chapter examines the salient changes in the economy over the last several years. The shift in policies giving the private sector a larger role began timidly in the 1970s and more boldly after 1990. The chapter finds that the increase in the private sector’s role in the economy led to a substantial increase in productivity. Nevertheless, the Government has an important though different role than before — and the report as a whole looks at how the government is changing to fill this new role. This chapter begins by describing the changing economic structure with a detailed look at physical investment.
2. The first section examines the dramatic observable shift in the private sector, especially in investment. In addition to the larger private sector, Egypt’s growth is increasingly correlated with that of OECD countries: every percentage point rise in OECD growth is associated with a 1.25 percentage point increase in Egypt’s output. This increased correlation is the result of many links, not the direct effect of a single factor like oil or tourism. Despite these changes, some parts of the economy have barely changed, giving rise to concerns over disparities in incomes and the persistence of poverty especially in rural Upper Egypt. The complex nature of poverty is briefly described: the poor are employed in low productivity work, and the extremely poor are deprived in many ways, lacking land and access to public services such as education, health and family planning. While economic growth may have bypassed some of the extremely poor, economic growth has benefited the vast majority of Egyptians, although the recent rise in inflation has had adverse distributional effects.
3. The second section examines the role that physical investment has played. Using disaggregated data that the Ministry of Economic Development carefully collected for nine segments that constitute the whole economy, the section finds that rising productivity is the result of private investment. Total factor productivity rose more in those parts of the economy where the private sector’s share increased: so the relation is causal, not co-incidental. Public investment has declined as a proportion of GDP without adverse effects on output growth. Indeed, the empirical analysis finds that a dollar in private investment increased output four times as much as a dollar in public investment despite the obvious public infrastructure shortcomings. This underscores the poor choice of past investments both in public enterprises and even in infrastructure where inadequate maintenance renders such investments less useful.
4. The secular decline in public investment has not adversely affected output because Egypt’s stock of public infrastructure is substantial and built over earlier decades. This infrastructure is decaying in many areas, and the third section examines how the government is now turning to public private partnerships to improve public investment. This approach has both merit and risks and the recent experience both in Egypt (in power generation) and elsewhere are summarized. The Ministry of Finance has established a unit to promote PPP, and the merit and limitations of the efforts to improve school building is analyzed.
Changing Economic structure
5. Over the last three decades, Egypt’s economy has changed in three important aspects — and did not change in one. First, as with development in most countries, the composition of output changed with agriculture’s share in output declining. Figure 1.1 shows this for Egypt, and large share of services reflects Suez Canal traffic and tourism. Despite its declining share, real agricultural output rose as shown in Figure 1.2; it is just that non-agricultural output grew faster.
|Figure 1.1: Sector Shares in GDP |Figure 1.2: GDP by Sector Constant 1992 LEb |
|[pic] |[pic] |
|Figure 1.3: Private (below) & Public (above) Shares |
|[pic] |
6. Second, the state’s role in the economy has declined in general, but not consistently. Figure 1.3 shows the private-public split in the economy’s GDP, total employment and aggregate investment: the private sector’s share (the portion below each line) rising considerably for investment, discernable for output (the decrease since 2001 reflects the booming Suez Canal traffic and of oil and gas output that accrues to the state), and barely changing for employment.
|Figure 1.4: Egypt Private Sector |
7. Figure 1.4 shows that private investment to total GDP varied over the years, and the recent sharp rise from 8 percent in 2004 to an expected 14 percent in 2007 is not unprecedented. But it is remarkable because the investment increase is despite the private sector’s declining share in GDP from about 61 percent in 1991 when policies permitting private enterprise were instituted and peaked around 71 percent in 1999 when Suez Canal traffic and gas production (accruing to the public sector) began rising rapidly. Natural gas production overtook petroleum in 2005-06, together they account for almost 15 percent of GDP, almost double that in 2000-01.[4] Private investment’s share in aggregate investment rose because public investment declined, and these effects will be examined further later in this chapter.
|Figure 1.5: Correlation of OECD and Egypt’s GDP Growth |
|5 year moving averages |
|[pic] |
8. A third change is the greater correlation of Egypt’s growth with OECD countries. Dobronogov and Iqbal[5] (2004) examined Egypt’s growth since the 1960s and found that its correlation with OECD growth increased substantially since 1991. Figure 1.5 reproduces their findings showing lower growth volatility which they take as evidence of a structural change resulting from Egypt’s greater openness.
9. Two additional years of data finds that OECD growth explains almost two thirds of the variation (R2 of 0.63) in Egypt’s real economic growth from 1990 to 2005 — the period after the detected shift that coincides with the start of structural reforms[6]. Growth rates of Egypt’s GCC neighbors have no explanatory power, and the effect of oil prices are also statistically insignificant (p-value 0.81). If this relation continues to hold, every percentage point increase in OECD growth would raise Egypt’s growth by 1.25 percentage points. Egypt has greatly benefited from the unusually good economic conditions in OECD countries now, and this allows the government to undertake further reforms.
Almost all have benefited from growth, despite regional disparities
10. Egypt has less consumption inequality (Gini coefficient is 0.32) than most countries but some Upper Egyptian governorates have remained poorer than others for decades. This and the seemingly meager decline in poverty measures between 2000 and 2005 have alarmed some about the effects of growth on the poor. The Bank’s 2007 Poverty Assessment Update examines household survey data from 2005: in a country with little inequality and a PPP adjusted GDP per capita of over $10/day, almost 20 percent are poor (including almost 4 percent extremely poor), and an additional 20 percent are near poor [7]. Table 1.1 shows this total of poor and near poor at 40.5 percent in 2005; but while poverty has declined, the magnitude has been modest and disparities across regions remain. This has led to some disappointment and calls for urgent actions.
Table 1.1: Percentage of Poor and Near-poor, by regions 1995-2005
|Regions |1995/1996 |1999/2000 |2004/2005 |
|Metropolitan |35.6 |19.6 |18.0 |
|Lower Egypt Urban |33.5 |27.7 |27.2 |
|Lower Egypt Rural |57.1 |42.0 |41.1 |
|Upper Egypt Urban |44.0 |48.9 |38.0 |
|Upper Egypt Rural |65.3 |63.5 |64.6 |
|All Egypt |51.4 |42.6 |40.5 |
|Source: World Bank (2007) based on HIECS |
11. This section provides a perspective to these developments and makes three points: (1) all groups are benefiting from higher incomes and standards of living, some more than others; (2) a few groups, smaller in number than even the extremely poor, are barely prospering and they are deprived in many ways (no land, education etc.); and (3) public infrastructure such as better roads could help raise regional incomes, but the extremely poor would benefit more from well-administered public services such as health care and family planning.
12. With large numbers clustered around each poverty line, small changes in the defined line have large effects on the head count measure. Despite care and effort in the calculations, the price indices used with the 2005 household survey data are less reliable than in other periods because the survey followed the large 2003-04 depreciation of the pound in the foreign exchange market and whipsawing inflation. Other data in the same surveys show improving standards of living even among the poor: they have more consumer durables, telephones etc.
13. But while the poverty decline may be underestimated, disparities have persisted for decades, and these could be viewed as either rural or regional (Upper Egypt). Rural areas account for 56 percent of the population, 66 percent of the near poor, 78 percent of the poor, and 80 percent of the extremely poor. Viewed differently, Upper Egypt’s rural areas have 27 percent of the population, 31 percent of its near poor, 51 percent of the poor, and 66 percent of the extremely poor. But while the poor are more numerous in some parts of Egypt, there is progress even in these regions.
14. Figure 1.6 plots the change in population against changes in the poor by governorates: with the area of the circle representing population size, and shaded for Upper Egypt. Economic growth pulled people out of poverty in most governorates, but the poor have increased more than the population in Assiut — and internal migration is probably too small to affect the picture[8]. So while poverty has risen in some governorates, it has fallen in others governorates like Fayoum in Upper Egypt. And poverty declined most in urban areas.
Figure 1.6: Increases in Population and the Poor by Governorates, 1995-2005
[pic]
Lower Egypt (blank), Upper Egypt (dark shaded) and Urban (diagonally hatched)
Source: World Bank (2007) based on HIECS
|Figure 1.7: Real GDP per capita by Region 1992-2004 |
|[pic] |
|Source: Calculated from UNDP & Institute of National Planning, Egypt Human |
|Development Report, 1995, 2001 and 2005 using GDP deflators to arrive at 2004 |
|LE values |
15. Even in regions where poverty persists, there has been progress. Figure 1.7 shows GDP per capita rising, albeit at different rates[9]. And most measures of human development — mortality, literacy and years of schooling — show improvements. Figure 1.8 shows some measures of mortality: health in both Upper and Lower Egypt is clearly improving, although “gaps” remain and, since the pace of improvements varies, some may widen.
|Figure 1.8: Improving Health indicators Everywhere |
|[pic] |
|Source: UNDP Human Development reports, 1995 and 2005. |
16. Poverty is an individual characteristic, not a regional aggregate; so group averages do not measure welfare. Similarly, poverty rates merely measure how many are below an arbitrarily determined line, not how deprived they are. The detailed findings in the Poverty Assessment Update shed some light on the characteristics of the poor: most work, often at non-wage jobs and the extremely poor have no land, little education and often ill health. Nevertheless, except for very few people (a sub-group of the extremely poor), their diets, life expectancy and other human development indicators are improving — more rapidly for some groups than for others.
How to catch up?
17. A low standard of living, especially in developing countries, reflects limited opportunities, little capital and low technology, not the absence of effort or the temporary effects of business cycles. Such situations sometimes arise within countries as well, and Governments have found it difficult to increase growth in such lagging regions.
18. Upper Egypt is such a lagging region, although it has more fertile land and better water (being upstream and unaffected by salinity) than Lower Egypt. Nevertheless, 93 percent of the cultivated area in Upper Egypt produces low value traditional crops, and subsistence agriculture accounts for 40 percent of rural incomes and for almost two-thirds of rural employment. Small land holdings and high transport costs makes farming non-traditional crops (e.g. horticulture serving export markets) uneconomical: the Bank’s recent Policy Note on Rural Development[10] points out that public investments have not been calibrated to poverty and that almost “90 percent of government transfers are absorbed by wages at the expense of infrastructure and equipment.” Many groups would benefit from better physical infrastructure and greater regional trade, especially those with larger holdings able to invest the greater capital required; but the extremely poor may not benefit because they do not have land or capital. Indeed, some empirical work using governorate data for 2000 to 2005 find higher yields per feddan associated with higher poverty rates.
19. Public infrastructure investments, discussed later in this report, are therefore not panacea. Improved roads and other infrastructure that reduce transport costs would help raise incomes in the lagging regions, but in sparsely populated regions (where the extremely poor live) the expense of such infrastructure may exceed the additional benefits. Some private investments in refrigeration and packaging facilities may be worthwhile, and these will occur as the business climate improves and the growing private sector seeks out and finds these potentially profitable niches. Employment in manufacturing, trade, transportation and services rose by 28 percent between 2000 and 2005 in rural Upper Egypt adding half a million new jobs to sectors employing a quarter of the 6 million workforce, but poverty rates did not fall whereas real wages did[11]. Chapter 3 discusses employment in detail, but real wages fell because wages in low skilled jobs did not keep pace with inflation. One clear way for the Government to help the extremely poor in lagging regions is to provide adequate public services.
Better government services
|Table 1.2: Children under 5, percentage stunted |
|(low height for age) 1992-2005 |
|Regions |1992 |2000 |2005 |
|Upper Egypt Rural |40 |27.2 |23.2 |
|All Egypt |26 |18.7 |17.6 |
|Source: Egypt Demographic and Health Surveys; figures are for children under age |
|five classified as undernourished if their z-scores are below two WHO reference |
|population’s standard deviations from the median. |
20. The Government is responsible for providing services such as public health and education. Almost 40 percent of residents in Upper Egypt have no access to sanitation versus 31 percent in Lower Egypt. Clean water would help lower infant mortality rates (under five mortality is 34.6 per 1,000 versus 20.3 elsewhere), and the Bank’s water sector studies have many specific suggestions on sewage disposal and maintenance of irrigation canals. Primary health clinics could tackle preventable diseases and offer family planning services: surveys find that although the poor in Upper Egypt have more children (7.5 persons in an average poor household versus 4.4 elsewhere), their preferred numbers are not different. This is not to imply that nothing is being done: Table 1.2 shows dramatic improvements in one metric of children’s’ health, and the dramatic narrowing of “the gap” shows what is possible.
21. Along with other measures discussed in Chapter 3, a more equitable regional allocation of education spending would improve schooling: only 73 percent of children complete primary school in Upper Egypt versus 82 percent in Lower Egypt and 87 percent in urban governorates. Half the public preparatory schools’ pass rates in Upper Egypt are below the national average while only 27 percent in Lower Egypt and 3 percent in urban governorates fall in this category. Excessive centralization has been detrimental, but decentralization alone will not improve education and other measures that would help are discussed later in this report (Chapter 3).
Rising Productivity from Private Investment
22. Figure 1.3 had showed the rising share of private investment in aggregate investment, and Figure 1.9 shows that this rise was primarily because public investment declined over the decades, lowering aggregate investment fell from an average of 32 percent of GDP in the 1980s, to 25 percent in the 1990s, and even further to 19 percent in the current decade. Output has nevertheless grown, and this section examines the level and productivity of investment, separating private and public productivity in nine segments that together encompass the whole economy using data carefully prepared and made consistent by the Ministry of Economic Development. These data
|Figure 1.9: Investments to GDP |
|[pic] |
conform to the government’s classification (e.g. Law 203 firms are considered private although the government owns their equity) and investment in “transport” includes railways, trucks and roads. Figures showing the public–private split in investment, employment and GDP are first presented before turning to productivity calculations.
23. Without exception, private investment rose in all sectors: in agriculture, industry, and construction the private sector’s share in investment raised six fold between 1960-83 and 2001-2006; in services (particularly restaurants/hotels) private investment’s share reached 86 percent; in finance/insurance and in social services, the public sector remains important, although the private sector’s share is rising. Figure 1.10 shows that in infrastructure, private investment rose from almost nothing to 16 percent in electricity and from 12 percent to 36 percent in transport and communications.
|Figure 1.10: Investment Composition by Sector and Category over Time |
|[pic] |
24. While Figure 1.3 showed little change in the private sector’s share in aggregate employment, Figure 1.11 shows substantial changes in several segments. Two-thirds of total employment is in Agriculture and Education, and the private sector’s share in education declined. The public-private split did not significantly change in Health and General Services which are shown combined with Education. While the share of private employment in petroleum rose substantially, it is not as large an employer as industry.
|Figure 1.11: Employment by Sector and Category over Time |
25. This shift towards private sector is also apparent in figure 1.12 showing the sectoral components of GDP: it was pronounced in transport and communication (from 13 percent private in 1960-82 to 55 percent in 2001-07). Similarly by 2000-2007, the private sector’s share reached 90 percent in Industry and Mining, 75 percent in construction and building, 85 percent in trade, finance and insurance, and 99 percent in restaurants and hotels. The public sector remains large in energy (petroleum and electricity).
|Figure 1.12: GDP Composition by Sector and Category over Time |
|[pic] |
26. GDP per worker and per capita do not decline secularly (not shown) despite the large decline of investment as a proportion of GDP because the capital stock does not decline as rapidly as investment flows. After a boom and contraction in the first half of the 1980s, GDP per worker grew at an annual average of 1.59 percent during the remainder of the 1980s, 1.48 percent in the 1990s, and 1.74 percent in the 2000s when for the same periods, GDP per capita grew at 2.02 percent, 2.24 percent, and 2.34 percent respectively. This is the rise in productivity, and how the economy used capital more efficiently is explored further below.
Factor Productivity Differences and Changes[12]
27. Figure 1.13 shows that the rise in total factor productivity (shaded areas estimated by decades) coincides with increased private share in investment (the line). Causation could run in either direction, so the relation between productivity and the private sector’s role is explored further in this section. Turning to the other factors of production, the lower panel shows that labor’s role increased only slightly (and recently) while capital’s share declined: Egypt accumulated substantial capital during the 1960s, 1970s and 1980s; but its contribution is more similar to that of labor and productivity in the 1990s and 2000s.
|Figure 1.13: TFP Average Growth and Private Investment Share |
|[pic] |
| |
|[pic] |
| |
28. This general pattern is also observed when the growth is decomposed at the sectoral level. Figure 1.14 shows four sectors where this is clearly the case: agriculture; industry and mining; electricity; and construction and building. The patterns are similar for transport and communications, and restaurants and hotels (not shown). In contrast, the pattern differs where the public sector continues to dominate investment and/or output (viz. petroleum and derived products; trade; finance and insurance; and education, health, and general services): in these segments, total factor productivity has not risen significantly. This suggests that productivity changes may result from ownership.
|Figure 1.14: GDP Growth Decomposition |
|[pic] |
Productivity by ownership
29. Some interesting similarities and differences arise when growth is examined by ownership: Figure 1.15 shows that TFP of the private sector rose substantially after 1991 when the economic policies were reoriented to permit this sector’s growth; but it also shows a remarkable improvement in the public sector’s total factor productivity in the 2000s following a decline in the 1990s. Capital’s contribution to productivity also diminished in both public and private sector (where it diminished less): the bulk of productivity gains in the private sector were in the 1990s, although the most recent period ends before the exchange rate corrections may have worked their way fully through the economy. These findings point to the benefits resulting from the private sector’s larger role in investment and output.
|Figure 1.15: Growth Decomposition – Public / Private Sectors |
|[pic] |
| |
|[pic] |
| |
30. The estimates from a more complex production function (Annex I) suggest that a dollar in private investment was four times as productive as the same in public investment. This should not be misinterpreted to mean that private investment suffices or that public infrastructure is excessive. Rather the estimates show that past public investments have not resulted in commensurate output increases — either because of a poor choice (e.g. schemes like Toshka or investment in irrigation instead of on drainage) and/or inadequate maintenance that renders them useless (e.g. potholed roads). The right choice and execution of public investments that are adequately maintained may have high economic returns: the findings suggest that these did not materialize in the past.
Improving Investment
31. Economic theory links growth to investment, but Figure 1.16 shows a weak empirical relation between the two: a wide scatter visually dominates a slight positive relation between investment and growth rates averaged over the most recent five years. The outliers are countries with unusual circumstances (e.g. acute economic mismanagement in Zimbabwe). China is an outlier on growth, and its investment rate is also astonishingly high[13]. Egypt lies near the middle of the scatter: many countries with Egypt’s investment rate grow faster (and vice versa).
Figure 1.16: Investment versus Growth Rates (2000-2005)
[pic]
32. Growth would rise if current investment levels were better allocated in Egypt. The increased productivity described in the earlier section arose because private investments are guided and motivated by profits. But public infrastructure is also important and much of it is old and parts are crumbling as the recent spate of tragic railway accidents shows — particularly tragic in a country that pioneered railways before much of Europe. Public investment has declined to around 4-6 percent of GDP over the past two decades, and several sector specific Bank reports have pointed out that neglected maintenance is more to blame than low public investment per se.
33. The Government has recently sought to involve the private sector in public investment through public private partnerships, establishing a unit in the Ministry of Finance to promote them. Such partnerships have the potential both to improve investment and maintenance, but realizing this potential requires careful management as discussed below.
Public Investment & Private Partnership
34. Public Private Partnership (PPP) is a term coined in the 1980s, but the concept of harnessing each sector’s relative strength is not new — Hansard, a private entity until 1909, has long printed the great debates at Westminster. Traditionally, the Government provides public goods (i.e. non-excludable goods and services that create a free rider problem) and the private sector produces other items efficiently because competition and the drive for profits foster the use and diffusion of the best production and delivery techniques. What has changed is technology[14] in some activities that alters the demarcation allowing competition among private providers of some hitherto public goods and services.
35. When responding to these changes and “partnering” with the private sector, many governments have made mistakes with adverse fiscal effects and resulting in poor investments[15]. These can be avoided when governments know where the gains from private sector involvement arise (and why) and recognize the hidden risks. Indonesian power contracts had “pay regardless of use” clauses with prices indexed to foreign currency while consumer prices were in local currency saddling the Government with exchange risk and contingent debts. In Brazil, contracts with privately owned thermal generators resulted in chaos, not efficiency gains because they ignored the large hydroelectric power’s links to rainfall and irrigation needs; consequently, a drought required the release of water that increased hydro power generation adversely affecting the demand on the private thermal generators. Private toll roads cannot capture the externality of a road network or bear the uncertainty of traffic projections; so competitive auctions for franchises are plagued by the winner’s curse, and result in ex post bailouts to maintain public service (e.g. toll roads in Mexico, the tunnel under the English Channel).
36. Box 1.1 describes Egypt’s own recent experience with electric power. As in Indonesia, foreign developers were guaranteed payment in dollars while electricity users are charged tariffs in pounds. Consequently, when the pound depreciated and the Egyptian Electricity Transmission Company made the contracted payments on behalf of EEHC, the state owned firms’ finances were adversely affected. The EEHC believes the IPPs benefited Egypt because the contracted price of $0.0254 per kWh is low; but this reflects the low price of contracted gas used to generate electricity. The economic rates of return may nevertheless be high because the plants were built quickly and cheaply and Egypt used the power generated, unlike Indonesia where electricity demand fell in the wake of the 1997 crisis. So Egypt probably benefited from the PPP arrangements despite the adverse effects on the state-owned electricity firms’ finances. But much of the benefits may have been dissipated through inefficient power use because electricity prices remain too low.
Box 1.1: Egypt’s Independent Power Projects
|In 1993, as part of its structural reform efforts, the Bank and bilateral donors made financing power plants contingent on Egypt raising |
|electricity prices to reflect the utilities’ costs. Finding this unacceptable, and with private operators eager to finance such projects |
|world wide, the Government opened electric generation to private investment. Doing this required changing several laws, and further |
|reshuffling the state owned utilities. |
|The power sector had already been unbundled in 1964; the Egypt Electricity Authority (EEA) had been created in 1976; and the eight |
|distribution companies had been corporatised under the Ministry of Public Enterprises in 1992. Article 7 of the 1996 Law 100 permitted |
|public utility concessions to local and foreign investors allowing them to build, operate and maintain power generation stations. |
|Egypt attracted IPPs for three 682.5 MW generation plants with a total capacity of 2,048 MW (a significant portion of its total installed |
|capacity of 17,600MW, including the hydro turbines of the Aswan Dam). EEHC acted on the Government’s behalf: first reviewing the |
|international experience (but the dangers were not perceived until the late 1990s), and developed a strategy based on a risk matrix manual. |
|EEHC then hired consultants (from Sargent & Lundy, Arthur Andersen and McDermott, Will & Emery) to help manage the process which included |
|pre-qualification, short listing, the request for proposals, evaluation and selection of the preferred bidder followed by negotiating the |
|contract. |
|The gas-fired steam generator in Sidi Krir was the first IPP. The process began in 1996 and the bidding was intensely competitive with over|
|50 firms expressing interest at the pre-qualification stage. InterGen (with Edison and Bechtel in the consortium) won the BOOT contract in |
|1998 with project (not corporate) financing and an off-taker provision. Furthermore, the Power Purchase Agreement (PPA) specified EEHC |
|payments denominated in US dollars (with a Central Bank guarantee) and a formula to adjust fuel costs in pounds; so EEHC bore the exchange |
|risk. |
|Several laws and regulations were changed during the process. The 1997 investment Law 8 granted tax and other incentives including |
|Government guarantees. The Government sought to partially privatize seven regional distribution companies through the Cairo stock exchange,|
|but when there was no investor interest, the publicly owned distribution companies, the generation companies, and the national transmission |
|company were all put under the Egyptian Electricity Holding Company (EEHC, created in 2000 under Law 164 to replace the EEA). An internal |
|power pool to permit competitive bidding for power did not work as envisioned because the market was undercut by ex post price adjustments. |
|A Presidential decree created an independent regulatory agency in 1997, but it proved inadequate and ineffective. A second Presidential |
|decree in 2000 created the Egyptian Electric Utility and Consumer Protection Regulatory Agency (ERA) whose mandate includes: setting retail |
|electricity tariffs, review and approve power purchase agreement and license IPPs. But ERA’s statutes do not allow independence from its |
|line ministry that has the final say. |
|The second and third plants were built using the same procedure, and although the details differed, the process was quicker. Electricity de|
|France (EdF, with some IFC financing) won the bid to develop two 683MW plants, one in Port Said and the other in Suez. |
|Subsequent Developments |
|After two years of operation, the original project developers sold their Egyptian interests when they no longer fitted their corporate |
|plans. GlobelEq (an affiliate of the UK’s Commonwealth Development Corporation) bought out InterGen’s interests in December 2004 and |
|Edison’s in May 2005. Kusas Nusajayas (an affiliate of Tanjong Public Corporation Limited, a Malaysian firm with casino interests seeking |
|to become a global provider of O&M services) bought EdF’s stake for US$ 935m ($305 for the equity plus $628 in debt) in March 2006. |
|The Government honoured its IPP contracts, but stopped the twelve additional IPPs planned and modified the requirements. New projects were |
|to (i) obtain foreign currency financing abroad, (ii) involve local private sector to participate in project construction and operation, |
|(iii) pay local costs in local currency, (iv) have substantial equity and a local investment component, and (v) have power customers, not |
|EEHC, sign PPAs. No new IPPs were undertaken, and EEHC is again looking to finance the sector from international financial institutions |
|(European Investment Bank, Arab Fund for Social & Economic Development, Kuwait Fund, African Development Bank, Islamic Development Bank |
|etc.) The World Bank approved a $260m loan in 2006 to finance the El-Tebbin steam power plant with two 350MW units powered by gas and |
|residual oil. |
Source: Anton Eberhard and Katharine Nawaal Gratwick (2007) “From state to market and back again: Egypt’s experiment with Independent Power Projects”, The Energy Journal, Vol.32. Also available as MIR working paper, Graduate School of Business, University of Cape Town at:
37. Given this experience, the Ministry of Finance created a PPP unit in 2005 to involve the private sector in various types of public infrastructure. Box 1.2 analyses the issues in its current efforts to build better schools. While such contracts could build better school facilities more cheaply, there are greater potential gains elsewhere in education (as Chapter 3 will discuss): the inefficiency and waste in operating schools (i.e. hiring teachers, staff, providing other inputs etc.) are considerable and well documented. These gains could be realized only when schools are better run — whether directly or through PPP (which require far more complex contracts and more sophisticated monitoring).
Box 1.2: Building Better Schools
|The Information Memorandum on the New Public Schools PPP Project describes the education system to potential bidders. The Ministry of |
|Education estimates that 240,000 classrooms would be needed over the next five years (the basis is not stated, and some consider the |
|numbers too high), and that PPPs for about 2,200 new public schools, each with multiple classrooms, would cost about LE 7.3 billion or |
|$577,000 per school at LE5.75/$. The PPP contracts are envisaged for 20 years and may be finalized over the next several months. |
|Rounding up its cost of building a school to $600,000, and ignoring maintenance (it should not be ignored in practice) to keep the |
|numerical example simple, the Government’s reservation price is a $65,728 annual payment for the next 20 years if its cost of borrowing |
|(the TBill rate[16]) is 9 percent. Obtaining a school building for less is a budget saving[17]. |
|A private firm has a marginal cost of capital greater than the TBill rate. Discounting the 20 annual reservation lease payments at 16 |
|percent[18] gives a present value of $389,690; so the firm could bid a lower annual payment only if it could build the school for 65 |
|percent (= 389,690/600,000) of the Government’s cost. If its marginal cost of capital were 20 percent, meeting the Government’s |
|reservation annual payment would require the private firm building the school for a little over half the Government’s cost. |
|This is a steep but not insuperable hurdle; but when private financing is so much dearer than government borrowing (16 versus 9 percent), |
|tying construction to its financing precludes PPP unless construction costs are substantially lower for the private sector: 35 percent |
|cheaper — or more if the interest rate difference were larger. |
|Furthermore, this calculation ignores the additional negotiating costs (lawyers and advisors are not cheap) that both builders and |
|Government incur. These costs may decline after the first contract or two, but how disputes arising during the 20 year life of the |
|contract are resolved would determine their success. Regardless of how rare such disputes are and how quickly they are resolved in the |
|Britain or elsewhere, Egyptian courts operate differently. Disruption to education arising from such disputes may be far costlier than the|
|waste in building; it would be prudent to evaluate this PPP experience before extending their use. |
38. Public private partnerships can improve investment efficiency, but they still require the Government to undertake a careful analysis (e.g. cost benefit calculations) to determine if the investment is needed, and to be clear on the source of any gains (e.g. from better construction management). The institutional limitations that make it difficult for the government to build infrastructure well may also apply to its ability to design, negotiate and oversee complex PPP contracts. Poorly designed contracts could nullify the potential gains — and the flaws are difficult to correct when subsequently detected and when they are properly overseen. Courts may intervene in disputes: so the requisite expertise relating to these contracts is also needed outside the PPP unit.
39. This chapter showed the benefits to Egypt’s economy from giving the private sector a greater role. Most people have benefited from higher incomes and a higher standard of living, although some groups have benefited more than others. Nevertheless, there are regional disparities and, worryingly, pockets of poverty. The extremely poor may not automatically benefit from economic growth because they are deprived in many ways: they have no land, little education or marketable skills, and often ill health. They would benefit from better public services like schools, primary health care and family planning. The next chapter examines how the private sector has responded to the recent changes in economic policy.
Private Response to Trade & Business Climate Changes
Chapter 1 showed the overall benefits from giving the private sector a greater role in the economy, and this chapter examines how the private sector has responded to recent trade and business climate reforms. The authorities have lowered trade taxes, redoubled privatisation efforts, and improved the business climate through a variety of measures. While the picture is still blurry — detailed trade data that permit careful analysis end in 2004 just before the effects of the major tariff reductions and the currency depreciation — the signs are encouraging.
The first section examines the effects of trade reforms. Trade volume has grown after the depreciation in 2003 and the elimination of the premium in the parallel exchange market in 2004. Trade tariffs were reduced in several steps, the latest in February 2007, and the weighted average tariff rates are now 6.9 percent making Egypt among the world’s more open economies. The standard deviation of tariff protection is now only 5.1 percent (excluding beverages), but effective protection remains high primarily because the sizeable energy subsidies have disparate effects: the standard deviation of implicit effective protection is around 130 percent (excluding beverages). Removing these subsidies would both reduce the budget deficit and improve resource allocation.
Exports have grown both in volume and in the number of items, but the export propensity is low and the exported items have low technology content. This would change as Egyptian firms become more integrated into global production chains and better technology gets diffused. There is concern that Egypt’s unusually low proportion of mid-sized firms may hamper such integration: smaller firms generally trade less internationally.
The second section notes the government’s redoubled privatization efforts and the large FDI inflows. Privatisation proceeds totalled LE33.5 billion ($5.8 billion at current exchange rates) between July 2004 and November 2007, mostly from the sale of land, cellular licenses, the partial sale of Egypt Telecom, and, more recently, of the Bank of Alexandria. Few of the firms (Law 203) that were slated for privatization have been sold because of political opposition. The unsold firms now employ less than a fiftieth of the labour force and their assets (especially land) could be more productively used under other owners. Furthermore, their sale or closure would eliminate a potential financial drain and make banking reform more likely to take root because in the past, creditor banks accommodated them.
The third section examines the effects of business climate improvements that made Egypt the year’s top reformer in the Bank’s latest Doing Business annual survey. It is now easier to start a business but operating one remains difficult. The chapter examines data from diverse sources to ascertain business health: births, deaths, and their operation. More larger firms are being registered, and although the recent surge is abating, this pattern is consistent with a bottleneck being relieved. Fewer smaller firms are being registered, and the shift to larger firms could be a healthy sign: so also is the decline in bankruptcies. Several Egyptian firms are now better known internationally, but a “world class” Egyptian firm (or indeed any from the region) has yet to make its mark with pioneering technology or innovation (e.g. van Agtmael[19]). Innovation and ways to promote it are not discussed in this report.
The fourth and final sections pull the diverse pieces of evidence together. Despite some de jure improvements, many de facto hurdles remain. Large private firms, both domestic and foreign owned, may have the clout to deal with the hurdles, while others prefer to remain small and operate in (or near) the shadows of informality. The size distribution of firms may be one of several indicators that the government may find useful to monitor in its efforts to improve the business climate. Such indicators, like the Doing Business rankings, are useful but become misleading when countries actively influence them rather than what they seek to measure. It may be useful to have a channel for businesses to convey their perception of hurdles, and as creditor banks improve, the central bank could become such a channel if it monitored real business activity better.
A. Trade Reforms and their Effects
|Figure 2.1: Weighted Average Tariffs, Latest Year Available |
|[pic] |
Tariff rates lowered gradually
Egypt steadily lowered its trade tariffs beginning in the late 1990s under the Uruguay Round. Tariff bound rates declined from an average of 45 percent in 1998 to 38.6 percent in 2005 and the average applied most favoured nation tariff rate fell from 26.8 percent in 1998 to 20.0 percent in 2005 and the number of tariff bands was reduced. Tariffs were further reduced in steps and the weighted average tariff rate declined from 14.6 percent in 2003 to 9.1 percent after the 2004 reduction and further to 6.9 percent after the February 2007 cuts. Consequently, customs fees plus import-tariff revenues fell from 17.3 percent of imports in FY 2003/04 to 6.5 percent in FY 2005/06: without customs fees, the rates declined from 13.3 percent to 6.5 percent suggesting that such fees are now negligible. Egypt is now among the countries in the region most open to trade (Figure 2.1).
Trade has boomed as a consequence, especially after the government also depreciated the currency as shown in Figure 2.2. Figure 2.3 shows the rise in merchandise exports, split among major components and Figure 2.4 shows the same for imports. Egypt generally runs a trade deficit and a substantial surplus in service exports because of the Suez Canal and tourism. The current account has been a small surplus.
Figure 2.2: Nominal and Real Effective Exchange Rate Index (2000=100)
[pic]
|Figure 2.3: Export composition and Real |Figure 2.4: Import Composition and Real |
|Exchange Rate |Exchange Rate |
|[pic] |[pic] |
Effective Protection remains high
While trade tariffs are now low, cheap energy and fuel favours the production and use of energy intensive items and has the same effects as disparate trade tariff rates. To determine the magnitude of the effects of energy subsidies, we calculate the effective rate of protection (ERP). The ERP calculates how value added would change without such distortions, assuming unchanged production technology and input-use, and indicates which industries benefit from the distortions and by how much.
The last two rows of Table 2.1 show that energy subsidies substantially increase the dispersion of the ERPs for domestic producers. The ERPs for 20 segments of the economy are calculated using the 2005 Social Accounting Matrix (SAM with data on subsidies, indirect taxes, and indirect subsidies) and the post-February 2007 tariff schedule. These estimates ignore export subsidies re-introduced in 2006 and subsequently[20], and the ad-valorem subsidies in the 2005 SAM affect both domestic producers and exporters equally. The energy subsidies used in the ERP calculations are still an under-estimate. Production sharing (non-public) agreements with foreign oil or gas companies that operate the field give the government (or the domestic oil/gas company that is state-owned) a portion of physical output that the foreign energy company may sell on its behalf; so the payment of royalties in kind does not disrupt the physical handling of the product. The government oil/gas company in turn may sell the refined or processed products domestically at a low price. The Ministry of Finance pays the government owned oil/gas company for the net shortfall in its revenues for selling the items cheaply; so this amount in the budget ignores the revenues earned from the sale of the Government’s share of output (royalty/terms of the production sharing agreement) and therefore underestimates the subsidy[21]. The extent of the underestimate is sizeable and varies with production and prices: budget’s energy subsidy was LE 41.8 billion in FY06 ($7.4 billion or about 6.4 percent of GDP) whereas the Bank had estimated total energy subsidies at $9 billion in 2005. Most of the energy subsidies were for gasoline (39 percent), LPG (21 percent), natural gas (14 percent) and diesel (14 percent).
These differences are sizeable, and food, metals and chemical industries are among the larger beneficiaries of the current energy subsidies, while agriculture and electrical machinery are least protected. But there are differences within these categories as well: while trade tariffs for cotton products appear low, the ERP is high when energy subsidies are taken into account, because growing cotton uses substantial amounts of water pumped using cheap fuel. This means that energy subsidies undercut the benefits from the recent reduction in trade tariff rates and their dispersion. Considering their size, reducing these energy subsidies would benefit the economy more than further reductions in trade tariffs.
The Government announced in 2004 that it would gradually eliminate energy subsidies and, in parallel, have a mechanism to protect vulnerable consumers; but the structure of prices remain riddled with disparities and the government’s role in setting them is undiminished. Electricity tariffs were raised for the first time since 1992 from an average of US¢2.2/kwh to US¢2.4/kwh, and while the cabinet endorsed 5 percent annual increases, the real price declines because the domestic inflation rate is higher. The government announced in August 2007 that electricity and gas subsidies for the 40 largest industrial users would be phased out over 3 years and that by 2010, all energy intensive industry would pay market prices and that subsidies to non-energy intensive industries would continue until 2013. The Government also increased the prices of petroleum products in July 2006: gasoline prices were raised by 30 percent as were prices of diesel and kerosene. And in January 2008, the Government doubled the price of heavy fuel oil to LE1,000/ton, but did not apply the increase to the electricity sector that consumes 35 percent of the fuel oil.
It is difficult to raise any controlled price, and inflation makes frequent increases in nominal prices necessary even if world prices were stable. Egypt has yet to discard the war-time controls instituted during colonial rule. But to obtain the full benefits of increased trade, energy prices that act analogously to disparate trade protection should be adjusted continually.
|Sector |Tariff |Sub|Ind|
| | |sid|ire|
| | |ies|ct |
| | | |Tax|
| | | |es |
|Sectors based on Egypt’s Social Accounting Matrix 2005. “Petroleum” includes Oil and Extraction, Petroleum products and Coke; “Textiles” combines Cloth and Spin & Weaving; “Metal Industry” combines | | |
|Basic Metals and Metal industry. Export subsidies are not included because they are only available after 2005. The tariff is the non-weighted average of all the tariff lines included in the sector; | | |
|Factor Costs as Share of Gross Output=Labor+Capital Costs over Gross Output. | | |
Table 2.1: Nominal and Effective Rates of Protection (in percent)
The Content of Trade
Egypt’s exports are concentrated in a few items. Figure 2.5 shows the Herfindahl-Hirschman Index of export concentration for several countries including Egypt for 1990 and 2005. Egypt’s oil exports are large and rising and the concentration index without oil falls from 0.24 to 0.09. Even so, five items account for over 45 percent of Egypt’s merchandise exports. Manufactured goods were only one-fourth of merchandise exports in 2005, although manufacturing exports to GDP rose from 1.5 percent in 2001 to 3 percent in 2005. Greater trade diversification per se is not the objective, but integration into global production chains indicate whether firms are taking full advantage of the lower trade tariffs.
Figure 2.5: Herfindahl-Hirschmann Index of Export Concentration
[pic]
Egypt’s exports have low technology content. Figure 2.6 shows that only about 6.2 percent of Egypt’s exports have high or medium technology content, far lower than Jordan’s 26.6 percent or that of other comparable countries and regions. Recent research finds that diversified economies export more and grow faster, and a recent Bank study confirms this for the region.[22] The underlying force is technology that raises productivity and spills over to into non-traded activities as well: and integration into global production chains allows the technology to be adopted, adapted and diffused.
Figure 2.6: Technology Content of Exports
[pic]
Source: Comtrade data
Increasing Trade Benefits
Many governments have sought with mixed success to improve the content of trade and garner greater benefits, and Egypt is no exception. Box 2.1 summarises Egypt’s experience with export or special economic zones that created an enclaves conducive to exports when the rest of the economy had poor business conditions or was protected. More lasting improvements would result from “behind the border” changes, and these morph into business climate improvements. Among the items of special importance to trade are the ease of transport and the administrative barriers when goods cross the borders.
Although Egypt has good ports and substantial international shipping passes through the Suez Canal, transport infrastructure is antiquated. Table 2.2 shows that Egypt is not an outlier when comparing infrastructure indicators, but case studies identify problems with shipping and trucking that impede productivity[23].
The private sector relies on trucking, which is more expensive than rail that handles only 8 percent of domestic freight, mostly for public enterprises or river transport preferred in most countries. Most trucks are privately owned but poorly maintained, and few are suitable for containerized cargo. Egypt’s excellent location could make it the regional logistics and distribution hub; but the government’s powers to license and regulate have inhibited the adoption of better technology and management. The government is improving some ports that now have container terminals, and computerisation and automation will increase[24]. Opening these sectors to foreign entry and improving the business climate would help, and the next two sections describe the many recent developments.
Box 2.1: Trade Agreements & QIZs
|Egypt has signed several trade agreements — with 16 Arab countries through the Greater Arab Free Trade Area (1997), with 19 African countries |
|through the Common Market for Easter and Southern Africa (1998), with 25 EU members (2004), with Tunisia, Morocco & Jordan (2004, coming into |
|force in 2007), with 10 Mediterranean states through the Euro-Mediterranean partnership, and with EFTA countries (Iceland, Liechtenstein, |
|Norway & Switzerland in 2007) and co-operation agreements with China and Kazakhstan. |
|These agreements have not resulted in much trade except for the Qualified Industrial Zones (QIZs) established under the 1996 agreement with |
|America and Israel. Exports of industrial products manufactured jointly with Israel (with at least 11.7% Israeli content and 35% Egyptian |
|value added) enter the United States duty free. Egypt’s government designates, and the US government approves, a geographic area as a QIZ, |
|and there are now seven QIZs in three regions. But 96% of the exports and 80% of the 467 QIZ firms (fewer than half actually export) are in |
|apparel and textiles. Egypt’s location and climate are conducive to growing cotton, and while experts debate the relative superiority of |
|Egyptian long fibre over American Pima, raw materials are tradable and reputation for reliability and quality determine the location of value |
|added manufacturing. India and Pakistan imported some 70,000 tons of raw Egyptian cotton in 2006, and garments with both “Egyptian Cotton” |
|and “Made in India” labels already garner prime markets. Chinese and Indian global garment powerhouses own many of the QIZ firms to benefit |
|from duty free access to the US (and to the EU since 2004). These tariff advantages will disappear when the US fully opens its markets in |
|2008 (EU in 2007), and this highly mobile apparel industry could shift operations to countries offering genuine cost and productivity |
|advantages. Almost a third of Egypt’s industrial exports are in textiles, and but garment exports to the EU declined in the first half of |
|2006 to 85,391 tonnes from 87,656 tonnes the year before. Although QIZ textile firms face an uncertain future, if Egypt remains business |
|friendly, other industries would take their place. |
Table 2.2: Infrastructure Indicators 2005
[pic]
B. Privatization & FDI
Privatisation has had a later start and a rockier course in Egypt than elsewhere, but it managed to avoid some pitfalls as well.[25] State ambivalence towards the private sector and the resulting complexities in business regulations began changing in the early 1970s: since the wave of nationalisation in the 1950s, private firms were only sole proprietors and partnerships. Private stakes in joint ventures with state owned firms were permitted and in 1991 fully private corporations were allowed. But few were formed and fewer thrived: the dominant state-owned firms smothered their growth, and state owned banks denied them credit. Tax and other special incentives were granted to overcome the generally hostile business climate, and as these multiplied, the politically well connected sought them and prospered. The private sector, and by extension privatization, began to be perceived as the privileged benefiting at the poor’s expense.
The 1991 Law 203 allowed — but did not require — the government to sell non-financial public enterprises, and little was sold until the Supreme Court dismissed the opponents’ legal challenges in early 1996. The newly appointed Prime Minister Kamal Ganzouri’s cabinet then oversaw the quick sale of two hundred firms (134 non-financial),[26] before they were stopped under the successor government that took over in October 1999. Some 164 firms, many large, remain in state hands. Figure 2.7 shows inflation adjusted privatization receipts plummeting after 2000, and this was accompanied by a distinct coolness towards the private sector. Although ceilings on banks’ lending to the private sector were ostensibly eliminated in 1992, the later chapter on intermediation shows (Figure 4.3) that lending fell.
Recent Revival
Privatization resumed in mid 2004 despite much opposition, and Figure 2.7 shows the impressive rise in privatization receipts since July 2004[27]. These totalled LE 33.5 billion ($5.8 billion in 2007 exchange rates), but most receipts were from the floatation of 20 percent of Telecom Egypt (the land line monopoly) on the Cairo Stock Exchange, and the sale of cellular licenses, of joint ventures banks, and more recently of the Bank of Alexandria. Despite concerted Government efforts, vested interests and popular resentment combine to thwart the sale of unsold (Law 203) firms: the sale of the department chain, Omer Effendi generated much controversy.
Figure 2.7: Real Privatization Revenue (in 2006 LE m using GDP deflator)
[pic]
The DPR did not examine the finances of the 164 unsold (Law 203) firms that are now held under 9 holding companies organized by industry under the Minister of Investment’s purview. Numerous earlier studies[28] found their sales revenues do not fully cover their operating costs which are high because they are overstaffed and poorly run. Some of the firms’ assets, especially land, may be valuable, but machinery gets obsolete, and the better workers and managers may have long since moved to other firms with better prospects. A few firms with a cash surplus (e.g. tobacco, pharmaceuticals) may be cross-subsidising others within and across the nine holding companies. They collectively employ over 376,000 workers (down from about 437,000 workers in 2001, mostly lost through retirement and attrition) and are a tiny fraction of the 26 million labour force. While there may be some truth in the claim that investment in new machines and better technology were neglected, the experience world wide is that operational restructuring is best left to private owners with the right skills and incentives. State owned creditor banks have financed their cash shortfall, and as these banks improve their lending criteria and classify and provision their loans better, the indebted firms’ budget constraint will harden. Whether this will force their closure, hasten their sale or open other funding sources remains to be seen.
The privatized firms, in contrast, have improved. Several reports find productivity and efficiency increased, and although some initially reduced their overstaffing, subsequent sales increases resulted in more workers being employed[29]. This is also the international experience as the Megginson and Netter (2001) survey of the vast empirical literature finds.
Surging FDI
Foreign Direct Investment (FDI) to Egypt almost doubled to $ 6.1 billion in 2005-06, and again in 2006-07 to about $11 billion — the flows are a larger share of GDP than to China or India. This inflow continues to rise: $7.8 billion in the first half of 2007-08 (versus $7.2 billion in the corresponding half the year before). There is international evidence that FDI helps technology transfer, better jobs, promotion of trade, and increased international integration. However, Box 2.2 explains why FDI is not evidence of a better business climate per se and that poorly functioning markets may increase FDI (although FDI is not a measure of distortions either). Regardless of the cause, FDI benefits both source and host countries.
Box 2.2: DFI to FDI: Changing Label & Views
|FDI is not a business climate measure |
|Jean Jacques Servan-Schreiber predicted that American multinationals would takeover European business in his 1967 best seller, Le Defi |
|Americain (The American Challenge). A decade later, a slew of books warned of the imminent Japanese conquest of corporate America. Views — |
|and fears — of what was then called Direct Foreign Investment (DFI) have changed more than the volume and direction of such flows: now Foreign|
|Direct Investment (FDI) is welcomed and celebrated. Host country suspicion and resentment of the 1960s and 70s would seem strange at |
|gatherings in Davos and elsewhere where hopeful recipients seek out foreign investors. |
|Despite its name, FDI is a type of international capital flow, not physical investment: it differs from other flows (e.g. debt or portfolio |
|investments) in giving control over the local firm’s operations. FDI has long puzzled economists because running a business from a distance |
|is an added cost, especially across national boundaries where language, laws, currencies and customs differ. Employing locals reduce some |
|costs, but entails the additional expense of integrating them into the organization. So FDI occurs only if there were substantial cost |
|advantages elsewhere, but what could these be? Better technology in production, marketing or some other aspect of the business is |
|insufficient because a local firm without the cost disadvantage could buy or rent (license) these technologies. Lumpiness of some inputs or |
|other local scale economies is one explanation but Coase[30] (1937) provides the clue: a firm exists because it co-ordinates some activities |
|internally better than markets. FDI therefore results when some markets do not work well, either because the needed contracts are too complex|
|to write or impossible to enforce. |
|Put differently, FDI is the result of some business conditions being poor. Some foreign firms invest directly in China because they fear that|
|Chinese courts will not fairly enforce their technology licensing contracts with local firms. But FDI could also result when foreigners are |
|unfairly favoured: Huang[31] (2002) finds more FDI in provinces with hostile or avaricious local politicians because the central government |
|protects large foreign firms from such harassment. Research finds an inverse relation between FDI and business conditions: Fernandez-Arias |
|and Hausmann (2001) find that higher FDI indicates poorly functioning markets, inadequate institutions and natural resource rich countries; |
|Loungani and Razin (2001) find FDI share is large in countries with low Moody’s country ratings[32]. Consequently, FDI cannot be a litmus |
|test of host countries’ business climate. |
FDI’s effects are as complex as its causes: as with other types of capital inflows, the currency could appreciate (the dreaded “Dutch disease”) to the extent they are not used for imports (multinationals often import even office supplies that may be cheaper locally). If FDI purchases the stake of domestic investors (privatisation, or portfolio investment), then it has the same effects as other capital inflows: foreign exchange reserves and money rise, leading to inflation. Some economists favour FDI, considering them less skittish than other types of inflows: but the greater willingness of FDI investors to “ride out” a bumpy macro-economic stretch is because it is hard to liquidate their stake (i.e. higher transactions cost than portfolio investors or short term lenders); but if getting out is difficult, investors would be more cautious getting in. Egypt is among many countries in the region benefiting from the oil price induced surplus that may lie behind FDI, and an improved business climate will help ensure that the private sector chooses the best investments.
C. Effects of Business Climate Improvements
The Bank’s 2008 Doing Business annual survey placed Egypt as the world’s top reformer, and Table 2.3 shows its ranking moved up to 126th place among 178 countries after being 165th for two years. While this improvement is well earned, Egypt remains among the bottom third of countries. Such surveys have their limitations and the rankings neither attract nor deter investment — large investments flow into Brazil (rank 122 now, 121 a year ago) and China (rank 83 now, 93 a year ago) while higher ranking Kenya (now 72) gets little. Besides, as the earlier section just discussed, FDI rose for two years before the ranking changed. Even so, indicators for sound and market friendly regulations are correlated with economic growth[33].
Table 2.3: Improving the Business Climate
|Ease of... |2005 rank |2006 rank |2007 rank |
|Doing Business |165 |165 |126 |
|Starting a Business |123 |125 |55 |
|Dealing with Licenses |169 |169 |163 |
|Employing Workers |147 |144 |108 |
|Registering Property |139 |141 |101 |
|Getting Credit |160 |159 |115 |
|Protecting Investors |114 |118 |83 |
|Paying Taxes |155 |144 |150 |
|Trading Across Borders |94 |83 |26 |
|Enforcing Contracts |157 |157 |145 |
|Closing a Business |115 |120 |125 |
Easier entry and fewer hassles …
Births and deaths give some indication of a population’s health, and analogous data on new registration and bankruptcies are examined for Egyptian firms. Starting a business is now easier, and more new firms are being created, particularly large ones.
The data on firm entry reflect the multiplicity of laws and changes that let in the private sector by the back door, as it were[34]. The General Authority for Free Zones and Investment (GAFI) was created in the early seventies but its functions and reporting arrangements changed over the years: the 1997 Law 8 (that consolidated the many tax breaks in some 20 specified industries) gave GAFI authority over the firms it registered to ensure they complied with regulations. A separate Companies Authority was created in 1981 to register private firms, although this also required numerous additional steps. When GAFI took on the investment promotion role in 2002 (Decrees 79 and 636), it created a “one stop shop” to help investors navigate the complex process of starting a firm under Law 8. This was not considered a success, although the general economic conditions may have been more to blame. Tax breaks ceased in July 2004 (the tax reforms are described in Chapter 5), but other benefits of Law 8 remain (e.g. getting permits to employ foreigners) and in some industries, firms may choose between Laws 8 and 159 to incorporate. The Companies Authority (responsible for registering Law 159 firms) was folded into GAFI which now registers most limited liability firms, but the data are still gathered separately and GAFI’s data include Law 159 firms only back to 2000.
More and larger new firms registered with GAFI
Table 2.4: New Company Registrations 1999-2007
| |
|GAFI |
|Commercial Registry |
| |
| |
|Number of new firms registered |
|Registered capital per firm (in ,000 2007 LE) |
|Number of new firms registered |
|Registered capital per firm (in ,000 2007 LE) |
| |
|1999 |
|2,206 |
|8,242 |
|27,547 |
|41 |
| |
|2000 |
|2,555 |
|6,245 |
|24,544 |
|40 |
| |
|2001 |
|2,909 |
|6,880 |
|21,701 |
|33 |
| |
|2002 |
|2,569 |
|3,630 |
|20,858 |
|27 |
| |
|2003 |
|2,671 |
|3,504 |
|20,674 |
|20 |
| |
|2004 |
|4,053 |
|4,024 |
|22,721 |
|33 |
| |
|2005 |
|5,832 |
|2,777 |
|20,455 |
|24 |
| |
|2006 |
|4,551 |
|6,438 |
|10,653 |
|126 |
| |
|2007 |
|7,546 |
|3,817 |
|11,477 |
|184 |
| |
GAFI’s success in increasing new firms registered has been widely reported[35], and Table 2.4 shows their numbers rising from 2,671 in 2003 to 7,546 in 2007. The total value of registered capital, part of which is paid when the firm is registered, continues to rise in nominal terms; but when deflated by the price level, the average is now smaller than before.
Firms registered in GAFI are a fraction of all firms: they are fewer than the proprietorships and partnerships registered in the Commercial Registries[36] (different from GAFI &/or Companies Authority). Data for 2006 and 2007 (in Table 2.4) show a sudden decline in the number of new firms registered with the Commercial Registry and a quadrupling of the value of registered capital. This sharp change could reflect changes in data collection on a sharp response by firms. Some Government officials believe these Commercial Registry data are unreliable and it would be worth examining the issue further.
Fewer exits
Declining deaths indicate rising population health, but data on bankruptcy must be interpreted with care. While business downturns increase bankruptcies and vice versa, (1) the lag between filing and ruling (preliminary and final) vary over time and by firm size and complexity, and (2) bankruptcies capture legal, not operational demise which could have occurred much earlier. Figures 2.8 and 2.9, however, are consistent with better business conditions and show a steady decline in preliminary and final bankruptcy rulings since 1999 after a surge following a change in Egypt’s bankruptcy law.[37]
|Figure 2.8: Bankruptcy Rulings by Preliminary Courts |Figure 2.9: Bankruptcy Rulings by Appeal courts |
|[pic] |[pic] |
And little change for existing firms
Having examined the births and deaths of firms, we turn to how the living fare. The Bank surveyed firms through Investment Climate Assessments (ICA) in 2004 (pre-reform) and again in 2006. They reveal improved perceptions: Figure 2.10 shows that taxes fell from being perceived as the top constraint to number 5, and their administration to number 6; “macro-economic instability” rose to first place, reflecting fears of renewed inflation. In addition, ICAs contain self reported data that, when interpreted with care, show some of the difficulties that may cause firms to remain on the fringes of formality.
Figure 2.10: Top 10 Constraints to Firm Investment in Egypt, 2006
|[pic] |
The 2004 ICA surveyed 1,000 firms that broadly represented the formal sector, and the 2006 survey[38] sought out the same firms, and each survey has some recall data for earlier years. Figure 2.11 shows the main characteristics of the 736 firms in the repeat panel: they employ 179,685 workers in 18 industry groups and vary in size (68% have fewer than 51 workers; 19% more than 150) and ownership: 6% are government owned, and these account for 47% of panel’s total employment. Few are recent, and Figure 2.12 shows that most were formed several decades ago.
Figure 2.11: Firm Ownership and Number of Employees
[pic]
Figure 2.12: Firm Age (2006 year of establishment)
[pic]
Firm size may limit productivity
Since the 2004 firm sample was broadly representative, its firm size distribution is compared with that of other countries.[39] Figure 2.13 shows that Egypt has proportionately more small and mid-sized firms than countries with comparable incomes (despite the slight survivor bias towards larger firms in the repeat sample). Figure 2.14 uses ICA data to show that such firms employ more unskilled labour and spend less on their training.
Figure 2.13: SMEs Proportion in Countries
|[pic] |
Figure 2.14: Skill Composition of Sample Workforce and Number of Employees in the Sample
[pic]
Figure 2.15: Factors That Affect Decision of Changing
Number of Workers
| |
While the next chapter examines the labour market and skills, could it be that smaller firms do not (a) consider on the job learning as training and (b) do not train their workers because of turnover? Unfortunately, the ICA surveys were not designed to answer such questions, but Figure 2.15 provides an indication of how different groups of firms view de jure requirements that affect labour. Mostly government firms responded that laws matter when labour is to be redeployed: domestic (i.e. small private firms) find unspecified reasons more important than even wage regulations. Put differently, private firms may have ways to avoid or evade restrictive laws. While few report that minimum wages are binding, the relatively high numbers of domestic private firms reporting are the larger firms that adhere to the mandated profit sharing arrangements.
Larger firms growing
Besides data from the ICA surveys, the national statistical office has some data on the distribution of employment in manufacturing firms. These are before the recent efforts to improve business climate, and Figure 2.16 and 2.17 show a slight decrease in total employment overall but that employment in firms with more than 100 workers rose slightly. So the more recent changes that the ICA surveys capture continue a trend that began earlier.
|Figure 2.16: Number of Manufacturing Firms by Size |Figure 2.17: Number of Employees by Firm Size |
|[pic] |[pic] |
Summing up this section’s findings, the improving business climate resulted in small but discernable changes in the larger firms: there are more being formed. Little has changed for the smaller firms: fewer new ones are being created, perhaps reflecting the greater difficulties in accessing finance. All this relates to formal firms: informal activity is obviously more difficult to observe.
So what does it all imply?
Trade is growing faster than the economy after the exchange rate correction in 2003-04 and lower tariffs; but exports are concentrated in a few low technology items. Greater integration into global production chains would make it easier for better technology to get diffused through the economy and raise productivity also in non-traded sectors. Some firms are obviously prospering, but for the most part firms remain and operate in the fringes of formality. “Behind the border” improvements would help: regulations thwart progress in trucking and shipping. So trade reforms and business climate improvements go hand in hand. It is encouraging that foreign investment and firms are now entering without special tax or other advantages. The surge in FDI is welcome, but its importance should not be exaggerated and its causes and effects understood.
While trade, both export and import volumes, have increased, effective rates of protection remain high despite lower trade tariffs because of the disparate effects of the sizeable energy subsidies. Reducing these energy subsidies (expected to exceed 8 percent of GDP in 2007-08) would both reduce the budget deficit and allocate resources better.
Although privatization receipts have risen, few of the firms (Law 203) have been sold, because of opposition from vested interests. After decades of neglected investment, land may be the more valuable of the unsold firms’ assets: technically obsolete and poorly maintained equipment may be worthless and their abler workers may have long since left for better jobs. Even so, their continued existence and need for funds diminish the chances of better lending criteria taking root in banks. Banking reform, discussed in a later chapter, would speed the growth of firms that add value in the economy.
The Government has recently adopted several new laws aimed at improving the overall operation of the market economy, such as greater use of Industrial Parks, the Competition Law, and the Consumer Protection Act (see Box 2.3). While their full impact of this effort is yet to be assessed, it is important to note that sweeping new laws may not necessarily improve the business climate. Easier entry of firms is generally a sound policy: de novo firms in transition economies generated much of the economic growth and employment. But Egypt did not have the pervasive controls of pre-1989 China or the former Soviet Union — and only selectively enforces its regulations. Consequently, private firms learnt to cope: the larger ones through political connections (that also perpetuated distortions and bestowed rents to the favoured) and the smaller ones by being invisible — even if it meant forgoing economies of size and scope. Mid-sized firms are relatively few.
It may therefore be useful to emphasise policies that enable firms to grow and increase formal employment than easier entry per se. Size is not the objective since firms of all sizes innovate; but very small firms have less direct access to “off the shelf” technology that greater international trade provides access to. There are encouraging signs that there are more large firms, and in time this would help increase formality of employment that, as the next chapter discusses, would benefit broad swaths of society.
Box 2.3: Recent Laws to Improve Markets
|The Government has adopted several new laws and initiatives to improve the markets and business environment, the full impact of which is|
|yet to be evaluated. This Box outlines the intent of Industrial Parks (IPs), the Competition Law, and the Consumer Protection Act. |
|Industrial Parks: The Industrial Development Authority (affiliated with the Ministry of Foreign Trade and Industry) is restructuring its|
|Industrial Zone Development Program. The IPs are designed as integrated complexes with a variety of services providing a single point of|
|contact for all Government/municipal functions, streamlined entry and operating stages procedures. There is no limit on foreign equity, |
|a 100 percent import tax exemption on machinery and other project-related products and advantageous payment schemes. Industrial areas of|
|around 42 millions square meter in different regions in Egypt would later become available. The new generation of IP gives a more |
|leading role to the private sector through assigning the long term land development, management and operation rights to private |
|investors within Public Private Partnership (PPPs) arrangements. |
|The Competition Law of early 2005 applies to state-owned enterprises and private firms, not state-run public utilities, or public |
|utilities managed by private companies and of basic products (such as (including fuel, sugar, flour and other basic foodstuffs) whose |
|prices are set by the government. The Law defines a dominant position as a party having a market share exceeding 25 percent and unfairly|
|influencing the price or volume of the product in the market. It also encompasses anti- competitive measures, such as the refusal to |
|deal, setting discriminatory pricing or using tie-in agreements. The Law stipulates enforcement punishments, but the Competition |
|Authority’s role is to advise the government, not to litigate. The Prime Minister must to initiate litigation and the law does not cover|
|mergers and acquisitions. |
|The Consumer Protection Act of May 2006 seeks to protect consumers’ interests, whether products are provided by private or public |
|enterprises. The Act reaffirms the rights of the consumer as outlined in the UN Guidelines for Consumer Protection, spells out producer |
|obligations, and enables the setting up of a Consumer Protection Agency, affiliated with the Ministry of Trade and Industry, to receive |
|consumer complaints. This Act also gives NGOs the right to file suits and claim compensation on behalf of consumers). |
Increasing Value Creating Employment
1. Employment has been growing rapidly: the 4.6 percent annual increase between 1998 and 2006 is robust by any standard and much of this has been in the private sector. Unfortunately, formal employment remains low: less than one fifth of the working age population, of which for three quarters are employed in the public sector. To the extent that private firms remain small and avoid many hassles by operating in the shadows, improving the business climate would allow firms to expand formal employment and take advantage of other economies of scale and scope. But there are also many elements that the government could improve in the labor market: reducing overstaffing as an employer and improving schooling would go a long way. Egypt has increased school enrolments, but quality is not commensurate with the substantial sums that are spent both by the state and by parents. Egypt’s current challenge is to increase value creating employment.
2. This chapter examines these intertwined issues and suggests how reforms in employment and education could proceed in tandem. The demographic transition offers the potential for a demographic dividend. Government policies as an employer and in providing education have long term effects — and changes also take long to have observable effects. So reforms have to be sustained over lengthy periods and a consensus over their direction is essential. This chapter highlights some changes that are needed although it is selective in its coverage: the effects of transport and housing, for example, greatly influence where people work but are not discussed.
3. The first section provides an overview of the labor market. Economic growth has raised employment: two detailed labor market surveys in 1998 and 2006 found that employment rose and the unemployment rate dropped despite higher labour participation. Even so, under-employment is substantial, especially for women and rural residents: consequently, the poverty rate has not fallen much despite the rise in employment and real wages. Most employment remains informal which reduces the competitiveness and productivity of Egyptian manufacturing. The extensive and expensive education and training system has not created a highly skilled workforce needed for a modern economy.
4. There have been some important changes. The public sector employment guarantee for technical secondary school and university graduates has been suspended and growth of public employment has slowed. This reduced overall queuing for public sector jobs but raised it for some groups such as University graduates and young educated women; but queuing should be viewed in conjunction with labour participation rates which have declined for women. The 2003 Labour Law allows firms to hire workers directly (i.e. without going through the Ministry of Employment offices) which, along with other changes like the unlimited renewal of fixed term contracts and collective bargaining for wages, are an improvement. The Government has sought to improve job search and placement through their employment offices as well as to improve skills and vocational training. Some attempts, like the conversion of the Middle Technical Institute into Technical Colleges appear to be more successful than others such as the Mubarak-Kohl initiative whose sustainability is in doubt.
5. Later sections in the chapter project employment creation by economic sectors and by skill. On the basis of past elasticities, projected GDP growth of around 7 percent p.a. would generate sufficient jobs in the aggregate; but still the number of new technical secondary school and university graduates entering the labour market will exceed available jobs by about 50,000 per annum over the next five years. Something more must be done to avoid this potentially productive group being unemployed, underemployed or working in low quality non-wage jobs.
6. A strategy for increasing value creating employment would include three elements. First, policies that encourage firms to hire workers with formal contracts and to increase their training on the job. Such policies include the planned pension and social insurance reforms that reduce the tax rate on wages and eliminating the now “suspended” public sector employment guarantee and holding down public sector wages (aggregate, although the wage and benefit structure should be re-examined). Second, improving institutions supporting the labour market such as helping out-migration, job search and placement, career counselling and students’ advisory services. Third, improving the quality of education and training. This report will say little about this the complex issue of how to go about it: a recent regional report[40] has just suggested the broad approach, and ongoing sector work is working on the details with the Government. The current two-track education system is too rigid, and permitting multiple points to switch stream would better match students with schools and simultaneously improving the post secondary education would help increase skills that private firms value.
Main features of the labor market
|Figure 3.1: Age Distribution, 2006 |
|[pic] |
|Source: World Bank |
7. Figure 3.1 shows the current structure of Egypt’s population and it is apparent that the youth population will continue to grow faster than the total. This demographic transition represents a potential demographic dividend with the right policies in place, and a source of discontent otherwise. The fertility decline since 1988 has slowed the population growth rate. Table 3.1 shows the working age and the youth population (WAP between ages 15 and 64) grew faster than the 2 percent annual population growth rates over 1998- 2006[41].
Table 3.1: Average Annual Population Growth Rate
| |1988-98 |1998-2006 |
|Total Population |2.1 |2 |
|Working Age Population (15-64) |3 |2.7 |
|Youth Population (15-24) |3.4 |2.1 |
|Source: Assaad 2007a |
The Labor Force Structure
8. Table 3.2 shows that the 2006 WAP was 61 percent of the population and that about half were in the labor force, three quarters of which is male and nearly 60 percent in “rural areas”[42]. The high level of informality in the economy is reflected in the labor market: only 64 percent of the total employed (regular and irregular) are wage earners while the remaining 36 percent are in non wage-earning jobs including household activities and the self-employed. This informality has increased both in magnitude and as a share of non-wage employment, rising from 29 percent to 36 percent between 1998 and 2006.
Table 3.2: Employment & Labor Force
| |1998 |2006 |Growth |Percentages |
| |,000 |,000 |1998-06 | |
|Population |64,000 |73,600 |2 |% of 2006 |
| | | | |Population |
|Total Working Age Population |36,754 |44,901 |2.7 |61 |
|Labour Force |17,184 |23,318 |4.2 |32 |
|Actively Unemployed |2,007 |1,936 | |8 |
|Total Employed |15,177 |21,382 |4.6 |92 |
|Male |13,291 |17,243 |3.8 |74 |
|Female |3,893 |6,075 |7.5 |26 |
|Of the Total Employed |… |… |… |% of 2006 Employed|
|Wage work |10,807 |13,745 |3.2 |64 |
|Non-wage work |4,370 |7,637 |7.4 |36 |
|Male |12,361 |16,436 |5.3 |77 |
|Female |2,816 |4,946 |14.8 |23 |
Source: Assaad 2007a
Figure 3.2: Education Level of the WAP
[pic]
Source Assaad 2007a
9. The labor force is changing rapidly although its education level is fairly low: with only about 48 percent of the WAP in 2006 had a high school diploma but, the proportion of technical (vocation) secondary school graduates rose sharply over 1988 to 2006. Consequently those without educational credentials (illiterates and literates) fell and the proportion of university graduates increased from 8.3 to 11.5 percent of the WAP as shown in Figure 3.2. The Figure also shows the low proportion of post-secondary institute graduates that in many countries outside the region provide the skilled technicians that industry require.
Unemployment Trends
Table 3.3: Unemployment as a percentage of Labor Force
| |1988 |1998 |2006 |
|Market definition |
|Male |na |7 |4.7 |
|Female |na |27.6 |18.6 |
|Total |na |11.7 |8.3 |
|Extended market Definition | | |
|Male |4 |7 |4.6 |
|Female |7.7 |9.4 |8.8 |
|Total |5.3 |7.9 |6.2 |
10. Unemployment levels and trends differ by source and measurement, creating some confusion among commentators, and Box 3.1 explains the measurement issues that account for the differences. Until recently, CAPMAS reported higher unemployment rates; but labour market survey data show the unemployment rate using different definitions declining between 1998 and 2006 after having risen between 1988 and1998 (Table 3.3).
Source Assaad 2007a
Box 3.1: Measuring Unemployment
|Egypt’s unemployment rate reported by CAPMAS was “stuck” above 10% for several quarters despite rising GDP, and suddenly fell in October 2006 |
|(just over 9 percent in March 2007). Since these rates are widely reported, it may be useful to explain how the data are gathered and why the |
|rate (that differs slightly by publication both in level and trend) may have limited use as a guide macro-economic policies as is done in many |
|developed countries. CAPMAS changed an important question in the Labor Force Sample Survey from October 2006: respondents are now asked |
|separate questions about their capacity to work, desire to work and availability to work within two weeks of getting a job offer (these had |
|been in one question earlier, and respondents may have answered differently). Consequently, CAPMAS unemployment data after October 2006 are |
|not comparable with earlier numbers. |
|Subsistence workers are considered employed under the extended definition but are considered unemployed under the market definition. A person |
|is counted as unemployed (under the ILO’s definition that Egypt also uses) if he never worked even an hour in the previous week and is “seeking|
|work”. “Seeking work” has three definitions: the narrow definition requires an active search, the standard definition requires some search in |
|the previous three months (being registered in an employment office suffices) and the broad definition drops the search requirement so as to |
|include discouraged seekers. |
|CAPMAS reports the standard definition (and calculates, but not publish, the broad definition), and as this uses the employment register, some |
|unique features warrant an explanation. The Ministry of Manpower registers job seekers in person at its 300 local employment offices across |
|the country. Until 2003, firms employing more than 10 people could only hire workers through these local employment offices. Although the |
|2003 Labour Law did not change the system of reporting or recording, it reduced the incentives to comply. A firm may now hire workers |
|directly, and although all firms must still furnish details of all its employees to the Ministry annually, doing so makes it harder to evade |
|other requirements: they must pay (in addition to the substantial taxes on wages for pensions, etc.) 1% of the total wages into an “emergency |
|fund” that ostensibly pays workers wages for 6 months if the firm experiences cash flow difficulties, but senior officials in the Ministry |
|could not say how many firms availed of this. The 2003 Law gives labour unions (that replaced the labour management consultative committee |
|which firms with more than 50 workers must have) the right to strike. Firms, especially private profit-seeking ones, therefore have less |
|reason to report accurately, and with some 1.5 million firms, the Ministry’s 30,000 inspectors (who also enforce health and safety regulations)|
|cannot ensure accurate compliance. The Ministry’s registry has some 2 million seeking work — making the roughly 10% unemployment rate. Note, |
|however that it includes: (1) those seeking work for the first time (reportedly 65% of the total); (2) the already employed seeking better |
|positions (about 15%); and (3) those who had worked before (and may be informally employed). |
|The Ministry’s job register data are reported both to the Ministry of Economic Development (formerly Ministry of Planning) and to CAPMAS, and |
|each uses the data differently resulting in two published unemployment rates that differ slightly. CAPMAS also uses data from a quarterly |
|labour survey (since 1957, irregularly until 2003, and now in the first week of January, April, July & October) of roughly 21,000 housing units|
|in all governorates; but this too uses the standard definition of job search. |
11. The fall in the unemployment rate was despite the increase in labour participation: participation rates rose by nearly 4 percentage points over 1998-2006 (from 47.2 percent to 51.1 percent), similar for both men and women. Table 3.4 shows the particularly large increase for rural women (the increase is significant even though rural female employment is thought to have been underestimated in the 1998 survey).
Table 3.4: Labor Force Participation for WAP, Market Definitions
| |Male |Female |Total |
| |1998 |2006 |1998 |2006 |1998 |2006 |
|Rural |
12. Second, the unemployed are mostly those seeking their first job, not those getting back on the job ladder (Assaad 2007a). New entrants (first time job seekers) among the unemployed rose from 74 in 1998 to 82 percent in 2006, and it typically takes an entrant 24 months to find work. Surveys find that women using the Government’s search mechanisms are unemployed the longest: almost 84 months in 2006 (i.e. 7 years, up from 4 years in 1998), and largely reflects the loss of job opportunities in the public sector and the different needs of the private sector.
13. Third, more women are unemployed, especially in urban areas. The urban unemployment rate is only modestly higher (10.0 percent versus rural unemployment rate of 7.0 percent using the market definition) for women, but Table 3.5 shows that their labour participation rate is a third that of men. In 2006 nearly 18.6 percent[43] of women and only 4.7 percent of men were unemployed. Starting from a much lower employment base, the reduction in unemployment for women has been greater i.e. from 27.6 percent to 18.6 percent while for men it has been more modest: from 7 percent to 4.7 percent over 1998-2006. Not only is unemployment higher for women, but their wages are lower: while salaries for men and women are similar in Government and public enterprises, women earn half of what men earn in the informal private sector and the irregular wage sector.
The Effects on Poverty
14. These differences in earnings have implications for poverty, but (as with the unemployment rate) one must interpret the data carefully. The Bank’s 2007 Poverty Assessment Update[44] finds the poverty rate for wage and salary workers rose from 16.7 in 2000 to 19.6 in 2005 using the national poverty line (roughly $1.5/day) based on Household Income, Expenditure and Consumption Survey (HIECS). In contrast, labour market surveys (ELMPSs) find that real earnings rose.
15. The findings are consistent and the apparent contradictions arise from three differences in the HIECS and ELMPS data. First are differences in survey timing: the ELMPS capture the big jump in real wages between 1998 and 2000 while real wages increased only modestly between 2000 and 2005 when HIECS was conducted. Second, the ELMPS measures incomes while the HIECS and poverty lines measure consumption expenditures using indices that may be inaccurate because of high inflation in 2004. Both the ELMPS and the HIECS find increased spending on consumer durables: ownership of stereos, colour television, gas stoves, refrigerators and mobile phones rose among both the rural and urban poor suggesting that they are better off than before. National accounts data also indicate an increase in per capita consumption. Third, the percentage of near poor (set 30 percent higher than the poverty line of LE 1,423 p.a.) declined from 46.6 percent in 2000 to 40.5 percent in 2005, and this is consistent with labour market trends. So the poor have benefited from economic growth, notwithstanding the slight increase in the poverty head count measure, and Chapter 1 already discussed how the extremely poor have fared and how they would benefit from the better delivery of public services such as health care, education and family planning.
16. Higher growth and employment may not have benefited a few groups because of the nature of employment: the poor are employed, but in jobs that involve few hours and pay little. Only 60 percent of the employed worked 45 hours or more a week; and only 21.5 percent of the unemployed are poor, and the rate is not that different for the 18.7 percent of the self-employed and 16.6 percent of wage earners who are also poor. While employment grew 4.6 percent annually between 1998 and 2006, most of this was the self-employed and the household enterprise workers, two groups with low real earnings that account for 36 percent of the total employment. Well paying formal jobs account for only 10 percent of total employment, and most are in public enterprises and Government where employment has grown little.
Figure 3.5: Distribution of Employment by Institutional Sector
|[pic][pic] |
Rising informality
17. Employment is considered informal if the worker has no employment contract or social insurance. Figure 3.5 shows that informal employment (defined as the sum of self employed, household workers, irregular wage workers, informal private regular and wage workers) rose from 57 percent of the total employed in 1998 to 61 percent in 2006. And this proportion may continue to rise: 75 percent of new entrants in the first five years of this decade obtained informal work. The panel with numbers (left) shows the increase in formal private sector wage earners — an encouraging development that is obscured when viewed as proportions (right panel).
Figure 3.6: Average Annual Growth by Sector
|[pic] |
18. Figure 3.6 shows that the formal and informal private wage sector accounts for nearly 27 percent of the total employment in 2006. The extent of informality within the private wage sector declined from 75 percent to 70 percent of the labor force over 1998-2006. As indicated in Figure 3.7, the extent of informality declines with firm size, although even larger firms hire nearly a quarter of their workers informally. Source: Assaad 2007a
Figure 3.7: Proportion of Informal Employment in Private
Wage Employment by Firm Size (1998 – 2006)
|[pic] |
International Migration
19. Migration from Egypt has been a significant escape valve for the young and a safety net for their families. Between 3 and 5 million Egyptian migrants were abroad in 2005, according to the 2000 CAPMAS census and 2005 data from Egypt’s Ministry of Manpower and Migration on new work contracts for the Gulf region. Zohry[45] (2006) estimates that about 1.9 million Egyptians work in the Gulf, half of them in Saudi Arabia, followed by 18 percent in Libya and 12 percent in Jordan. Iraq was a major host country before its war with Iran and the 1990 Gulf war and subsequent decline in oil prices and exports changed the pattern also. Of the non-Gulf migrants, over 78 percent were in five countries: the US with 39 percent, Canada with 13 percent, Italy with 11 percent, Australia with 8.5 percent and Greece with over 7 percent. Egypt also hosts migrants, some legal and many refugees, from Sudan and other sub-Saharan countries both as a destination and in transit.
20. Falling oil prices in the early 2000s reduced migration from Egypt to about 1.2 million, or about 5 percent of the labour force, down from its 1985 peak of 10-15 percent of the labour force (these may have subsequently raised again with oil prices). Wahba (2005) notes that migrants are from two extremes: the highly skilled and unskilled (who work more in Jordan, Iraq and Lebanon as agricultural and domestic workers). Most migrants are young men (those to the West may have families), and many return after a few years and send funds home in the interim.
Figure 3.8: Remittances as a Share of GDP (1975 – 2006)
|[pic]Source: World Bank, 2003 World Development Indicators, CD-ROM |
21. Figure 3.8 shows that worker remittances, although significantly lower than in the 1990s, are still about 4 -5 percent of GDP. These data may underestimate flows: the parallel market for exchange, and a high premium between 2000 and 2004, probably resulted in substantial remittances outside the regular banking channels. Bouhga-Hagbe[46] (2006) finds that remittances are also inversely related to agricultural GDP because altruism prompts migrants to send funds when there is hardship at home.
22. Studies also find that few returning migrants start a business. Although somewhat dated, Adams[47] (1991) surveys three villages in Minya Governorate and finds that younger and better educated people migrate, that most are male with older brothers who care for the family when they are away, and that 54 percent of the remittances are spent on non-recurring items such as the construction or repair of houses: 73 percent of the spending by households with one migrant abroad is for the purchase of land. This spending pattern from remittances is not surprising considering the profile of the typical migrant.
B. Public Sector Employment and Wages
23. Public Sector employment and wages have major effects on the labour market, and worse, it is difficult for an overstaffed bureaucracy to provide government services effectively or efficiently. In the past, the Government guaranteed jobs for all technical secondary school, post secondary school and university graduates (men and women equally). This has led to:
• Excessive numbers in technical secondary school education without marketable skills
• Trapped a large proportion of Egypt’s work force in the civil service
• Increased the reservation wage for the private sector
• Made public sector employment attractive for women, especially in urban areas
24. The employment guarantee has been suspended but not revoked or abolished. While this has slowed public employment growth, abolishing the guarantee would reduce uncertainty and queuing (that is reflected in unemployment as measured). Public sector employment grew more slowly at 1.6 percent annually between 1998 and 2006 (when overall employment grew 4.6 percent) almost half the 3.3 percent rate between 1988 and 1998. Employment in public enterprises shrank by about 0.2 percent annually. Table 3.5 shows that although men bore the brunt of this slowing, it has been especially hard on women who find public sector jobs relatively more attractive because they combine generous medical and retirement benefits, relatively short work hours, employer provided transportation in many cases, and a measure of safety in workplace with the presence of other women. The longer wait in public employment (now 7 years) has led many women to drop out of the labour force altogether. The proportion of females in public sector employment has remained around 30 percent for about 15 years, having doubled from around 15 percent in 1981[48]. Considering the differences between public and private employment of women, especially for the educated in urban areas, reforms in public employment will have significant gender implications.
Table 3.5: Gender composition of Public Sector Employment ,000 Persons
| |Male |Female |
| |1998 |2006 |Growth % |1998 |2006 |Growth % p.a. |
|Public Enterprises |916 |905 |-0.2 |123 |117 |-0.7 |
|Total Employment |12,361 |16,436 |3.8 |2,815 |4,944 |7.5 |
25. Despite slower employment growth, Table 3.6 shows that the Central Government, Economic Authorities and public enterprises together employ 5.6 million in 2006 which, along with an additional 1.02 million in public enterprises, is about 30 percent of total and three quarters of Egypt’s formal employment. Central Administration has grown substantially, and the suspension of the employment guarantee mostly affected local administration.
Table 3. 6: Public Sector Employment and Real Wages
| |
|Central Administration |
|Central Government |
26. Wages are higher, and have grown faster in the public sector. Figure 3.9 shows this increase of wages and all financial benefits over a decade and its effects are increased queuing (i.e. measured unemployment), higher reservation wages and greater informality in the private sector. Real private sector wages fell in the second half of the 1990s when the economy stagnated and began to creep up after 2002; but average public sector wages grew faster and exceeded those in the private sector by a third by 2004 and this disparity continues in 2005[49].
Source: Hassan & Sassanpour (2007)
|[pic] |
27. There are differences within the public sector as well: Table 3.6 shows real wages grew by 5.4 percent annually in the economic authorities and only by 1.5 percent annually for civil service employees between 2001 and 2007. Wages reported to the social security system, analyzed for the Bank’s pension study, indicate that civil service wages in 2004 were about 80 percent of the wages in formal private and public enterprises, but nearly seven times higher than those for casual workers in the informal sector. These data underscore the substantially higher wages in formal employment and the continued attraction of civil service jobs especially considering better pension and health benefits, job security, better working conditions, and shorter working hours. Besides, many Government workers have additional employment (often simultaneously) to increase their incomes.
C. Private Employment and Regulations
28. Private employment was mostly in agriculture and in households, but as private firms were allowed to operate since the 1970s, such employment has risen although it remains mostly informal. The Labour Law (described later in the section) discourages employers from hiring workers formally: not only does the law make it difficult to shed workers but it also mandates an annual 7 percent increase in nominal basic wages regardless of inflation or the profitability of firms. Not surprisingly, employers commonly under report the wages to the social insurance (they pay lower contributions without hurting workers whose benefits are determined by the last five years’ wages, and reported wages would be increased nearer the retirement age) but many also require a signed letter of resignation (estamara or Form No.6) when hiring a worker. Such widespread practices have allowed labour market rigidities to be ranked low among constraints (13th and 9th of 19) that firms list in the 2004 and 2006 investment climate surveys, well below macroeconomic instability, illegal or unfair competition, corruption, regulatory policy uncertainty, tax rates and cost of finance. Although such regulations appear to be non-binding, they are nevertheless costly because they discourage a firm from growing to a size that requires formality and precludes the attendant benefits to its workers.
The 2003 Labor Law
29. After discussing draft amendments for nearly 10 years, a revised Labour Law was enacted in July 2003, and Table 3.7 lists some significant differences with the old. The Labour Law does not apply to the public sector, agriculture, and other specified activities like domestic help, and is only one of many regulations that a firm must comply with and which influences whether a worker would be formally hired.
Table 3.7: The Labor Laws Compared
|Provisions Under the Old Law |Revisions in June 2003 Labour Law |
|Permitted only indefinite contracts after the |Allows two kinds of labour contracts: indefinite term and fixed term contracts (that |
|probationary period, and employers could not |includes contracts for a specific task). |
|terminate contracts. |The Law does not mention part time work and temporary agency work. |
|Dismissal allowed only if the worker committed one |Language for dismissal largely maintained: a worker cannot be dismissed for financial |
|of nine serious errors. |problems facing the enterprise. In contrast the worker can terminate the contract due to|
| |health, social or economic conditions. |
|Dismissal reviewed by a tripartite committee. The |Dismissal reviewed by a judicial committee whose decision is binding. |
|decision was advisory. | |
|Dismissal without valid justification resulted in |Termination without valid justification entitles the worker to compensation only |
|reinstatement of the worker with mandatory back pay.|amounting to: one month for every year worked up to five years and one and half months |
| |pay for every year after five years. |
|Employers with >10 workers were not allowed to |Employers may now hire directly (but must notify the local employment office of the |
|employ directly and were required to go through the |vacancies, and if a suitable candidate is not found within a week, the employers can hire|
|local employment offices. |directly). |
|Workers were not allowed to strike. |Workers may now strike subject to specified procedures. |
|No collective wage bargaining. |Spells out rules for collective wage bargaining. For firms with >50 workers collective |
| |bargaining with firm’s trade union and for firms with ................
................
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