Saturday, October 30, 2010

Al Ahram Weekly Article 3 (4th March - 10th March 2010)

Small drops

SeifAllah Rabie examines what's hindering the trickledown effect of economic growth

Amid last year's financial turmoil Egypt remained among the top recipients of foreign direct investment (FDI) inflows in the region, according to the World Investment Report issued by the UN Conference on Trade and Development (UNCTAD). The report is not the only vote of confidence. The International Financial Corporation has also recognised Egypt as one of the global top reformers in its latest "Doing Business Report". Moreover, the International Monetary Fund (IMF) stated that, "growth in Egypt has picked up steadily since 2004 making it one of the Middle East's fastest growing economies."

Yet the question remains: What is hindering the trickledown effect? Why aren't investments surpassing the borders of Cairo and Giza? Why is the amount of jobs created far less than the amount of issued capital? The Board of Trustees at the General Authority for Investment attempted to answer some of these questions through a study conducted under the title of "A Just Distribution of the Fruits of Growth" . The main goal of the study is to analyse the factors hindering the trickledown effect.

According to the findings of the study, one of the main problems facing the trickledown effect is the proportion of investment to the overall GDP, currently standing at below 19 per cent, and needing to reach at least 25 per cent in order to propel development in the real economy. The study further referred to the history of the inverse relationship between private and public investments. At peak times of public investment, their private counterparts declined immensely. This phenomenon was most apparent during the year 2001-2002, in which public investments increased strongly while private investments plunged 23.5 per cent. Both types of investment should complement rather than substitute one another, as a decline in public investments indicates deterioration in public services, and a fall in private investments is an indication of a stagnant business environment.

Another reason for the crippled trickledown effect is the distorted geographic distribution of investments. During the period from 2000-2007, 34 per cent and 30 per cent of new investments were concentrated in Cairo and Giza respectively. This saturation in only two governorates was a major obstacle to the extension of the fruits of FDI to the rest of Egypt.

The study further drew attention to a very important, yet often ignored, aspect in assessing the larger growth accounting framework, which is total factor productivity. It has been proven that economic growth achieved during the period from 1982-1983 to 2006-2007 was created solely through capital accumulation. Thus, real enhancement of total factor productivity, which will only occur through widespread job creation, was absent. In assessing the period from 2002-2003 to 2006-2007 we find that the petroleum and energy sector, a capital-intensive sector with minimal job creation, has attracted the largest amount of investments, constituting 28 per cent. However, investment in manufacturing and mining, which are labour-intensive industries, did not exceed 12.3 per cent for the same period.

Other reasons such as the rise of the informal sector and the scarcity of a well- educated labour force were mentioned. If only 10 per cent of the labour force is capable of working in the so-called modern economy while the rest are restricted to jobs with low levels of productivity, and hence lower salaries, then the trickledown effect will remain stunted. Even if the informal sector is capable of alleviating unemployment to some extent, it will yet fail to provide decent jobs that reap the fruits of growth and investment.

Mohamed Taymour, chairman of Pharos Holding for Financial Investments and the founder of the renowned financial services institution, EFG-Hermes, stated that the obstacles facing the trickledown effect of FDI and GDP growth rates were all expected and make perfect sense. A new investor would naturally choose to set his business in an area that is most developed in infrastructure, such as Cairo and Giza, and would most probably hire the skilled and educated labour that constitutes the minority of the workforce.

Does this mean that we shall see the fruits of growth and investment in the near future, especially given the latest developments in infrastructure? How much of a time span is needed for the trickledown effect to take place in a country governed by free market policies since the early 1990s? How can the government move the market into strategic sectors that would help in propelling advances in the real economy? All these are genuine questions that need to be asked not only of the government, but also of civil society and the rest of the economic "intelligentsia" in the country, including prominent scholars and research centres.

Society is unfortunately withdrawn in either cynicism or exaggerated optimism. Corporate executives and government officials are more likely to present doubling growth rates and FDI figures to magnify a success story void of any failures. On the other hand, the general public is growing cynical of numbers and is continuously suspecting their manipulation. In this issue particularly, it is important to understand that economic reform in Egypt is in need of immense efforts far beyond doubling GDP growth rates and FDI. Unless a clear strategy resulting from a comprehensive vision is adopted, the disparity in perceiving economic development between the elitist minority of executives and government officials on the one hand and the general public on the other hand will continue to widen.

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