A long-run look at the Egyptian economy


Commercial media and other analysts have cited rising food prices and unemployment as factors contributing to recent revolts in North Africa and West Asia, most notably that in Egypt. Egypt’s 2008 strike wave also coincided with a drastic run-up in grain prices.

But little has been said about the longer-term evolution of the Egyptian economy.

Perhaps, alongside more conjunctural influences, this had some bearing on the course of Mubarak’s rule, and on its recent termination?

I lack any in-depth knowledge on the topic, so I turned to data contained in the Extended Penn World Tables for the period 1963-2003, compiled by Adalmir Marquetti.

The standout feature (the blue line in the chart below) is rapid growth in the average rate of return on fixed-capital investment earned by firms in Egypt, beginning during the 1990s, to very high absolute levels. If we compare Egypt’s profit trajectory to that of advanced economies such as Japan, or even developing economies such as South Korea, we can see how unusual it is.

But the rise in profitability was not prompted by technical advance. Labour productivity grew quite slowly in Egypt during this period – less than 2% annually in the period after 1990.

The source of increased profitability lay mostly in demographic growth: Egypt’s workforce increased by more than 50% over that same time.

But now look at the red line plotted above. It shows that, despite increased profitability, growth in the productive capacity of the Egyptian economy has been slow.

The rate of increase in the capital stock has indeed diminished over time. In some years total investment failed even to cover depreciation, resulting in negative growth of the capital stock.

Our two time series thus show that a very small and decreasing share of profits was reinvested in plant and machinery (this explains the slow productivity growth). This caused the capital:output ratio to fall, which in turn led to a rising average profit rate.

But it also limited technical advance in the productive apparatus through which the working population was reproduced. The living standards of the population must have stagnated.

In some sense, this slow rate of accumulation is an index of the venality of the military-financial coterie surrounding Mubarak.

Under the rule of this group, the surplus extracted from the working population was dissipated by conspicuous luxury consumption (performed safely in ‘niche housing projects’ for those ‘who seek distinction’ such as Dreamland, outside Cairo. This walled compound promised to ‘spread the wings of Egyptian success stories abroad.’) The vast security apparatus, needed for the maintenance of social order and property rights, absorbed still more. (The wealth engrossed by the security apparatus nonetheless did find some productive outlets, seeping into civilian areas of the economy such as construction, textiles, petrochemicals, and automobile manufacturing. Many owners and contractors are said to have had regime ties through the officer class and the ministries of Defence and Interior, nurtured in turn by USAID.)

But the paucity of fixed-capital investment also tells us about the sectoral makeup of the Egyptian economy and class relations of Egyptian society.

IMF-led reforms after 1990 disproportionately increased the weight of unproductive sectors, most noticeably finance.

In the period under investigation, an increasing fraction of profits earned by Egyptian firms went as interest payments, dividends and other unproductive expenditure, decreasing retained earnings and thus leaving less to be productively reinvested in new buildings, equipment, etc.

The scarcity of capital, alongside strong demographic growth, implied a relative glut of labour. The employed population’s resulting lack of bargaining power saw the wage share of national income drop from 45% in 1975 to around 28% by the turn of the new century.

This is an astonishingly low figure, well below that even of countries like Brazil.

The cost of labour is governed by that of its inputs: that consumer basket of goods and services which materially reproduces the capacity to work. In modern economies, cheapening the cost of labour thus generally occurs by technical innovation that cheapens the production of food, clothes, childcare, utilities, education etc. As we have seen, Egyptian productivity growth was slow in recent decades. There was little investment in new machinery or more efficient techniques. If the cost of labour nonetheless declined sharply, this was in the first instance due to state repression and demographic growth.

The result was that the net product increased faster than wages over much of this period.

But this also says something about the existence of Egypt as an integrated economic unit. Production of the goods and services making up the real wage – the consumption basket of the Egyptian employed population, and its dependents – did not only occur domestically.

A major and increasing component of Egyptian imports, for example, is foodstuffs for human consumption. North Africa, taken together, has one of the highest food-import dependencies of any region in the world.

Growth in Egypt’s external ‘food gap’ (i.e. exports minus imports) coincided, in the 1990s, with removal of consumer subsidies for food. Household food consumption dropped by around 20% in the course of four years. Between 1987 and 2000, per capita wheat consumption fell by 12%; potato consumption was reduced by 10%. Over the next decade, food consumption was projected to fall further still.

This represented, of course, a catastrophic decline in the standard of living of the broad Egyptian population. It also constituted a terrific drop in the real wage.

From 1990 onwards, the Egyptian ruling elite increased the size of the surplus extracted from the employed population, without having to direct its flow of profits from current consumption to accumulation of investment goods. This could only occur to the extent it did because the Egyptian economy was not a segregated, closed system but was embedded in a wider international network. Wage goods and capital goods were cheapened by turning to suppliers beyond the territorial boundaries of the Egyptian state.

With growth in the relative weight of unproductive sectors of the Egyptian economy, this became ever more important.

Egypt’s massive external deficit (around 20% of GDP) with the mercantilist economies among its trading partners – Germany, Italy, China, the Netherlands, France, Belgium, etc – constituted a free subsidy, a transfer of real wealth from these export-surplus countries. It was output produced by the workers of these latter countries, but not consumed by them as part of the real-wage bundle. The surplus was, however, consumed by the Egyptian ruling elite as luxury goods, private security services, etc.

This parasitic layer was thus supported not merely by the working population of Egypt, but by that of Europe, Asia and elsewhere.

The Egyptian economy does not reproduce itself materially from period to period. It must be taken as a non-self-sufficient subset of a broader (regional or global) economy. The Egyptian population’s defence or advancement of its living standards is bound up with the fate of European, Asian and other working people. Any solution to its problems requires a leap beyond national partitions.

Political actors must operate in the geographic area that constitutes a unified economy, and unite the working population within that territory to work for common goals that can only be achieved on that scale. In the present circumstances, this scale is necessarily global.

It is in that sense, as well as the consequences for Washington and Tel Aviv, that Mubarak’s fall is of international significance.


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