World Bank diagnostic report for Egypt observes low contribution of labor and capital to growth

It is a time of turbulence for Egypt and the world, with unprecedented global inflation and recession and a risk of food insecurity that is likely to disproportionately hit emerging economies most. With promising economic growth in the past couple of years, Egypt’s economy faces new challenges and a heightening need to address structural obstacles to shared prosperity. The World Bank recently released their systematic diagnostic report titled ‘Unlocking Egypt’s Potential for Poverty Reduction and Inclusive Growth’ analyzing the most critical constraints and opportunities to ending extreme poverty and promoting shared prosperity in a sustainable manner. The report covers the period extending from 2004 to 2019 and compares Egypt’s economic performance to a few of its peers, including Indonesia, Malaysia, Mexico, Morocco, Pakistan, Peru, Poland, the Philippines, Sri Lanka, Tunisia, Turkey, Ukraine, and Vietnam.

“Egypt has significantly expanded educational attainment since the 1980s. The share of illiterate adults fell sharply between 1988 and 2018 as the number of students graduating with vocational education and university degrees grew significantly. Employment has grown but has not kept pace with the growth in the working-age population. As a result, the employment rate (share of working-age population that is employed) fell,” the report said. Nearly 6 million additional jobs would have to be created between 2019 and 2030 just to keep the employment rate at the 2019 level. Moreover, a demand for low- and middle-skilled jobs has been observed, along with a decline in demand for high-skilled jobs.

A comparison of employment rates in the report between Egypt and its peers shows that Egypt, Jordan and Tunisia have the lowest share of working-age population that is employed. “Egypt has both a younger population and a higher annual population growth rate than its peers (2.0 percent, compared to less than 1.2 percent on average in middle-income countries in 2004-2018. Vietnam and Sri Lanka had average annual population growth well below 1 percent. They also employ a large share of their working age population,” the report mentions.

When it comes to poverty, figures in the report indicate an increase in poverty rates between 2015 (27.8 percent) and 2017 (32.5 percent). This worsening of poverty is associated with the sharp rise in inflation following the November 2016 currency depreciation. The analysis also showed a weak impact of GDP growth on labor income and jobs, which affects both the poor and the non-poor.

Between 2015 and 2017, all households experienced a reduction in real incomes as income growth was weak and did not keep pace with inflation. Looking at the performance of peers can help identify patterns that can bridge the gap between GDP growth and household incomes growth, according to the report. For example, Egypt’s annual GDP per capita growth of 2.4 percent is less than comparator countries like Vietnam (5.2 percent), Indonesia (4 percent), and Turkey (3.4 percent). In addition, Egypt’s labor input contribution to this growth is low compared to what it is in these peer countries (0.7 percent, compared to 1.4, 2.2 and 1.8 percent in Vietnam, Indonesia and Turkey respectively).

All in all, Egypt’s growth model has not delivered the level of productivity growth, or the productive utilization of labor and capital needed to sustainably increase incomes. “We find in our analysis that the reasons why macro-growth hasn’t translated into poverty reduction are three; labor productivity is low; contribution of labor and capital to growth is low; overall employment and investment rate is low,” said Nistha Sinha, senior economist at the World Bank during a seminar discussing the report at the American University in Cairo (AUC) School of Business. Compared to peer economies, Egypt’s capital accumulation (how much the value of assets is increasing through investments or profits) is low, and the private sector’s share of total investment is also small. On the other hand, the share of public investment in total investment is higher in Egypt than its peers. It reached 60 percent in 2018 and dropped to 50 percent in 2019, mainly due to an increase in private investments in new energy projects.

Alvaro Gonzalez, lead economist at the World Bank, specialized in firm performance, competition and regulatory issues emphasized during the discussion at AUC the importance of the private sector becoming the engine for a jobs-rich growth in Egypt. “The report finds that firms in Egypt are characterized by low, stagnant productivity, small size and under-capitalization,” he explains.
“Egypt has fewer larger firms than other economies, and larger firms are job creators, especially for the middle class. Large firms produce jobs that are increasingly more productive, pay higher wages, and provide the kind of job stability and benefits that is the foundation for a strong middle class,” reads the report.
Tackling the impact of climate change on Egypt, Gonzalez pointed out that even though Egypt is quite resilient to natural disasters, it faces risks from depletion of natural resources—mainly water and clean air as well as unprecedented weather conditions. “Climate change exposes Egypt to increased frequency of droughts and heatwaves, sea level rise and coastal erosion, increased water stress, land loss, and agricultural productivity. This will put additional burden on the poor who disproportionally rely on and obtain income from nature-based sources and tend to live in high-risk areas”.

“Fuel subsidy reforms and investments in the Benban solar park, and the Gabel El Zeit wind farm have created the conditions for sustainable growth. Since 2019, the climate agenda has also increasingly become a focus for the government. In September 2020, Egypt became the first country in the Middle East and North Africa (MENA) region to issue green bonds,” says the report.

Both World Bank economists recommended adopting a new growth model, and suggested pathways for Egypt to further enhance its economy, and reinforce the resilience, efficiency and sustainability of the current growth model.

“The new growth model [ideally] emphasizes an economy that is more open to international markets. The state would reduce its role as a market participant and investor while focusing on promoting fair and transparent competition,” Gonzalez told Business Forward and added, “The proposed growth model is built on finding ways to complement private sector investments, reducing deficits and limiting borrowing while injecting more investments in health, education, technical training and expanding the social safety net to protect the poor. Environment also arises as a priority that requires public and private efforts to protect the environment, especially to reduce environmental vulnerabilities that expose the poor to shocks.”

With recent indications of the government’s privatization plans and intentions to exit certain sectors and double the contribution of the private sector, time will tell if this model would begin to materialize.

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