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Challenges to economic growth in Egypt discussed at AUC conference

'Towards an Economy for All' conference organized by the Alternative Policy Solution Research Project held at the American University in Cairo

Doaa A.Moneim , Thursday 19 Dec 2019
AUC
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A developing country's informal sector, particularly in Egypt, should be enrolled in the taxing system to benefit from the sector in economic growth and to merge it with the formal sector, said Panos Tsakloglou, a professor at the Department of International and European Economic Studies at the Athens University of Economics and Business in Greece
 
Speaking to Ahram Online on the sidelines of “Towards an Economy for All” conference that the Alternative Policy Solution Research Project held at the American University in Cairo on Wednesday, Tsakloglou clarified that Egypt has to introduce incentives to encourage informal sector workers to pay taxes and to merge with the formal sector. The incentives should be set according to the country’s economic activities.

Investing in human capital 

The cornerstone of Egypt's economy in the current phase, according to Tsakloglou's approach, is to upgrade and invest in human capital and to create an efficient capital market that leads to higher growth rates and solved all of the economy's problems.

“The saying that the informal economy is the backbone of states’ economies is not completely true. In general, this sector does not create products with proper quality, compared to the formal sector. If economic development increases, normally informal activities decrease. This is the key to dealing with the informal sector in the Egyptian market and in any other developing country,” he pointed out.

There are several examples of developing countries that can be emulated in this regard. South Korea, for instance, was a very poor country due to the civil war, but it managed to be one of the largest economies in the world and to achieve the required economic growth and development.

AUC

Growth not creating good jobs

During the conference, Ragui Assaad, professor of planning and public affairs at the University of Minnesota and former consultant to the World Bank, UNICEF, and the UNDP, reviewed a study he prepared which noted that Egypt’s economy is not creating good jobs.

According to the study, Egypt’s economic growth has substantially recovered from the post-revolution slump, but poverty and inequality have increased. Growth has essentially not been creating good jobs despite the apparent decline in unemployment.

EPR not responsive to growth

Employment to population ratio (EPR) has been fairly responsive to GDP growth, but with a certain degree of lag. Moreover, the most recent recovery in growth has not resulted in a reversal of the decline in the EPR, according to the study.

It also demonstrated that the share of formal employment in the economy has continued to fall steadily since 1998, due to the decline of public sector and very slow growth in formal private sector employment. Otherwise, the largest increase was in the informal wage employment outside fixed establishments, followed by informal wage employment inside establishments.

“This finding is strongly connected to the Egyptian pattern of economic growth,” Assaad pointed out.

Construction, transport and storage fastest to grow

The fastest growing industry sectors in terms of employment have been construction, whose share went from seven percent in 1998 to 13 percent in 2018, in addition to the transport and storage sectors, the share of which went from five percent in 1998 to nine percent in 2018. Manufacturing, mining and utilities combined went down from 18 percent to 14 percent, as the study noted.

“In private sector  establishments, job creation is concentrated in wholesale and retail trade and, to a lesser extent, manufacturing, but the contribution of each of them is declining.

Meanwhile, on a more detailed level, the top 10 industry sub-sectors contributing to job creation, with 66 percent, focused on trade and distribution, with 41 percent, and personal services with six percent”, Assaad clarified.

SMEs control the scene

The study revealed that annual rates of employment growth in small enterprises have more than doubled from 1996 to 2006 and from 2006 to 2017, while medium enterprises nearly tripled.

Wages trajectory in the Egyptian market, the study found, declined significantly between 2012 and 2018 after growing modestly in the 2006-2012 period, with -1.2 for men and two percent for women. The study added that the fastest wage growth was from 1998 to 2006.

The study also said that real wage erosion has been substantial and wage inequality has increased.

For voices that call for tallying the informal activity in Egypt, Assaad said the private sector will defeat any attempt towards this goal. Egypt has to reduce taxes on investment capital to attract the informal sector to engage in the formal market and do more business which will, definitely, absorb the major percentage of unemployment.

AUC

Poverty increases

Dina Armanious, a professor of statistics at Cairo University, said there had been a steady increase in income poverty rates in Egypt from 1999 to 2018, as it increased by 7.3 percent, from 25.2 percent in 2010-11 to 32.5 percent in 2018, affecting 32 million Egyptians.

According to her study on poverty in Egypt, extreme poverty has increased steadily from 2012 to 2018, as 6.2 percent of the population in 2018 were categorised as extremely poor, unable to meet their minimum food requirements, and suffering from food insecurity.

The study pointed out that poverty rates have been generally higher in Egypt’s rural areas. Between 2015 and 2018 urban poverty increased significantly from 16.9 percent to 24.6 percent, while insignificant increases of poverty were experienced by residents of rural areas.

Cairo second  highest increase in poverty

The study found that Cairo is the second country to record the highest increase in poverty rates after Behera, with 14 percent, between 2015 and 2018.

In 2018, 24.6 percent of households could barely meet their basic food needs, and almost 30 percent does not consume adequate food. In Upper Egypt, 23 percent of households are food insecure, while 18 percent of Cairo residents are food insecure.

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