Mind the gap, it's harming Egypt's economic growth, says UN

Marwa Hussein, Thursday 13 Sep 2012

Greater equality makes both moral and economic sense, says trade body, advising Egypt to counter a shortfall in foreign investment by boosting local consumption

Mahmoud El-Khafif
Mahmoud El-Khafif criticised Egypt's economic path (Photo: UN)
Greater income equality in Egypt would lead to stronger economic growth, the UN said on Tuesday, as it slammed 30 years of global policies and what it said were ineffective recent austerity measures.
A new report from the United Nation Conference on Trade and Development (UNCTAD) claims that reducing the widening gap between the rich and poor is not only necessary for social justice, but could also spur economic growth.
The report also pours cold water on the idea that austerity is the solution for crisis-struck Western economies, saying that "supportive government policies" are still needed to avoid disaster.
It said lower wages and cutting of public expenditure had impoverished the West's lower classes and slashed their purchasing power. With global demand hit, businesses are struggling to grow, potentially dragging the economy into an ever-deepening spiral.
UNCTAD warned that a fresh wave of austerity cuts could further slow economic recovery, and have a negative effect on the world's poorest nations.
"No country will be spared in the case of a new financial shock in the developed countries," UNCTAD Secretary-General Supachai Panitchpakdi said recently.
Global growth fell from 4.1 per cent in 2010 to 2.7 per cent in 2011, figures in UNCTAD's 2012 report show. The UN body expects a further decline to below 2.5 per cent in 2012.
UNCTAD's report said the last three decades of global economic policies had been diastrous in fostering equality. Egypt's programmes, too, had been deeply misguided, it said.
"Unrestricted markets liberalisation, capital flows, privatization combined with the contraction of the role of the state during the last decades led to a huge disparities in revenues on the national level as well as between countries," Mahmoud El-Khafif, a UNCTAD spokeman told Egyptian journalists gathered for the Tuesday launch of the report.
While the West sees economic crisis, developing economies like Egypt should prepare for a shortfall in foreign investment and export orders by focusing on local demand, UNCTAD said.
In practice, however, many poorer counties are doing exactly the opposite.
UNCTAD, typically concerned with global trade and investment, is now advising governments to adopt policies that support domestic demand, such as increasing public spending, imposing progressive taxes and investing in social and health facilities.
Egypt's post-Mubarak governments, however, seem to be following the same road the country has been on for 30 years, fiercely resisting policies many associate with social justice.
Instead of progressive taxes, President Morsi's government is proposing the application of a Value Added Tax and slashing subsidies. Both approaches were condemned by UNCTAD officials.
"The VAT increase puts pressure on the poor. It is a regressive tax and leads to a redistribution of the wealth in the wrong direction," El-Khafif said.
This view is broadly shared by Gouda Abdel-Khaleq, Egypt's minister of social solidarity during the transitional period, who says that cutting subsidies for oil products will eventually bring price hikes for many kinds of merchandise and hit consumer purchasing power.
He proposed, instead, a cut in subsidies for the higher-grade fuel used by luxury cars.
El-Khafif also criticised Egypt's economic policies during the transitional period, saying several opportunities had been missed by those in charge, which the country must now pay for.
"In such a time [of crisis] it is acceptable to impose temporary restrictions on capital flows --  the international community accepts it," he said.
"In March 2011, Egypt's international reserves lost $3.5 billion in one month, more than the amount Egypt was originally seeking from the IMF."
The country's endemic povery is also choking demand and causing businesses to falter, El-Khafif said.
"When 40 per cent of the Egyptian population lives under the poverty line they simply are not contributing to demand," he explained, pointing out the proportion of salaries to GDP in Egypt is a very low 25 per cent.
"Enhancing employment is the first objective of the Federal Reserve in the United States but doesn't figure at all in the objectives of the Central Bank of Egypt."
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