Subsidy reform and social safety nets are 2 sides of same coin: WB Egypt Director

Bassem Sabry, Wednesday 6 Nov 2013

Egyptian writer and commentator Bassem Sabry talks to Hartwig Schafer, World Bank Director for Djibouti, Egypt and Yemen about the economic challenges facing Cairo

petrol station
A man fills the tank of a car at a petrol station in downtown Cairo May 29, 2013. (Photo: Reuters)

Egypt’s deputy prime minister is visiting the United States, where he met with World Bank officials.

Bassem Sabry recently sat down for a discussion with Hartwig Schafer, the World Bank’s country director for Egypt, Djibouti and Yemen.


Sabry: What do you think are the questions that are missing from the discussion on Egypt right now?

Schafer: I think the question is, what is the priority right now for Egypt? If we go back two and a half years, the revolution was basically the result of growing exclusion and inequality. And that is still, in my view, the top priority. When you look at GDP growing very steadily, then you compare that to the perception of the people and how they felt about their own wellbeing and livelihood, that wedge overtime - between what the macroeconomic numbers told us and how people perceived how well off they were - that wedge was widening. And I think that was a typical recipe for revolution. When people feel they are much worse off than what the economy tells you, then you have a case of stark exclusion and lack of participation in the economic sphere. What you also had was a lack of participation in the political sphere. This is still the case between different income groups, with regards to geographic distribution in Egypt, and between men and women. So, there are all of these wedges that are widening. What I see as a top priority is the bridging of these gaps, to make the wedges go away. This is what I've put my effort into with my team over the last year, through labour intensive projects that have a strong focus on Upper Egypt. They are what we call “employment opportunities,” for 6 months, they’re not lifetime jobs.

Sabry: How does that work?

Schafer: Well, this is the first project we took to the board after the 2011 revolution, costing 200 million dollars. What “labour intensive work” means is basically work by the community itself like cleaning canals, rehabilitating roads and fixing communal infrastructure. There are two tracks in there: You use a contractor to clear the canal in a particular district, and that contractor hires workers. You determine the wage, so that it is something that wouldn’t attract people who are gainfully employed to give up their jobs, but would bring in those who are not employed, particularly young people and women. The other track is through NGOs, and we have an enormous number of NGOs in basic service delivery and provision. The NGO can do the same thing, and you [Sabry: i.e. the financier of the project] pay for it. We already have 200 million dollars for that, and we’re adding 70 million dollars from the European Union to the sum.

Sabry: When will the 70 million be finalised?

Schafer: Anytime now, in October or November. [Sabry: Follow up: final approval expected this November].

Sabry: Let me ask another basic question. This growing inequality, to what would you ascribe it? Some claim the main culprit was corruption; others argue it was a lack of progressive taxation or minimal governmental focus on Upper Egypt and rural areas. What do you think?

Schafer: The geographic inequality is clearly on the agenda of the government. You can basically direct your public projects to particular regions. Look, I’m from Germany, I grew up close to the East German border, close to where the iron curtain basically was. What the German government did was that it gave subsidies to industries to set up shop along that iron curtain. So we basically ended up in a relatively rural area with a lot of industry to create employment for the people, and that kind of kept the economy going. We can do the same thing. When you have a project, whether for water sanitation or to provide incentives to small and medium enterprises, you can direct it to areas such as the Delta or the outskirts of Cairo. So that’s one thing.

The other thing is that we conducted a study on income inequality, and we also looked at the inequality in opportunities. What that means, is that you are more likely to get a job in the formal sector if your parents are well off and connected. And the formal sector in Egypt after the revolution is still the public sector. If your parents are in the civil service, your chances of being in the civil service are much higher than someone who is equally qualified but doesn’t have the connections. 

Additionally, anything we are doing has a very strong gender dimension and a heavy emphasis on youth. We have another project that is going extremely well. It’s a project to support small and micro enterprises, because the formal banking sector sees such segments as too risky to become clientele. So, through the Social Fund, we’re providing up and coming small local enterprises with access to credit, which could be as much as 40,000 to 60,000 dollars through a bank. We are also working with microfinance NGOs who give loans from 1000 to 10000 dollars. I’ve seen a couple of those in old Cairo, in areas such as Khan El-Khalili. There was this one woman who used credit to buy three or four looms and raw material to make carpets. She needed the credit as start up capital, and she is now employing five or six people from the neighbourhood. In a year’s time, she plans to employ twelve people, and she has repaid the loan. She also buys looms and gives them to families, so that women who can’t leave their homes can work from there. 

There’s another guy who is on the other side of Khan El-Khalili. He makes the colourful tents [Sabry: that are used in events, the ferasha]. He has an MBA and has done his military service. He took over the business from his father. While the father may have worked fine by himself, this guy has an education and said, “look, I want to grow the business.” The bank would never give him a loan because he doesn’t have collateral, but through this program he has access to 10,000 dollars. Those are some of the things that I am personally proud of when I see what we are doing. I think that since the revolution this window has opened for the bank to start looking into areas that have a direct impact on poverty, that directly reach the segment of the population that is less fortunate.

Sabry: What about progressive taxation? Do you think it is a necessity as some argue, or would taking other measures be of greater value?

Schafer: Progressive taxation works in an ideal world, but right now you have a very regressive subsidy system. If you look at fuel subsidies, which are a massive percentage of the budget, only 8% are going to the poor. The rest are benefitting the better-off. You could have a much larger impact if you took those subsidies and used them to reach the poor through conditional or unconditional cash transfers. Egypt already has a really good data system for such a purpose. For example, you have cards for the baladi bread. You start out with a database as such, and then you use other databases and juxtapose them. For example, if you have a card for bread but you also have a car, then you’re probably not poor. You look at tax records; you look at electricity bills. If someone has an electricity bill that is enormously high, then it’s safe to assume he’s not poor. What you do is narrow it down, and get a fairly good estimate of who are the real poor in Egypt, then use smart cards and other means of transferring cash directly to them. We are talking about small amounts of money. In some cases it could be 40 dollars a year, in others 20 dollars a month; a lifeline rather than an incentive not to work. This is an area in which we have been very much engaged in discussion with the government, and have broad experience from Brazil, Mexico, Malaysia and Indonesia.

Sabry: Which country or model do you think Egypt would benefit the most from studying?

Schafer: I think the Opportunidades programme from Mexico, and the Bolsa Familia from Brazil. I think that if Egypt were to start today, it would be in a better position than when Brazil and Mexico started their programmes. 

Sabry: In that case, why hasn’t Egypt started?

Schafer: Talks are ongoing; I think a decision has been made, but there is a logistical issue of identifying the poor, and policy decisions to consider. This is something that I hope over the next couple of months we can work out. We are prepared to fund the initial phase. Subsidy reform and social safety nets are two sides of the same coin. So you have to do the two things together, and you need to have a very good information campaign. It is something where you need to communicate, communicate and communicate, to make sure everyone understands what this is about. If you move to targeted subsidies, you could have budget savings of anywhere between 16% or 18%.

Sabry: Are there any conditions to the Bank’s participation, especially given the political situation of Egypt right now and the new transition? Or are you entirely focused on technical issues?

Schafer: The technical issues, soundness of the policies, and the actual safety net programme. Questions like, what is the threshold of poverty? These are the kinds of issues we focus on.

Sabry: But aren’t you concerned that the current interim government might agree with the Bank on wide ranging programmes that the Bank would then commit to finance, only for a new government to come into power and roll back such reforms?

Schafer: I think this is a reform that will have broad base support. It would be very hard to argue against trying to target and reach the poor. If it is a government that is running on a platform of trying to reduce poverty, then I would think that the social safety net programme would appeal. And, we have been in dialogue with successive Egyptian cabinets from 2011, as well as the new cabinet once it was nominated in July. We have brought senior directors from Washington who explained where we engaged, where we can be helpful, and we listened to the government and what they want to do. I think at this stage what was most valuable is that we were able to very quickly mobilise global expertise and practitioners from other countries who had gone through the same kind of transition.

Sabry: What is the immediate reform that you would enact if you were in a decision-making position in Egypt right now?

Schafer: One of the reforms I would embark on immediately would be to try and bring together all the various non-targeted universal subsidy programmes and try to make them targeted. And you can do that relatively quickly, starting with the cash transfer programme. This has already been piloted in parts of the country. 

Sabry: There is growing debate on water scarcity in Egypt, with some reports suggesting the per capita share has dropped below 700 cubic metres. Do you have any thoughts on how to approach this?

Schafer: When it comes to water, I always mention agriculture and water together. If I had to do something, a medium term reform agenda, in my view it would be in the agriculture and water sector. Agriculture, water, land. Egypt is the biggest importer of wheat in the world, yet in terms of agricultural productivity, it is very low. The challenge here is in the old land, to increase the productivity and the efficiency of water use, and make new land available for agriculture. This is one area that I have put my team to work on, because the bank has not been very active in the agricultural sector in the past. What you need, is to consider the entire sector. It has a huge impact on poverty reduction. It has a huge impact on food security, and an impact on employment. 

Also, water scarcity obviously has a lot to do with efficiency and the effectiveness of irrigation. It is a technical issue that is doable.

Sabry: Are you worried about the Ethiopian dam and its potential contribution to water scarcity in Egypt?

Schafer: This is a highly sensitive topic. We have to recognise that the Ethiopian dam could actually be something that would benefit Ethiopia, Egypt and Sudan in terms of the power it would generate, because power generation is one thing Egypt needs to worry about. I hope that there will be an agreement between the three countries involved, especially on the filling phase of the dam. The dam is in a very narrow valley in high land, and thus the filling could be relatively fast, because there would be very low evaporation. The critical phase is during the five to six years when the filling takes place. In this phase, the three countries will have to reach an agreement that links the filling and water flow regulation. What our experts say, is that there could be such a solution that does not impact the downstream uses of water. You can model the filling. Once this is reached, then the electricity that would come out of the dam would benefit the three countries.

Another factor in the agricultural sector is land policy. Something that could be done fairly quickly is ensuring access to land. We currently have a project on water sanitation. The project needs a little piece of land to put a pumping station in it. But, it has been impossible to get this land for the project, and it benefits the community. When it comes to land policy, to titling and sales and so on, the process has become so cumbersome and bureaucratic and it is a real obstacle. I hear this a lot from the private sector. You need clear and transparent regulation and laws, which are currently absent. You have too many institutions that are involved in the process, which needs to be fixed. We have a project underway now to expand the one stop shop, and to also promote e-government, reducing opportunities for graft and corruption. 

Sabry: What is the most pressing infrastructural issue and need for Egypt right now?

Schafer: I think transport and logistics. This involves the ports, the airports and urban transport. In part, this needs to be addressed, keeping in mind that there is a lot of gridlock because gasoline is really cheap. In Thailand, for example, the river is a major transport artery. In Cairo, the Nile isn’t. The railway network in Egypt is probably amongst the most developed in the world, but they are not making any meaningful revenue out of cargo. It’s almost all passengers. Normally, railways could make losses on passengers but profits on cargo. 

Sabry: Any last words?

Schafer: In general, what is important is that the Bank is ready to support Egypt across a whole range of issues that are currently challenging for the country, including education, infrastructure, energy - including renewable energy - water and sanitation. It is amazing how resilient the Egyptian economy has been, and that has been due to the informal sector. We should not say that the informal sector is bad, but we should instead help it gravitate towards the formal sector, so that it can have access to credit and so forth.

Hartwig Schafer is the World Bank’s country director for Djibouti, Egypt, and Yemen. He is based in Cairo. He tweets at @HartwigSchafer

Bassem Sabry is an Egyptian political writer and commentator. He tweets at @Bassem_Sabry

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