Wrong path to economic growth

Gamal Abdel-Gawad , Saturday 18 Dec 2010

While the Egypt's economy is growing, its growth is based on the wrong formula

Investment in Egypt fell as a result of the world financial crisis. The problem with growth levels over the past few years is that they relied heavily on capital; when that receded, so did the rate of growth. While Egypt’s economy is still growing at an acceptable rate, and which is predicted to rise, conditions could have been better if they did not rely so heavily on large capital to achieve growth.

Capital is responsible for 70 per cent of growth in Egypt’s economy, while labour only accounts for 30 per cent. This means that for every LE100 added to Gross Domestic Product (GDP), LE70 comes from investment to create economic institutions and supplying them with equipment and technology, while labour’s share is only LE30. This is an unacceptable ratio for a country like Egypt where capital is scarce and labour abundant.

Heavy dependence on capital in achieving growth raises the cost of creating new jobs and, accordingly, does not help in quickly reducing soaring unemployment rates. The cost of creating a new job in Egypt is close to LE500,000, which is four times as much as in Southeast Asian countries such as Vietnam and Thailand.

The rise in needed investment to create a new work opportunity means that our industries primarily rely on expensive modern technology capable of doing the job of workers. This formula between capital and labour may be appropriate in countries where labour is scarce, such as in developed countries or Gulf States, but it is entirely inappropriate for Egypt.

The small share of labour in economic growth is a result of a drop in its productivity caused by education, training, and work ethics and values. It is also the outcome of the laws regulating the labour market in Egypt. The decline in the quality of Egyptian labour is caused by a serious problem in the education system, and deterioration in work ethics and values. Also the relationship between workers and labour laws, which position employees and employers in opposition to each other with each side trying to take advantage of the other in a variety of situations and to various degrees.

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