Opinion: El-Sisi's Economic Challenge - Expand the Middle Class

I have recently returned from Cairo with the feeling that Egyptians may need to be reminded of Albert Einstein’s definition of insanity as “doing the same thing over and over again and expecting different results.” Following the same economic policies that contributed to the fall of the Mubarak regime over again would probably lead to discontent and political instability--maybe even another revolution with all the human and economic costs that this entails. It is important that the El-Sisi administration adopt a new economic strategy that gives Egyptians hope for a better future, and avoids repeating past mistakes.

A recent Pew Center survey shows that 82 percent of Egyptians believe that “improving the economy is very important for Egypt’s future,” which is more than double those who say the same thing about religious freedom, the right to peaceful protest, or civilian control of the military. This does not necessarily mean that those other issues are not important for Egyptians. The same survey shows that a majority of Egyptians continue to believe that democracy is the best form of government. However, this result does mean that fixing the economy is Egyptians’ top short-term priority.

It is legitimate to ask: what would be wrong with a return to Mubarak era economic policies? After all, during the ten year period leading to the January 25, 2011 revolution, the Egyptian economy was doing well. GDP was growing at 5-7 percent a year while the current account was under control and foreign reserves were high. This strong performance continued even during the global financial crisis. But this growth was far from inclusive. Mubarak-era economic policies increased the gulf between a struggling middle class and the elite.

Recent research [1] has identified 469 firms that were directly or indirectly owned by businessmen close to the Mubarak regime. Those politically-connected firms have been able to take control of a large part of Egypt’s formal private sector. Before the 2011 revolution, their revenues represented about 55 percent of total private sector revenue while their employment represented only 11 percent of private sector employment.

Politically-connected firms grew faster than other firms and became much larger (their average revenue was four times higher than the sector average) because they were able to capture government protection and subsidies, many of them in energy intensive sectors. This allowed them to increase their market shares relative to competitors and to leverage their equity with a dominant access to the capital market. Growth of those politically-connected firms was at the expense of small and medium enterprises, and hence at the expense of the middle class.