Ahmed Galal tells Ahram Online that changing mindsets and ways of thinking, through institutional and policy reform, can be just as effective in kickstarting economic growth as acquiring new finance Egyptian economist Ahmed Galal was appointed finance minister in July 2013 under the cabinet headed by Hazem El-Beblawi, after Mohamed Morsi's ouster. The World Bank veteran declined the post in previous governments but ended up accepting at a time when Egypt's economy was facing severe trouble, including an unexpected budget deficit. Galal, who holds a doctorate in economics from Boston University, later restored his occupation as managing director of the Economic Research Forum (ERF), a Cairo-based non-governmental research institution covering the Middle East, which he has headed since 2007. Ahram Online: Right now, what should the government do to improve economic performance? Ahmed Galal: The short answer is to activate the economy, restore macroeconomic balances and ensure a more equitable distribution of fortunes. Before I left the finance ministry, we published a mid-year review in which we identified three main problems facing Egypt: large macro imbalances, sluggish economic growth and high unemployment and poverty and rising inequality. Any reform agenda that does not deal with all three at the same time is not a very good agenda. And we moved on all three fronts. Over the coming few years, Egypt needs not only rapid economic growth, as in the past, but also growth that is shared evenly or decently across the entire population. We know that economic growth comes from two things: factor (capital and labor) accumulation and productivity improvements. Productivity is partly the product of using better technology, but fundamentally the outcome of a set of policies, institutions and incentives. Incentives to make people work hard, incentives for entrepreneurs to invest in productive activities, not to buy real estate and keep it sitting until selling it at a higher value.To ensure that Egypt moves on the growth agenda, major policy changes will be necessary. Moving to egalitarianism, equality of opportunity seems to me to be the most relevant concept. And this will require reforms to improve education, health and other infrastructures. In essence these reforms should aim at giving all Egyptians the same chance to participate in and benefit from economic growth. Motivating and empowering people to take part in economic activities serve society better than creating dependency on the state and living off handouts from government. But equalising opportunity will take time and it certainly does not contradict with the government adopting a more progressive tax system and more progressive public expenditures allocations. Obviously there will always be a group of people who will need to be protected anyway. For this group, we need a better social safety net. One last comment is in order. Reforms are carried out by politicians and if they do not have the incentives to adopt the right policies, nothing much will happen. This is why building inclusive political institutions makes the difference between successful and failing countries. How can Egypt modernise its economy given the lack of funds and financial resources? I do not believe that all we need are more resources. A lot of what I said before has to do with policies and institutional changes, which can be done even if additional resources are not available. We need to change our mindset and our way of thinking. We know countries that have a lot of resources, but they also suffer what is called a resource curse. So additional resources are part of the story, but we also need ideas for heaven's sake. I am arguing that you can get a lot more out of what you have, rather than banking on just getting more resources. I am not saying resources are not important, but we have lot of unused resources sitting on the ground. Many believe that the government would not have made it without Gulf aid. What do you think? It is not entirely true. The Gulf aid came after the first stimulus package was announced. With the Gulf money, we were able to put together a second stimulus package. To make the point clear, we certainly acknowledge and appreciate the support we got from the Gulf and it made our life easier. It gave us breathing space and allowed us to carry out some reforms that may have been difficult otherwise. However, we knew we cannot live on money from outside, so we prepared our projections for the budget of the following year without taking into account any additional resources. We were counting on what I call three dividends. One of them is the political dividend, which refers to the economic benefits from the confidence and credibility to be gained from the full implementation of the political roadmap. Second is the stimulus dividend: by allocating two thirds of the stimulus packages into public infrastructure, we knew that the fruits would be in the new fiscal year. The third is what I call the reform dividend. We knew that we needed to initiate a set of reforms that would also pay off down the road. In the area of public finance, we initiated reforms of value added tax, property tax and a new income tax. We also tried to do something about smuggling, customs and tax evasion. Other reforms were being carried out by different ministries. These reforms are expected to pay off later as well. Where to start from? For about two and half years since the January 2011 revolution, we were doing nothing but negotiating with the International Monetary Fund on a programme to improve our macro imbalances. We did not worry enough, either about activating the economy or about issues of distribution. I did not think that was the right formula for us. Our orientation in the government since July 2013 shifted to expansionary policies, with real resources so that we do not worsen the macro stance. We launched two stimulus packages to get the economy to operate more fully with little slack, to create jobs and get the private sector back on track. At the same time, we did some work on the social agenda. On macro balances, we had a budget deficit of 14 percent of GDP in June 2013. I announced in the fall of 2013 that Egypt would end the fiscal year 2013/14 with a budget deficit of 10 percent of GDP – very close to the figures lately announced. Of course, things happen with a time lag. You do not expect the result of what you do now to show up immediately. We knew that we were not going to see the results of the stimulus packages and other reforms in a short period of time, but that was still perfectly alright because we care about the country rather than our personal image. The government promotes the development corridor project (that would link areas in the Nile valley south of Cairo to Egypt's Red Sea port of Safaga) as a mega project that will help develop the economy and boost growth. How do you assess its potential? In the public debate, it seems that there are two views of development for Egypt: development by relying on mega projects and development by policy. I believe in the latter. This does not mean that I do not believe that important projects are not worth pursuing. It is just that they cannot be a substitute for doing what we need to do. We are not starting from scratch: we have industries, agriculture and we also have skilled people. We want to make sure that we are using all of this efficiently. A good megaproject can be beneficial, but it is not a substitute and I think we cannot think about development as development by project, whether it's the Suez Canal or Toshka, etc. I am not against the project, but I am against the idea that this is how to develop. Mentioning Toshka, how can we prevent repeating the fate of Toshka's megaproject, where billions of pounds were lost in other megaprojects? I think any big project needs discussion. We need to open a discussion in society about what the project is, how much it will cost, what are the returns, what are the risks and how are we avoiding them. I think that discussion is what we need. I also think we need to move progressively on this project – not in one shot – to minimise the risks Energy scarcity remains a major barrier to industrial, and thus economic, growth. How can Egypt address this problem? I fully agree. Energy is critical for making progress and we need to deal with current shortages as well as plan ahead for the future. We need to change the mix of our consumption of energy products, and certainly move ahead with removal of energy subsidies. And the government I was part of had a strategy to that effect. Some reforms were initiated, including allocating resources to increase the use of natural gas in households, the initiation of "smart cards" to reduce leakage and possibly rationing later on, as well as paying part of the dues to foreign petroleum companies to encourage them to invest in new discoveries. A new unit was also established at the finance ministry under the heading of "Economic Justice Unit" to deal with targeting poor households with the removal of subsidy reforms. As a follow up to the previous agenda, the current government took the decision to phase out petroleum subsidies, which is an important step forward. While this move will contribute to higher inflation and hurt some groups in society (mostly the middle class), it was unavoidable if we wanted to deal with the budget deficit and allocate more resources to health and education for the benefits of the poor and the middle class. But the harbinger of the electricity problem manifested itself in 2008, with the first frequent power cuts in summer. Why has this problem not been yet solved? I would say there was no rational investment planning of energy needs. And given that building a power plant takes a few years, planning is critical. Historically, Egypt was relying in the 1990s until a few years ago on BOT (build, operate and transfer) as a way of engaging the private sector in generating power. BOT can relax the resource constraint by getting the private sector to put in the money instead of the government. The use of BOT was later not used fully, but no alternative investment plans were put into effect. Hence we have the shortage now which is likely to stay with us for a while. Going forward, planning is key. So is the creation of an independent regulatory body to oversee the investment and pricing of energy. http://english.ahram.org.eg/News/106875.aspx
