In the second of two articles, Samir Radwan* looks at what can be done to resolve Egypt's recession and rising unemployment problems The Nazif government has realised that partial solutions may provide palliatives in the short-run, but for the long-term, there is no alternative to the introduction of unconventional policies and innovative institutions within a coherent strategy capable of sustaining growth and creating employment. It is time for the objective of employment creation to be treated as an indigenous component of socioeconomic policy. Other crucial questions include: what should such a recovery and employment strategy look like; and how different should it be from traditional policies? What are the elements of what we have called an "employment-intensive growth strategy", which is based on sustained growth that maximises demand for labour. In the long term, we must think of Egypt as a modern industrial country. But for the immediate future, focus may be on three major lines of action: expansionary macroeconomic policy; enhancing the productivity of the labour force; and reform of the civil service. ACHIEVING SUSTAINED GROWTH THROUGH INCREASED INVESTMENT: To accommodate growth in the labour force and reduce current unemployment levels, the economy has to grow at six per cent annually, which requires an investment rate of about 25 per cent compared to the present level of 16.4 per cent. For the economy to grow at such levels, there is a need for an expansionary macroeconomic policy. Contrary to contractionary policies that have been adopted with the aim of fighting inflation, employment creation should be given precedence, even if it comes at the cost of some inflationary pressure. Increasing saving levels, which currently stand at 14.5 per cent of GDP, as well as efficiency and competition in domestic economies are challenges that face employment creation. Creating an enabling environment for investment is also imperative to raise investment levels from the current rate of 16.4 per cent. An integral part of the strategy to raise investment levels from their current levels is creating an incentives framework that encourages sectors with high potential for labour absorption. Industry and tourism represent the most promising sectors for labour absorption. Incentives should be directed to raise the competitiveness of these industries. Such incentives could include lowering tariff rates on imports, reduction or exemption from taxes or providing subsidies. In addition, with the demand for housing on the rise, housing construction represents a very promising channel for labour absorption. Migration of Egyptian workers could also help ease pressure on the labour market by reducing unemployment and raising real wages. In the 1980s, migration accounted for 10-15 per cent of the Egyptian labour force. At present, five per cent of the Egyptian labour force works abroad. Expatriate remittances are a major source of foreign exchange receipts in Egypt. Accordingly, the government may focus its efforts on including the liberalisation of labour flows on its negotiating agenda, whether with Arab countries or other non-Arab partners. Under the EC-Egypt Association Agreement, the implementation of a new migration policy would facilitate the movement of labour from one side of the Mediterranean to the other. The current negotiations within the Greater Arab Free Trade Area framework to liberalise services should also aim to liberalise labour flows between Arab countries, taking into account that labour movements have been the most successful form of cooperation between the Arab states. THE "SKILLING" OF THE LABOUR FORCE: A primary task in upgrading the skill of the labour force starts with a radical reform of the educational system. However, this requires a full-fledged, long-term strategy. Here, focus will be on training as this lends itself to immediate action. Investment in training and improving the quality of the educational system are key measures that would help enhance the skill level of Egyptian workers and ultimately help boost its GDP growth rates. Training is key to improving productivity and social well-being. Narrowing the gap between labour supply and market demand necessitates a concerted effort to reform training institutions. Most of Egypt's training institutions are supply-driven and inadequately funded; they also have outdated and traditional curricula. The majority of training institutions are public with only about one per cent of the total private. The proliferation of public training institutions (1,240 vocational training centres) has led to duplication and overlap in their mandates and activities. The institutional expression of reform may be in the creation of a National Training Fund. Basically, this training fund will pool the necessary financial resources needed to sub-contract training institutions that meet certain quality standards. Developed countries such as France and countries like Brazil, Cote d'Ivoire, Cyprus, India and Singapore have created such funds for training. Experience in countries that have adopted such funds indicates that training funds work best when they enjoy managerial and financial autonomy. Funds that are run in a business-like manner are more expedient and have greater chances of success than bureaucratic controlled types. A tripartite board with a majority of private sector representatives should manage the Fund. Among the functions that the Fund could perform: (1) identifying skill shortages in key bottleneck areas; (2) supporting programmes in entrepreneurship, self-employment initiatives and training unemployed youth; (3) upgrading skills of workers and employees through expanded in- company training programmes supported by levy/ grant systems, and supporting programmes intended to retrain workers displaced due to structural adjustment programmes; (4) identifying and implementing programmes that aim at reforming current training activities; (5) mobilising resources from donors and streamlining their use; (6) allocating funds on the basis of competitive bidding to private training institutions; (7) promoting the transfer of successful training experiences from other countries and regions. The fund should start as a centralised entity, and in five years time decentralise regionally. In sectoral coverage, the fund should limit itself to the industrial, construction, transport, and tourism sectors. Extending the fund to include other service sectors could be done over the medium- term. Sectors with specific needs (e.g. health and agriculture) should be excluded. The fund should not limit itself to meeting vocational and technician training needs, but extend these to white collar and managerial training as well. Concerning the financing of the fund, three sources should be used: one per cent payroll tax, coupled with a refund or a grant to enterprises conducting their own training. Currently, Labour Law 12/2003 includes a provision that firms with 10-plus workers should contribute one per cent of their profits to a National Fund for Vocational Training. The payroll tax could be combined with outside bilateral and multilateral funds as well as direct government contributions amounting to LE100 million annually. REFORMING THE CIVIL SERVICE: Despite the initiation of a civil service reform programme in the early 1990s, Egypt has one of the highest levels of government employment among developing countries. Civil service employment has even expanded over the 1990s to reach more than six million public sector workers. The problem with public sector employment is that it puts enormous strain on the state budget and the resulting bureaucratic control increases transaction costs, affecting investment and exports. At the same time, public sector employment suffers a multitude of problems including low productivity; overstaffing; low salaries and wages; bureaucratic control and an unsustainable wage bill. The low level of salaries and wages in the public sector has provided grounds for corruption, especially when real wage levels are declining. This inadequate incentive structure ultimately impacts public service efficiency negatively. Civil service reform is imperative if the Egyptian economy is to attract investment and allow the private sector to grow at rates sufficient to create employment. A World Bank study estimated that bureaucracy and administrative corruption raises the cost of doing business in Egypt by about 15 per cent. The imperatives of fiscal discipline accords civil service reform as one of the top reform priority areas. However, the political economy of civil service reform remains a major barricade to any reform efforts, as the lessons of the 1990s have proven. The security that public sector employment provides still reinforces the lingering effect of "Employment Guarantee Schemes". The 2.7 million applicants for 170,000 recently announced jobs is evidence that people still have high expectations of securing a public sector job with low working hours. In addition, nepotism and favouritism in public sector recruitment and promotion continues to stifle reform. FOCUSSING ON DOWNSIZING ALONE WILL NOT SOLVE THE PROBLEM: Given the problem's political economy nature, focus on downsizing alone has not been successful. Lessons learned from World Bank civil service reform programmes are that achieving downsizing in the public sector on its own has not achieved permanent reductions in the civil service size, and did not overcome capacity constraints in economic management and service delivery. There is no universal solution or model of public sector reform. Nevertheless, an approach is needed that combines capacity building and reform of the incentive structure. The objective should be to gradually reduce the current staffing size in administration while improving the average wage and salary payment to productive employees. The timetable should be set as a 10-year target, with transparent policies and programmes discussed and publicly debated. A first step is to reform the system of recruitment. The Civil Service Examination in India, which is a tough screening mechanism to ensure high quality of public employees, could be of relevance to Egypt. Hong Kong and Singapore also carry out aggressive recruitment at the entry level and entice top recruits for training. Any reform scenario should aim to raise productivity of the civil service by using a monitoring and evaluation (M&E) system, and developing standards of civil service performance. A system of checks and balances on hiring should be used to combat favouritism and nepotism. A well-defined authority between the budgeting and personnel departments could help limit arbitrary action. Successful Asian reformers emphasise the importance of recruiting talented people and improving their skills through constant training. In addition, merit-based promotion and compensation will allow for young talent to move up the career ladder. With regard to improvements in public service delivery, several developing countries have adopted user surveys that collect feedback about the quality and efficiency of services. These user surveys can be initiated from autonomous bodies and by involving community members. Specifically, over the next few years the structure of government employment will also have to improve in favour of local government employment in the social sectors, and at the expense of administrative occupations in both central and local government. Improved access to elementary education in remote rural areas and restructuring health expenditure in favour of preventive care and basic health, should mean an increase in the number of jobs for teachers, paramedics and social workers serving poor communities in rural and urban Egypt. Downsizing is an issue that needs to be carefully adopted, given the bloated bureaucracy and the large number of labour redundancies. At the same time, cushioning the effect of downsizing should take place in such a way as to avoid social upheaval via early retirement programmes and re-training. International aid and capacity building programmes should be targeted towards this goal. Often there has been a tendency to create new government agencies and units at the expense of reforming existing ones. This strategy, often driven by the need to create jobs, is considered a waste of resources at the same time. The focus should be to reform existing entities to make them more efficient and responsive to the public; otherwise, they should be dissolved. Delineation between functions of policy formulation and policy implementation will allow for a business-like climate that is free from bureaucratic constraint. A start has taken place with the new government. We must seize the moment and build on this new momentum. * The writer is the managing director, Economic Research Forum for the Arab Countries, Iran and Turkey, and a member of the Board of Directors of the General Authority for Investment.
