In the first of two articles, Samir Radwan* provides an overview of Egypt's unemployment problem. Next week, he looks at what can be done to resolve it When Bill Clinton was running for president against George Bush Senior, he came up with the slogan "It's the economy, stupid!" in reference to the missing issue in his opponent's campaign: the health of the US economy. By focussing on the economy, Clinton won his way to the White House, and eight years of unprecedented growth. Likewise, this is a call for us in Egypt to put employment at the centre of the agenda for reform. For more than two decades, the focus has been on stabilisation; i.e. achieving internal (government budget) and external (balance of payments) balance, and controlling inflation. Egypt won high marks from international financial institutions for this performance. But this was achieved at the cost of slow structural change and rising unemployment. The economy was not transformed; exports got stuck at the eternal $5 billion mark (while imports soared to $15 billion); growth was slow (slightly above that of the population); and unemployment went into double digits. It is against this background that we must review the recent, and daring, economic policy changes in customs, taxes, investment, industry and trade. The success of these policies will depend on three factors: consistency through coordination among different actors; sustainability through a period of at least ten years; and enthroning employment as the ultimate goal of economic policy. This is, therefore, a call to shift our thinking from unemployment as a problem to employment as a potential. This is not an exercise in stylistic gymnastics, but a fundamental difference in approach, with significant difference in the policy agenda. If we talk of "the unemployment problem", our mind set will be geared towards solving this problem (usually through partial remedies). But if our focus is on how to create jobs, then our attention will be on achieving a rate of growth high enough to absorb the increase in the labour force, and robust enough to absorb them in meaningful (i.e. productive) jobs. What we are proposing here is an employment intensive growth strategy, instead of the piecemeal approach that has dominated our thinking so far. To put such a strategy in perspective, we shall first describe the magnitude of the problem at hand, and then provide the broad lines of a strategy for the future. Five major characteristics of the problem in Egypt can be distinguished, and are explained in further detail below. LABOUR FORCE GROWTH HAS OUTSTRIPPED THE DEMAND FOR LABOUR: The combination of an expanding labour supply and incomplete structural change on the demand side has produced poor labour market outcomes over the past decade. The main problem with the labour market is that labour force growth has outstripped the demand for labour. Based on official statistics, the unemployment rate increased from eight per cent in 1990 to 11 per cent in 1995, and settled at about 9.9 per cent in 2002. Between 1988-98, the Egyptian labour force experienced an annual average increase of 523,000 workers. The labour force is forecasted to grow at 2.6 per cent for 2001-2010, which means that the economy should generate about 638,000 new jobs every year, a number that exceeds the annual average of 435,000 attained over the last decade. Taking into account the output of the educational system, as well as dropouts who join the labour market each year, the labour supply reaches an estimate of 896,000 persons. YOUTH UNEMPLOYMENT AS A TIME BOMB: Unemployment is essentially a youth problem. Total unemployment for the 15-29 age bracket has increased from 82 per cent in 1988 to 84 per cent in 1998, the majority being first time job-seekers. At the same time, the average duration of unemployment tends to be highest among youth, reaching 37, 64, and 67 months for the age groups 20-25, 25-30, 30-40, respectively. Unemployment tends to be highest among those with intermediate education (33 per cent are unemployed), followed by those with above intermediate education (19 per cent) and university graduates (12 per cent). Given this situation, young people seek to emigrate or join the ranks of the low-productivity informal sector. Youth unemployment is essentially a time bomb. The negative economic and social repercussions of such a situation cannot be overemphasised. Reducing youth unemployment needs to be at the heart of any strategy to reduce unemployment. CIVIL SERVICE AND THE INFORMAL SECTOR CONTINUE TO BE A MAJOR SOURCE OF EMPLOYMENT: Although government policy involves creating jobs through the private sector, the expansion of the civil service has continued to be one of the primary mechanisms of labour absorption. Government employment went from 22.1 per cent in 1990 to 27.7 per cent in 2001, compared with an average of 11 per cent worldwide. As a result, one finds that expenditure on wages and salaries alone constituted 24 per cent of public expenditure in 2003/04. At the same time, employment in state-owned enterprises continued to contract (dropping from 9.7 per cent of total employment in 1990 to 5.9 per cent in 2001). Sector by sector, agriculture's contribution to employment growth is declining -- by -0.4 per cent from 1988- 1998. The private sector, at 65.1 per cent, employed the greatest number of people in 2001. However, most of the increase in private sector employment has been in the informal sector. The growth of the informal private sector was huge in the 1990s, with the number of workers doubling in just one decade. Actually, 55 per cent of non- agriculture employment in Egypt is in the informal sector. Wholesale and retail activities absorbed about 41 per cent of informal employment, followed by building and construction, then manufacturing and transport. The informal sector continues to be the main refuge for low-productivity, low-income employment, especially for women. The bulk of demand (66 per cent) is for unskilled labour, while only 17 per cent of the demand is for graduates of higher education. The highest growth in demand for labour between 2001 and 2005 is expected to be in the manufacturing sector (i.e. industry and petroleum) at 46.5 per cent. Also, demand for tourism labour stands at 19.4 per cent over the same period. Tourism is probably the sector attracting the most FDI with significant potential to create new jobs because of the existence of a competitive labour force and the necessary institutional and physical infrastructure. LOW LABOUR PRODUCTIVITY IS LIMITING GROWTH PROSPECTS: Another problem that is limiting growth prospects of the Egyptian economy is low labour productivity. Total factor productivity was -0.5 per cent per labourer in the 1980s, with the change from the 1980s to the 1990s standing at 1.1 per cent. In a comparative context, Egypt has one of the lowest levels of productivity per labour in comparison with other developing countries. Taking productivity levels into account, it also has a very high unit labour cost. Despite a government objective to increase productivity, investment in the quality of education and training still falls short of the target. This has much to do with both the fact that a large chunk of public expenditure goes to public sector wages, as well as the tendency for educational spending to be biased towards quantity at the expense of quality. When looking at productivity and unit labour costs in a comparative context, it is clear that the mismatch between labour supply and market demand is negatively affecting employment growth. The divorce between the outcomes of educational/training systems and labour market demand tends to be one of the most serious problems affecting unemployment growth. Currently, the educational system often produces graduates who lack the necessary skills to compete in the labour market. Structural changes tend to create the demand for new types of knowledge, skill, and expertise that are lacking in the existing labour force. Although almost five per cent of GDP goes to education, educational spending per student falls short of other countries such as Malaysia and Turkey. It is also biased towards quantity at the expense of quality. Actually, a large share of public expenditure goes to wages and salaries. The share of wages to current expenditure was 86.1 per cent in primary and secondary education, and 75 per cent in higher education, compared to the international norm of 66 per cent. The educational system also suffers from administrative overstaffing, with the share of teaching to non-teaching staff measuring in at 1:3 in 2001. The inadequate educational incentive system has resulted in the proliferation of the parallel system of private tuition in public schools. The lack of a system for monitoring and performance-based evaluation also gives little incentive for teachers to improve on service delivery. Next week, we will take a closer look at the possibility of implementing a coherent economic strategy that can reverse these trends. * The writer is the managing director of the Economic Research Forum for the Arab Countries, Iran and Turkey, and a member of the Board of Directors of the General Authority for Investment.
