Despite bleak predictions for the global economy, Heba Handoussa* sees Egypt as being uniquely situated to exploit the downturn Keynesian expenditure for job creation was the key economic innovation in response to the Great Depression of the 1930s. Fiscal measures such as tax cuts are unlikely to work in Egypt or in rich countries today. The ideal recipe is government direct expenditure on investments -- especially in infrastructure -- to compensate for shrinking private investment and to compensate for job losses. Public expenditure to boost employment and maintain growth is by no means digging holes and filling them, and Egypt's absorptive capacity is enormous for extending roads, bridges, electricity grids and waterworks and sewage networks. For Egypt, providing much-needed access to basic infrastructure support for small and medium enterprises (SMEs) can potentially create many infrastructure-related jobs, of the sustainable type. For every job that can be created in infrastructure, one can conceive of up to 10 in the private SMEs for the same amount of government expenditure. Egypt is uniquely positioned to exploit the global downturn for at least two reasons. First, Egypt is one of the least integrated emerging markets in terms of its level of commodity exports of goods to GDP. And second, it also has a very low reliance on borrowing from abroad. Government rescue measures are neither needed to prop up the banks nor to salvage collapsing firms. The losers are the exporters of manufactured goods and the tourism sector. However on the positive side, the enormous reduction in world commodity prices can provide a real boost to the ongoing growth and investment momentum experienced by Egypt in the last two years. In 2008, Egypt's exposure to world prices was the third highest among emerging economies with a trade deficit of $23.4 billion. China has increased subsidies to exporters and has reduced interest rates to enhance investment and we should follow suit additionally. We should promote our domestic market by raising Egypt's capacity to supply more domestic demand with high quality goods that compete with imported products. It can be predicted that Egypt's domestic market will be targeted by big exporters in the region and worldwide. Those could damage or even kill local industry by engaging in dumping at below cost. It is also time to move very fast on pursuing reforms in the regulatory framework for business. For the third year running, Egypt is one of the top 10 reformers according to the World Bank's Doing Business Report, and yet, Egypt still ranks 114th in the international league. In the real economy we are not yet seeing the effects of the recession. If we preemptively simplify laws and procedures, it is a signal to investors to re-route their investments towards us. So if we manage this crisis right, we could come out as winners rather than losers. The expected decline in food prices is a plus for Egypt. Consider that Egypt is the second largest cereal importer in the world. As prices ease, this will be very good news for the government because it will mean huge savings for the budget, which could be directed to welfare payments or Keynesian types of injections. These moves should be bold and taken advantage of immediately. The time is ripe in 2009 for Egypt's consumer to be king. We are not out to promote consumerism per se, but rather to ensure that consumers receive basic goods and services at a quality and price that compete with the best of imports. There is a very strong case for reforming our wholesaler trading system to overcome enormous market failure due to monopolies, all the way from food to construction materials. In terms of employment, the crisis is likely to transform the SME sector into a refuge for those who lose jobs. SMEs cater more to local consumers, so they are more protected from the recession and can prove more resilient if domestic demand remains strong. We should move immediately to ensure that SMEs have access to credit and all of the non- financial services -- including information and communications technology -- that help enhance productivity. A carefully planned programme can help provide a package of incentives and support for fresh graduates to be hired by SMEs. The package could include the government shouldering social security payments for each newly hired employee, plus access to credit and extension services to the employer. In turn, this will create a virtuous cycle whereby the job training and improved productivity will serve Egypt's consumer as well as export markets in the longer term. One should also not lose sight of the longer-term challenges of migration and prospects of Egyptian workers in the Gulf. There may be dramatic changes in the demand for white and blue collar workers. What are the solutions? One has to take a longer term view to make youth more flexible to changing work opportunities through proper vocational training and education which is relevant to the local and Arab markets. And this involves revising the education curriculum and to reverse the attitude whereby vocational training has become a parking lot for so-called second rate students. In the financial sector, what is alarming is that the message seems to be to increase regulation because of what is happening in the US, which is exactly the wrong thing to do in Egypt. Egypt's banks have excess liquidity. The ratio of credits to deposits in the Egyptian banking system is only 55 per cent as compared to an international norm of 80 per cent. So it is not that they are safe: they are too safe and unwilling to assume sufficient responsibility, even though we have just started to make a dent in the market for credit to SMEs and to house purchasers. The government must be careful so as to ensure that the additional expenditure is targeted at the poorest locations using Egypt's poverty map, for instance, in infrastructure. Subsidies for basic foods should also be increased subsidies on energy and taxing polluting activities, such as private cars, should be eliminated. The introduction of smart cards should be accelerated in order to speed up the targeting of basic commodities for the poor and disadvantaged. I have full confidence in the present Cabinet. But unfortunately, the weight of past government failures over a span of some 50 years is cumulatively astronomical. For Egypt, the challenges of 2009 are more to do with governance and social stability than with economic management. We are on the brink of either making or breaking Egypt's social cohesion. There are seven huge legacies of government failure that can no longer be postponed. In descending order they are: poverty and hunger, population growth, informal settlements, health pandemics, damage to the environment, a poor record on land reclamation, and imbalances in human resource development for the labour market. Each of these seven failures continues to plague Egyptian society while most other middle income countries have overcome them in a maximum of 20 to 25 years. If we cannot deal with these social ills as an integral part of fiscal policy over 2009 and 2010, we will have no doubt missed a rare opportunity. * The writer is lead author of the Egypt Human Development Report since 2004.
