CAIRO: “The main challenge [for Egypt's economy] is mostly — but not wholly — fiscal,” said Peter J. Montiel of Williams College in a conference last week. Montiel, who has worked for the International Monetary Fund and has published several books about macroeconomic policy in developing countries, was speaking at a lecture entitled “Macroeconomic Reforms and Resilience in Egypt: International Lessons from the Great Recession,” organized by the Egyptian Center for Economic Studies. Taher Helmy, founder of ECES and the partner and co-founder of Baker & McKenzie Law in Cairo, said, “The Egyptian economy has weathered the financial crisis, achieving reasonable economic growth rates compared to other countries. This is because of the substantial macroeconomic, fiscal and monetary reforms that helped us get through the crisis.” Magda Kandil, director of ECES, said that despite ongoing reforms, the country, which grew at 4.7 percent during the crisis and is growing at around 5 percent now, has not realized its full potential in terms of achieving higher growth that spurs economic development and realizes better standards of living. “The economy still struggles with high unemployment and a growing informal sector, in addition to concerns about the distribution of wealth, the need to improve competitiveness, mobilize the private sector, and decrease the economy's vulnerability to shocks,” Kandil stated. She pointed to China, India, South Korea, Turkey and Brazil — the economies of which are all currently growing much faster than Egypt's — as examples to be analyzed. Montiel started the lecture by stressing the link between market-oriented economic reforms in Egypt over the past two decades and the Washington Consensus, which was a set of neo-liberal market-oriented reforms advocated by the International Financial Institutions in developing countries in the late 1980s. In general terms, the intended objective of the reforms was to improve living standards through higher growth rates. Montiel said that the “germ of truth in neo-liberalism” is that the market is a powerful force for the improvement of living standards, and that privatizing and liberalizing are intended to give greater scope to the market in the allocation of resources. However, Montiel recognized that these reforms have not always led to faster growth in Latin America and the Middle East, where countries that have grown quickly have not always followed standard reform strategies. “China and other countries in East Asia are good examples of countries that have grown quickly without implementing the Washington consensus,” Montiel stated. Through this analysis Montiel reached the conclusion that, for Egypt and other developing countries, creating a well-functioning market economy is not just a matter of privatizing and liberalizing. “There is a need for reforming institutional capacity, including property rights, rule of law [such as the absence of corruption], competition, information, [and] correctives for industry-specific market failures,” he said. For Montiel it is imperative to include spending on health, education and infrastructure originally included in the Washington Consensus, as part of the reform process. “So, under the right circumstances, privatizing and liberalizing make sense,” he added. Montiel also pointed out that Egypt did not escape the financial crisis unscathed, but was less affected than many other countries due to the fact that “the country has been a relatively late reformer.” “Real and financial integration are still limited in relative terms, and domestic financial reform is still in its early stages.” Montiel's main point was that, since Egypt has recognized that it can only catch up to other better performing economies by implementing more reforms — as it is currently doing — fiscal and monetary policies should be carefully addressed. Through the country's strategy for export-led growth, “external integration will increase its vulnerability.” “The premium on macroeconomic flexibility is likely to be substantially higher for Egypt in the future,” said Montiel. “As you opt for reforms that give higher growth, you expose yourself to more instability.” He added that because increasing fiscal credibility, accumulating reserves, and reducing debt stocks all take time, the country needs to prepare beforehand. Montiel believes that the only way this preparation may be done is by addressing the usual suspects: efficient public expenditure allocation, larger public sector revenues through low marginal tax rates, and a wide tax base.
