Egypt's new government promised an economic revolution -- but Egyptians get more of the same
This op-ed article was published in Foreign Policy on 12 March 2015.
As Egypt hosts a major investment conference aimed at reinvigorating the country's economy, Allison Corkery, Director of the Rights Claiming and Accountability program at CESR, and Heba Khalil, Deputy Director of the Egyptian Center for Economic and Social Rights, warn that the government appears to be continuing with the same failed development model of the past.
This weekend, the Egyptian government will welcome delegates from around the world to the resort town of Sharm El-Sheikh for an investment conference described by Egypt’s investment minister, Ashraf Salman, as the “backbone” of the country’s future economic growth. According to reports, the Egyptian government plans to use the conference to launch a new economic development program, while attendees will listen to presentations on a wide range of investment projects.
In the lead-up to the conference, the Egyptian government has been on a major public relations push, talking up the country as a business-friendly destination. Writing in the Wall Street Journal last week, Salman argued that the government’s economic, legislative, and regulatory reforms together “amount to a quiet revolution” in the economy. Yet there is little to distinguish these reforms from the failed economic model of Egypt’s past, which, despite impressive economic growth, only intensified poverty, unemployment, inequality, and social injustice.
In fact, it appears Egypt is continuing to ignore the international human rights treaties it has ratified, which commit it to dedicating “maximum available resources” to advance social and economic rights. These rights, many of which are also guaranteed in the Egyptian Constitution, establish entitlements to healthcare, to education, to decent work, adequate housing and social security. They embody the Egyptian people’s aspirations for a country where everyone has the chance of a decent life.
Widespread deprivation of these rights was at the heart of the calls for “bread, freedom and social justice” characterizing the mass mobilization that overthrew former President Hosni Mubarak, and it has been a continuous theme in popular discontent since. Much like the administrations that came before it, however, Egypt’s current government has failed to enact the reforms needed to realize these fundamental rights.
First, the government’s reforms fail to tackle Egypt’s endemic corruption; indeed, they are likely to further weaken efforts to promote corporate accountability and transparency. At the heart of Egypt’s corruption problem is the enormous economic role played by the military, which receives construction contracts worth billions of dollars with no public oversight of the bidding and evaluation process. Another fundamental problem is the emphasis on massive infrastructure projects which receive little scrutiny. Of particular concern is the Suez Canal Corridor Development Project, an accelerated plan to develop an international industrial and logistics hub in the Suez Canal area, the economic feasibility and potential returns of which have been questioned by commentators.
New legislation advanced by the government will, unfortunately, make it even easier for officials to engage in such corrupt, self-enriching practices while escaping responsibility. For example, a law passed in April 2014 prohibits third parties from challenging state contracts. This law, which applies retroactively, is being promoted as a way of cutting red tape -- but the effect will be to reverse court orders that have annulled past corrupt contracts, while seriously weakening the public’s ability to exercise oversight over future ones.
On March 4, the Cabinet approved a new investment law, still pending a final sign-off from President El-Sisi, which offers investors increased protections and incentives – and introduces a new dispute resolution mechanism separate from the Egyptian judiciary. This not only grants blanket immunity to investors and state officials in dealing with public funds, it also annuls existing procurement procedures, enabling state officials to sell, rent, and dispose of public property for investment purposes by direct order, without resorting to public tenders and bids. What’s more, the new investment law allows state officials to hand over public property to investors free of charge, for a period of five years, for “developmental” purposes.
Meanwhile, a new bankruptcy law provides an escape route for investors who wish to abandon failing projects. In a country struggling with systematic corruption, these new investment laws amount to a green light for further wastage of public funds.
Second, and more fundamentally, the government’s approach to development perpetuates an outdated model of trickle-down economics which offers very little to the growing number of Egyptians who live in poverty. Egypt’s reforms fail to draw a link between foreign investment and the population’s needs. According to the Central Bank of Egypt, 74.3 percent of total FDI inflows into Egypt in the first half of the 2013/14 financial year went to the petroleum and oil sectors, while manufacturing and agriculture combined amounted to less than 2 percent. The fact that this concentration of investment in oil and petroleum was accompanied by a major energy crisis highlights the mismatch between energy investment and consumption.
This isn’t to say that Egypt should do without foreign direct investment. The point, however, is that the country has been failing to attract FDI to the sectors that are the most likely to create jobs and boost development. Investment in manufacturing, services, and agriculture should be a priority in a country where youth unemployment continues to hover around 30 percent. While greenfield investments were less than a quarter of Egypt’s FDI in 2013/2014, indirect portfolio investment (in stocks and bonds) has amounted to one-third of total foreign investment. This might help to explain why rapid growth in the financial sector is failing to translate into reductions in poverty or unemployment. As such, there is a pressing need for an investment policy that that connects incentives and tax breaks to specific sectors, as well as labor-intensive industries, instead of providing blanket incentives to all foreign capital inflows.
There is little reason to assume that income generated from this new wave of foreign investment will reach the place where it is most needed: the public purse. Egypt’s regressive tax regime makes it likely that much will find its way into the pockets of the wealthy elite. Corporate income taxes make up the smallest contribution to the tax base in Egypt, amounting to approximately 12.8 percent in 2012/13. By contrast, consumption-based taxes, which have disproportionate impacts on poorer households, represented almost two-fifths. Yet in its bid to attract investment, the government is offering even more tax cuts and subsidies to investors: depending on their activity, companies will now benefit from exemptions on taxes levied on contracts and other legal documents. Most recently, the government reduced the income tax rate on both corporate and personal income from 30 to 22.5 percent. Combined, these policies make it easy for investors to dodge corporate taxes, seriously undermining the government’s ability to secure the resources needed to invest in social and economic rights and fuelling inequality.
The government’s economic reforms, which have received a stamp of approval from the International Monetary Fund, pay lip service to the need for “inclusive growth.” Central to the reforms, however, have been harsh austerity measures that are disproportionately affecting those least able to afford it. Recently the government has focused its energies on reforming Egypt’s costly food and fuel subsidies. It is true that a large percentage of subsidies do not adequately target the poor. So far, however, the government has cut subsidies without any meaningful assessment of the negative impacts on the rights of the population, and further cuts are planned for 2016. Nor have officials come up with comprehensive plans for mitigating such impacts. The African Development Bank recommended that the government should allocate 30-40 percent of the resources recouped through subsidy cuts to compensate poor and vulnerable groups. While the IMF has encouraged the government to roll out cash transfer schemes to protect the poor, efforts to implement such transfers have lagged.
Further, instead of boosting social spending to offset the negative impacts of its subsidy cuts, the 2014/15 budget continues the pattern of gross underfunding of the social sector. The 2014 constitution mandates increased public spending on health, education, and scientific research. Nevertheless, the government’s approach has been characterized by creative accounting – broadening the definition of health and education expenditures to include those incurred by other ministries. It is unclear what reforms might accompany any increased budget to improve the delivery of public services in these sectors.
Moving away from the failed development model of the past and towards one that prioritizes the wellbeing of ordinary Egyptians is not only important for ensuring sustainable development; it is also an obligation under international human rights law, as has been confirmed by both the UN Committee on Economic, Social and Cultural Rights in 2013 and, more recently, by the Human Rights Council’s Universal Periodic Review mechanism.
There is little doubt that an economic revolution is needed in Egypt – and that foreign investment can contribute to it. The human rights obligations that Egypt has committed to offer guidance for what truly revolutionary economic reform in the country would look like.
A rights-based economic revolution would prioritize strengthening Egypt’s regulatory framework, in order to ensure foreign investors are not violating human rights and environmental standards. Corruption continues to deprive the country of urgently needed resources, so measures to curb it are of the utmost importance. As difficult as it is essential, fighting corruption demands more transparency from the government. The reversal of certain “investor protection” clauses, particularly where these impede third-party challenges to investment contracts before the judiciary, is critical.
Such an approach would reorient economic policy to addressing the country’s development needs, particularly in the hard-pressed food production and manufacturing sectors. Development-focused policies should aim to encourage greenfield investments, especially in productive sectors, adding jobs and promoting value-added growth. Megaprojects that fail to deliver meaningful impacts in terms of resource generation should be reconsidered. Meaningful change would also require reform of Egypt’s regressive tax regime.
Above all else, a rights-based economic revolution demands accountability from all concerned, including investors, creditors, donors, and international financial institutions, who should have clear incentives to support the fulfillment of economic and social rights. If those gathering in Sharm El-Sheikh this weekend really want to make a meaningful investment in Egypt, they need to bear this in mind.