Economic Growth in Egypt: Constraints and Determinants

Abstract

Egypt accelerated its ongoing transition from a public sector dominated economy to a private sector led and market oriented economy after the collapse of oil prices in the mid-1980s. Some aspects of the economy, such as trade policy, have been substantially transformed since then whereas other aspects, such as public control of the financial sector, have experienced less change in substance. We examine some determinants of growth in Egypt since the mid-1980s using insights from both standard econometric techniques and a diagnostic approach proposed by Hausmann, Rodrik and Velasco (2004). We find that trends in government consumption, credit to the private sector and the average growth rate of OECD countries have been significant determinants of growth in Egypt in the past. We also present evidence that suggests that inefficiency of financial intermediation is a significant current constraint on growth.

Egypt: Searching for Binding Constraintson Growth

“…That paper also documents that Egypt-while one of the countries having experienced debt problems at some point in time-never resorted to the very high inflation rates ahead of default that were typical for "serial defaulters"; indeed even in the years leading to the 1991 crisis, inflation remained fairly stable at around 20 percent and reliance on the inflation tax quickly dropped thereafter (Subramanian, 1997). 18 Dobronogov and Iqbal (2004) argue that even the much greater macroeconomic imbalances in the early 1990s (with total public debt exceeding 150 percent of GDP) did not constrain growth as their resolution by the mid-1990s "did not help to increase private investment rates." However, the sizeable increase in nongovernment investment rates (from an average of 11 percent of GDP during 1991/92-1995/96 to 14 percent for the subsequent five years), and the concomitant growth spurt provide some evidence that macroeconomic stabilization in the early 1990s did remove a then-binding growth constraint (possibly operating through debt overhang effects).…”

“…The approach employed follows that developed in Hausmann, Pritchett, and Rodrik (2004) (see Dobronogov and Iqbal, 2004, for a similar undertaking seeking to identify the growth constraints on Egypt during 1998Egypt during -2003. It starts from a view of growth as the result of a process akin to optimization under constraints, and seeks to identify factors that are the "most" binding in the sense that their removal allows at least temporary growth spurts (until other constraints become binding).…”

“…The prominent place of "access to finance" in surveys of business concerns could, however, also reflect an inefficiency of the financial system in allocating savings to entrepreneurs, rather than the availability of foreign or domestic savings. Dobronogov and Iqbal (2004) argue that access to finance in that sense has been the key recent constraint on growth, 11 citing as evidence for the banking system's inefficiency that in 2003 only 17.4 percent of private firms had an outstanding loan from a financial institution; high and rising lending-deposit spreads; and an underdeveloped credit registry. They attribute the inefficiency to both government control over a large chunk of the banking system, and the dominant role of government securities in banks' portfolios, both of which factors would weaken efficiency, notably by politicizing and softening budget constraints, and by reducing incentives for banks to develop the capacity to serve risky private investors.…”

“…Given the large number of Egyptians (of all skill levels) working abroad, notably in the booming Gulf countries, it is however difficult to disentangle the impact of domestic demand versus foreign demand on the returns for education, and the limited data on education returns provide little help in identifying growth constraints. Nonetheless, the conclusion in Dobronogov and Iqbal (2004) that there was little evidence that human capital constraints were then holding back Egypt's growth may have to be qualified today.…”