If anything in Egypt is worth learning from the global financial crisis, it is that the current structure of the Egyptian economy and the mindset sustaining it needs fundamental change.
Economists divide states according to the sources of income upon which they rely. There are “exoteric states (states predominately based on revenue accruing directly from abroad) and “esoteric states (states whose income flows from domestic revenue and taxation).
In tandem, another group of economists use instead the terms “allocation versus “production states. Allocation states are those whose income derives largely from oil exports or other foreign sources of income. For these states, allocation is quite the only activity that they do with their domestic economy. Out of these notions came the more common concept of the “rentier state – first articulated by Iranian economist Hossein Mahdawy in 1970 – which refers to states which derive a substantial amount of their national income from the rent of natural resources (e.g. oil) to external forces.
Although the oil-rich Gulf States embody the perfect contemporary example of rentier states in the Arab world, they are by no means the only ones. Egypt has been a rentier (or at least a quasi-rentier) state for decades. Since the 1970s, Egypt’s economy has relied on four main sources of foreign exchange, namely oil, tourism, workers’ remittances and the Suez Canal. In the fiscal year 1981/82, they constituted 75 percent of total foreign exchanges.
All of these sources are more influenced by demand than supply and are heavily prone to violent fluctuations resulting from international developments upon which Egypt has obviously no control. More importantly, they are closely interlinked; a change in one factor very likely elicits similar changes in the other sources and these changes work in the same direction, hence exacerbating the cash shortage crisis.
Hence, part of Egypt’s vulnerability to the current financial crisis stems from the shortcomings of this unstable economic structure. Egypt’s banking sector is immune to the turbulences sweeping Wall Street and its mortgage market is too small to create trouble. However, Egypt’s four golden eggs will most likely decline following a global recession due to the anticipated decline in volumes of international trade and plummeting oil prices.
A quick look at last year’s figures reveals the extent of the upcoming crisis. In the fiscal year 2006/2007, workers’ remittances exceeded $6.3 billion and Suez Canal revenues hit a record of $4.168 billion. In addition, tourism revenues in the first three quarters of 2008 amounted to $8.2 billion and oil exports approximately accounted for half of total exports last year (around $22 billion). If the crisis of capitalism in the US and Europe is not derailed, the Egyptian treasury will lose billions of scare foreign exchange.
Changing this structure is all too necessary now. But the rentier state creates, over prolonged periods of time, what economist Hazem Beblawi calls “a rentier mentaliy. Mahmoud Abdel-Fadil, Professor of Economics at Cairo University, concurs that this “rent-seeking mentality becomes a self-perpetuating one, and a dominant feature of the economic activity of rentier states. Under this economic structure, the conventional work-reward relationship is broken.
“Reward – income or wealth – is not related to work and risk bearing, rather to chance or situation, Beblawi points out. “For a rentier, reward becomes a windfall gain, an isolated fact, situational or accidental as against the conventional outlook where reward is integrated in a process as the end result of a long, systematic, and organized production circuit.
The windfall gains smoothly accrued from these sources sustained the rentier state and inhibited the development of productive sectors. That’s probably why the reform-oriented cabinet, which has overseen Egypt’s economic affairs since 2004, considered generating additional income by pushing the privatization process ahead and attracting foreign direct investments (again depending on foreign sources of income) instead of investing in domestic productive projects. Needless to say, the flow of cash from these two options is bound to dwindle as well in the coming period.
The recent reformation of the structure of taxation is probably the only exception to that rentier mentality, as it increased the state’s domestic sources of revenue – reaching an unprecedented LE 116 billion in the fiscal year 2007/2008. That’s not sufficient, however. Unless more attention is given to productive sectors, Egypt will remain vulnerable to the unpredictable fluctuations of international markets. Surely, this shift will not materialize before the rentier mentality is shattered for good.
Nael M. Shama,PhD, is a political researcher and freelance writer based in Cairo.