Economic Development of Egypt

Economic Development of Egypt 1

Economic Development of Egypt: From Past Glory to Modern Times

Elijah Fiore

Word Count: 2,973


Economic Development of Egypt: From Past Glory to Modern Times

Introduction

The story of the economic development of Egypt is not a simple one by any means: it’s

the tale of a country that was, many years removed from modern day, at the forefront of the great

history of the Middle East. It’s past involves the ancient civilizations that built the pyramids, an

agricultural colony that failed to modernize, as well as a recent history of political and social

turmoil. As many saw during the Arab Spring and the following months, there is still much

instability in Egypt politically and socially. In this way, the current situation in Egypt acts a

microcosm for the plight of the entire Arab world and, as a result, the Middle East as a whole.

Perhaps to understand the economic successes and shortcomings of a tumultuous region, one

must first comprehend how a previously strong country, formerly at the center of the known

world, fell so far to be an afterthought in the modern economic and political climate. In order to

investigate the state of the Middle East in today’s world, this report aims to dissect Egypt’s

historical growth, modern growth, and its human capital development.

Economic History

Egypt’s economic success in ancient times was caused by much of what helped the entire

Middle East prosper before the Middle Ages, geography and strong leadership. Egyptians could

develop effective trade and travel through the Nile before most other ancient civilizations and it

provided a source for the advanced irrigation system that lead to effective agriculture (the source

of economic surplus important for growth), it did not flood to the extent that other bodies of

water did in this time like the Euphrates or the Tigris, and the river was extremely navigable due

to the winds from the north. These geographic elements led to Egypt developing as a civilization


much earlier than many other regions such as Europe. As mentioned previously, a main

contributor to the growth of Egypt in this early era was the food surplus that, according to

Issawi’s The Middle East Economy: Decline and Recovery, was the vehicle for the early

economic growth of Egypt.

The decline of Egypt occurred between the 13th and 18th centuries due to the eventual

decay of advantages in geography and leadership. According to Issawi, at this time, Egypt had a

literacy rate of about 5% at the start of the 1800s (Issawi, n.p.). For context, compare this to

22% for Italy, 38% for France, and 53% for Great Britain around the same time frame (“Our

World in Data”, n.p.). Highlighted by this severe lack of human capital, Egypt had been

stagnating for a while and just emerged from a brief French and British occupation that renewed

European interests in the region. By 1805, an Ottoman officer Muhammad Ali (the “father of

modern Egypt”) took control of the country as Pasha and Viceroy and ushered in economic and

social reform that facilitated Egypt in returning to flashes of its previous glory.

Ali’s reforms primarily focused on agricultural and industrial development. By 1815,

Muhammad Ali had seized cultivable, feudal lands from the Mamluks of Egypt and the religious

institutions of Cairo converted them to state-run lands. State-run agriculture meant that the

income surplus could be used for investment in public works such as irrigation as well as

financial and military development; this would later become an issue with the misallocation of

surplus to bureaucrats and military forces instead of the workers of the country, a common theme

in Middle Eastern economic decay in this period.

Though the 1800s, Egypt’s economy became increasingly export-oriented and focused on

comparative advantages on the world market; in this case, Egypt’s advantage was cotton. Much

like oil for other MENA nations, Egypt’s supply of cotton in this fragile era of development led


the country into an economic corner, so to speak. Egypt’s reliance on cotton amplified in the

middle 19th century and met greater returns because of the nature of the market at this junction.

The American Civil War had taken the United States, one of the largest suppliers of cotton to

Europe, out of the equation for multiple years, leading to a superior demand for Egyptian cotton

and larger profits for the country. According to one source, cotton exports raised from $15

million in 1862 to $56 million in 1864 (“Tour Cotton, n.p.). Egypt would go onto invest this

surplus, as well as take loans from abroad (namely Britain) in order to bank roll further

modernization; however, these actions were taken with the assumption of prolonged profits from

cotton of the previous magnitude. Between 1863 and 1879, national debt rose from $3 million to

$100 million and, despite repaying $29 million in loans by 1875, Egypt still owed around $46

million and neared bankruptcy. Cotton revenues and the construction of the Suez Canal made

Egypt a hot commodity for Europe and eventually, citing anarchy in the country and fear of

losing the canal Britain invaded and took over Egypt in 1882 (“Egypt and Europe”, n.p.). This

furthered the descent of Egypt into “lop-sided” development as it entered an era of British

colonization (Issawi n.p.).

From 1800 to 1917 population grew from 3.8 million to 12.8 million and from 1917 to

1960 doubled to 25 million, according to Issawi. Population growth because of positive

economic times reflects the old style of growth characterized in the Lucas model where

advancements in production lead to population growth instead of living standard upturn. Per

capita income also grew in the time of colonization. By 1913, per capita income in Egypt was at

$50, twice the amount of Japan or India and about a fourth of France’s per capita income.

Despite raises in per capita income, savings rate was comparatively low at 3.5% at the turn of the

century and human capital had still been neglected (literacy rate still incredibly low at 7%). The


combined effect of colonization was the over-reliance on imports, decrease in cultivable land per

head and, as a result, a declining GNP per capita. The social effect of colonization was possibly

even more pejorative. Egyptians were mostly pushed towards the agricultural sector for cotton

while the “bourgeoisie” were imported from foreign countries. This created an identity crisis in

Egypt made capitalism seem like an alien concept while also leaving a bad taste in the mouth of

the common man. It was clear at the close of WW2 that Egypt was neither diversified nor fit to

enter the world market because of this “lop-sided” development. Egypt’s troubled times in this

period of its history define a common theme that is reflected even to this day, which this report

will examine next (Issawi, n.p.).

Modern Economic Growth

Over the last 25 years, the MENA region has gone through periods of major growth and

change. To understand Egypt’s position in this economic change, it is imperative to look the

transitions in GDP per capita, as well as savings and investments. Since the 1990s, Egypt has

had major growth in its GDP per capita, as made evident in the chart below.

Today, Egypt has a GDP per capita of around $10,000 in PPP terms, roughly a $4,000

increase over 25 years. Despite the relative positive growth over this era, it is necessary to

GDP per capita PPP (Constant 2011 International $)

Figure 1 - This figure shows the major growth in GDP per capita in PPP terms, from about $6,000 in 1991 to around $10,000 today. (WDI)


compare this growth to other developing nations as well as to the entire MENA region to gain

some context. In this same time frame, WDI data for the MENA aggregate shows that the

average MENA country started with higher GDP per capita than Egypt in 1991(at about

$11,000) but also grew to a greater extent with a current per capita income of almost $17,400.

While this is useful to see how the entire area is progressing economically, it is somewhat

unreliable because of the inclusion of all income levels. This includes the oil-rich countries like

Saudi Arabia and Oman who have some of the highest per capita incomes in the world.

Comparing these countries to Egypt, who does not have such a lucrative resource, is unfair as a

result. According to WDI, a similar emergent region in South Asia and totals of Middle Income

nations paint a different picture. South Asia is at less than $6,000 per capita today while

countries of Middle Income grew from $3,600 to around $9,300 per capita in the previous 25

years. Egypt was doing better than South Asia and similarly to Middle Income countries in this

time frame (despite not experiencing the same level of growth as the latter).

Gross Domestic Savings and External Balance (in % GDP)

Figure 2 - A comparison of the % of GDP that savings (in blue) and external balances (in green) make up. (WDI)


Above is the comparison of gross domestic savings and external balances of good and

services. As a general trend, savings has decreased for Egypt over the 25 years from 13% to

almost 5%. In this same snapshot, external balance “decreases” from about -7.9% to -8.5%,

meaning that Egypt is depending more so on imports over time. As savings reduce, Egypt must

make this gap up with more foreign aid, direct investment, and loans. Comparing these figures to

that of other Middle Income countries, one can see that Egypt is not progressing as well because

of its lack of investment. Middle Income countries, on average, have grown in GDS (from 26%

to 30%) and have stayed near 0% on external balances. Even South Asia has a higher savings

rate of about 26% and a much lower external balance at -3.5%. One can deduce that stagnation

in Egypt’s economy could originate from its lack of savings and investment in general on top of

its reverent reliance on imports.

Using the previous numbers obtained on Egypt and the Harrod-Domar model for economic

growth and some intuition, one can acquire an informed hypothesis on future economic growth.

Assuming a depreciation (delta) of 2 and a capital-output ratio of 3 (v in the equation) from an

estimate calculated by averaging savings and foreign investment from WDI over the last 10

years, a calculation for economic growth of Egypt is reached below.

𝑔 =5.28+ 8.54

3 − 2 = 2.61% By inserting the most current values for savings and external balances, one arrives at a

growth rate of about 2.6% year over year. Comparing this to the average growth rate calculated

over the last 10 years from WDI data, 4.36%, it is clear that there are diminishing returns to the

way Egypt has run its economy. If Egypt follows the current trend of saving less and having

Saudi Arabia and others cover the investment gap, while GDP may not fall immediately, GDP

growth rate may stagnate as foreign debt rises depending on the foreign investment Egypt


receives (whether it is in aid, direct investment, or by loan). Egypt is clearly not living within its

means based on the figures in this report, and a recent decline in FDI (from 9.3% in 2006 to

about 1.6% in 2014) shows a weakening of the private sector. The culmination of these factors

is a possible lack of economic development in the near future until Egypt can invest more in the

attributes that truly increase production: physical and human capital, the latter this report will

inspect subsequently.

Human Resources

While one can see in the previous section Egypt has experienced some growth in GDP

per capita over the last 25 years, this is not the only measure of the development of an economy.

The Arab Spring, to a certain extent, was caused by a large subsection of the ME population (the

youth bulge) that were left unemployed or employed in the chaotic informal markets as well as

without the necessary skills to be competitive in the world market. Human capital improvement

is a common theme throughout the ME because it signals a true transition for a country away

from the old way of growth (population) and towards the modern instance (rises in living

standards). This is touched on in the Lucas model and in previous sections of this report.

Basically, increases in production should result in a demographic transition from high fertility to

low fertility as families focus more so on the “quality” of children rather than the “quantity” due

to increased opportunity cost and returns to education. Egypt and much of the MENA region

had not seen this transition in the late 20th century to the extent of South Korea, as an example.

Figure 3 - The fertility rate per woman in Egypt over the last 50 years. (WDI)

Fertility Rate per Woman (1965-2015)


The preceding graph shows the fertility rate (total births per woman) in Egypt from 1965 to

present. The overall pattern is a general decrease over the last 50 years. In the 1960s the fertility

rate for Egypt was a surprisingly high 6.1 births per woman and the rate was at its lowest in 2005

at about 3 births per woman. As of today, the fertility rate has slightly increased to 3.3. At its

highest, fertility rate was much higher than the “replacement rate” customary of most developed

countries, about 2 births per woman. This can help explain some of the troubles of the Egyptian

economy in the late 1900s and early 2000s; there was an excess of youth looking for jobs that

were not being left by the older generation because of the high fertility rate. Even today, Egypt’s

fertility rate is higher than that of a modernized and adjusted country. In addition to lower

fertility rate, life expectancy rose from 50.9 years to about 71 years and infant mortality rate also

positively changed in this time, from 173 deaths per 1000 live births to only 20. This may still

be comparatively high when compared to much of the modern world but it also shows great

growth in living standards for Egypt’s citizens. Based on this, Egypt has roughly succeeded in

decreasing the “quantity” side of the transition.

Education, especially that of women, is also an important indicator for economic

development and demographic transition to “quality”.

Figure 4 - The progression of male and female enrollment in primary education over the last 50 years. (WDI)

Primary Education Enrollment (%Male and %Female)


This chart shows the net primary education enrollment rates for Egypt over the last 50

years. As made evident above, the enrollment rates of females in Egypt have been historically

lower than that of males (at least in primary education), the largest gap being in the 1970s where

there was an enrollment rate separation of over 20% in favor of males (who stood in the high

70% rate). Over time this gap has decreased while both rates for males and females showed

signs of overall increase. As for secondary education, the numbers are generally similar. Both

sexes increased their participation in secondary education in the 50-year period as well (from

34% to about 76% for males); however, the secondary rate is still comparatively low for a

country that wishes to modernize. In this period, female enrollment also caught up to that of the

males and highlights, at least, some empowerment of the females in Egyptian society as far as

education. The real economic effect would be studied based on how many of these women with

higher education end up actually working as compared to having large families instead. Both

males and females now have a primary enrollment rate of around 100% and a secondary rate of

around 76%, an encouraging sign towards the move to quality instead of quantity of children.

Total Unemployment (% of population) and Youth Unemployment (% of unemployed)

Figure 5 – Total (red) versus youth (blue) unemployment for Egypt over the last 10 years. (WDI)


Compared to other countries in the region, like Turkey, Egypt has a high youth

unemployment rate (currently almost a third of all unemployed compared to around 17% for

Turkey). These countries have similar total unemployment rates at around 10%, so this contrast

is very useful to picture the situation for the youth in Egypt. This youth bulge is a main factor in

the stagnation of many ME countries like Egypt; even if there are higher enrollment rates, there

are not enough jobs to justify going to school or to employ all of the youth, creating revolts like

in 2011.

The previous chart shows the ratios of unemployment based on education levels. The

largest percentage of unemployment in Egypt comes from secondary and tertiary educated

individuals at almost 80% combined while primary educated citizens make up much less than

both. This is not an indicator of an economy with large returns to education that would influence

a transition to “quality” children. There is no incentive to invest in the youth and have lower

fertility because when those that do get educated leave school, there are no jobs for them. One

can imagine, this was a contributing factor to the disenfranchised feelings of the youth leading up

to the 2011 revolution. Until Egypt can find a way to lower the unemployment of the educated

Unemployment Rate Ratios by Education Level

Figure 6 - Unemployment rate by education level over 10 years: primary (blue), secondary (red), and tertiary (green). (WDI)


or increase the returns to schooling, one cannot foresee sustainable economic progress or

demographic transition to occur in the future.

Conclusion

Egypt’s modern economic growth and decay is directly tied to its failures in the past to

globalize in a meaningful manner even before colonization. By the time Muhammad Ali ignited

the country with his economic reforms and moved to focus on comparative advantage in cotton,

Egypt’s slow descent into “Third World” dependency on a cash crop export was set. Egypt’s

emphasis on population growth to increase production, while colonized and previously, set the

country’s human capital back decades behind that of its contemporaries. These issues had

progressed through the 20th century until modern day where the uneducated and unskilled youth

bulge of today are left without jobs or incentive to improve their resources in a time where other

regions experience relative prosperity and growth. Though the country has shown some promise

as of late in the decrease in fertility rate/mortality rate and increases in life expectancy, the

situation in Egypt appears grim until the country can wean of its dependence on imports, foreign

aid, and create employment opportunities for the marginalized youth. The ME, and specifically

Egypt, is going through a transitional period vital to the future of the region, a fixing of the issues

created during the aborted globalization of the past due to oil, cotton, or the like. The future is

unclear for the area, but one thing is for certain, however: one can sympathize with such a

situation.


References

Egypt and Europe in the 19th Century. (n.d.). Retrieved May 02, 2016, from

http://courses.wcupa.edu/jones/his312/lectures/egypt.htm

Issawi, C. P. (1995). The Middle East economy: Decline and recovery: Selected essays.

Princeton, NJ: Markus Wiener.

Our World in Data. (n.d.). Retrieved May 01, 2016, from https://ourworldindata.org/literacy/

Tour Egypt :: Cotton: One of Egypt. (n.d.). Retrieved May 01, 2016, from

http://www.touregypt.net/featurestories/cotton.htm

World Development Indicators. (n.d.). Retrieved May 01, 2016, from

http://data.worldbank.org/data-catalog/world-development-indicators

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Economic Development of Egypt