Economic Research Forum (ERF)

Inequality underestimated in Egypt: evidence from house prices

492
Standard estimates of income and consumption inequality rank Egypt as one of the world’s most equal countries. By analysing data on house prices to obtain a more accurate estimate of the top tail of the income distribution, this column presents evidence that Egyptian inequality is considerably underestimated.

In a nutshell

It is possible that household surveys underestimate inequality in Egypt, failing to capture top incomes, either because of non-response by the rich or under-reporting of their incomes – or both.

This research uses data on house prices to estimate the top tail of the income distribution.

Using this method, the Gini coefficient of household income for urban Egypt increases from 0.39 to 0.52.

The estimates are derived from national household surveys that collect detailed income or consumption data for a sample of households, which are assumed to be representative of the country’s population.

The Gini coefficient, arguably the most commonly used measure of inequality, ranges between 0 and 1 with higher values indicating more inequality. To obtain estimates of the Gini coefficient for 135 countries around 2008-09 (the most recent period for which we have survey data for Egypt), we use the World Bank PovcalNet, a repository of household income and consumption surveys from around the world.

Figure 1 shows the results, with the most unequal countries on the left, becoming progressively more equal as we move to the right. Egypt’s Gini coefficient is just over 0.3, which is low by international standards. It is even low by the standards of the region, as the highlighted countries show.

This will come as a surprise to many Egyptians. For example, research by economist Ragui Assaad finds that a child from a disadvantaged family has a one in ten chance of going to university while a child from a privileged family is virtually guaranteed to make it to university.

In addition, taxes have become more regressive, particularly since 2005, and signs of inequality have become increasingly visible during this period. As freelance journalist Osama Diab writes, ‘In Egypt, where luxury hotels and upscale neighbourhoods abut sprawling informal settlements, inequality is out in the open, bringing with it the constant potential for social unrest.’

The increased level of inequality may not have been the decisive issue in the social unrest that began in 2011, although it may well have contributed. Protesters were motivated by both economic and political grievances – and many of those grievances are related to inequality: the deterioration in public education and healthcare, chronic corruption, crony capitalism, police brutality, poor working conditions, low pay and lack of accountability.

Egyptians who can afford it rely increasingly on private education and healthcare, contributing to ‘social separatism’. Post-Mubarak, leading political parties have made economic inequality a defining issue in their election manifestos.

So is Egypt’s inequality higher than official estimates? It is possible that household surveys underestimate inequality, failing to capture top incomes, either because of non-response by the rich or under-reporting of their incomes – or both.

One solution to this problem is to estimate the top tail of the income distribution from income tax record data, then estimate the rest (often 99%) of the income distribution using the household survey, and combine the two. Income tax records arguably are the ideal source of data, but they are usually hard to find. Egypt is no exception, so a re-estimate in this case requires alternative top income predictors.

Our research uses data on house prices to estimate the top tail of the income distribution. The house price database is compiled from real estate listings that are available in the public domain. We estimate the relationship between the house price (or the implied rent) and household income using the household survey.

We find evidence that inequality is considerably underestimated in Egypt. Using this method, the Gini coefficient of household income for urban Egypt increases from 0.39 to 0.52. This would move Egypt to the middle of the pack in Figure 1.

There are caveats when we rely on predictors of this kind. We make assumptions about the functional form of the relationship between rents and household income, and about the functional form of the upper tail of the house price distribution. In addition, we assume that one house constitutes one household and that all houses are domestically owned. Therefore, in cases where tax record data are available, these should undoubtedly be considered first.

Nevertheless, we believe that this approach will provide more reliable estimates of inequality than estimates obtained using survey data alone. The perfect should not be the enemy of the good.

Inequality estimates for other countries may also be downward biased. When household surveys are combined with income tax data, the Gini coefficient for the United States in 2006 increases from 0.59 to 0.62; for Colombia in 2010, from 0.55 to 0.59; and for Korea in 2010, from 0.31 to 0.37. Where Egypt will ultimately rank in a completely revised version of Figure 1, nobody knows.

Further reading

Van der Weide, Roy, Christoph Lakner and Elena Ianchovichina (2016) ‘Is Inequality Underestimated in Egypt? Evidence from House Prices, World Bank Policy Research Working Paper No. 7727; forthcoming in the Review of Income and Wealth.

A longer version of this column is available at VoxEU.

Most read

Arab countries are caught in an inequality trap

Conventional wisdom, based mainly on surveyed household income distribution statistics, suggests that inequality is generally low in Arab countries. At the same time, little attention has been devoted to social inequalities, whether in terms of outcomes or opportunities. This column introduces a forthcoming report, which offers a different narrative: based on the largest research project on the subject to date and covering 12 Arab countries, the authors argue that the region is caught in an inequality trap.

Recession without impact: why Lebanese elites delay reform

The survival of Lebanon’s political elites is highly dependent on the wellbeing of the economy. Why then do they delay necessary reform to avoid crisis? This column examines the role of politically connected firms in delaying much-needed economic stabilisation policies.

Fair competition is needed to empower women economically in the Arab world

The participation rates of women in the labour market in Arab countries are the lowest in the world. This column argues that remedying the under-representation of women in the labour force is a social and economic imperative for the region. There are three dimensions for action to realise the potential of Arab women: amending laws and regulations; instilling fair competition in markets; and promoting the digital economy.

Competition laws: a key role for economic growth in MENA

Competition policy lacks the attention it deserves in the countries of the Middle East and North Africa (MENA), a region characterised by monopolies and lack of market contestability. As this column explains, there are many questions about the extent of anti-competitive barriers facing new market entrants in the region. What’s more, MENA’s weak overall performance on competition is likely to be hindering economic growth and the path towards structural transformation.

The Egyptian economy is still not creating good jobs

Growth in Egypt has recovered substantially since the downturn following the global financial crisis and the political instability following the 2011 revolution – but what has happened to jobs? This column reports the results on employment conditions from just released data in the 2018 wave of the Egypt Labor Market Panel Survey.

How Egyptian households cope with shocks: new evidence

Managing risks and reducing vulnerability to economic, social, environmental and health shocks enhances the wellbeing of households and encourages investment in human capital. This column explores the nature of shocks experienced by Egyptian households as well as the coping mechanisms that they use. It also examines the relationship between such risks and job formality and health status.

The future of Egypt’s population: opportunities and challenges

Egypt’s potential labour supply depends on the growth and changing composition of its working-age population. This column reports the latest data on labour supply and fertility rates, concluding that the country has a window of opportunity with reduced demographic pressures to try to address longstanding structural challenges for the labour market.

Egypt’s labour market: facts and prospects

An ERF policy conference on the Egyptian labour market in late October 2019 focused on gender and economic vulnerability. This column summarises the key takeaways from the event.

An appeal for Sudan’s future

Sudan today is on a knife-edge: it can evolve toward peace and democracy – or spiral into instability and violence. As this Project Syndicate column argues, vital and timely international assistance can make the difference between success and failure for the new government.

Domestic demand and competition: a new development paradigm for MENA

A lack of competition in domestic and regional markets is holding back development in the Middle East and North Africa. This column argues that the region and the international community must ensure that barriers to market entry and exit are eliminated, and that independent regulatory bodies at the national and regional levels help to promote domestic demand as the main engine for sustainable and inclusive growth.