Economic Research Forum (ERF)

Galal Amin and the Egyptian middle class

A sense of ‘defeat’ among the Egyptian middle class was the main motivation for the uprising of 25 January 2011. In a tribute to economics professor Galal Amin, who passed away last month, this column explores what his analysis would suggest lay behind that feeling. The main culprit is the pursuit of stabilisation at any cost: macroeconomic stability rarely translates into more investment and better-quality jobs; liberalisation typically leads to crony capitalism and greater inequality; and it is the poor and the middle class who experience the pain.

In a nutshell

Stabilisation policy has built-in mechanisms that specifically harm the vulnerable lower middle class of Egypt, even when growth in the economy as a whole is restored.

The situation of the poor and the middle class in Egypt today is reminiscent of the late 1990s and 2000s.

As Galal Amin said, ‘those who have power aren't interested in human development and those who are interested in implementing such changes don't have any power’.

Galal Amin was not your usual economics professor. Armed with a unique blend of witty Egyptian sarcasm and a seemingly endless knowledge of history and political economy, he was well equipped to produce a lasting influence on his students. And that he did!

I was one of those fortunate students who attended his classes on Egypt’s economic policy. It was quite a treat and I ended up (for better or worse) studying development economics as a result.

At that time, around 1991, tense debates about liberalisation took place almost on a daily basis on the campus of the American University in Cairo. Galal Amin was never concerned with winning points in an argument, which he could do with ease.

Rather, his main concern was to steer his audience to appreciate the beauty and power of a simple narrative, a skill lacking among most of the contemporary younger generation of economists. As it turned out, his narrative on what had happened to the Egyptian middle class since the ‘infitah’ of the 1970s and on the possible ramifications of more recent economic reforms was both compelling and foretelling.

The Egyptian middle class of the early 1990s was clearly larger in size and materially better off than their counterparts in the 1950s and 1960s. But they were far less cultured and more socially crippled compared with their predecessors. Indeed, the sense of ‘defeat’ among the Egyptian middle class was the main motivational force underlying the uprising of 25 January 2011, as Amin would argue in his book Egypt in the Era of Mubarak, 1981-2011. What lay behind this sense of defeat?

Egypt’s economic reform programme, Amin would argue, played a central role in the making of its middle class saga. The main culprit was stabilisation policy, which primarily aims to reduce inflation and deficits (of the budget and the balance of payments) and to correct ‘wrong’ prices. Two such ‘wrong’ prices that have haunted the Egyptian government since the early 1970s are the overvalued official exchange rate and heavily subsidised fuel or commodity prices.

Right prices, so the mainstream story goes, are necessary for an efficient use of scarce resources and to ensure specialisation in areas where the economy is most productive. This will boost domestic production and competitiveness, leading to high growth led by exports and inflows of foreign investment. Surpluses in the current and capital accounts then reduce the balance of payments deficit and restore equilibrium to the demand and supply of foreign currency.

Restoring macroeconomic stability is therefore the first and foremost concern of any agreement between the government and the International Monetary Fund (IMF), even if the social cost of stabilisation is high for the poor or the middle class since the short-term pains are bound to lead to medium- and long-term gains.

The trouble is, as Amin and many other critics of liberalisation would argue, is that macroeconomic stability rarely translates into more investment and better-quality jobs.

Stabilisation in the standard neoclassical textbook narrative is supposed to be accompanied by complementary medium- and long-term structural adjustment policies, such as trade liberalisation and regulatory/governance reforms, that will aid higher private sector and foreign investment, growth, employment generation and productivity growth. Poverty reduction and an expanding middle class are the final outcomes.

As the data and events that took place in the two decades after 1990 would show, clearly this theory didn’t work for the Egyptian middle class. Yes, austerity measures restored macroeconomic stability and even helped the resumption of GDP growth, especially from 2000 to 2010. But goods exports, decent employment and poverty reduction did not respond as projected by the World Bank and the IMF.

Amin’s brilliance was that he could easily see the failures in the underlying logic and the precarious social implications of ‘laisser-faire’ economics. His verdict was that liberalisation would lead to more crony capitalism and higher inequality – and that it would further disempower the middle class.

This is precisely what happened. Through their impact on prices and real wages, stabilisation had built-in mechanisms that specifically harmed the vulnerable lower middle class, even when growth in the economy as a whole was restored. Of course, this last narrative did not go unnoticed by the thousands of middle class youth who flocked to Tahrir Square in 2010. For them, as for Amin, what happened in the real world often had nothing to do with the world of mainstream economic theory.

The situation of the poor and the middle class in Egypt today is in fact reminiscent of the late 1990s and 2000s. One of Egypt’s cardinal challenges is that its lower middle class (who constitute the majority of the estimated 40% size of the Egyptian middle class) are located right above the vulnerability line – that is, they spend just above the value of the upper poverty line or what separates them from being poor. Thus, even a small increase in prices will cause them to fall into moderate poverty.

Many did fall into poverty after 2011, especially after price reforms were implemented. This sense of vulnerability explains much of the sense of ‘defeat’ among the middle class, a central theme in Amin’s narrative.

The heart of the problem, recalling Amin’s class discussions, is that Egypt’s economy is still highly dependent on volatile sources, such as workers’ remittances (still the main source of hard currency inflows) and tourism. Lately, the threat of foreign investors demanding higher interest rates, especially with a trend of rising global rates and instability in other emerging markets, is another major source of concern.

In addition, Egypt is still a net importer of oil, and until this situation changes when the revenues from the newly discovered natural gas fields start kicking in (after three to four years?), the gap between local and international fuel prices will continue to be a major determining force of the macroeconomic and fiscal policy landscape.

What to do? Macroeconomic policy is a difficult subject and one on which few people, economists especially, agree. So I’m not really sure what our professor would have had to say on how to fix these endemic problems of ‘structural dependency’.

Perhaps he would have concurred that public investment could have been used more effectively via projects in health and education that benefit the poor than in building a new capital city that risks increasing crony capitalism and accentuating already wide inequalities between rich and poor. Perhaps he would also have called for a more equitable and progressive taxation policy than one that gets the bulk of its revenues from indirect taxes.

But I’m sure he would have started any such discussion with a few hearty jokes before making a remark that would stick in the back of your mind for years to come, such as ‘those who have power aren’t interested in human development and those who are interested in implementing such changes don’t have any power’. As he would often preach, ‘that makes the development issue not just a technical, economic problem, but a political one’.

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