Charting the course
Youssef Boutros Ghali, Egypt's minister of finance, is seen by the people as someone out to empty their pockets. He does indeed have the unenviable job of filling up the coffers. But the task is necessary and is left up to Ghali who knows the Egyptian economy inside out, having been involved for the past 20 years in the country's economic policy-making process while holding portfolios of the economy, foreign trade and international cooperation. Late last year Ghali was chosen to chair the 24-member International Monetary and Financial Committee, the policy-steering committee of the International Monetary Fund, thus becoming the first representative from a developing country to hold such a high-ranking position. He tells Niveen Wahish where he hopes to see the Egyptian economy in 10 years and what needs to be done to get there.
Where do you see the Egyptian economy going in 10 years time?
In 10 years I see the Egyptian economy at the same level where Italy and Turkey are today. These are economies that are well structured, well established and have institutions that function.
Don't you think this is too ambitious?
I tend to be too ambitious but most of the time I get what I want.
Would that be your best case scenario?
More ambitious than that would be fiction. This is what I think we can do and what we should be aiming for.
What is it that we have that could make this possible?
We have everything; resources, people, the labour force, a huge market, a great geographical position, agriculture, tourism and raw materials. In short, we are a rich country.
But we've always been a rich country...
We can mismanage our resources and not do anything with them. But if managed properly we can be a dominant economic regional power in Africa. We can stand up to South Africa if we want in 10 years.
What guarantees are there that it will be managed properly?
What provides a sort of guarantee is that we have functioning institutions that are not dependent on one man. What I am trying to do and I hope my colleagues will try to do as well is build an institution that functions efficiently irrespective of who is in charge. The person in charge provides political guidance, policy directives but the day-to- day running of the institution is self- generating. It has its own momentum, its own dynamics and its own efficiency. And it does not rely on whether the minister is competent or not. This is what guarantees proper management of the economy.
What would be the worst case scenario?
The worst case scenario starts today -- if we lose control of the budget deficit and if we decide to spend more than we can afford with the excuse that the economy is not growing and we need to generate jobs.
Failure to generate resources, by whining about the property tax or the energy subsidies, coupled with a failure to maintain discipline in the budget by keeping the expenditure within the limits that are sustainable, means that we lose control of the budget deficit, domestic debt and ultimately our spending. If we do this, the first to suffer is infrastructure and investment. If investment and infrastructure spending decline, then the productivity of the economy declines. When that happens you cannot achieve growth rates of seven and eight per cent. That would be the beginning of a secular decline where we sort of hum along at three to four per cent growth every year. We get nowhere and population growth is way ahead of whatever we can do. And the situation goes from bad to worse.
What is a sustainable budget deficit?
If I can address the level of our domestic debt, my sustainable budget deficit can be in the order of three to five per cent. Right now it is 8.5 per cent for 2009/10. It is an exception. And we did this on purpose. We cannot keep it up. We are going to have to scale back spending or raise resources. If we fail to do this then we put ourselves on a slippery slope where we weaken our capacity to generate growth in the medium term. And with the lower capacity to generate growth our problems grow faster than we can solve them. And we run into stagnation.
What is the ideal growth rate we should be targeting?
We can go to 15 per cent if we want. It is a matter of policy and commitment. If we are committed to getting 10 per cent growth rate we will get it, but it entails policies and reform measures that target spending and revenue generation.
What policies and reforms do we need in the next 10 years?
Expand infrastructure development, get the private sector more involved in infrastructure development, limit the distortions caused by subsidies and eliminate distortions caused by inadequate taxation. We fixed the income and property taxes. We need to fix the Value Added Tax (VAT). It is still distorted and needs to be revisited.
Once we are past this crisis we can restore growth at around 7.5 to 8.5 per cent. If we can maintain this for five years I can almost guarantee a significant improvement in the standard of living of all Egyptians. But I need five consecutive years at above 7.5 per cent.
Do you see Egypt becoming an OECD member or one of the top 50 economies?
Maybe it could become one of the top 50 economies in 10 years. We cannot get there any faster. Membership of the OECD is not so much about the wealth of the economy as much as it is about how it is run. If you are running properly and you have proper management tools and proper governance and proper statistics and proper procedures for managing the government, then you can be a member of the OECD without problems.
How can the Egyptian economy deal with global crises?
If you have a well run economy you can survive crises. It is like somebody who gets the flu. If his or her health is not good, the flu could kill them. If his or her health is good, they will fall sick for a couple of days and then get back on their feet. Had we not done the reforms we did in the past five years, the first crisis of commodity price increases followed by the global financial crisis would have killed us completely. Had these two crises happened in 2004, we would be dead by now.
But we are in perfect health considering the international situation. We are considered one of the top three highest growing countries in the world after China and India. We are doing well, not good enough to change significantly the standard of living of Egyptians; 4.5 and 4.7 per cent growth rates are not enough. We need seven per cent. But by international standards we are miraculous.
How do you see the economy absorbing more than 100 million population in 10 years?
It is a matter of management. A properly managed economy can absorb these numbers but of course it is making life more difficult. If you are running and you carry a weight you are going to run slow. Take off the weight and you will run fast. The more we can control population growth, the better off everybody is. But population growth can torpedo everything we do if it continues at present rates; there is no growth in the world that can accommodate that. We would need to be growing at 10 and 12 per cent like China. And it requires much more brutal measures to generate income and revenues and to spend more on infrastructure and spend more on growth.
Developing economies like Brazil, India, South Africa and Mexico have grown extensively. What do they have that we don't?
Good management. They have good macroeconomic policies and they have good social policies.
There is criticism that Egypt's safety nets have not been given enough attention in the reform process...
On the contrary, they have been granted attention but we face resistance from society whenever we try to look at these safety nets in depth. We cannot go on having the system as it is. This needs to change. But there is a lot of mistrust of the government. Whenever we say we are going to fix subsidies, everybody thinks we are going to dump people by the side of the road. That is not true.
What we know is that we cannot afford our systems as they are now, with a lot of waste and a lot of assistance that goes to people that do not deserve it and do not need it. We need to reform this system and we need the support of society at large. The message that is not getting across is that we want to reform the subsidies system and to reach out to more people who are not being helped by the subsidy system as it stands. But of course in the meantime, we will have to kick out people who do not deserve it. Those are the ones who make the most noise and who are not helping us reform the system. It is the same sort of resistance that the property tax is receiving. The property tax is going to touch the rich and it is they who are most against it.
How is the development of direct money assistance vis-a-vis subsidies coming along?
We need to be able to identify the poor. We are working on targeting systems, and putting smart cards in the hands of families so that we can track and transfer money to them. But it takes time and there is huge resistance.
How about fears that when people start receiving money handouts prices will escalate?
Then we will increase the money. People think that we want to change the system so that we can kick people out. We do not. If we give money I can guarantee you there will be an excess supply of commodities. Now people are consuming commodities because they are cheap. They are not consuming, they are wasting. Bread is being thrown away and ends up as cattle feed because the loaf costs LE0.05. Give the money to the person deserving the subsidies and put the price of the loaf at LE0.25. All this waste will disappear. And consumption is going to drop.
What type of reforms should we expect in the upcoming decade?
The coming decade will need to see massive reforms in education. This must be at the core of our planning for the next decade if we are to maintain high growth rates. Massive reform in healthcare and reform in the financial system are also needed. Our banking system needs to be upgraded. It is in good health but it is neither efficient nor effective. You need a banking system that is active, that finances growth and goes into projects and expands the reach of the private sector. Our banking system is healthy but it does not like risk. It should be more involved in pushing the country to grow. Now they are not; they are being dragged into it. They need to address problems of small and medium enterprises, but they do not because it is difficult, because it requires new skills. It is profitable but it is a hassle and they go for the easy solutions. The easy solutions keep them healthy but it does not help the economy.
In the past decade we saw serious reforms like privatisation. Should we expect something similar in the next 10 years?
We need to resolve the public sector once and for all by getting rid of it one way or the other. By getting rid of it I do not mean it in the sense of property. I can still own it but it needs to be managed like the private sector.
What's keeping us from doing it now?
Resistance in society at large. They refuse and are fearful that we are going to create unemployment. But we are one of the few countries in the world that has privatised without increasing unemployment.
What about the public ownership plan?
That is an idea whose time has passed.
There is criticism that the government is bailing out of the health and education systems.
This again is an issue of mistrust. We are doing this to be more efficient. There is nothing wrong to ask for healthcare to be provided by the private sector if I control what the public pays. I contract for it and the public pays me.
Looking back at the financial crisis, do you believe capitalism has gone beyond control?
That is nonsense. It needs regulation of a different kind. Capitalism is not a managed system. It is a system that grows intrinsically. And it grows by crises. The Great Depression of 1929 brought in central banks, social security and all sorts of regulatory practices that were not there before. Other crises came and brought in other regulations. This crisis will bring in a new regulatory system that will help address what has evolved in the economy. Some areas have evolved without regulation because they evolved too fast. Now they are going to be regulated. This is in the nature of capitalism; every time there is a crisis we discover that we are missing something. It's a system that is dynamic and based on innovation. And with innovation you come into virgin territories.
I am not saying that it is not painful, but that is the nature of it. We will have crises in the future of a different nature than the one we had today, just as the one we had today is different than previous crises.
Should there be a greater role for the government?
There is a different role for the government, not greater. We need to regulate things that we did not regulate and control things that we did not control. For example, the derivatives market was not regulated properly and the same goes for the hedge funds. And the way banks interacted between various regulatory environments left a loophole. The banks would go to the market that was least regulated and because the economy has become globalised, that had become very easy, which means that now that the economy is globalised we need to have a global regulatory infrastructure that is the same everywhere.
There were too many loopholes because the system outgrew the regulatory infrastructure. Now we are going to put regulation in front. Very soon, in 10-30 years the system will outgrow these regulations, too, and we will have to put new rules.
From your vantage point in the IMF, how do you see the role of the IMF in all this?
The IMF is the main clearing house for regulations. It keeps track of the health of the international system. Somebody has to supervise the international system from above and keep track of the various cross national flows, transactions and impacts. The IMF should have a better regulatory structure and better access to analysis and more control in what it says to economies. Its advice needs to be taken more seriously, and it needs to have tools to enforce its advice on countries, especially the large ones; the small ones are easy. It is the large ones that do not listen to the advice and later we run into problems for all of us.
But how do you explain the fact that the IMF has been criticised for giving advice that affected countries negatively?
I am not saying the IMF does not make mistakes, but at least it is present. In the past crisis it was not there. This is wrong. The IMF needs to be involved. It may make mistakes, but by managing it through the member countries we learn from these mistakes.
To what extent is Egypt a fully-fledged market economy?
You judge an economy by its results. If it is bringing in results, raises the standard of living, creates jobs, and grows by seven and eight per cent, who cares if it is a communist or a capitalist economy? If it works then it is good. We can be the best capitalist economy in the world but if it does not work, I will go the other way.
When will the results of reform trickle down to the average citizen?
When we have growth. We had growth rates of seven per cent for two and a half years then the situation started plunging. There is not enough to trickle down. In four years we created three and a half million jobs. The people who found these jobs have felt it trickle down to them. We have increased the potable water capacity by 25 per cent. The people who now have potable water have felt it. We have increased the sewage capacity from 42 per cent to 60 per cent. That 18 per cent has felt the difference. But we still have people who do not have sewage and we have people who do not have enough water. And we still have people who get incomes below what is necessary for proper living. There is a lot more that needs to be done but we need to be able to have five years of seven per cent growth every year. Then I can guarantee it is going to trickle down.
How optimistic are you about the future?
You cannot work at something unless you are optimistic and you think that you are going to make a difference. I know that this country can be a strong, powerful, comfortable, and prosperous country. We just need to put our heads to it and do what needs to be done.
