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Between Islam and the free market

Steering Egypt toward balanced growth

by Hassan Aly

The current Egyptian government led by Prime Minister Hesham Kandil — as well as the other transitional governments in Cairo following the 25th of January revolution — have been heavily criticized for not having a different economic philosophy to the one that prevailed before President Hosni Mubarak’s ousting.

The old regime's economic philosophy that was based on the ‘free, non-restricted market’ has led to economic and social deterioration, and was among the main causes of the revolution. For the average Egyptian, it is unacceptable and undesirable that old policies remain the same.

The current government was expected to reveal its philosophy in simple and clear terms. But as these economic policies (monetary and fiscal) have not diverged from existing economic models, the average man in the street hasn’t seen any significant change. Thus people are quickly making comparisons between the old business elite — such as steel magnate Ahmed Ezz and former minister Rachid Mohamed Rachid — and emerging businessmen such as the Muslim Brotherhood’s Hassan Malek and Khairat al-Shater.

However, and to be fair, the current government is in a dilemma which is shared by many developing countries. When trying to develop an economic strategy there are currently almost no viable alternative philosophies to the free market. Communism would once have been a realistic rival but, after the fall of the Berlin Wall and the transformation of the Russian economy and all the Eastern bloc economies, including China, to various forms of market economies, it is impossible to make the case for it.

And given that the unrestricted free market system has failed advanced economies as much as developing ones — especially after the global financial crisis of 2008-2009 — the choices the Egyptian government faces are tough.

Clearly, the government is attempting to consider the religious dimensions and is tempted to offer ‘Islamic economics’ as an alternative. However, the global and local sensitivity towards emerging Islamic forces are preventing this. More importantly, ‘Islamic economics’ has yet to be fully developed beyond a couple of key policies. While both Islamic banking, as an alternative to commercial banking, and Islamic Sukuk, as an alternative or a complement to conventional bonds, are realistic, there is still a lot of ambiguity concerning the nature of Islamic economics and whether it follows free market or socialist principles.

Therefore to avoid these issues the current government should not pay much attention to the name of its economic philosophy, and should instead work on developing a policy that stems from the reality of the Egyptian economy. In this regard, I propose the following as examples:

1 – The economic policies of export promotion similar to the ones used in the growth models of East Asia have, in Egypt, resulted in the concentration of wealth with a small class of beneficiaries. A good example of the failure of the country’s export policies is the marble industry, where China imports raw materials from Egypt and re-exports it back as a finished product for a much greater price.

We must, therefore, work on import substitution, encouraging the local manufacturing of products that are imported from abroad, especially when the raw materials and basic inputs are available. This may require importing advanced technology and workforce training in economically cooperating countries such as China and Turkey. Entering into a joint-venture or a cooperative partnership with these countries to bring such industries home is vitally important.

2 – Investment policies should adopt the principle of ‘inclusive growth’ or equitable geographical distribution. The establishment of new industries and new facilities should favor areas of higher unemployment and higher poverty rates.

3 – The state should adopt the principle of ‘balanced growth.’ This means giving the same attention and importance to productive economic sectors, such as agriculture, as to the mining and industrial sectors. It is important to note here that the support given to encourage agricultural and rural investment may need to be more extensive than that given to other sectors in order to compensate for the periods of utter neglect.

4 – Economic policies of the country should aim to reduce dependence on the ‘rentier economy’ compared to the ‘productive economy.’ The term 'rentier economy' in this context refers to revenues collected from exporting oil, gas, and other minerals as well as revenues from foreign aid, worker remittances, international tourism, and fees for the use of water, land and air space. Collectively they constitute more than 60 percent of the revenue collected by the government but leave the people dependent on the government rather than vice versa.

These are only examples of some of the policies that, if followed, could help avoid the problems of pure unrestricted capitalism. Thus, we should not worry about how big or small the state’s role in economic activities is or the name of the economic philosophy. What is important now is the rapid and effective treatment before the spread of the country’s economic woes.

HASSAN ALY is a Professor of Economics at Ohio State University and an economic advisor to the Ministry of Planning in Egypt. A version of this article was published in Arabic in the Al Ahram newspaper on October 13, 2012

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