Economic freedom audit series case study: Egypt

The Suez Canal

Water has brought prosperity to Egypt for millennia. The richness provided by the Nile river and fertile soil historically produced agricultural boons, but in modern times an adjacent body of water has brought its own flood of commerce: the Suez Canal. The canal, opened in 1869, is an artificial waterway that connects the Mediterranean Sea with the northern Indian Ocean, via the Red Sea. Each year, this allows 17,550 vessels (25 percent more traffic than the Panama Canal) to bypass up to 4,000 miles of sea travel in each direction.

Since its impetus, the Suez Canal has brought political power-wheeling along with its promise of prosperity. Egypt is no stranger to political tensions. Since its history began there have been powers vying for control of the land — the Persians, the Romans, the Arabs, the Turks, and the British, to name a few. The various outside parties have impacted the daily governance of the Egyptian people, for better or worse.

In recent years, it has become more possible to track the impact of political forces on the country’s performance. Social scientists and international organizations seeking to unlock development have developed novel measurement tools to inform policymaking. One such indicator is the Economic Freedom of the World (EFW) Index, generated by the Fraser Institute. Economic freedom is strongly correlated with other metrics of well-being, for individuals and entire societies. The EFW index captures performance on a range of public policy indicators, including Size of Government, Legal System, and Security of Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation.

Egypt has underperformed in each of these areas. In fact, Egypt is one of the lowest-ranked countries in the latest edition of the EFW Report, coming in 140th out of 159 with a score of 5.73 out of 10. In terms of personal freedom, Egypt is ranked 156th. This hasn’t always been the case. While never ranking at the top of the EFW report, Egypt was consistently near the middle of the pack until the past decade or so. In 2000, Egypt was ranked 72nd out of 123 for economic freedom, meaning that the country has fallen from the top 39 percent to the bottom 12 percent.

The inflection point can be tied to the Arab Spring. On January 25, 2011, Egyptians took to the streets of Cairo's Tahrir Square to protest for increased political and economic freedom. More than 800 died in clashes with police. The demonstration resulted in the removal of Egypt's longtime dictator, Hosni Mubarak. Out of the upheaval, Mohamed Morsi, of the Muslim Brotherhood, arose as the nation’s leader, but that was short lived and led to further national turmoil, protests, and another regime change.

The government has long sought to appease the public with increased spending. Such policies have brought new kinds of plagues on the country: subsidies, inflation, and debt. Public debt has surpassed 100 percent of GDP. Fuel, water, and food are heavily subsidized. For example, Egyptians pay only 59 percent of the cost of fuel, and the state pays the rest (amounting to $30 billion over five years). These subsidies account for nearly one-third of Egypt’s public expenditures — 13 percent of GDP. This has led to market distortions in the economy, which has chilled investment.

Despite increased public spending, necessary institutions have broken down and society has grown segmented according to people’s connections to power. Under table payments have become prominent and poorly enforced laws and ingrained corruption leave some businesses dependent on leveraged connections and middlemen, while others are well-connected and enjoy special treatment. In 2016, half of Egyptians who used public services paid a bribe. A quarter of businesses identify the current Egyptian court system as a major hindrance to their ability to do business in the country.

The international community has taken notice, and some groups have pursued constructive change.

In 2016 the International Monetary Fund (IMF) initiated a $12 billion loan in accordance with the tranches that the Egyptian government requested. This has spurred some economic reforms. So far, the Egyptian government has:

• Floated its currency, untethering the Egyptian pound and allowing market forces to determine its value.
• Strengthened minority investor protections by increasing the rights of shareholders and providing them access to a greater role in major corporate decisions.
• Committed to cutting energy and fuel subsidies.
• Signaled it is pursuing inclusion in internationally held emerging market bond indices.

However, it is unclear whether the changes will be effective at bolstering confidence, from within or from without, and whether any change will structurally improve crucial institutions. Emblematic of the Egyptian political scene, there is a diversity of voices clamoring for influence at this critical time. But one strong voice comes from the Egyptian Center for Public Policy Studies (ECPPS), which has an impressive track record of not just operating within such turmoil but affecting real policy change amidst it.

The Project

The tumultuous social environment in Egypt presents an opportunity for change, but it also creates a lot of noise to filter through. Seeing that a problem exists is a cursory first step; grasping the nuance of reality in a way that translates to affecting progress is the real key. While ECPPS’ broad goal is to improve society, to accomplish that end they decided to investigate the core drivers that restrict economic liberties and target them for reform.

To determine these pivotal areas, they partnered with two organizations with robust experience in economic evaluation, the Fraser Institute and Atlas Network. Specifically, with these partners, they launched an Economic Freedom Audit (EFA). This project would not only trace the root of Egypt’s economic woes, but it would provide a roadmap to navigate the path toward greater freedom and prosperity.

Before beginning their audit, ECPPS sought a thorough appraisal of both Egypt’s current standing and how to conduct a successful EFA. They initiated a rigorous review of the 5 main EFW categories and the 42 sub-indicators, drawing on specialized material provided by Fraser. They also reviewed other organizations that had completed successful EFAs. Following this investigation, ECPPS narrowed the scope of the EFA to specifically target four leveraged sub-components of the EFW index: intellectual property, non-tariff trade barriers, monetary and fiscal policies, and subsidies.

The four policy themes emerged as areas ripe for tangible reforms that could dramatically ameliorate Egypt’s steep decline in economic freedom whilst resonating with broad enough groups within society that change could be possible. Once ECPPS identified the targeted policy areas, they created a research plan to build substance for their proposals. The specific outputs included research papers for each of the four target areas.

For the in-person audit workshops, ECPPS identified stakeholders with direct connections to the identified areas. Then they needed to reach out to them.

ECPPS already had an established database of contacts, which allowed them to quickly identify primary contacts to invite. This freed them up to spend time generating a tiered outreach plan to reach additional stakeholders with whom they had not had prior interactions. ECPPS sent invitations to embassies, ministries, governmental bodies, political parties, public figures, and even some international organizations, like the World Bank and USAID. They also implemented a social media campaign for outreach activities. And they extended personal invitations over the phone to specific people they deemed vital to the audit.

Conclusion

A successful audit can lead to serious policy changes and ideological shifts, so determining the factors that ensure success of an EFA is crucial. From ECPPS’s experience, a number of important lessons arise. First, ECPPS recognized the unique economic position of its country. If there is any time to push towards economic freedom, this is it. Important, sympathetic ears are currently open to suggestions, exemplified by numerous attendees being high-level government employees. Second, ECPPS utilized the experience of its network to reach these Egyptian leaders. Third, ECPPS used its introductory conference to create an efficient, informed atmosphere — one crucial to the success of an EFA.

Although the EFA is currently ongoing, ECPPS’s audit can become the groundwork for more sustained, substantial change in Egypt. ECPPS plans to use their EFA to examine current reforms while also proposing new ones, striking while the iron is hot.