Productivity and the Egyptian Economy
The second installment of the Basics of the Egyptian Economy series, this time following productivity: how it’s measured, why it’s important, and what Egypt is doing around it.
In our previous article of this series, ‘Basics of the Egyptian Economy: the 1952 Movement’, the Egyptian movement of 1952 reshaped the development, inclusivity, and productivity of the Egyptian economy with the fall of the king. Since then, the lack of productivity has been one of the fundamental problems in the economic growth of Egypt. Khalid Ikram (2018) illustrated that Egypt’s economic growth has increased in labor force with the growth of the population as well as in some forms of capital but has not seen a large increase in productivity across the last 50 years.
Productivity*as an economic termis meant to define the amount of output produced per unit of input. These units of input can be individuals working, the capital it takes to start the business, or any other resource. Labor productivity, in particular, is the amount of output produced per the labor force in question. When it comes to the labor force, there are things that can help improve productivity such as advances in technology, education and experience, or increases in the amount of capital given to each worker. According to the Solow Model, which measures changes in economic growth while accounting for the population growth rate, technological advancement is a crucial part of increasing productivity, which will result in having an increasing return to scale. Moreover, Ikram (2005) explains that it’s fundamental to qualify and educate labor, as it is an input factor in the function “N” and is significant to the increase of participation in the labor market. In Egypt by 2019, about 27 percent of the population was illiterate, according to a study by CAPMAs highlighted in Egypt Today, while many still highlight the gap between skills acquired in higher education and the needed skills in the labor market (El-Araby, 2009). These facts, amongst others mentioned, are some of the most important reasons Egypt’s productivity remains at low rates.
The issue with Egyptian productivity can be highlighted through comparing similar economies. When comparing economies, Egypt is often placed as a middle-income nation, yet, productivity in Egypt cannot be compared to other middle-income countries’ rates. Egyptian productivity growth was negative across the period of 1965 until 1997. Comparatively, productivity contributed to 24% of economic growth in Malaysia and 40% economic growth in Thailand during the same period (Ikram, 2005). For example, in Malaysia the increase in average industrial value per capita (how much a person contributes to industry) was at $1517, compared to the Egyptian average at $226 in 2002 (El-Araby, 2009). Meanwhile, there has also been a huge rise in the expenditure of real estate such as the rise of the new cities like New Cairo, New Capital, Sheikh Zayed, etc. Such expenditures are categorized under the services sector, which according to Ikram (2005) contributed to 50% of the GDP from the period of 1965 until 2000, while other sectors, known as the productive sectors, such as agriculture, did not exceed a 20% increase. The share of agriculture, for example, declined steadily. The increase in the service sector rather than increase in the manufacturing and agriculture sectors came as a result of the open-door, infitah, policy during the 1970s. According to Rivlin (1984), this policy increased oil revenues, emigration remittances, Suez Canal revenues, and tourism revenues, but it didn’t change the domestic economy, which relies on industry and agriculture. This policy, highlighted by its neoliberal tendencies, has been institutionalized in the mindset of the decision makers and the political institutions until today, as the increase in current government expenditure is mostly used for creating new cities and acquiring quick money and cash flow in order to stabilize the exchange rate, leaving it several externalities rather than empowering it in a productive manner.
The significance of productivity in enhancing the Egyptian economy is opening to us an effective question regarding development and inclusivity. As presented above, labor is a highly important factor of production and will have positive impact on productivity, which is needed to evaluate the extent of economic development.
Notes for further understanding:
Productivity can be expressed by a well-known economic function called the “Cobb-Douglass function” (Y = AkαN 1−α.). The Cobb-Douglass production function is often used to explain the relationship between two or more factors in the economy (in most cases, it is used to compare capital and labor to the total output), it is one of the ways we can calculate how much productivity (or other factors) in any economy actually affect the economy. Essentially,Yis equal to the total output provided from Kcapital, Nlabor, and A total factor of productivity. There are some issues with this model, as there are with many other models, and they are clarified well here.
Citations and Sources for Further Reading:
E. (2019, November). Illiteracy in Egypt decreases, but number still high: Official. Retrieved August 21, 2020, from https://www.egypttoday.com/Article/1/77697/Illiteracy-in-Egypt-decreases-but-number-still-high-official
El-Araby, A. (2009, May). The Productivity and Competitiveness of the Egyptian Economy. Retrieved from http://www.encc.org.eg/wp-content/uploads/2017/03/ashraf-el-araby.pdf
Ikram, K. (2005). The Egyptian Economy, 1952-2000: Performance Policies and Issues. Retrieved from https://ebookcentral.proquest.com
Ikram, K. (2018). The Political Economy of reforms in Egypt: Issues and Policymaking Since 1952. New York; Cairo; The American University in Cairo press.
Kenton, W. (2020, January 29). Productivity. Retrieved August 21, 2020, from https://www.investopedia.com/terms/p/productivity.asp
Kwatiah, N. (2016, March 02). The Cobb-Douglas Production Function. Retrieved August 21, 2020, from https://www.economicsdiscussion.net/production-function/the-cobb-douglas-production-function/18519
Moffatt, M. (n.d.). The Cobb-Douglas Production Function. Retrieved August 21, 2020, from https://www.thoughtco.com/the-cobb-douglas-production-function-1146056
Rivlin, P. (1984). Aspects of Economic Policy in Egypt 1970-80
Solow Growth Model - Overview, Assumptions, and How to Solve. (2019, November 22). Retrieved August 21, 2020, from https://corporatefinanceinstitute.com/resources/knowledge/economics/solow-growth-model/
