Economist: Balance between market and state economy ideal for Egypt

Nobel Prize winner and economist Joseph Stiglitz believes that an economic model balanced between a market and state economy would be ideal for Egypt in managing a successful transitional period, as it works to attract investments to stimulate its economy.

In his first visit to post-revolution Egypt, the prominent economist gave a lecture at Bibliotheca Alexandrina in Alexandria on Thursday entitled “Solving Unemployment in Egypt,” in which he outlined some of the challenges the nation faces during its transition and measures to deal with them.

Stiglitz was awarded the Nobel Prize in Economics in 2001 for his analyses of markets with asymmetric information. He is now University Professor at Columbia University in New York and chair of the university's Committee on Global Thought. Although Stiglitz served as the chief economist and senior vice president of the World Bank from 1997 to 2000, he afterward became critical of its neo-liberal model, which he outlines in his book, “Globalization and Its Discontents,” which sold more than a million copies worldwide.

“The economy can’t wait until the resolution of all the political problems. We can’t say, 'Let’s solve the political problems and then begin to work on the economy.' Unfortunately, in this period, the economy will go down, unemployment will go up, and impatience will increase,” said Stiglitz. 

Stiglitz's visit comes at a time when Egypt is suffering the economic repercussions of the 25 January revolution, with growth slowing to a rate of 2 percent despite previous projections of 5 percent, and poverty increasing to 42 percent of the population (those living on less than US$2 a day), according to government measures. Income from tourism, one of Egypt’s main revenue sources, has decreased by 80 percent due to the political turmoil; similar fears have made investors loath to pump cash into the country.

Stiglitz slammed both the socialist and the market fundamentalist models as failures, imploring Egypt and other countries undergoing revolutions to adopt a balance between the state and the market, more specifically the European social model.

The European model combines sustainable economic growth with improved living and working conditions. This entails seeking full employment, good quality jobs, equal opportunities, social protection for all, social inclusion and involving citizens in the decisions that affect them.

“It has been proven that the socialist model doesn’t work, government domination of production doesn’t work. We saw its failure over and over again in Russia, in China and the Middle East,” said Stiglitz. “But we have also seen that the market fundamentalist model has failed, the neo-liberal model has failed as it produces unsustainable growth and in many cases it was marked by corruption.”

Achieving social justice has been a central demand by protesters, who have issued calls to set minimum and maximum wage limits that would ensure decent living standards for workers and government employees.

The Nobel Prize winner added that democracy will play an important role in setting the right model, since it will allow for a debate in the society on what is the appropriate mixture of the market and the state for each country.

“It’s not just the size of the state, but how it functions and what it does,” Stiglitz added.

Stiglitz criticized Egypt’s system of subsidies as “not well targeted,” providing the example of fuel subsidies that help the rich, not the poor, as the latter do not drive  heavy trucks or sport-utility vehicles (SUVs). Egypt allocates more than 20 percent of its annual budget to subsidies. 

“It is the role of the government to make subsidies more targeted to enhance social protection and to use fewer resources so that the rest is used for development,” said Stiglitz.

While the notable economist recognized the important role that the private sector plays in the economy, he rejected the privatization imposed by international financial institutions such as the World Bank and the International Monetary Fund on governments like Egypt's, as it often leads to even more corruption.

“I call privatization: bribatization,” said Stiglitz.

“Corrupt governments discovered that privatization gave them the opportunity to be even more corrupt, because before they used to steal a fraction of annual flows of profits,” he continued. “But privatization meant that they could steal the future flows. Around the world, you can see some of the greatest inequalities associated with corrupt privatizations.”

Stiglitz addressed the problem of unemployment in Egypt, which according to official statistics, amounts to 11.9 percent, up from 8.9 percent in December of last year; 28.9 percent of the unemployed have a college education and 52.6 percent some kind of technical or vocational qualification.

“One reason creating jobs for the youth is so important is that not only does it destroy valuable human capital and risk the ability to grow in the future, but it also creates a kind of alienation between the youth and the government which is destructive to society,” said Stiglitz.

He used an example from the US, where 20 percent youth unemployment reflected in the voter turnout in the 2010 elections, which was also 20 percent. Stiglitz said that young people felt at the time that the political process was not responsive to their needs and voted, explaining why is particularly important for Egypt and Tunisia to address their own youth unemployment.

When dealing with the issue, Stiglitz explained that there is “a potential conflict across generations” that has to be addressed by reaching a social consensus. He asserted that the government needs to make tough decisions on where to direct its scarce money.

“Do we spend money on educating the young, on investment in infrastructure and technology, or do we spend money on health care, social security and pensions?” he asked rhetorically.

Similarly, in the area of jobs, governments must realize that there are some tough calls over whether to protect people in current jobs with high wages, or whether these protections may cause more workers to remain in their positions, preventing more qualified young people with no jobs from entering the labor market.

Stiglitz added that economic growth is needed in order to increase job opportunities and that in order for growth to happen, the government has to encourage domestic as well as foreign investment. One problem with neo-liberal doctrine, he said, is that it puts emphasis on foreign investment at the expense of domestic investment. Encouraging young entrepreneurship is one of the best paths to take, said Stiglitz.

“Every big business used to be a small one,” he reminded.

Stiglitz ultimately called on the Egyptian government to follow Mexico’s experiment, providing youth with both the skills and capital to come up with sound business plans. Banks should also play a role in helping medium and small-sized enterprises.

Stiglitz added that one way to fight corruption after the uprising is to ensure transparency by developing a Freedom of Information Act, resembling the one in the US.

“When people are afraid of transparency, one should be suspicious,” said Stiglitz.

The famed economist ended his talk by expressing his happiness to share the excitement of the transitional period with Egypt. He noted that while these changes of course take time, they could require even more years of economic planning without a clear agenda. 

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