Econ Reform Tops List for Tunisia and Egypt

Economic reform is a priority for policymakers in Tunisia and Egypt. These countries, like others in the Middle East, need to streamline their public sectors and promote the type of private sector growth that reduces poverty and inequality. But doing so will involve tough trade-offs between short-term pressures and long-term priorities.

In the short-term, people in Tunisia and Egypt are clamoring for higher standards of living: higher real incomes and more jobs. Since 2006, inflation in Egypt has risen faster (11.8%) than average incomes (4.4%), eroding peoples’ purchasing power. In Tunisia, while coastal incomes have kept up with inflation, inland incomes — especially in Kasserine and Sidi Bouzid — have not, leaving inland residents worse off. An influx of refugees from Libya, moreover, will continue to put upward pressure on food and housing prices in both countries. In terms of jobs, a quarter of Egypt’s 15-26 year olds and nearly a third of Tunisia's youth, are out of work.

This puts pressure on policymakers to maintain or even increase certain forms of state support, such as subsidies on food and energy, salary increases in the public sector, or expanding the public sector payroll. But while some of these measures may be necessary, they are still palliatives, not long-term solutions.

In the long-term, Tunisia and Egypt need to streamline their public sectors to free up funds, and re-allocate such funds to promote human development and private sector growth. One way to free up state funds is a gradual reduction in subsidies, which cost 3.2% of Tunisia's GDP and 9.0% of Egypt's GDP in 2009. Another way is to gradually dissolve State Owned Enterprises (SOEs), most of which are inefficient and rely on so much credit for their operations from the formal banking sector that small and medium enterprises run by families must seek credit from the informal market, where interest rates are higher. Finally, Tunisia and Egypt can generate revenues by breaking up the economic assets of their former regimes. This will be harder, but no less important, in Egypt, where the military controls about one-third of the economy, including the water, olive oil, construction, hotel and gasoline industries. Opening up these industries to new local or foreign ownership will make them more efficient and transparent, as well as provide new jobs to those put out of work from dissolving SOEs.

At the same time, Egypt and Tunisia should increase government spending on critical public goods, drawing upon the newly pledged $20 billion in economic assistance from the G-8. Egypt needs to spend less on defense and more on education and infrastructure in rural areas, to raise the skills of the local workforce and attract foreign investment.  Tunisia's interim government has recently announced two important plans: one to fund infrastructure projects in the country's regions to promote job-growth, and another to set up a "generational fund" to encourage private investment in new businesses.  Both governments, especially Egypt, need to slash the amount of time it takes for local entrepreneurs to obtain licenses to start up new businesses.

With legislative elections scheduled for Egypt in September and Tunisia in October, the pace of economic reform each country will undertake in the short-term is unclear.  Policymakers in both governments face the unenviable task of managing short-term pressures and long-term priorities.   

Photo Credit: Jeff Christiansen