A solid foundation to build upon.

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Nurturing Egypt’s Economic Transformation

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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With bad news generating many of the headlines from the Middle East, it has been easy to miss the ongoing transformation of the Egyptian economy.

The Egyptian government is trying to correct this perception by inviting a range of high-level officials from both the public and private sectors to Sharm el-Shiekh for the Egypt Economic Development Conference, beginning March 13. The discussions are sure to shed light on the ongoing revival of one of the largest economies in the region.

The numbers are encouraging. After another rough patch, the economy is picking up. Growth accelerated to more than 5 percent in this fiscal year's first half, which ended in December 2014. Investment, both domestic and foreign, is gradually recovering. Tourism is slowly coming back. The budget deficit is targeted to fall to 10.5 percent of gross domestic product under the 2014/15 budget -- from 12.5 percent in the previous year -- and to 8 percent for 2016/2017.

QuickTake Egypt's Revolution

Moreover, disorderly currency pressures have eased, allowing the central bank to cut interest rates. All this contributed to the International Monetary Fund's recent assessment that “the measures implemented so far, along with some recovery in confidence, are starting to produce a turnaround.”

As important as these indicators are, their implications pale in comparison to the emerging scope of Egypt’s comprehensive economic policy response. The aim isn't just to stabilize the economy. It is also to unlock the country's significant untapped potential, which, despite Egypt's considerable human and physical assets, has been repeatedly held back by political factors and bureaucratic inertia from delivering the prosperity that past and current generations of Egyptians deserve and now expect.

To this end, immediate measures to stabilize the economy are being accompanied by three, mutually reinforcing pillars of durable economic reform:

  • Enhancing actual and potential growth and job creation, including a new investment law to reduce inefficiencies, increase investor protection and provide targeted incentives; and a subsidy reform to better target support for the more vulnerable segments of society.
  • Encouraging sector-focused programs by emphasizing critical economic and social areas such as education, health, housing, energy, infrastructure and information and communications technology.
  • Creating a macroeconomic framework that credibly targets sustained high inclusive growth, whose benefits are shared widely by the population, with particular emphasis on protecting the most vulnerable.

Such a comprehensive policy approach, which has been lacking in the country's recent history, is critical to Egypt's longer-term economic well-being.

It is also a necessary (though not sufficient) condition for a more inclusive nation -- in economic, political or social terms.

This time, Egypt is also benefiting from the substantial support of its partners, notably Saudi Arabia, the United Arab Emirates and Kuwait.

The Egyptian authorities aren't alone in their efforts to reform economic policy to ensure superior outcomes. They aren't the only ones to have recognized that success means doing things both better and differently. And they aren't the only ones seeking to place greater emphasis on engaging youth, an absolutely critical element of any inclusive approach to reform, and a paramount necessity (especially in the aftermath of the 2011 revolution).

Donors also are adapting their approach. The UAE, in particular, has adopted an innovative on-the-ground approach in both urban and rural areas. This model supplements financial and technical assistance with close involvement with the Egyptian government and businesses in projects that construct homes and health clinics, establish schools, provide public transportation, improve sanitation services and build roads.

Given these promising developments, at least four transitions will be critical to Egypt's success in building a more prosperous economy:

  • Improving policy implementation to ensure that the design of programs includes responsive execution that adjusts in a timely fashion to developments in an increasingly volatile global economy.
  • Moving economic development away from relying just on state-led growth to a more inclusive model that supplements important national projects with public-private partnerships and private sector activities (particularly small and medium-sized businesses and start-ups).
  • Restructuring domestic institutions to ensure they are more transparent, efficient, accountable and inclusive, and that they meet the needs of all Egypt’s people, not a privileged few.
  • Broadening external support for Egypt’s domestic reforms from a few partners to a wider range of donors (including regional and multilateral institutions).

 These transitions are critical if Egypt is to overcome decades of chronic economic underperformance, reduce its excessive vulnerability to the vagaries of an increasingly volatile global economy, and meet the legitimate aspirations of the January 2011 revolution. Ensuring that they occur successfully, and simultaneously, will require a combination of careful domestic implementation and timely external support. They also need to sustain broad social and political buy-in.

The benefits of a successful Egyptian economic transformation would have notable spillover effects that extend well beyond the country's borders. A dynamic and growing Egypt constitutes an integral part of a more secure and stable Middle East.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net