Taher Helmy* charts a course for social and economic success through empowerment of the average citizen
One of the challenges that Egypt is facing with regards to reform is the fact that those most affected — average Egyptians — have not been directly addressed by the process, or at least do not feel so. Reform is not just a matter of economic or procedural checks and balances dictated by authorities to achieve efficiency; it is a human process of seeking deliberate change in order to restore dignity to the lives of the people of this nation. Reform is therefore a comprehensive process that takes place on the level of society. Only by granting people their rightful place at the centre of this participatory process, can we achieve the goals to which we aspire.
Economic abstractions like growth rates, budget deficits, debt servicing and structural reform mean nothing to the average citizen concerned with a safe and secure home, how to feed a family and educate children on a highly-taxed salary that is shrinking with inflation. Under such conditions, people will view the reform process as adversarial, and public consensus will be withheld, preventing government from making the bold moves required to turn Egypt around. It is essential to facilitate public participation and support. This article outlines some of the means available to accomplish this; mindful of the fact that the job of political parties is to connect with the people, and the role of government is to serve the people, having earned their trust and confidence in their ability to do so.
Comprehensive reform means change that touches every aspect of life. This includes economic policy be it fiscal or monetary, institutional restructuring and decentralisation, and also public education, public health and financial empowerment for men and women of every walk of life. In other words the vision must encompass the design of technical and substantive policies (i.e. customs, taxes, property rights etc.), the people who will take responsibility for implementing them, and those who will benefit from them. In devising a master plan based on such a vision, the parts must fit together like pieces of a puzzle that are joined in sequence. Success of the whole depends on the inter-working of the many parts: change is only as strong as its weakest link.
Furthermore, this plan should not be the province of decision-makers alone. The role of the media must be reassessed as a great, untapped resource that can be rallied to the cause of public awareness to keep people apprised of the value of their participation throughout the reform process. It must be understood — and communicated — that such a process takes time, but the magnitude of the task should not prevent its beginning.
It is perfectly reasonable to set a ten-year framework, comprising a sequence of actions that consecutively lead to the agreed-upon goals that everyone must strictly abide by along the way.
The first goal is deregulation, which, for our purposes, means simplification. The last decade has seen key legislative changes that abolished taboos regarding a market-driven, versus centrally planned, economy. We have indeed made progress with policies, but stumbled in terms of implementation. Our skill level and institutional reform has not kept up with policy leaps; in fact, we have more bureaucracy today than before. Civil servants are being asked to make decisions regarding complex new market economy concepts and take responsibility for them. They are at a loss, so they create more obstacles to slow things down and protect themselves, knowing that mistakes can cost them their jobs — or worse. The absence of a simple system that is competently executed has proved to be a tremendous impediment for investors large and small, local and foreign.
SIMPLIFICATION — A CAMPAIGN AGAINST DISCRETION: In approaching the task of simplification, the bureaucracy itself must be reduced from the current six million civil servants to approximately two million over the course of the next ten years. This must not be understood as a way of punishing, or beating, the bureaucracy — which is in fact composed of average citizens trying to earn a livelihood — but as the process of revising a system that is no longer constructive, freeing millions from redundant and poorly paying jobs, while seeking to provide them with alternatives for a better life. Under the current scenario, no one profits — not the civil servants in their ill-conceived jobs, or a public who equates bureaucracy with overwhelming obstacles, or investors who face endless red tape.
The key lies in reducing discretion by government functionaries, making inappropriate, time- consuming decisions unnecessary. The simpler the system and procedures, the less the discretion. This is the first step towards achieving more efficient governance, a better business environment, more transparency and less corruption. For example, Egyptian customs recognises around 30 tariff bands and hundreds of sub- bands. These can be reduced to no more than three, simplifying the customs official’s work, not to mention reducing costs to businesses, and ultimately the consumer. We can start by first reducing the tariff bands to six and setting a time target, say three years, for having three bands at a low tariff rate that is globally competitive. Chile, the most successful Latin American economy, has one flat tariff rate of six per cent.
Similarly, tax procedures and the underlying legislation demand decisive action. The current tax system is hugely complex, inviting discretion and corruption. This could be remedied with a simple flat tax regime, say 15-20 per cent for everyone across the board with minimum easy deductions, if at all, and a higher level of allowances to help lower income groups. The allowance level increase must be significant: personal allowances should go over LE10,000, and family allowances over LE15,000. Likewise corporations would pay a flat tax rate without tax holidays, which only create distortions in the economy.
Studies conducted here and elsewhere show that although tax rates will go down in a flat rate scenario, revenue to government increases. Simplification will enlarge our tax base — but only provided a tax amnesty is granted. Indeed, a friendly settlement initiative to close corporate tax files (open in some instances for over ten years) and a “forgive and forget” approach would restore confidence in the system and ensure the success of the new tax policy.
The current system of taxation has failed to improve overall standards of living, and has created an atmosphere of distrust. The rich can afford lawyers and auditors to benefit from the system’s complexity, while the average wage earner, including civil servants, bears unrealistic burdens. The current system is therefore inherently unfair. Considering these features, it is no wonder that Egypt’s taxation system has bred a culture of avoidance. Ultimately, people either declare less than they earn, or do not file at all. In fact, according to World Bank estimates, Egyptians declared approximately 20 per cent of their income for the year 2001.
Another indication of our tax system’s failure is the presence of a massive informal economy. Research by the Egyptian Centre for Economic Studies (ECES), in cooperation with Hernando De Soto’s Institute for Liberty and Democracy, has shown that extra-legal businesses employ at least 8.2 million people, or about 40 per cent of Egypt’s work force. This number includes 1.4 million entrepreneurs, 82 per cent of Egypt’s total — the people who are willing to start and operate businesses that should generate employment.
Not only is the informal sector growing in its own right, it is attracting frustrated members of the formal sector who can no longer make a reasonable living. But the informal sector operates under serious limitations. Businesses that must hide to survive cannot expand and hire more employees; they cannot improve capacity or performance, use legitimate channels for finance, or offer legal social benefits to employees. One of the reasons the informal sector continues to grow, in addition to the bureaucracy, is an intimidating and prohibitive taxation system.
A flat tax could help remove these disadvantages. Like Egypt, Russia’s tax system was mired in complexity; also like Egypt, estimates of Russia’s declared income reached just 25 per cent of earnings prior to reform. Subsequent to the flat tax rate of 13 per cent, tax revenues rose by 28 per cent between 2000 and 2001, and a further 21 per cent the following year. Egypt could experience a similar turnaround. Right now personal income tax stands at 20-30 per cent; corporate tax on services and industries is 42 and 32 per cent respectively. In order to encourage people to participate in a system that once alienated them, they will have to feel that the new one is not only better but also a great bargain. A flat rate of between 15-20 per cent across the board, plus higher allowances for lower-income brackets, and a quick and fair settlement with tax payers, combined with amnesty on previous years’ taxes, would do just that.
A simplified system will be easier to enforce. Legitimacy is an incentive for informal businesses that each day face the fear of being shut down. As for established businesses, the new rate would cut tax expenditures substantially, not to mention reduce the anxiety derived from the system’s current arbitrariness. Closing corporate tax files on a yearly basis with auditors’ certification, and random tax audits, should replace the current invasive system of inspection. With higher allowances, more of the poor would be exempt, and low-wage earners would find their burdens substantially relieved. Given such incentives, confidence should be regained, and the tax base would broaden significantly.
Converting the informal sector to an equitable and simplified formal sector would increase the national output of goods and services and encourage more investment by promoting capital formation. With higher revenues and a reduced deficit, the government could provide better services and prove itself capable of instituting fair systems, thereby earning the respect of the people. The result is restored confidence — both on behalf of the people in government and vice versa — which is the very heart of political stability. Only bold actions such as these will reverse the culture of avoidance that currently undermines our economy. A flat tax is no magic wand, but it would allow us to turn a page and make a strong, fresh start, building a new economy on simpler and more participatory foundations.
DECENTRALISATION AND DEREGULATION: Decentralisation is a crucial aspect of reform, one that addresses the core problems plaguing Egypt’s bureaucracy, namely complex systems that are unresponsive to local realities, bad management, low salaries and incentives, and the resulting inefficient delivery of services and low economic performance. While simplification of bureaucratic systems is a necessary feature of reform, decentralisation and greater autonomy for well-organised governorates would lay the groundwork for an Egypt that is more productive in every way.
Egypt’s administrative bodies, business and industry are concentrated in and around the capital; consequently, so is a third of Egypt’s population. While centralisation may work for small-scale operations, it is stifling the economic and human potential of an overburdened capital, not to mention causing the atrophy of the provinces. The role of government has changed from an owner- manager of assets to a regulator, and the structure of government should reflect this change. We can’t use old institutions to administer new systems. Egypt is divided into 25 governorates, plus the city of Luxor — demarcations that are historic in some cases and haphazard in others, but anyway less functional than they might be. Egypt’s governorates could be restructured more productively, thereby providing the basis for lasting, beneficial reform.
Egypt needs responsive and efficient local governments. Decentralisation would render local governments answerable to their communities and more efficient in serving them. Decentralisation doesn’t mean delegating duties to local governments while calling the shots from the capital. It means the empowerment of local bodies to make decisions, based on their more intimate understanding of their communities’ needs. Decentralisation means more autonomy on the ground, and the financial strengths to back it up.
Although requiring in-depth study, we could examine how governorates are configured and think of new divisions based on the human, natural and financial resources, and potential in each area. We could redraw the lines to level the playing field, giving each new entity a chance to become more competitive and have fiscal independence. The latter could be achieved by either allowing local governments to levy state and city taxes, or by allocating a portion of the national budget to assist each governorate. Either strategy would enable the new governorates to compete in attracting investment and providing services — especially health and education — thus improving both the local environment and overall economy. The success of decentralisation is evident, the United States and Europe being the most obvious examples. But developing countries like Argentina, Brazil, South Africa and China also offer models. We can look at their experience for ideas on how to proceed.
Decentralisation does not mean relinquishing central government power. Indeed, local governments must be accountable for the failure — or success — of their decisions. In the latter case, the central government could offer incentives and rewards for productivity. Decentralisation does not entail a loss of control by the main governing body, but a more interactive rapport with local governments. Decentralisation would have wide-ranging effects, one of which is more participatory local government that better employs the talents of local individuals. The trend for migrating towards the capital will stop when people have options regarding where to live and conduct productive careers.
Under current conditions, cities like Alexandria, Suez, and Ismailia and their surrounding areas are not performing to the best of their abilities. One way of judging the potential of decentralisation would be to run a pilot project, perhaps in Alexandria, making it the centre of a new governorate that could generate income and make decisions and improvements based on local priorities, like improving tourism. What if the Alexandria municipality could afford to pay civil servants better, and was more actively and immediately responsible for their performance? You’d attract more talent to government and encourage mobility in the work force between governmental and non-governmental bodies. Ultimately, decentralisation eases the burden on central bureaucracy by creating more competent, manageable and transparent units to oversee.
GIVE TITLE, GIVE CREDIT, CREATE OPTIONS: Historically, extra-legality has been perceived as a political and social problem to national economies, whereas it could instead represent an excellent solution for economic growth. An ECES survey of Egypt’s property market has revealed some startling facts. Ninety-two per cent of Egypt’s property owners hold their real estate assets as extralegal — that is, unregistered and without a title. The total value of this property is estimated at a staggering $200 billion, and may well exceed this amount; but so long as it is unregistered, it is dead, useless capital. This situation is largely owed to an archaic and expensive process whereby registration of deeds and contracts takes over 200 days of red tape, and costs the applicant the sum of approximately LE20,000. The cost of obtaining authorisation to build on undeveloped land takes more than 1000 days and estimated costs exceed LE100,000. The registration process is dispersed and disorganised, representing a costly and daunting challenge that people find impossible to confront.
Clearly, it must become easier for people to own their property. The solution would be similar to that proposed for establishing new businesses — namely, a one-stop shop and a single real estate formalisation and registry authority. As De Soto has pointed out, “anarchy is not the absence of laws but the presence of too many laws”. Such is the case in Egypt, where vast amounts of capital have been rendered inert by not facilitating legal ownership.
By giving poor and average citizens the opportunity to own the place where they have lived, often all their lives, the government would in effect be providing them with a fresh start, real security and a capital asset. A deed in hand is far more valuable than any amount of rhetorical promises of future prosperity. By rendering property registration accessible, people would become a part of the reform process instead of its critics. Ownership would serve as collateral for loans with which people can start businesses, thus providing millions of average Egyptians with a concrete stake in the national enterprise. If people have their names on a deed that ensures the roof over their heads, and promises the possibility of credit and enterprise, while being provided a more equitable tax treatment at the same time, the impact on the economy and people’s outlook will be tremendously positive. Furthermore, the political benefit would be outstanding.
It is expected that restructuring the bureaucracy and privatisation would result in lay-offs and employees taking early pensions. This would be counterbalanced by giving people title and the possibility of seed money, reducing their taxes, simplifying the business environment, and therefore providing alternatives for people to improve their lives in any number of ways.
CLOSING THE CIRCLE: The ideas discussed here represent only the highlights of a comprehensive, participatory approach to reform, where every element is interrelated. The concept of simplification must extend to corporate, investment, competition, civil, and commercial law and court procedures, to name a few. Proper implementation of monetary policy and a stronger financial sector are also necessary goals. Public sector banks still await privatisation that can be accomplished using a phasing approach over the next three to five years, and we must resolve the lingering problem of non-performing loans. Although a detailed discussion of these aspects is beyond the scope of this article, they are nevertheless equally important parts of the puzzle.
Simplification and deregulation are essentially a means of reducing the role of government and increasing the autonomy of the private sector. But such a shift in responsibility will also increase litigation and commercial disputes. This will require a stronger court system. Accordingly, the upgrading and smooth functioning of the judicial system must become a priority. This will require training as well as creating new courts for areas such as banking, capital market and competition law issues, as well as family courts. Economic and political stability will only come when people feel confident that their contracts with government and each other can be enforced. The rule of law and a sense of justice are paramount and it must apply to rich and poor alike.
All of the strategies related here are motivated by the need to restore people’s confidence in government and in themselves, while involving citizens in a necessary process of growth and development. By applying these strategies people will become part of a reform process that they can understand, and will wish to advance and protect. Only by touching lives in beneficial ways will the government achieve the groundswell of support necessary to proceed with even deeper reform, including political reform. However demanding on people and government alike, this kind of change is nevertheless possible, thanks to significant shifts in thinking as evidenced by a more active political party apparatus, the composition of the new cabinet and the growth of civil society.
Devising and implementing a master plan for the future prosperity of a nation is a difficult task requiring coordination, courage and dedication. Its success relies not only on these qualities, but also on the ability to communicate them publicly with passion and sincerity, along with the advantageous reasons for embarking on real change. People know caring when they see it, and they will reward it with loyalty. Once Egypt’s future is recognised as the outcome of a group effort in which everyone has a place, that future will be secured. By laying the foundations for a participatory economy that respects the rights of citizens and workers, Egypt will take a major step towards democratic governance.
* The writer is president of the American Chamber of Commerce (AmCham) in Egypt.