Freedom, prosperity, and human development in Egypt: Why does freedom matter?

Throughout history orators and poets have extolled liberty, but no one has told us why liberty is so important. Our attitude toward such matters should depend on whether we consider civilization as fixed or as advancing. In a fixed society there ought to be best methods of doing things. Experts should be more capable of finding these methods than ordinary people, and, for the good of all the people, these methods should be put into effect by collective action. In such a society the practical problem is to obtain the best rulers; there is no need for individual liberty.

In an advancing society, however, any restriction on liberty reduces the number of things tried and so reduces the rate of progress. In such a society freedom of action is granted to the individual, not because it gives him greater satisfaction but because if allowed to go his own way, he will on the average serve the rest of us better than under any orders we know how to give.

—H. B. Phillips¹

The 2022 Atlantic Council report, Do Countries Need Freedom to Achieve Prosperity?, showed that prosperity and freedom are highly correlated: the correlation coefficient between the indexes is 0.81. High scores for freedom are associated with high scores for prosperity, and low scores for freedom with low scores for prosperity.²

We can focus our analysis of these results on the lower-middle-income countries in the Middle East and North Africa (MENA) region. Despite their differences—these countries have diverse demographic, political, and socioeconomic conditions—most are categorized as Mostly Unfree with the exceptions of Tunisia and Morocco (Mostly Free). On the prosperity index, except for Lebanon which is Mostly Prosperous with a score of 52.3, the rest of countries in the region are considered Mostly Unprosperous.

The UN Human Development Index (HDI) allows us to further examine the relationship between freedom and prosperity. The HDI is a summary measure of average achievement on three key dimensions of human development: a long and healthy life, being knowledgeable, and having a decent standard of living. The HDI is the geometric mean of normalized indices for each of these dimensions. The health dimension is assessed by life expectancy at birth. The education dimension is the mean of years of schooling for adults aged twenty-five and above, and expected years of schooling for children of school entering age. The standard of living dimension is measured by gross national income (GNI) per capita.³

All countries in the region have a low HDI rank. Algeria performs best, ranking 91 out of 183; Mauritania ranks last in the region at 158 (Table 1).⁴

Sources: Freedom and prosperity rankings: Dan Negrea and Matthew Kroenig, “Do Countries Need Freedom to Achieve Prosperity? Introducing the Atlantic Council Freedom and Prosperity Indexes,” Atlantic Council, https://www.atlanticcouncil.org/ in-depth-research-reports/report/do-countries-need-freedom-to-achieve-prosperity; HDI ranking: United Nations Development Programme (UNDP), Uncertain Times, Unsettled Lives: Shaping Our Future in a Transforming World, Human Development Report 2021/22, UNDP, 2022, https://report.hdr.undp.org.

This confirms the correlation between the freedom and prosperity indexes. Despite all the differences between these countries, lack of a high degree of freedom is consistently linked to lower prosperity.

Over the period covered by the Freedom and Prosperity Indexes (2006–21), Egypt consistently remained in the Mostly Unfree and Mostly Unprosperous categories. Its freedom score peaked at 46.6 in 2011, but then gradually decreased over the years, reaching 35.8, before slightly improving to 37 in 2021. Despite this, Egypt made progress on the HDI, rising from 0.65 to 0.73 over the same period.⁵

Challenges facing Egypt

Between 2011 and 2022, Egypt faced unprecedented challenges both at national and regional levels. At the national level, Egypt experienced staggering population growth, with over 20 million births in this period. The population reached over 104 million in 2022, one-third of whom are under the age of fourteen. This is particularly problematic given the urban concentration on the Nile Delta and along the length of the Nile River, which together account for just 6.8 percent of Egypt’s one million square kilo-meters. Deteriorating infrastructure and high rates of poverty, with almost one in every three Egyptians living below the poverty line, present additional major challenges.⁶

These and other factors led to political turmoil: millions of young Egyptians took to the streets in 2011 in a massive uprising demanding better standards of living, eradication of corruption, and more democratic reforms. The protests sparked a revolution, but the turmoil continued, characterized by terrorist attacks targeting civilians, particularly Christian minorities, foreigners, and tourists. This resulted in a decline in tourism activity, one of Egypt’s main sources of revenue and foreign currency.

At the regional level, instability in neighboring countries such as Syria and Libya caused an influx of Egyptian workers returning home, increasing the already high unemployment rate. The turbulence in these countries also led to security issues, including illegal migration, human trafficking, and border infiltration by Islamic terrorist groups and the illegal trade of military weapons. To address these issues, the government implemented expensive and prolonged security and military measures, which were successful in restoring stability, but required ongoing resources to maintain.

As the decade came to an end the world was hit by the COVID-19 pandemic. Egypt was no exception and is still suffering from its repercussions.

To address these challenges, the government began implementing economic reforms in 2014, including reducing fuel subsidies and redirecting those funds toward targeted cash assistance programs for the most vulnerable members of society. This program was launched in 2015 under the name of Takaful and Karama: two connected schemes providing conditional cash transfers to support poor families with children under eighteen.

In 2016 the Egyptian government sought support from the International Monetary Fund (IMF), which resulted in a loan of US$12 billion. The loan was accompanied by a socioeconomic program aimed at achieving macroeconomic stability and improving the quality of life for Egyptians. As part of this program, the government was required to implement several measures, including allowing the value of the Egyptian pound to float freely on the currency market, and making changes to the taxation system.

The government intensified investment in infrastructure projects, as well as social expenditure, implementing major development projects and initiatives in education, health, housing, and utilities. It also expanded social protection programs to mitigate the impact of several monetary and fiscal reforms that were imposed as conditions of the IMF loan (which included cutting energy and fuel subsidies, currency devaluation, and replacing the existing sales tax with higher value-added tax, VAT), and to improve Egyptians’ quality of life. The result of these changes was that Egypt improved its ranking on the HDI. In 2006, Egypt ranked 111 out of 177 countries. Progress stalled in 2011, and the country’s ranking fell to 113 (of 187). In 2016, Egypt ranked 111 (of 188) and by 2021 it had further improved to 97 (Table 2).⁷

* Latest enrollment data are from 2019. Gross enrollment is the ratio of total primary-school enrollment, regardless of age, to the actual population of primary-school-aged children. The 106% ratio here indicates that a number of older children are enrolled in primary education.
Sources: Population, GDP, GNI, and school enrollment: World Bank Open Data;⁸ HDI, life expectancy, expected years of schooling, mean years of schooling, and inequality adjusted HDI: UNDP Human Development Report 2021–22.⁹

The Egyptian government celebrated the launch of the UNDP 2021 HDI report as evidence of its success in improving citizens’ lives. However, the question arises as to whether freedom is also necessary for progress in human development. To answer this, we must examine the macroeconomic environment and its impact on human development, education, healthcare, and poverty in Egypt.

Egypt’s macroeconomic environment

The government’s economic reforms, supported by the US$12 billion loan from the IMF, have helped stabilize the country’s economy in recent years and led to a budget primary surplus. The reform of energy subsidies, in particular, played a large part in this. However, tax revenues remain insufficient and are heavily dependent on indirect taxes, specifically VAT. This resulted in a tax revenue of 12 percent of GDP in fiscal year (FY) 2020/2021. The government financed its spending by increasing its debt, which reached 87.5 percent of GDP in 2020/2021,⁸ with external debt at 34.2 percent of GDP. This affected the budget allocation, with interest payments alone accounting for 33 percent of total spending in the 2021/2022 budget.⁹

Although the central bank devalued the Egyptian pound in 2016, it did not take the necessary measures to keep the Egyptian pound floating, which resulted in a pegged rate and created an unrealistic exchange rate. This led the government to accumulate more debt. And because of the structural issues in the Egyptian economy—characterized by low productivity and a reliance on non-tradable, less sophisticated activities like wholesale, transportation, and construction—this has had a negative impact on the trade balance and reduced the competitiveness of Egyptian exports. The ratio of external debt to exports of goods and services reached 308.6 percent in FY 2020/2021.¹⁰

This was accompanied, throughout 2016–22, by the expansion in the activities of state-owned enterprises and public economic authorities, both of which are generally economically inefficient entities. As a result, these entities have a negative impact on the Treasury, as the sum of the transfers they received (subsidies, loans, and contributions) is greater than the taxes and dividends paid to the Treasury. To put this in perspective, in FY 2022/2023 the shortfall between Treasury disbursements and revenues from these bodies was EGP 169.7 billion.¹¹ This is equivalent to almost 120 percent of the allocations for food subsidy, fuel subsidy, cash transfer programs, and baby formula and children’s medicine subsidy combined for the 2022/2023 budget.¹²

The implementation of these policies resulted in the private sector, particularly non-oil sectors, experiencing contraction. This is evident in the average of Egypt’s Purchasing Managers’ Index (PMI), which was 48.8 during July 2021–February 2022,¹³ making its share of investments 21.4 percent in FY 2022/2023.¹⁴And despite reforms taken, the government still couldn’t attract foreign direct investment (FDI). The highest annual FDI inflow during this decade was US$9.01 billion in 2019, well below the 2008 figure of US$9.49 billion.

This macroeconomic environment has made the Egyptian economy more susceptible to exogenous shocks, due to its high dependency on imports for raw materials, intermediate goods, and investment goods, as well as its reliance on tourism, expats’ remittances, and revenue from the Suez Canal as the main sources of foreign currency. By July 2021, the situation had become so dire that the net foreign assets position of banks had turned negative to keep up with the demand for foreign currency.

In early 2022, Egypt faced a major challenge when the United States Federal Reserve tightened monetary policy in response to Russia’s invasion of Ukraine. This led to a large exodus of portfolio investments, estimated at around US$21 billion. The government of Egypt had to take drastic measures to prevent further deterioration of foreign currency reserves, including restrictions on imports to reduce the outflow of foreign currency. However, these measures had unintended consequences: they created a supply shock that disrupted production and caused a backlog of goods worth US$14 billion at ports. This ultimately led to an increase in inflation.

The import restrictions caused a decline in exports as well (especially because three-quarters of imports are raw materials, intermediate, and investment goods). This was reflected in the data from Egypt’s PMI for November 2022, which showed that business optimism among non-oil firms had dropped to its lowest level in over a decade, with only 4 percent of firms reporting a positive outlook for the next 12 months.¹⁵ Rising prices, supply problems, and weak global demand also served to drive business activity even lower.

In March 2022 the Central Bank of Egypt devalued the Egyptian pound by almost 16 percent. In order to mitigate such inflationary hikes while maintaining a tight grip on foreign reserves, the government launched a social aid package including the expansion of Takaful and Karama, the cash transfer program, by increasing the tax exemption threshold.

As inflation kept rising, due to the ongoing war in Ukraine and the supply shock created by import restrictions, another social mitigation package was announced in July 2022. It included a raise of the minimum wage for government employees, a second expansion of cash transfers, and a six-month temporary pension for nine million households.

In October 2022 the government announced a third package, expanding the Takaful and Karama program once again so that it now reached 20 million individuals, and extending the temporary pension announced in the previous package for another six months.¹⁶ This package marked an important structural shift, as it involved civil society organizations both in delivery and outreach efforts.

In parallel, the government of Egypt turned to the IMF to seek help and negotiate a new deal under the Extended Fund Facility (EFF). The government also launched a dialogue on state ownership and its role in the economy, and held a conference to discuss the economic crisis, involving experts, private sector executives, and politicians.

The government announced a gradual easing of import restrictions to alleviate supply problems, and released goods that were stuck at ports. In addition, they issued the State Ownership Policy Document, a set of guidelines clarifying the state’s role in the economy.¹⁷

At the end of October 2022, Egypt and the IMF agreed an additional loan of US$3.1 billion. As part of the agreement the government agreed to implement a durable flexible exchange rate. In November, the Central Bank of Egypt implemented a third devaluation of the Egyptian pound, causing a sharp decline in its value. This has led to a growing black market for foreign exchange, as people seek to buy and sell currencies at rates more favorable than the official exchange rate.

Reviewing government efforts on the Human Development Index (HDI)

Education

Egypt’s pre-university education system is the largest in the MENA region, in terms of number of students and teachers. In 2019/2020, about 23.6 million students were enrolled in the system, with about 1,019,000 teachers. Despite achieving high enrollment rates in primary schools and a low dropout rate, Egypt is performing poorly on one of the most important indicators of educational quality: class size. The primary level class size increased from an average of 43.8 students in 2011 to 53.4 students in 2020, suggesting a decline in quality.¹⁸

It is worth mentioning that in the year 2019/2020 the average class size across all education levels at public schools, responsible for almost 90 percent of enrollment, was 48.3 students. In private schools, it was 33.8 students.

The World Bank’s Learning Poverty Brief for Egypt estimates that 70 percent of students are not able to read and understand an age-appropriate text at age ten.¹⁹ The results of the Trends in International Mathematics and Science (TIMSS) assessment for Egyptian students in 2019 showed some progress compared to those achieved in 2015. The average score in mathematics increased from 392 to 413,²⁰ and in science from 371 to 389.²¹ TIMSS is a nationally representative international assessment for 4th and 8th graders in mathematics and science.

Despite the progress made, Egypt still ranks in the bottom decile of countries based on the percentage of students reaching the “Low International Benchmark” set by the TIMSS scoring scale. Nearly a half of students reach the Low International Benchmark in mathematics and science, and about a quarter reach the Intermediate Benchmark.

Healthcare

Maintaining and improving the health of a population of over 104 million is a tremendous task, especially considering the population growth rate of 2.1 percent per year between 2010 and 2020, higher than the 1.8 percent rate of the previous decade. The Egyptian government succeeded in increasing life expectancy at birth over the past decade, from 69.9 in 2011 to 71.8 in 2018. The repercussions of the COVID-19 pandemic drove it down to 70.2 in 2021, but even with the worldwide decline in the HDI, Egypt is still below the global average.²²

In addition, there was significant progress in reducing the child mortality rate. For children under five this has fallen from 28.8 deaths per 1,000 live births in 2010 to 20.3 deaths in 2019. Malnutrition and stunting in children remain big challenges for the government but there have been significant improvements. In 2008, almost one in three Egyptian children under the age of five were stunted, but in 2021 the percentage went down to 12.8 percent. Similarly, child wasting came down from 7 percent in 2008 to 3 percent in 2021. Yet prevalence of anemia among children under five has increased from 27.2 percent in 2014 to reach 43 percent in 2021.²³

On accessibility, the ratio of doctors per ten thousand inhabitants increased from 11.7 in 2011 to 12.1 in 2020.²⁴ Despite the increase in the ratio of doctors to inhabitants, there has been a decline in the number of doctors working in the public sector in recent years, falling from over 103,000 in 2016 to around 91,000 in 2020. The number of doctors working in the private sector over the same period rose from around 22,000 to around 30,000.²⁵

A similar trend took place in the number of hospital beds. Over the past decade, there has been a 9.8 percent decline in the number of hospital beds in the public sector, from 98,319 in 2011 to 88,597 in 2020. On the other hand, the private sector has seen a 30 percent increase in the number of hospital beds, from 25,287 in 2011 to 33,020 in 2020. This represents 27 percent of Egypt’s total number of hospital beds.²⁶

Private clinics and pharmacies are the preferred choice as service providers for chronic and acute medical conditions; 53 percent of individuals with chronic conditions seek care at private clinics that offer specialist outpatient care, while 18.5 percent seek medical advice at pharmacies, and 11.5 percent receive care at government hospitals. For acute conditions, about 38 percent of individuals seek medical advice at pharmacies. There are serious concerns about the quality of these services, as pharmacists and pharmacy clerks have no medical training, let alone medical licenses.

Out-of-pocket expenditure is another important issue for access to healthcare. Over the past decade, out-of-pocket payments remained almost constant at 60 percent of current health spending, with a slight decrease in 2020 to 59 percent.²⁷

Poverty

Poverty in Egypt has been increasing since the start of the twenty-first century. In FY 1999/2000 the poverty rate was 16.7 percent. By FY 2010/2011 it had risen to 25.2 percent. It continued to increase, reaching a peak of 32.5 percent in FY 2017/2018 due to the devaluation of the Egyptian pound in 2016. For the first time in the decade, the poverty rate dropped, to 29.7 percent in FY 2019/2020. The official poverty rate is surveyed and calculated by the Central Agency for Public Mobilization and Statistics (CAPMAS) and a new poverty line is set each survey year. The value at which the line is set changes over time to reflect the most recent consumption patterns of the population.

The small decrease in 2019/2020 meant that around four million people were no longer living in poverty. This was due to a couple of policy reforms, including the increase of the tax exemption threshold and the extended coverage of the cash transfer programs (Takaful and Karama), as well as market absorption of the inflationary wave caused by devaluation.

The Gini index, which measures inequality in distribution of per capita consumption, has barely changed since 2010. In the most recent year for which we have data, FY 2019/2020, Egypt’s Gini index stood at 29.0.²⁸ This means there was almost no change in wealth distribution, whether through government interventions or through market or labor changes. The composition of household income can shed some light on this, as it comprises a significant share of “transfers”: income received by households in several forms (e.g., charity, gifts, remittance, government aid, and subsidy, whether in cash or in kind).

The latest Household Income Expenditure and Consumption Survey (HIECS) gives a clearer view of the living conditions of the poor in Egypt.²⁹ Transfers, in cash or in kind, represent 23.7 percent of national average household income after wages. However, in rural areas this increases to 24 percent, of which around three-quarters were in cash and one-quarter in kind. The average household spends over one-third of its income on food. This is an indicator that jobs in both rural and urban areas are of low quality and that government interventions and policies are leading to distortions, creating a dependency on transfers for the majority of households. Nationwide, the majority of households rely on food subsidies, with 84 percent of households covered by the program and even higher percentages in rural areas (91.1 percent). These subsidies make up 7.4 percent of total household food consumption, but this figure rises to 11.9 percent for households with the lowest incomes. Though the percentage may appear small, the reliance on subsidized food items is significant. For example, households obtain 77.9 percent of their cooking oil, 78.5 percent of their sugar, and 14.7 percent of their rice from these subsidies, highlighting the distortion caused by the long-standing, inefficient food subsidy program.

Looking at healthcare expenditure, the average household spends 10.4 percent of its income on healthcare services. Of this healthcare spend, 51.2 percent goes to medication and other healthcare products. This increased to almost 58.2 percent in the poorest households. Expenditure on hospital services is 12.2 percent for the poorest and 26.4 percent for the highest-income households. This is another example of the access problem in the healthcare system, as the poor usually go to pharmacies for their diagnoses and prescriptions.

As for education, expenditure reaches 5.7 percent of households’ spending. Of this, school fees represent 38.6 percent, private tuition fees 28.3 percent, and transportation to schools 9.6 percent. In rural areas, the allocation of expenses is different, with 22.1 percent going toward school fees, 36 percent to private tuition, and 10.3 percent towards transportation. The enrollment rate for public schools in rural areas is 89.8 percent and 82.6 percent in urban areas. This allocation reveals disparities and distortions in the education system, and suggests a lack of quality in some areas.

Another indicator of the poor quality of school education is the high average expenditure on private tuition, by even the poorest households. This extra tuition makes up 30.8 percent of total education expenses, compared to school fees, which represent only 17.2. In contrast, the highest-income households allocate only 13.3 percent of their education expenses to private tuition and 67.1 percent to school fees, as they tend to send their children to private schools where tuition standards are higher.

Conclusion

Since 2011, the government of Egypt has faced unprecedented challenges. At the international level, instability and civil wars in neighboring countries, coupled with the ongoing global crises caused by the COVID-19 pandemic and its repercussions, supply chain disruptions, the Russian invasion of Ukraine, and a general tightening of monetary policy have all had an impact. At the national level, Egypt has also experienced two major uprisings—in 2011 and 2013—a war on terror, and a rapid growth in its youth population.

To address these crises, the government has relied heavily on state intervention to drive growth and create jobs by expanding and strengthening public economic authorities and state-owned enterprises. This has led to a restriction of economic freedom and hindered private sector growth, even before the Russian invasion took place. From July 2021 to February 2022, Egypt’s Purchasing Managers’ Index (PMI) averaged 48.8.

The government’s policies, interventions, and heavy investment in non-tradeable activities and infrastructure have led to some improvements in standards of living and a better ranking on the Human Development Index, as evidenced by the data. Yet, this progress remains modest. Despite these improvements, the quality of services remains poor, and barriers to access still exist. An unfavorable macroeconomic environment has led to a reduction in private sector activity, although it still outperforms the public sector. Furthermore, there are some concerning indicators related to “brain drain” from the public to private sector within Egypt, as well as to other countries.

The ongoing war in Ukraine, high inflation—particularly of food prices—coupled with a significant outflow of approximately US$21 billion in portfolio investments during FY 2021/22, has led to a sudden drop in reserves and further increased pressure on the budget. As Margaret Thatcher famously stated, “the problem with socialism is that you eventually run out of other people’s money,” which in the case of Egypt, has become a reality. As a result, it is anticipated that the poverty rate will increase and standards of living deteriorate for millions of Egyptians.

Therefore, eventually improving people’s lives and liberating them from poverty will require a vibrant free market where the private sector can thrive and create decent jobs, while also ensuring efficient public investments in human capital. History and research have established that economic and political freedoms are prerequisites for this goal. It is no surprise that countries that are at the top of the Human Development Index are also at the top of the Freedom and Prosperity Indexes.

Therefore, for Egypt to overcome its structural distortions and the tremendous challenges of reducing poverty and improving standards of living, a well-defined role for the state in the economy, improved governance, and efficient allocation of public resources are needed. This will enable growth led by the private sector, where jobs can be created and more revenue generated, allowing for the development of healthy and skilled workers, and a more stable economic environment that is less vulnerable to external shocks and crises. Expanding social protection for the poor and improving health and education for all will be crucial steps toward achieving this goal.

This cannot be achieved without greater economic, social, and political freedom. It is imperative for the government of Egypt to see the current crisis as an opportunity for further reform and to implement more drastic measures to decrease the state’s involvement in the economy and establish a clear framework for the relationship between the state and the private sector through the state ownership policy. Improving competition policies and removing trade barriers are also crucial steps. However, these steps cannot be successful without better governance and more transparency.

Mohamed Farid is a member of the Egyptian Senate and the deputy chair of its Committee on Human Rights and Social Solidarity. He is also a founding member of the Liberal Club in Cairo.

Image: A man waits in front of a street restaurant to eat the Egyptian traditional food "Suhoor" which is a staple during the holy month of Ramadan in Cairo, Egypt April 11, 2023. REUTERS/Hadeer Mahmoud

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