Economic Development of Egypt

Economic Development of Egypt 1
Economic Development of Egypt: From Past Glory to Modern Times
Elijah Fiore
Word Count: 2,973

Economic Development of Egypt: From Past Glory to Modern Times
Introduction
The story of the economic development of Egypt is not a simple one by any means: it’s
the tale of a country that was, many years removed from modern day, at the forefront of the great
history of the Middle East. It’s past involves the ancient civilizations that built the pyramids, an
agricultural colony that failed to modernize, as well as a recent history of political and social
turmoil. As many saw during the Arab Spring and the following months, there is still much
instability in Egypt politically and socially. In this way, the current situation in Egypt acts a
microcosm for the plight of the entire Arab world and, as a result, the Middle East as a whole.
Perhaps to understand the economic successes and shortcomings of a tumultuous region, one
must first comprehend how a previously strong country, formerly at the center of the known
world, fell so far to be an afterthought in the modern economic and political climate. In order to
investigate the state of the Middle East in today’s world, this report aims to dissect Egypt’s
historical growth, modern growth, and its human capital development.
Economic History
Egypt’s economic success in ancient times was caused by much of what helped the entire
Middle East prosper before the Middle Ages, geography and strong leadership. Egyptians could
develop effective trade and travel through the Nile before most other ancient civilizations and it
provided a source for the advanced irrigation system that lead to effective agriculture (the source
of economic surplus important for growth), it did not flood to the extent that other bodies of
water did in this time like the Euphrates or the Tigris, and the river was extremely navigable due
to the winds from the north. These geographic elements led to Egypt developing as a civilization

much earlier than many other regions such as Europe. As mentioned previously, a main
contributor to the growth of Egypt in this early era was the food surplus that, according to
Issawi’s The Middle East Economy: Decline and Recovery, was the vehicle for the early
economic growth of Egypt.
The decline of Egypt occurred between the 13th
and 18th
centuries due to the eventual
decay of advantages in geography and leadership. According to Issawi, at this time, Egypt had a
literacy rate of about 5% at the start of the 1800s (Issawi, n.p.). For context, compare this to
22% for Italy, 38% for France, and 53% for Great Britain around the same time frame (“Our
World in Data”, n.p.). Highlighted by this severe lack of human capital, Egypt had been
stagnating for a while and just emerged from a brief French and British occupation that renewed
European interests in the region. By 1805, an Ottoman officer Muhammad Ali (the “father of
modern Egypt”) took control of the country as Pasha and Viceroy and ushered in economic and
social reform that facilitated Egypt in returning to flashes of its previous glory.
Ali’s reforms primarily focused on agricultural and industrial development. By 1815,
Muhammad Ali had seized cultivable, feudal lands from the Mamluks of Egypt and the religious
institutions of Cairo converted them to state-run lands. State-run agriculture meant that the
income surplus could be used for investment in public works such as irrigation as well as
financial and military development; this would later become an issue with the misallocation of
surplus to bureaucrats and military forces instead of the workers of the country, a common theme
in Middle Eastern economic decay in this period.
Though the 1800s, Egypt’s economy became increasingly export-oriented and focused on
comparative advantages on the world market; in this case, Egypt’s advantage was cotton. Much
like oil for other MENA nations, Egypt’s supply of cotton in this fragile era of development led

the country into an economic corner, so to speak. Egypt’s reliance on cotton amplified in the
middle 19th
century and met greater returns because of the nature of the market at this junction.
The American Civil War had taken the United States, one of the largest suppliers of cotton to
Europe, out of the equation for multiple years, leading to a superior demand for Egyptian cotton
and larger profits for the country. According to one source, cotton exports raised from $15
million in 1862 to $56 million in 1864 (“Tour Cotton, n.p.). Egypt would go onto invest this
surplus, as well as take loans from abroad (namely Britain) in order to bank roll further
modernization; however, these actions were taken with the assumption of prolonged profits from
cotton of the previous magnitude. Between 1863 and 1879, national debt rose from $3 million to
$100 million and, despite repaying $29 million in loans by 1875, Egypt still owed around $46
million and neared bankruptcy. Cotton revenues and the construction of the Suez Canal made
Egypt a hot commodity for Europe and eventually, citing anarchy in the country and fear of
losing the canal Britain invaded and took over Egypt in 1882 (“Egypt and Europe”, n.p.). This
furthered the descent of Egypt into “lop-sided” development as it entered an era of British
colonization (Issawi n.p.).
From 1800 to 1917 population grew from 3.8 million to 12.8 million and from 1917 to
1960 doubled to 25 million, according to Issawi. Population growth because of positive
economic times reflects the old style of growth characterized in the Lucas model where
advancements in production lead to population growth instead of living standard upturn. Per
capita income also grew in the time of colonization. By 1913, per capita income in Egypt was at
$50, twice the amount of Japan or India and about a fourth of France’s per capita income.
Despite raises in per capita income, savings rate was comparatively low at 3.5% at the turn of the
century and human capital had still been neglected (literacy rate still incredibly low at 7%). The

combined effect of colonization was the over-reliance on imports, decrease in cultivable land per
head and, as a result, a declining GNP per capita. The social effect of colonization was possibly
even more pejorative. Egyptians were mostly pushed towards the agricultural sector for cotton
while the “bourgeoisie” were imported from foreign countries. This created an identity crisis in
Egypt made capitalism seem like an alien concept while also leaving a bad taste in the mouth of
the common man. It was clear at the close of WW2 that Egypt was neither diversified nor fit to
enter the world market because of this “lop-sided” development. Egypt’s troubled times in this
period of its history define a common theme that is reflected even to this day, which this report
will examine next (Issawi, n.p.).
Modern Economic Growth
Over the last 25 years, the MENA region has gone through periods of major growth and
change. To understand Egypt’s position in this economic change, it is imperative to look the
transitions in GDP per capita, as well as savings and investments. Since the 1990s, Egypt has
had major growth in its GDP per capita, as made evident in the chart below.
Today, Egypt has a GDP per capita of around $10,000 in PPP terms, roughly a $4,000
increase over 25 years. Despite the relative positive growth over this era, it is necessary to
GDP per capita PPP (Constant 2011 International $)
Figure 1 - This figure shows the major growth in GDP per capita in PPP terms, from about $6,000
in 1991 to around $10,000 today. (WDI)

compare this growth to other developing nations as well as to the entire MENA region to gain
some context. In this same time frame, WDI data for the MENA aggregate shows that the
average MENA country started with higher GDP per capita than Egypt in 1991(at about
$11,000) but also grew to a greater extent with a current per capita income of almost $17,400.
While this is useful to see how the entire area is progressing economically, it is somewhat
unreliable because of the inclusion of all income levels. This includes the oil-rich countries like
Saudi Arabia and Oman who have some of the highest per capita incomes in the world.
Comparing these countries to Egypt, who does not have such a lucrative resource, is unfair as a
result. According to WDI, a similar emergent region in South Asia and totals of Middle Income
nations paint a different picture. South Asia is at less than $6,000 per capita today while
countries of Middle Income grew from $3,600 to around $9,300 per capita in the previous 25
years. Egypt was doing better than South Asia and similarly to Middle Income countries in this
time frame (despite not experiencing the same level of growth as the latter).
Gross Domestic Savings and External Balance (in % GDP)
Figure 2 - A comparison of the % of GDP that savings (in blue) and external balances (in
green) make up. (WDI)

Above is the comparison of gross domestic savings and external balances of good and
services. As a general trend, savings has decreased for Egypt over the 25 years from 13% to
almost 5%. In this same snapshot, external balance “decreases” from about -7.9% to -8.5%,
meaning that Egypt is depending more so on imports over time. As savings reduce, Egypt must
make this gap up with more foreign aid, direct investment, and loans. Comparing these figures to
that of other Middle Income countries, one can see that Egypt is not progressing as well because
of its lack of investment. Middle Income countries, on average, have grown in GDS (from 26%
to 30%) and have stayed near 0% on external balances. Even South Asia has a higher savings
rate of about 26% and a much lower external balance at -3.5%. One can deduce that stagnation
in Egypt’s economy could originate from its lack of savings and investment in general on top of
its reverent reliance on imports.
Using the previous numbers obtained on Egypt and the Harrod-Domar model for economic
growth and some intuition, one can acquire an informed hypothesis on future economic growth.
Assuming a depreciation (delta) of 2 and a capital-output ratio of 3 (v in the equation) from an
estimate calculated by averaging savings and foreign investment from WDI over the last 10
years, a calculation for economic growth of Egypt is reached below.
𝑔 =
5.28 + 8.54
3
− 2 = 2.61%
By inserting the most current values for savings and external balances, one arrives at a
growth rate of about 2.6% year over year. Comparing this to the average growth rate calculated
over the last 10 years from WDI data, 4.36%, it is clear that there are diminishing returns to the
way Egypt has run its economy. If Egypt follows the current trend of saving less and having
Saudi Arabia and others cover the investment gap, while GDP may not fall immediately, GDP
growth rate may stagnate as foreign debt rises depending on the foreign investment Egypt

receives (whether it is in aid, direct investment, or by loan). Egypt is clearly not living within its
means based on the figures in this report, and a recent decline in FDI (from 9.3% in 2006 to
about 1.6% in 2014) shows a weakening of the private sector. The culmination of these factors
is a possible lack of economic development in the near future until Egypt can invest more in the
attributes that truly increase production: physical and human capital, the latter this report will
inspect subsequently.
Human Resources
While one can see in the previous section Egypt has experienced some growth in GDP
per capita over the last 25 years, this is not the only measure of the development of an economy.
The Arab Spring, to a certain extent, was caused by a large subsection of the ME population (the
youth bulge) that were left unemployed or employed in the chaotic informal markets as well as
without the necessary skills to be competitive in the world market. Human capital improvement
is a common theme throughout the ME because it signals a true transition for a country away
from the old way of growth (population) and towards the modern instance (rises in living
standards). This is touched on in the Lucas model and in previous sections of this report.
Basically, increases in production should result in a demographic transition from high fertility to
low fertility as families focus more so on the “quality” of children rather than the “quantity” due
to increased opportunity cost and returns to education. Egypt and much of the MENA region
had not seen this transition in the late 20th
century to the extent of South Korea, as an example.
Figure 3 - The fertility rate per woman in Egypt over the last 50 years. (WDI)
Fertility Rate per Woman (1965-2015)

The preceding graph shows the fertility rate (total births per woman) in Egypt from 1965 to
present. The overall pattern is a general decrease over the last 50 years. In the 1960s the fertility
rate for Egypt was a surprisingly high 6.1 births per woman and the rate was at its lowest in 2005
at about 3 births per woman. As of today, the fertility rate has slightly increased to 3.3. At its
highest, fertility rate was much higher than the “replacement rate” customary of most developed
countries, about 2 births per woman. This can help explain some of the troubles of the Egyptian
economy in the late 1900s and early 2000s; there was an excess of youth looking for jobs that
were not being left by the older generation because of the high fertility rate. Even today, Egypt’s
fertility rate is higher than that of a modernized and adjusted country. In addition to lower
fertility rate, life expectancy rose from 50.9 years to about 71 years and infant mortality rate also
positively changed in this time, from 173 deaths per 1000 live births to only 20. This may still
be comparatively high when compared to much of the modern world but it also shows great
growth in living standards for Egypt’s citizens. Based on this, Egypt has roughly succeeded in
decreasing the “quantity” side of the transition.
Education, especially that of women, is also an important indicator for economic
development and demographic transition to “quality”.
Figure 4 - The progression of male and female enrollment in primary education over the last
50 years. (WDI)
Primary Education Enrollment (%Male and %Female)

This chart shows the net primary education enrollment rates for Egypt over the last 50
years. As made evident above, the enrollment rates of females in Egypt have been historically
lower than that of males (at least in primary education), the largest gap being in the 1970s where
there was an enrollment rate separation of over 20% in favor of males (who stood in the high
70% rate). Over time this gap has decreased while both rates for males and females showed
signs of overall increase. As for secondary education, the numbers are generally similar. Both
sexes increased their participation in secondary education in the 50-year period as well (from
34% to about 76% for males); however, the secondary rate is still comparatively low for a
country that wishes to modernize. In this period, female enrollment also caught up to that of the
males and highlights, at least, some empowerment of the females in Egyptian society as far as
education. The real economic effect would be studied based on how many of these women with
higher education end up actually working as compared to having large families instead. Both
males and females now have a primary enrollment rate of around 100% and a secondary rate of
around 76%, an encouraging sign towards the move to quality instead of quantity of children.
Total Unemployment (% of population) and Youth Unemployment (% of unemployed)
Figure 5 – Total (red) versus youth (blue) unemployment for Egypt over
the last 10 years. (WDI)

Compared to other countries in the region, like Turkey, Egypt has a high youth
unemployment rate (currently almost a third of all unemployed compared to around 17% for
Turkey). These countries have similar total unemployment rates at around 10%, so this contrast
is very useful to picture the situation for the youth in Egypt. This youth bulge is a main factor in
the stagnation of many ME countries like Egypt; even if there are higher enrollment rates, there
are not enough jobs to justify going to school or to employ all of the youth, creating revolts like
in 2011.
The previous chart shows the ratios of unemployment based on education levels. The
largest percentage of unemployment in Egypt comes from secondary and tertiary educated
individuals at almost 80% combined while primary educated citizens make up much less than
both. This is not an indicator of an economy with large returns to education that would influence
a transition to “quality” children. There is no incentive to invest in the youth and have lower
fertility because when those that do get educated leave school, there are no jobs for them. One
can imagine, this was a contributing factor to the disenfranchised feelings of the youth leading up
to the 2011 revolution. Until Egypt can find a way to lower the unemployment of the educated
Unemployment Rate Ratios by Education Level
Figure 6 - Unemployment rate by education level over 10 years:
primary (blue), secondary (red), and tertiary (green). (WDI)

or increase the returns to schooling, one cannot foresee sustainable economic progress or
demographic transition to occur in the future.
Conclusion
Egypt’s modern economic growth and decay is directly tied to its failures in the past to
globalize in a meaningful manner even before colonization. By the time Muhammad Ali ignited
the country with his economic reforms and moved to focus on comparative advantage in cotton,
Egypt’s slow descent into “Third World” dependency on a cash crop export was set. Egypt’s
emphasis on population growth to increase production, while colonized and previously, set the
country’s human capital back decades behind that of its contemporaries. These issues had
progressed through the 20th
century until modern day where the uneducated and unskilled youth
bulge of today are left without jobs or incentive to improve their resources in a time where other
regions experience relative prosperity and growth. Though the country has shown some promise
as of late in the decrease in fertility rate/mortality rate and increases in life expectancy, the
situation in Egypt appears grim until the country can wean of its dependence on imports, foreign
aid, and create employment opportunities for the marginalized youth. The ME, and specifically
Egypt, is going through a transitional period vital to the future of the region, a fixing of the issues
created during the aborted globalization of the past due to oil, cotton, or the like. The future is
unclear for the area, but one thing is for certain, however: one can sympathize with such a
situation.

References
Egypt and Europe in the 19th Century. (n.d.). Retrieved May 02, 2016, from
http://courses.wcupa.edu/jones/his312/lectures/egypt.htm
Issawi, C. P. (1995). The Middle East economy: Decline and recovery: Selected essays.
Princeton, NJ: Markus Wiener.
Our World in Data. (n.d.). Retrieved May 01, 2016, from https://ourworldindata.org/literacy/
Tour Egypt :: Cotton: One of Egypt. (n.d.). Retrieved May 01, 2016, from
http://www.touregypt.net/featurestories/cotton.htm
World Development Indicators. (n.d.). Retrieved May 01, 2016, from
http://data.worldbank.org/data-catalog/world-development-indicators

Economic Development of Egypt

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