Abstract

Some of the economic benefits of the economic reform policies carried out by Egypt and several other Arab countries began to emerge a few years ago. However, these policies have also given rise to some adverse social effects, particularly for low-income groups. The comprehensiveness of reform implementation is the ultimate major determinant of economic benefits and transient disadvantages to society, namely, the aggravation of poverty and unemployment. It is even quite likely that inconsistent and slow reform could lead to the loss of expected benefits and to the emergence of negative effects.

Khalifa Ali Dau and Hussein M. El-Amach

Some of the economic benefits of the economic reform policies carried out by Egypt and several other Arab countries began to emerge a few years ago. However, these policies have also given rise to some adverse social effects, particularly for low-income groups. The comprehensiveness of reform implementation is the ultimate major determinant of economic benefits and transient disadvantages to society, namely, the aggravation of poverty and unemployment. It is even quite likely that inconsistent and slow reform could lead to the loss of expected benefits and to the emergence of negative effects.

This paper discusses Egypt’s Social Fund for Development, developed to support the social safety net Egypt put in place to guard against the effects of its economic reforms. The paper briefly reviews the main economic reform policies, their social effects, and how Egypt and a few other Arab countries addressed them. It examines the contribution of the Social Fund for Development in Egypt to the strengthening of the safety net in addressing poverty and unemployment. It seeks to clarify the Fund’s mechanisms for providing financial and institutional support to targeted groups and to identify the actual outcome and consider the feasibility of generalizing the Fund’s experience. The aim of this case study is to disseminate information available on this scheme to the other Arab countries that are seriously considering establishing similar institutions.

Economic Reform

Main Features of Reform

Economic reform policy may differ from one country to another and from one period to another within the same country. However, most such policy covers the following broad areas:

  • (1) Budget reform. The reform of the government budget and reduction of the deficit that now characterizes the budgets of many Arab countries constitute a major step in linking the budget to changing economic activity in a society. Measures under this heading include reforming tax laws to make them more transparent and reducing government spending through, among other measures, the removal of subsidies on goods and services.

    The first phase of Egypt’s economic reform and structural adjustment program for 1990–93 covered major steps in this direction. Actual government expenditures started to decline, and subsidies on many goods—such as fuel, utilities, and bread—were reduced. The Egyptian government was able to reduce the budget deficit from 15 percent in 1989 to about 1.6 percent in 1995. This permitted the government to pursue a tight monetary policy. During the same period, the rate of growth of government spending dropped substantially. Tax reform, however, was limited to the introduction of a sales tax into formally organized sectors. Tunisia, Jordan, and, to some extent, Egypt succeeded in adopting several measures to eliminate restrictions on interest rates, increase the autonomy of financial institutions, restructure state-owned banks, liberalize movements of foreign exchange, and encourage foreign investments.

  • (2) Financial reform. Defined in a comprehensive sense, financial reform has several goals, principally, alleviating restrictions on interest rates, deepening the role and effectiveness of money and capital markets in the economy, and strengthening supervisory and control standards. Making financial reform a complementary part of economic reform requires measures to facilitate access to banking services and credit by weak social groups to entice them to participate in private investment activity and to alleviate thereby the hardship stemming from economic reform, from which those groups are expected to suffer the most. Egypt’s reform program had some success in this area. Ceilings on interest rates and credit facilities to all sectors were removed, legislation was issued that promotes the financial market and the use of financial paper, and external transfers were liberalized. The Egyptian government was able to accumulate adequate resources to back the exchange rate of the Egyptian pound. Although financial reform seems to have been effective in the area of external transactions in Egypt, Tunisia, and Morocco, the expansion of banking activities and credit facilities to all sectors and regions is still limited in Syria and Morocco and remains partial in Egypt.

  • (3) Market mechanism and promotion of the public sector. Government market intervention policies and the pursuit of rigid pricing systems in many Arab countries created deep-rooted distortions in resource allocation to productive sectors. Allowing market mechanisms to determine prices will, over the longer term, bring resource allocation into line with the effectiveness of the various productive sectors. In the transitional period at least, low-income groups will be adversely affected by such a change because the prices of certain goods and services will increase beyond their means. This phenomenon was quite visible in many countries that initiated and implemented economic reform programs, such as Egypt, Tunisia, and Jordan. Egypt adopted a number of measures to create and foster an investment-friendly environment favoring private sector enterprises: streamlining procedures for company licensing, authorizing private enterprises to venture into all areas of economic activity on par with public sector entities, and treating them uniformly with regard to access to the same financial and institutional resources. Moreover, Egypt, Jordan, and Tunisia offered a number of investment incentives in the form of exemption from certain taxes and facilities for the import of production inputs and the export of products.

  • (4) Subsidy reduction and price liberalization. Reform programs in many Arab countries, including Jordan, Morocco, Sudan, and Tunisia, contained measures to liberalize prices of public sector goods and services with a view to eliminating price distortions. Egypt raised power prices gradually and eliminated restrictions on the prices of agricultural crops and quantitative restrictions on agricultural output and marketing. It also reduced subsidies on animal feed and fertilizers. Egypt, Jordan, and Morocco have each adjusted public transportation fares, which are now subject to constant review, in order to secure full recovery of direct costs. Sudan liberalized fuel prices and fares almost fully.

  • (5) Restructuring of public sector enterprises and privatization. Many public sector organizations and enterprises suffer from mismanagement, low productivity and quality, accumulated losses, and deteriorating financial and administrative conditions. These organizations can be grouped in two categories: the strategic group includes those that are maintained, at least under current circumstances, as part of the public sector. These enterprises need to be given greater autonomy and liberty in managing their business as well as in adjusting their financial structure and tightening their supervision. The second group comprises those institutions that could be managed on a purely commercial basis. They should be sold to the private sector, which is better equipped to develop their production and improve their performance. Tunisia has made major strides in this direction, privatizing several public enterprises, including a number of loss-making ones. In Egypt, there has been a mass restructuring of public sector enterprises, which have been organized into holding companies with increased autonomy and freedom. Partial and comprehensive privatization remains slow and has affected only a limited number of such enterprises.

  • (6) Other policies. Reforms have also included measures to adjust the external sector through the liberalization of external trade, export and import policies, restructuring of external debts, borrowing policies, balance of payments adjustment, customs policies, and the like. The debts of Egypt, Jordan, and Morocco were rescheduled, and Egypt benefited from several instances of forgiveness and write-offs once it started implementing its second economic reform program in 1993.

Expected Social Effects

Arab economies in which economic reform programs are being carried out have been experiencing a difficult transition that began, for many of them, in the late 1980s. The severity and duration of the interim period depend on the country’s ability to select appropriate reform policies, the adaptability of national resources, and the confidence of foreign capital in the country and its reform policies. During this period, various adverse implications will affect several social groups, including (1) excess labor made redundant because of restructuring; (2) marginal labor associated with small industries and services from which subsidies are withdrawn; (3) workers who are unable to adapt, owing to either age or a lack of skills; (4) low-income and destitute groups, which will suffer from subsidy removal, price liberalization, and inflation; (5) residents of rural areas and agricultural farmers who cannot benefit from improved prices of agricultural products; and (6) long-term unemployed persons.

While a liberalized economy will grow in line with the program’s expectations, the number of people who will be adversely affected by the process will increase unless a social mechanism is put in place. This mechanism will affect the different groups to varying degrees. While some of these groups will be more vulnerable than others, they will each be affected by one or more of the following social effects.

Unemployment

Higher joblessness levels are considered a major problem during the adjustment period, although high unemployment already exists in most countries implementing reform programs. However, the restructuring of the public sector and privatization create new sources of unemployment. Indeed, most Arab countries currently suffer from high unemployment, which has reached 18 percent in Jordan, 16 percent in Tunisia, and 14 percent in Egypt. In 1995, unemployment in Egypt was estimated to affect about 1.5 million individuals, to which should be added about half a million graduates entering the labor market for the first time. When disguised unemployment in the public sector—estimated at about 1.5 million persons who are slated to become redundant in the forthcoming rehabilitation period—is taken into account, effective unemployment would add up to about 3.5 million persons, or 20 percent of the 1995 workforce. Such massive unemployment represents a real problem for Egyptian society and accounts for the government’s long-drawn-out hesitation in going ahead with public sector restructuring and privatization.

Poverty

The reduction of government spending, the elimination or lowering of subsidies on goods and services, and the higher taxes that will eventually be required for the attainment of fiscal balance will primarily affect the poor. This means greater poverty and an inability of certain social groups to secure minimum levels of food, clothing, education, and health care. Currently, in many Arab countries, a growing number of citizens are living below the poverty line; in 1990 their proportion reached about 30 percent in Yemen and in rural areas in Tunisia, 32 percent in Morocco, and 34 percent in both rural and urban areas of Egypt (United Nations Development Program, 1995).

A local survey conducted in 1992 shows that poverty spread in rural areas, areas settled by squatters, and most governorates of southern Egypt and some coastal areas (Fergany, 1992). Published data also indicate that government expenditures on basic social services (housing, health, education, and social security) dropped from about 6 percent of total expenditures in 1990 to 4 percent in 1993 (Table 1). Moreover, the improved income that other social groups reap as a result of economic reforms will create larger income discrepancies, thereby heightening the poverty perception felt by a large segment of the population.

Table 1.

Egypt: Selected Economic and Social Indicators

(In percent, unless otherwise indicated)

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Sources: United Nations Development Program (1995), and Arab Fund for Economic and Social Development (1995).

Monthly expenditure of less than $35 per individual (purchasing power in 1985 prices) according to UNDP criteria.

1986 data.

Declining Living Standards

During the period of economic reform, inflation is expected to accelerate and reduce the purchasing power of individuals, with a resulting deterioration in their living standards. Distortion in income and wealth distribution to the benefit of productive groups and those in a position to control resources and services are also expected to occur. Policies that seek to achieve financial balance entail lower expenditures on public services, such as education and health, which introduces an additional burden on those individuals who have little to gain from changes in prices and incomes. In fact, the continuous decline in living standards is a phenomenon that affects most Arab countries, even those that are not implementing reform programs. For example, a series of household spending surveys conducted in Egypt by the Central Authority for Statistics and Mobilization shows that the standard of living declined in 1990 to a level lower than the one that prevailed in 1958, particularly in the south and in rural areas (Fergany, 1994).

Instruments to Address the Social Effects

The success of economic reform requires that the institutional environment be conducive to human development and that a mechanism to protect the groups most adversely affected by such a program, the so-called social safety net, be made available. The social safety net is a self-contained package consisting of institutional measures that support not only the affected groups but also those that do not benefit directly from economic reforms; financial support designed to create opportunities for investment, rehabilitation, and employment; and legislation to protect the affected groups and to enable their members to enjoy the expected benefits of reform.

Egypt’s social safety net was developed over several decades and has become an integral part of Egyptian social life. It comprises a system of social assistance to destitute families that caters to about 2.7 million eligible beneficiaries; a system of temporary employment covering about 770,000 beneficiaries; food subsidies, from which about 87 percent of the population benefits; and subsidized water, power utility rates, public health, and education available across the board. The economic costs of these components are estimated to represent about 19 percent of GDP, or $6.8 billion of the 1990 government budget (Table 2). Since a major proportion of those costs took the form of price subsidies on goods and services, their value was not listed in the budget under the heading of government expenditures on basic social services, but rather under other sectoral items, such as housing, electricity, and transportation. Because of the nature of Egypt’s safety net, all inhabitants benefit indiscriminately from most of its components, diminishing the equity aspect in distribution and raising its economic cost to society.

Table 2.

Components of Safety Net and Social Subsidy in Egypt, 1990

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Source: World Bank (1995).Note: The estimated cost listed in the government budget is about $6.8 billion, based on 1990 GDP data estimated at about $35.5 billion.

In view of these considerations, the new social safety net accompanying reform programs must be conceived in a comprehensive and methodical approach that will address the determinants of poverty and its temporary manifestations; modulate subsidies to specifically benefit the affected groups; protect the most vulnerable groups effectively, focusing on their most urgent needs; avoid creating an additional administrative bureaucracy; and focus on rehabilitation and redirection of redundant labor toward new areas of economic activity.

The required social safety network thus calls for a set of measures that include the following:

  • (1) Macroeconomic measures to reduce unemployment. These should be designed to remove the obstacles that impede the growth of labor-intensive activities and to create new employment opportunities. Included here are actions to promote export-oriented small businesses, support small farmers and labor-intensive projects, adopt legislation protecting workers’ rights, and develop tax and banking systems to enable small businesses to acquire production inputs and access credit facilities.

  • (2) Prevention of extreme poverty and malnutrition. Actions should deal with issues pertaining to malnutrition and direct, widespread famine in low-income and destitute groups. They include measures to make available at affordable prices, and to facilitate access to, basic foods through effective institutional arrangements.

  • (3) Domestic public spending measures. These actions aim to alleviate the hardships of poor segments of the population in certain geographical regions or social sectors. They include subsidies for some consumer products such as fuel and bread or services such as education and health so as to ensure that the benefit reaches the targeted groups. Measures would also initiate local infrastructural works conducive to the creation of durable services to the benefit of the local community.

  • (4) Family and childhood protection measures. The purpose of these is to increase job opportunities for women and to improve standards of living of children. They include actions to foster the role of government and national agencies in the alleviation of hardship for rural women, provide basic health care and education for school-age children, eradicate illiteracy, and organize family planning.

Some countries that embarked on economic reform have set up special institutions to carry out some of the above-mentioned measures with a view to reducing the impact of economic reforms on affected groups. Illustrative of such institutions are Bolivia’s Social Emergency Fund and Chile’s Minimum Employment Program. The Social Fund for Development in Egypt, with its new functions and specific mandate to address poverty and unemployment, represents one instrument to support the existing social safety net and redirect its benefits exclusively to eligible groups.

Design of the Social Fund for Development

This section of the paper examines the design framework that was adopted to serve as a basis for the establishment of the Fund in 1991, including its objectives, institutional setting, components, financing sources, and implementation mechanism.

Objectives

The Fund was created primarily to provide an instrumentality through which to alleviate the adverse effects of Egypt’s economic reform and structural adjustment program and protect affected groups. This broad purpose covers several categories of objectives. These include mitigating the acuteness of rising unemployment associated with the implementation of the reform program through the creation of new job opportunities, rehabilitation, training, and contributing to the absorption of new entrants to the job market; alleviating the poverty burden of the most vulnerable regions; improving services in the poorest areas; and absorbing workers returning to Egypt from abroad in the wake of the Middle East crisis.

Beneficiaries

The Fund’s beneficiaries fall into several categories, the major ones being the groups most affected by the privatization of public enterprises as well as by the economic reform program; the poorest segments of the population and very low income groups; inhabitants of the least developed communities and those who live in regions with inadequate services; the unemployed, including new graduates; and women. Beneficiaries within each of these categories are identified on the basis of poverty criteria, employment status, and population size and through surveys and specialized field studies.

Components

The Fund’s activities are organized into the following six principal programs:

  • (1) Public Works Program. This program aims to provide and improve labor services and public utilities in the neediest regions that rely on labor-intensive processes, creating new job opportunities for the maintenance and operation of those utilities so that they can generate permanent employment opportunities. Local private sector entrepreneurs implement the program, with the requirement that at least 50 percent of the labor used for the implementation of each project be drawn from the local population. The program focuses on multiple, labor-intensive small projects, such as the rehabilitation of irrigation systems, the delivery of potable water to remote villages, the maintenance of public services and utilities, construction of new buildings, and garbage collection. In accordance with the Fund’s criteria, priority is given to regions suffering from widespread unemployment and poverty. The program seeks to create about 26,000 temporary jobs a year over the Fund’s estimated lifespan of four years, together with about 15,000 permanent jobs involving maintaining and operating Fund-financed projects. Some 2 million persons are expected to benefit indirectly from such projects through improved services, incomes, and living standards.

  • (2) Community Development Program. The objective of this program is to mobilize and encourage initiatives in rural and urban populations. It assists individuals in carrying out small projects that will generate a living for them and their families by providing concessional financing for such productive individual activities as farming, food crop production, and distribution services. Business is usually conducted through associations of productive families and other local associations. It normally grants credit against personal collateral and with concessional interest and repayment periods, with a maximum principal of LE 7,000 a project. The program also endeavors to develop social services in poor areas to provide equipment for basic health care, education, nutrition, and vaccination of infants and mothers, as well as family planning, training, and the tools to eradicate illiteracy. The program’s contributions are normally in the form of donations and grants to national organizations involved in implementing such projects. Its aim is to create about 76,000 new employment opportunities in addition to a number of productive, income-generating activities.

  • (3) Enterprise Development Program. This is the largest program in terms of financing. It seeks to develop citizens’ aspirations for free enterprise, to encourage them to undertake new small-scale projects or to develop and expand existing ones, with a view to creating employment opportunities. This program is directed to small investors and recent university graduates, offering an integrated array of technical services and training, including techniques for project appraisal and preparation of feasibility studies, credit access procedures, and concessional credit facilities from commercial banks. Loans range from $4,000 for a small individual project to a maximum of $60,000 for collective projects. Such loans carry concessional terms comparable to those commercially available in Egypt, with interest rates varying between 9 percent for new projects and 12 percent for existing ones, a 6- or 12-month grace period, and repayment periods ranging from 6 to 12 years. The program aims to finance about 70,000 small projects in the private sector.

  • (4) Program for Employment and Retraining. The goal of this program is to create a mechanism to facilitate, through two types of interventions, the rehiring of labor made redundant by privatized or restructured public sector enterprises. First, neutral interventions seek to protect the employment and income of workers of public enterprises. Actions covered by these include the examination of rules for workers’ termination and procedures for their transfer from the public to the private sector, determination of arrangements to finance unemployment insurance, and early retirement privileges. Second, active interventions cover actions designed to identify suitable options for assisting unemployed labor—by searching for rehiring possibilities, training individuals for new jobs, and providing help until new job opportunities become available. Within the Fund’s administration, a special directorate was established to provide technical expertise, assist the government in identifying targeted categories, and implement relevant programs. The program’s objective was to work with about 48,000 employees of public enterprises likely to be restructured or privatized.

  • (5) Institutional Development Program. This program seeks to strengthen the capability of intermediaries implementing the Fund’s projects, particularly the poor among them, to mobilize additional sources for poverty alleviation actions and to conduct studies and surveys to gauge the extent of the impact of the government’s overall economic reform and the Social Fund’s activities for targeted social groups in particular. The program participates in several surveys in collaboration with the Central Authority for Statistics and Mobilization. The focus of the first survey in 1992 was to determine the basic living conditions of targeted groups and regions and the priorities for action. This survey was followed in 1993 by the social survey, which sought to evaluate basic services and infrastructure at the local level, and the comprehensive survey, which measured family indicators in more detail. Finally, another survey of priorities seeks to identify changes in living standards that will be undertaken after implementation of Fund projects. Under this program, a comprehensive study will be conducted to estimate and follow up on changes at the social level so as to assess the impact of Fund projects, or of the economic reform measures themselves, on unemployment, poverty, and level of local services.

  • (6) Program of Public Transportation Services. This program sought to improve public transportation services in the Cairo and Alexandria metropolitan areas, which are the most congested. It financed the purchase of vehicles and spare parts for the public transit system in those areas.

Cost and Financing

The costs of executing the programs of the Social Fund for Development in Egypt were estimated at about $572 million in 1991, of which $463 million was investment costs. The foreign component of overall costs was estimated at $180 million. About $255 million was earmarked for the Public Works Program, and about $42 million for the Community Development Program. Approximately $11 million was earmarked for the Institutional Development Program as well as $53 million for the Program of Public Transportation Services. The remaining amount was reserved for the operational costs of the Fund. The Fund’s budget for 1993–96 is estimated at $16 million.

Various Arab and international efforts were coordinated to secure the necessary financing for this social safety net. The Arab Fund for Economic and Social Development, the Kuwait Fund, the Abu Dhabi Fund, the World Bank, and the German government all participated by making available loans amounting to $295 million. Various grants and technical assistance were also made possible in the amount of $277 million from the European Union, the United Nations Development Program, and the governments of Canada, Denmark, France, the Netherlands, Norway, and Sweden, as well as Egypt.

Institutional Framework

The Fund was instituted as an autonomous body under an official decree of the Republic (No. 40) in 1991. It falls under the direct supervision of the Prime Minister, who also heads its board of executive directors composed of 15 members, including 7 ministers, with the rest appointed by the government from the private sector.

An executive committee to oversee the activities of the Fund was agreed upon after it was ordained by the board of directors, which has the executive power to approve projects that do not exceed LE 10 million. The executive committee is composed of eight members and is headed by the Vice-Premier and the Minister of Planning; the membership consists of two ministers and four members appointed by the government to represent the private sector, in addition to the managing director–secretary general of the Fund, who is to oversee the secretariat of the committee and the daily management of the Fund. The Fund consists of five central administrations: Community Development, Public Works, Employment and Retraining, Enterprise Development, and Finance and Administration.

A group of specialized divisions assists in planning, research, information dissemination, public relations, and internal audit, including 16 provincial offices distributed among various governorates. The Fund has various administrative and employment rules, to which flexibility is guaranteed, which enable it to attract experienced professionals. The Fund is subject to the rules and regulations that apply to all public institutions.

Implementation Mechanism

The Fund hires contractors to implement its programs and also goes through executives and intermediaries to carry out limited subsidiary projects (or outreach field projects). These intermediaries include ministries, including the Ministry of Social Affairs, governorates, units of local governance, civil associations, and commercial banks. The Fund remains responsible for overseeing the subsidiary projects that are executed.

Remarks on Design

The Fund has a number of strengths that have enhanced its ability to realize its goals, among which are the following:

Proximity to the decision-making centers. The Fund benefits from the direct supervision of the Prime Minister, who facilitates its work and supports execution of its policies and programs.

Freedom from governmental routine. The Fund has been given the freedom to put together an appropriate system and administrative rules, especially the rules and regulations that govern its employees. It has taken into consideration the rules that prevail in the private sector and the international organizations in order to attract professionals with the desired high-level experience.

Developmental integration of subsidiary projects. Projects financed by the Fund are designed for various developmental goals, to be completed at the same time The project that will initiate public employment for example, foresees an amelioration of services in the poorest areas as well as opportunities for permanent and part-time work. Among the project goals are training small investors as well as recent graduates and encouraging them to participate in small-scale productive enterprises, which would cover some of the local demand for services and can lead to new employment opportunities.

In spite of the characteristics outlined above, it is evident that the Fund has a number of weak points:

Public sector problems. The Fund’s goals to redevelop, train, and find work opportunities for workers that the public sector considers redundant presuppose that the core of the problem is overemployment in the public sector caused basically by incompetent management. In line with this train of thought is the assumption that the administration, financing, and marketing of such enterprises must be restructured. Unfortunately, the Fund has not looked into this primary matter. Rather, it has concentrated on finding alternative opportunities for the surplus labor. Because restructuring and privatization have slowed, the problem of overemployment has not been solved, and the Fund has not been able to operate within the existing framework of the Program for Employment and Retraining. The same is true of the Program of Public Transportation Services, which experienced organization problems that are outside the framework of the Fund’s goals. The program was thus canceled and its financing transferred to other programs.

The working poor. The Fund has put together assistance for the disadvantaged—opportunities for temporary and permanent employment that only those who are fit for work can take advantage of. But, the poor who are not capable of working are by definition not included. This situation has given rise to a misunderstanding of the Fund’s role and its expectations. It is hoped that the remaining elements of the social safety net will alleviate the negative effects of the economic reform among those affected by price increases and the abolition of food subsidies.

Autonomy. The Fund has been given a certain autonomy to work outside the government and freedom in dealing with government institutions. Yet, it is still under government control through the board of directors and its executive committee. Thus, the Fund sometimes adopts projects that fall under the direct responsibility of ministries. Many of these projects may not, in any case, meet the feasibility criteria. One such case was the project to promote handicraft industries under the Ministry of Social Affairs.

Program Implementation

Although the Fund was created in 1991, its activities did not start until 1993, when it first received paid-in capital from its sources of financing. The administration of the Fund during 1991–93 put together its administrative rules, hired a professional staff, established regulations and work procedures, and conducted an information campaign to familiarize the citizens and intermediaries with the goals of the Fund. The administration has attempted to conserve the essential goal of the projects during their execution, which is to alleviate poverty and lower the unemployment rate.

The Fund contracted out its subsidiary projects to 325 intermediaries, with specific qualifications, and within reasonable costs, to work with the Fund in its war against poverty and unemployment. Tackling unemployment and assisting intermediate enterprises, especially in the private sector, in strengthening their managerial capacity and improving their performance are major goals. The intermediaries include the four main commercial banks, as well as the autonomous units, public associations, and some central ministries and their branches, such as the Ministry of Autonomous Regions and the Ministry of Agriculture and Irrigation.

The Fund has profited from various studies prepared by consultants to delineate methodological criteria:

  • (1) To measure unemployment among individuals between the ages of 15 and 64 years who are out of work (this indicator is weighted on a scale of 100 points). It was demonstrated in the primary study conducted in 1992 that unemployment existed throughout Egypt, but was highest in the urban areas and the countryside, including Embaba—a district in downtown Cairo—Giza, and Asyūt.

  • (2) The indicator that measures poverty is based on six social and standard-of-living variables: the rate of illiteracy among women, the percentage of inhabitants without potable water, the number of families that do not have kitchens, the rate of expenditure on food, the number of families that use kerosene as their major energy source, and the average annual rate of family expenditures. This indicator considers relative rates of poverty, with the exception of abject poverty, on a scale of 1,000 points. This study demonstrated that the areas that had more than 850 points suffer from abject poverty and are concentrated in the south, especially in the rural areas, and a few areas in northern Egypt.

  • (3) The combined indicator for poverty and unemployment consists of a 20 percent weight for poverty and an 80 percent weight for unemployment, taking into consideration the population ratio in various areas. This combined indicator will be issued as a guide for applying the resources of the Fund to the projects.

The Fund’s assessment and follow-up procedures were improved, with the goal of issuing monthly reports, indicating the divergences between actual financial disbursements for each geographical area and the goals of the poverty diagram and unemployment, which includes all the governorates.

Development of the Implementation Stage

Various developments occurred during the implementation of the Fund’s programs, which affected the components of financing:

  • (1) The financing available to the Fund rose from $572 million to about $665 million, because of movements in the currency market and the addition of new donors.

  • (2) The economic reforms related to privatization slowed in relation to the restructuring of the public sector.

  • (3) The public transport sector had been earmarked to receive $53 million. However, this sector requires major changes in public policy to improve its services. Because the Fund does not have control over public policy, the decision was made to transfer this amount to the remaining projects.

Field Results

The Fund put together a database that enabled it to oversee its various programs and subsidiary projects and, from that point, to follow up on their implementation and to issue reports on the outcome. The Fund mobilized financing from 18 donors amounting to $665 million, of which it had received about $444 million as of October 31, 1995. The Fund entered into agreements with intermediaries to implement contracts for a cost of $580 million, of which it has paid $387 million. The intermediaries transferred about $321 million to the final beneficiaries. Table 3 shows the availability of funds, the size of the projects, and withdrawals as well as the distribution of subsidiary enterprises according to the five programs (after the Program of Public Transportation Services was canceled) as of October 31, 1995. The Fund’s goal was to benefit 25 million citizens through its projects and to create 277,000 permanent job opportunities. The cost of creating one permanent job opportunity was estimated at $2,400 (Table 4).

Table 3.

Social Development Fund: Flows of Program Funds as of October 31, 1995

(In millions of U.S. dollars)

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Source: Social Development Fund database.
Table 4.

Social Development Fund: Expected Beneficiaries and Targeted Work Opportunities as of October 31, 1995

(In thousands, unless otherwise indicated)

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Source: Social Development Fund database.

Only 350 work opportunities.

According to the Fund, 12 million citizens have benefited directly and indirectly from these projects, which have made available 74,000 temporary employment opportunities and about 177,000 permanent employment opportunities, with an actual average cost of $1,810 for each permanent job (Table 5). The Fund invested about $1,300 on average in the direct beneficiary, compared with about $2,400 for a project in Bolivia and about $2,770 in Ghana. The average investment in each beneficiary (direct and indirect) amounts to only about $26 (Table 6).

Table 5.

Actual Beneficiaries and Work Opportunities in Completed Programs as of October 31, 1995

(In thousands, unless otherwise indicated)

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Source: Social Development Fund database.Note: Figures of beneficiaries and work opportunities are rounded to the nearest thousand.

61 beneficiaries only.

350 temporary work opportunities.

Table 6.

Social Development Fund: Average Realized Investments to Reach Beneficiaries Through the Fund’s Programs

(In U.S. dollars per beneficiary)

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Source: Social Development Fund database.

According to the Fund, the average of repayments returned from sub-loans that were financed by the intermediaries (the commercial banks and the national associations) was assessed at 98 percent, which is a good average and exceeds the percentage of loan repayments by ordinary commercial banks. In comparison, the project for handicraft industries attained an average collection rate of only 44 percent. This was the first project within which the Fund initiated its operations, with the cooperation of the autonomous domestic units. This project was subject to a number of problems:

  • (1) Lack of sufficient professional skills to the targeted small investors from the side of the Fund and their lack of experience.

  • (2) Small scale of the projects in particular areas and the tendency to have too many relative to demand.

  • (3) Lack of confidence in the small investors in the market.

  • (4) Lack of working capital for small-scale projects.

  • (5) Lack of spare parts for purchased machines.

  • (6) Various administrative regulations that are not encouraging, such as the regulation related to contractual procedures, which requires prior experience, performance guarantees, and a strong financial position, conditions that are not likely to be met by the small contractors targeted for such tasks.

With the exception of the handicraft projects mentioned before, it could be maintained that the Fund has achieved some good results in a short time. But such results have to be viewed in the context of two realities. First, no objective evaluation has been undertaken by a national entity to date, nor has the Fund compiled an unbiased data source, especially in the areas of job formation opportunities, the number of beneficiaries, percentages attained, or the socioeconomic effects of the Fund’s programs. Second, a large number of projects that the Fund has financed have not been finalized because of a lack of clarity as to their prospective capacity and long-term viability.

Analysis of Experiments

Achievements

In addition to the quantitative results mentioned before, the Fund has realized several qualitative results at various levels in the short time since its inception.

Administratively, the Fund managed to attract $665 million in financing and was able to reach a large number of targeted beneficiaries in 26 governorates within 30 months only. The Fund would not have had such success if it had not acquired highly qualified professionals, instituted a competent administration and information system, and laid down rules of operation acceptable among the specialized intermediary institutions. As a result, a larger number of citizens will benefit in the second stage of the Fund. Its experience is worth emulating in designing other comparable projects.

By generating employment, many of the Fund’s subsidiary projects have been able to lessen some of the bottlenecks and ongoing problems, as well as ameliorate the level of basic services—especially in some of the poor and remote areas—using realtors and local workers. Some such projects involve shoring up the banks of the Nile River to limit soil erosion, preserving and improving agricultural lands, and bringing potable water to remote villages. Through its projects, the Fund has been able to encourage employers to hire the unemployed, especially recent graduates, by putting together small-scale projects that guarantee the employers and others new opportunities and self-sufficiency, through the following means:

  • (1) Educating and training the beneficiaries in such skills as identifying promising projects and examining their feasibility, dealing with commercial banks to secure financing for their projects, and so on.

  • (2) Facilitating procedures for acquiring loans, especially rules dealing with the required guarantees and the acquisition of licenses.

  • (3) Increasing the grant element from commercial banks by securing lower interest rates, extending the period for repayments, and debt forgiveness.

  • (4) Acquiring tax exemptions for five years, enabling the Fund in its secondary projects for the Community Development Program to assist the national associations in institution building and help plant a cooperative spirit among their members so as to assist them in executing various charitable projects, such as the eradication of illiteracy, training of manual labor, education of women, and providing health care and family planning.

  • The Fund financed a number of important studies on public transportation policies, public sector enterprise restructuring, available alternatives to the direct subsidies for primary foodstuffs, and poverty and unemployment and their geographic distribution in the different areas of Egypt.

Caring for Women

The importance of women in the development of the family has been an issue that the Fund has seriously considered in its Community Development Program through projects to eradicate female illiteracy, provide information about family planning, and train women in simple manual labor. Thirty percent of the Fund’s loans awarded to women have been small loans for the development of projects. This small-scale orientation is intended to accelerate the standards of living of illiterate women and lower their rate of unemployment in Egypt’s workforce.

Efficiency

The Fund achieved its results with 140 employees, distributed between the secretariat in Cairo and 16 provincial governorates, for a cost of about 3 percent of the financing available to the Fund, which is considered a reasonable average in comparison with other projects (Senegal, 5.4 percent; Bolivia, 5.5 percent; Nigeria, 6.5 percent; and Peru, 4 percent). The Fund’s efficiency can be attributed to certain factors, in particular its proximity to the highest level of executive authority, its independence from the government administrative organizations, and the application of administrative rules to the salaries of the Fund’s workers that approximate those in the private sector and international organizations. The Fund sets an example for how government institutions could improve their efficiency and raise productivity if they could be freed from traditional government routine.

Problems and Obstacles to Program Execution

There is no doubt that the Fund has achieved acceptable results thus far. However, it could have achieved better results had it been able to avoid some negative aspects as well as the obstacles that stood in the way of the execution of its programs over this period. These negative aspects and obstacles are not evidence of the Fund’s inadequacy. Some of these problems could not have been foreseen and others were impossible to avoid. They therefore represent a set of factors that should be taken into consideration in the design of similar projects in the future. As a matter of fact, the management of the Fund has already started tackling some of these issues.

  • At present, it is difficult to know whether the Fund has succeeded in reaching its intended beneficiaries and whether they, or the economy as a whole, benefited from its projects. This lack of information is due to delays in carrying out the necessary studies and surveys that the Fund commissioned the National Center for Statistics and Mobilization to undertake and also to the Fund’s internal information and follow-up system, which focuses essentially on financial parameters, such as the number of projects, the value of contracts, withdrawals, and the number of permanent and temporary jobs created. Certainly, difficulties are associated with following up on adherence to targeting methods, evaluating the extent to which recipients are benefiting from the Fund’s projects, and determining the social impact of the projects. The difficulties are due to the large number of projects and recipients, the large geographical area involved, as well as the difficulty of evaluating some projects that do not have concrete returns, such as institution building, the fight against illiteracy, and the organization of the family.

    Among the technical problems is the difficulty of ascertaining the needs of the beneficiaries. For instance, some beneficiaries were not selected objectively, especially in the community and enterprise development programs. However, we are not in a position to determine precisely the extent of these cases. In spite of these difficulties, it would have been possible to design a comprehensive information and follow-up system, including an evaluation of the extent to which targeting factors are adhered to and the effective benefits of the recipients from the Fund’s projects as well as their social impact. These data are of paramount importance to the management of the Fund, the state, and the donors, in order to supervise and direct the Fund’s activities to achieve the objectives for which it has been established.

  • To establish its credentials, the Fund may have given the impression, to some, that it has solved all problems related to unemployment and poverty in Egypt. In fact, at present, there are about 3.5 million unemployed people in Egypt, while the Fund will be able to create no more than 400,000 permanent and temporary jobs over the next four years. The Fund’s role in solving unemployment is limited for several reasons; chief among them is the financial resources at its disposal. As for the Fund’s role in solving poverty issues, it is very limited compared with the government’s expenditures for poverty alleviation (about $20 billion in 1993) and the high rate of poverty, estimated at about 34 percent of the population.

  • Essentially, the Fund started with the objectives of cushioning the negative impact of economic reforms on the most vulnerable members of society and providing job opportunities for those left jobless by the reforms and by the Middle East crisis. However, when it came to implementing these objectives, they broadened to cover the fight against poverty and unemployment in general. These objectives encompass many large and complex difficulties that require extensive human and financial resources. In its first stage, the Fund focused on expanding its operations by signing many contracts involving large amounts of financing in many governorates, in some instances at the expense of proper targeting. It is better for the Fund to concentrate on clear and narrow objectives in the fields in which it has obtained some results, such as public works and community and enterprise development. This might require a review of the Fund’s structure, its work procedures, and the projects it finances.

  • Most of the projects financed by the Fund, especially those related to public works, were selected by the government authorities and not by the beneficiaries. These projects fall within the field of competence of these authorities, and the Fund therefore became an arm of the government. It would have been better for the Fund to complement the government by financing projects suggested by the beneficiaries and that the authorities were unable to finance. To avoid duplication and achieve greater equity among the beneficiaries, there must be more coordination with other social and developmental institutions.

  • The projects were designed, and the relevant contracts signed, with the ministries and the central institutions in Cairo. The role of the Fund’s regional office was limited to following up on the execution of the projects. Designing and following up on the projects at the local level would be more effective because the regional offices are closer to the local authorities and the beneficiaries and are therefore in a better position to understand the needs of the latter group. Decentralization would require providing these regional offices with more human resources and adequate training.

  • There was no clear feeling about the importance of self-reliance in the projects financed by the Fund in its initial stages. There is no doubt that the Fund has helped provide many temporary jobs, especially in the Public Works Program and Community Development Program. However, it is more important to motivate the benefiting parties (local authorities and local societies) to provide their own financing to ensure the continuity of the projects and to enable them to finance other similar projects instead of relying on financing from the Fund and the Egyptian government.

  • The Fund was able to implement many of its subsidiary projects through intermediary parties, which are local and government institutions governed, in many cases, by traditional, complex, and “routine” systems. The Fund was able to upgrade the work methods of these parties to improve their performance in terms of the projects financed. The more important goal, however, is to maintain this spirit of development and to improve the performance of these institutions in their other activities after their relationship with the Fund ends. For instance, the Fund must convince the intermediary commercial banks it deals with to simplify administrative procedures and lower the amount of collateral they request from small investors, even for ordinary commercial loans, especially if the projects financed by the Fund have proved to be successful, and the borrowers serious in paying back their loans. This is an important and beneficial role for the Fund to play because the commercial banks are permanent institutions with large resources, while the Fund is temporary and has limited resources.

  • The Fund should increase its role in providing technical assistance to those who benefit directly from its programs, especially in enterprise development, by helping the beneficiaries undertake more accurate feasibility studies that focus on the real needs of the market, on ways and means to improve the quality of the projects while decreasing the cost, on marketing domestically and abroad, and on creating a data bank to help small new investors. Marketing is very important given that many similar projects being financed led to a stockpiling of output and difficulty in marketing in some sectors.

  • It will be useful to increase the Fund’s role in encouraging the creation of small complementary industries in order to increase specialization and consequently decrease the investments required for small specialized projects and to increase, and improve the quality of, marketing.

  • Like any other new, active institution, the Fund is subject to criticism, some of which has some basis but most of which is due to misunderstandings. The Fund should take this criticism into account and deal with it clearly and transparently. With constructive criticism, the Fund can improve its performance.

  • In light of the governmental structure of the Fund’s board of directors and executive committee and the large responsibility and daily activities of the Fund’s managing directors, there is a need for a think tank with world-class capabilities. Such a group would be entrusted with overseeing the Fund’s activities and suggesting ways and means to develop them without government input to improve the Fund’s performance on the basis of continuous innovation.

Conclusions

Economic reforms are different from one country to another and from one stage to another within the same country, but generally they involve reforming the government budget and decreasing the deficits; liberalizing interest rates and exchange rates; deepening money and capital markets; defining market mechanisms; giving more incentive to the private sector; privatizing and restructuring the public sector; liberalizing foreign trade and encouraging exports; and creating an environment that will attract foreign investment.

Over the past couple of years, the positive impact of the economic reforms implemented has started to appear in the Arab countries. However, these reforms have also had a negative impact—especially on the poorest social groups—through increased unemployment and inflation and decreased living standards. These side effects will basically affect the weakest members of society. To address these negative aspects of economic reform, Egypt implemented complementary measures to provide investment, training, and employment opportunities and issued legislation, in the form of the social safety net, that protects the affected groups and helps them take advantage of the benefits that are expected from the reforms.

The social safety net in Egypt took shape several decades before the economic reforms. It has several components, such as the system of support to poor families, the temporary employment program, the basic food subsidy program, and the program for subsidizing water, electricity, public education, and health care. In 1990, the cost of the social safety net was estimated at about 19 percent of GDP, or about $6.8 billion. However, the social safety net is constructed in such a way that all segments of the population benefit from most of its components, which distorts equity and increases its economic cost to society.

For these reasons, the social safety net that is required in the context of economic reforms must be built on the basis of objective criteria. It must address the causes of poverty and the conditions that can lead to short-term poverty and adjust its support mechanism so as to benefit the neediest. It is important that it achieve its goals without creating new bureaucracies.

In this context, the Social Fund for Development was created in 1991 as one of the pillars of the social safety net, with the explicit purpose of finding a mechanism to alleviate the negative effects of the economic reforms and structural adjustment program, and protecting the social categories affected by this program. In its approximately 30 months of activity, the Fund has managed to attract total financing of $665 million from 18 countries and international development institutions and sign contracts with 325 intermediary parties to implement subsidiary projects worth $580 million, of which the final beneficiaries effectively received $321 million by October 31, 1995.

According to preliminary figures gathered by the Fund, about 12 million citizens benefited directly and indirectly from its projects, and about 177,000 permanent and 74,000 temporary jobs were created. On average, the cost of providing a permanent job was about $1,810, and the Fund invested approximately $1,300 to reach each beneficiary, compared with $2,400 and $2,770 for two similar projects in Bolivia and Ghana, respectively. However, these figures have not yet been objectively evaluated by a neutral party. Furthermore, the projects financed by the Fund have not all been completed, and it is not clear that these projects are able to continue and succeed. From another angle, the social effects of the Fund’s projects, on the beneficiaries and on the whole economy, have not yet been evaluated.

On top of the quantitative results, the Fund managed to realize several important qualitative results, such as attracting high-level expertise, building information and administrative systems, putting in place working methods through existing specialized intermediary institutions, attracting relatively large financing, realizing developmental objectives parallel to its main objectives of fighting poverty and unemployment, increasing interest in the role of women, and undertaking several important sectoral studies. Despite these achievements, implementation of the Fund’s programs had a number of negative aspects: the rapid expansion of objectives at the expense of proper definition, the exaggeration of the role of the Fund, the weakness of follow-up procedures and evaluation of performance in light of objectives, the negligible contribution of the beneficiaries in selecting the financed projects, the focus on dealing with central government institutions as intermediaries, the lack of investment of some beneficiaries in ensuring the continuity of the projects, and the weak technical services provided to those benefiting from some projects.

These negative aspects do not reflect weakness in implementation because they could not have been anticipated, especially given the rapid pace of implementation. Rather, they represent a set of factors that must be taken into account when similar projects are designed in the future. As a matter of fact, the Fund’s management has already started dealing with some of these issues. The Fund’s model had many strong elements that enabled it to achieve acceptable results. It is possible to build on those elements and incorporate them, collectively or individually, into public domestic institutions and projects financed by international and regional agencies with the purpose of improving the performance of those institutions and projects. The most important elements are flexibility, the breaking away from bureaucratic and routine government systems, the closeness to the center of decision making in the state, and the choice of highly qualified staff, the whole supported by well-developed information and administrative systems. It seems that the Fund, if it is redesigned on the basis of its experience in Egypt, can be replicated in other societies, while taking into account local conditions, to mitigate the negative effects of economic reforms in those societies.

Comment

Mabid Al-Jarhi

We economists must admit that we have failed to give due consideration to social issues by incorporating them into our policies for economic adjustment. When negative social effects began to appear, we took it upon ourselves to address them. For a long time, economic analysts paid little attention to the unequal distribution of wealth, arguing that it involved moral issues outside the realm of economics. But now economists have begun to pay more attention to distribution, and, in the present paper, the following questions are addressed:

  • (1) Is the purpose of social policies merely to compensate for insufficient levels of income resulting from the activities of a free economy, or is it to create the conditions necessary for the market system to function effectively?

  • (2) What are the available options for social policies to achieve the desired results, and how can we choose from among them?

  • (3) What is the position of the Social Development Fund in Egypt with respect to these policies?

To answer the first question on the role of social policies, it is sufficient to consider the situations of the Republic of Korea and Taiwan Province of China in the early 1960s—when they were just two poor countries—before their economies took off.1 We find that the social indicators of both countries were at much higher levels than their income levels. Both countries had full enrollment in primary education and high levels of literacy. The distribution of wealth and incomes was unusually equitable owing to the agricultural reforms they had carried out in the 1950s, making them the countries with the least disparity in the distribution of incomes and wealth at that time.2

These arguments support the opinion of many economists that there are certain “necessary initial conditions” for an economic takeoff and that the tremendous growth achieved by these two countries was made possible in large part by the existence of these conditions. This view is based on a number of assumptions. First, it is assumed that achieving the conditions necessary to support the basic social structure requires an adequate supply of skilled labor in proportion to available capital and the prevailing level of income, which allows for the accumulation of capital at a high rate of return. Second, it is assumed that implementing appropriate policies to encourage investment and remove any related constraints can pave the way for an investment boom, which is an important factor in accelerating the rate of development. The third assumption is that redistributing wealth can in certain cases convert unproductive resources into productive ones, thus leading directly to an increase in real growth.3

In light of the above, it can be concluded that the role of social policies is not limited to dealing with the effects of transition from universality to economic freedom; such policies must be used to achieve the necessary initial conditions for an economic takeoff, which is the basic goal of reform.

In Egypt, one-third of city dwellers and one-fourth of the urban population live in abject poverty, which means that a fundamental redistribution of wealth and income is required in order to achieve even a minimum level of social equity, not to mention the necessary initial conditions. With this in mind, we shall attempt to answer the second question posed at the beginning of our discussion, concerning appropriate policies for improving such a situation. There are two basic approaches for carrying out redistribution: income maintenance and wealth maintenance. The income maintenance approach involves providing poor people with a minimum income. The most famous policy along this line was the negative income tax proposed by Milton Friedman in the 1970s. This policy is not sufficient to eliminate poverty, because it does not raise poor people’s wealth to adequate levels.

The wealth maintenance approach starts with the premise that an individual requires a minimum amount of capital to generate enough income to achieve a minimum level of comfort, based on the complementarity of labor and capital. This approach offers persons able to work the assistance they need to become productive workers. This assistance may take the form of working capital or the equipment and real estate required for productive activities. The donor also closely monitors the recipient and provides technical assistance to achieve the highest possible rate of return.

Because there are not enough resources to make everyone rich at once, the resources available must be used to lift the largest number of people possible out of poverty while ensuring a minimum income for the rest. Thus, wealth maintenance and income maintenance are considered complementary approaches. To assist the high percentage of its people living in abject poverty, Egypt must adopt policies to redistribute wealth and income that incorporate the elements of these two approaches.

The paper by Messrs. Dau and El-Amach states that the total assistance currently provided by the Egyptian government amounts to 19 percent of GDP, which in 1994 was approximately LE 175 billion ($52 billion). To put these resources to more effective use in the battle against poverty, they should be combined into a single fund4 and used to implement a distribution policy aimed at eliminating poverty in the shortest possible amount of time. A simplified model for implementing this policy is shown below:

Totalnumber ofpoorcoveredbywealthmaintenance=P(1)
Totalnumber ofpoorcoveredbyincomemaintenance=(1P)(2)
Resourcesavailableforassistancewealthmaintenance+incomemaintenance(3)
1P0.(4)

The required policy can be summarized by determining the value of (P), which will increase the value of indicator (1) under conditions of (2) – (4).5

If the poor who are covered by wealth maintenance become productive workers and if the resources allocated for assistance—most of which are considered nonproductive—are used for this purpose, this policy can lead to an increase in real growth in direct proportion to the amount of wealth maintenance achieved.

Tables 1 and 2 present the expected results of implementing this policy in Egypt, starting from the current year. Table 1 shows the basic assumptions, which can be summarized as follows:

Table 1.

Reform of Wealth Distribution in Egypt: Basic Assumptions

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Notes: Poverty level income = $35 a month (LE 1,198 a year in 1994); minimum sufficiency income = 1.5 times poverty level income (LE 1,797); minimum level of wealth = 10 times the minimum sufficiency income (LE 17,967).
Table 2.

Reform of Wealth Distribution in Egypt: Proposed Approach

article image
  • (1) Real growth rates start at about 3.5 percent a year and increase by ½ of 1 percent each year, reaching a maximum rate of 10 percent in 2009 and reflecting the results of both the distribution and the economic reform policy on production.

  • (2) Inflation rates start at about 7 percent and decrease by 1 percent each year, falling to 4 percent by the year 2000 and reflecting the results of the reform policies currently being implemented.

  • (3) The minimum levels of wealth and income are assumed to grow at the same rate as the rate of inflation each year.

  • (4) The minimum required level of wealth is guaranteed to the largest possible number of poor, and the remaining poor have at least the minimum required level of income, within the limits of available resources.

The results of the calculations in Table 2 show that, as a result of implementing this policy, the percentage of the population living in poverty will decrease from 34 percent in 1996 to 19 percent in 2009 (that is, in 14 years), until it reaches nearly zero in 2015 (in 20 years).

Finally, to address the third question raised by this paper concerning the position of the Social Development Fund in Egypt with respect to social policies aimed at creating the necessary initial conditions for economic takeoff, I present the following comments.

The goal of the Fund—to reduce the negative social effects of economic reform—is much larger than it appears to be. It is hardly reasonable to expect such a small entity with such limited resources to achieve a great deal toward reaching this goal. Nevertheless, the goal of reducing these effects is not directly related, as we have shown, to the goals of reducing poverty and improving the distribution of income and wealth. The former is limited to certain manifestations of this phenomenon.

The quality of projects financed by the Social Fund leaves much to be desired, as most of them were requested by government agencies and have many common features, which leads one to wonder how well they are able to meet the needs of the underprivileged. The data prepared by the Social Development Fund show that it was able to create 177,000 new permanent jobs, which I believe is the only accomplishment that is directly related to solving the problem of poverty. However, in the context of Egypt’s more than 20 million unemployed, this achievement appears to be quite modest. As previously emphasized, policies aimed at reducing the negative social effects of reform do not contribute significantly to economic development because they do not address the issue of poverty. Therefore, defining the Social Development Fund’s goal in these terms places it at the margin of social policymaking, not at center stage.

The Social Development Fund’s mandate will expire in four years, which leads to speculation concerning the future of social policies and what will happen to the data and information the Fund gathered during the course of its creation and operation.

Perhaps it would be appropriate, in light of the approach proposed above for reducing poverty, to transfer the resources allocated for assistance to the Fund, which could use them to fight poverty directly by creating new permanent jobs for the poor.

APPENDIX

Model for Implementing Proposed Policy

The problem is set as follows:

Pwt=Ω(Pt,wt,yt)=max,(1)

subject to

Rt=Rwt+Ryt,(2)

where P is the total number of poor; Pw is the total number of poor covered by wealth maintenance; R is the total resources allocated to redistribution; Rw is the total resources allocated to wealth maintenance; Ry is the total resources allocated to income maintenance; t is the time period; w is the minimum level of wealth maintenance; and y is the minimum level of income maintenance.

Pt=Pwt+Pyt,(3)
Rwt=wtPwt(4)
Ryt=ytPyt(5)
Pyt=(1at)Pt1(6)
0at1(7)
Pt=Pwt+(1at)pt1(8)
Pt=Pwt+(1at)(Pwt1(1at)pt2(9)
Pt=Pwt+(1at)Pwt1+(1at)2Pwt2+(1at)3Pt3,(10)

where Py is the total number of poor covered by income maintenance, and a is the proportion of resources allocated to wealth maintenance.

In general,

Pt=i=0n(1at)iPwti+(1at)n+1Pwtn1.(11)

In the last period,

(1at)n+1Pwtn1=0,(12)

where n is the number of periods through which redistribution is conducted.

We can therefore set the value of (at) such that

Pt=i=0n(1at)iPwti,(13)

subject to

Rt=Rwt+Ryt(14)
Rt>ytPyt(15)
ytyMin(16)
wtwMin.(17)

References

  • Organization of Arab Petroleum Exporting Countries, and others, 1995, joint Arab Economic Report (Dubai: Arab Monetary Fund).

  • Fergany, Nader, 1992, Final Report on Second Phase of Targeting for the Social Fund: Poverty and Unemployment Profiles (Cairo, Egypt: Almishkat Centre for Research and Training).

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  • Fergany, Nader, 1994, “On the Impact of Economic Restructuring on Human Development and Proposed Strategies to Alleviate Poverty: The Case of Egypt” (unpublished; Cairo, Egypt).

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  • United Nations Development Program, 1995, Human Development Report (New York: Oxford University for the UNDP).

  • World Bank, 1995a, Claiming the Future: Choosing Prosperity in the Middle East and North Africa (Washington).

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1

Dani Rodrick, “Getting Interventions Right: How South Korea and Taiwan Grew Rich,” Economic Policy: A European Forum, No. 20 (April 1995), pp. 55–107.

2

Measured as an index of income and landownership, ibid.

3

The first two assumptions are from Rodrick (1995). An example illustrating the third will be provided later in this discussion.

4

With the exception of primary and secondary education.

5

See appendix for details of the model used.