ECONOMIC KUZNETS CURVE IN EGYPT DURING THE ECONOMIC REFORM PROGRAM (1991 – 2010)

Prepared by the researcher 

Dr. Ahmed Mohamed Adel Abdel Aziz / Economics researcher / former Member of the advisory office of the Minister of Social Solidarity / EGYPT

Dr. Marwa Salaheldin Fahmy Mahmoud / Assistant Professor of Economics / Sadat Academy for Management Sciences / EGYPT

Democratic Arab Center

Journal of Afro-Asian Studies : Fourteenth Issue – August 2022

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin

https://democraticac.de/wp-content/uploads/2022/08/Journal-of-Afro-Asian-Studies-Fourteenth-Issue-%E2%80%93-August-2022.pdf

Abstract 

This research verified the applicability of Kuznets hypothesis and its economic curve to Egypt during the economic reform program period from 1991 to 2010, using official data issued by the World Bank regarding per capita national income and income distribution indicators. It was shown that the Kuznets curve applied, starting from 1994, and the curve reversed after four years, i.e. in 1999, but the economic reform program after 11 years from the curve reversing did not succeed in achieving better levels of income distribution than it was at the beginning of its implementation. Therefore, it is advised to take stronger and better steps to improve income distribution in any second economic reform program in Egypt, and not to follow the same policies that were previously followed by the first program.

INTRODUCTION

According to Kuznets’ hypothesis, when a developing country implement an economic reform program that aims to achieve high growth rates to improve the standard of living of citizens and thus ends with development, they will initially suffer from high income Inequality, but after a sometimes everyone will reap the fruits of growth and income distribution will improve.

The Egyptian government was forced to implement an economic reform program in 1991 to face the economic problems and crises it faced in the eighties of the twentieth century. The government, since the beginning of the program, has been saying that the fruits of growth will be reaped by everyone based on the Kuznets hypothesis, but the program ended with a revolution in January 25, 2011. The main question that the research will try to answer is: Was the Kuznets hypothesis realized in Egypt during the period of economic reform program?

This research will depend on official data from the World Bank for the period from 1991 to 2010, and it will use graphs to verify the applicability of the Kuznets hypothesis and, consequently, its economic curve to Egypt during the study period.

The data of the Gini index will be used to express the unequal distribution of income in Egypt, and the data on the per capita national income during the study period and its graphic representation will show us the extent to which the Kuznets curve applies or not.

The main objective of this research is to provide the decision maker with an idea of the extent of the success of the first economic reform program in Egypt so that he can use it again if it was successful, or avoid it if it turns out to be a failure.

ECONOMIC GROWTH VS. ECONOMIC DEVELOPMENT

The concept of the term development, which is known in contemporary economics, is a concept whose definition is disputed.  (Hettne, 2009) In English dictionaries it is derived from develop which means Grow larger, Fuller or more mature, organized, Where development means Developing or being developed. (Hornby, 1974)

The concept of development as an economic term before the seventies of the twentieth century meant an increase in the gross national product at rates ranging from 5% to 7% annually. The increase in the ratio of the division of the real gross national product over the population, which is known as the average per capita real product of the state, and the problems of poverty, unemployment and income distribution were of secondary importance. But after the third world countries in the fifties and sixties tried the previous recipe, while the living standards of the population remained unchanged, it turned out that there was a serious mistake in the narrow definition of development and considering it merely the growth of the gross national product, and therefore development was redefined in the seventies, as the growth of output with the fight against Poverty and its elimination, the reduction of differences between classes, the reduction of unemployment, and the slogan “redistribution from development” was raised.  (Todaro & Smith, 2012)

 Therefore, achieving development requires a combination of policies aimed growth and improving income distribution at the same time.  (Bourguignon, 2005) These two variables are what Kuznets was concerned with in what is known as the Kuznets economic curve for developing countries.

THE ECONOMIC KUZNETS CURVE

Professor Simon Kuznets, born in Russia in 1901, received his education as an economist in the United States. He took his doctorate at Columbia University in 1926. A bibliography of Kuznets’ work lists more than 200 titles. (Kuznets R. F., 1961) One can therein note around 30 books and major essays of at least 100 pages each, covering about 9000 pages all told. However, it should be observed that a part of this impressive output embraces reprints and revised editions of previously published essays. Other titles in the bibliography contain, apart from numerous reviews and shorter contributions, a great many major articles and contributions to collections. (Lundberg, 1971)

This paper is concerned with the effect of growth in income distribution according to Kuznets, who examined the relationship between per capita income and the income distribution pattern in a number of countries in his famous 1955 article. (Othman, 2015)

Kuznets suppose that underdeveloped countries are worse off in terms of income distribution, in contrast to developed countries which have income distribution tends more equitable, and imagines that the intensity of inequality in the distribution of income will tend to rise in the early stages of growth for developing countries and then begin to decline after a certain point, (Kuznets, 1955) that is, the relationship between inequality (on the vertical axis) and per capita income (on the horizontal axis) will take the form of an inverted U letter, as shown in the next figure.

FIGURE (1): ECONOMIC KUZNETS CURVE SHAPE

Kuznets did not specify when the inversion of the curve would occur. But based on the Kuznets assumption that the advanced countries have a better income distribution than the backward countries, it is logical to say that the Kuznets curve must end at a better income distribution level than the one from which it started.

Although Kuznets himself admitted in the summary of the article that the results are based on %5 of facts and 95 % of speculation mixed with wishes, (Kuznets, 1955) And applied results of other research showed disagreement with Kuznets’ hypothesis. (Tam, 2008) It has found many proponents, some of whom strongly exaggerate it when they describe it as an economic law. (Ferreira, 2014) Therefore, it is common  that, at a given level of inequality is of more consequence at low levels of per capita income.

Yet, inequality levels are typically higher in less-developed countries than in developed countries. Both facts have stimulated debate concerning whether the redress of inequality should be a development priority. Opponents of equity-oriented development strategies point to development theory and the experience of the currently developed coun- tries suggesting inequality routinely increases but subsequently decreases in the course of economic growth. They argue that an emphasis on equity as opposed to growth is counterproductive; it retards growth and per- petuates high levels of inequality and absolute poverty. (Randolph, 1990)

GNI GROWTH RATE IN EGYPT (1991-2010)

The need for an economic reform process in Egypt arose when the external debt crisis worsened and the trade deficit in the balance of payments rose, with a rise in inflation rates, problems of production structures and other crises.

Egypt found no escape from facing these crises, and in the late 1990s an agreement was reached with the International Monetary Fund and the Paris Club countries to reschedule the Egyptian debt in return for the Egyptian government’s commitment to take a number of measures called the Economic Reform Program. (Qassem, 1998) The period of this program extended until the revolution of January 25, 2011. Therefore, it became possible to evaluate the experiment from its beginning to its end in light of the available official data.

The first variables that catch the researcher’s attention when analyzing an economic reform program is the growth in the gross national income (GNI), the following table shows the value of the GNI in Egypt from 1991 to 2010.

TABLE (1): EGYPTIAN GNI (1991-2010) BILLION L.E

Source:  (GNI Carrent Value)

For more clarification, the data in the previous table was represented in the following figure No.2.

FIGURE (2): EGYPTIAN GNI (1991-2010) BILLION L.E

Source: Prepared by the researcher based on the data of Table No. 1.

From the previous table and figure, we find that, the nominal value of the gross national income in Egypt took a general upward trend, rising from about 113 billion pounds in 1991 to about 1182 billion pounds (1.8 trillion pounds) pounds in 2010.

Despite the importance of the value of the gross national income at current prices, the growth rate of the real gross national income is more important, and therefore its data was reviewed in the following table No. 2.

TABLE (2): EGYPTIAN GNI GROWTH RATE (1991-2010) (%)

Source: (GNI growth (annual %) – Egypt, Arab Rep.)

For more clarification, the data in the previous table was represented in the following figure No. 3.

FIGURE (3): ): EGYPTIAN GNI GROWTH RATE (1991-2010) (%)

Source: Prepared by the researcher based on the data of Table No. 2.

From the previous table and figure, we find that, the real national income growth rate in Egypt fluctuated during the study period. At first, it declined significantly from 1991 until 1993, Ibrahim Al-Esawy believes that the reason for this is the rise in oil prices due to Iraq’s occupation of Kuwait, and the subsequent events. (Al-Esawy, 2007) Then recovered in 1994 and took a general upward trend, reaching 6.27% in 2000, Khair El-Din believes that this was due to the government’s adoption of successful reform policies during that period. It also justified the decline in the growth rate during 2001 and 2002 by the attacks of September 11, 2001.  (Khair Eddin & Al-Laithy, 2007) Then the growth rate recovered and started to rise again until 2006 to reach its peak at 7.70%, but soon returned to take a downward trend that continued until 2010 when it reached 2.99%. It has averaged around 4.74% during the study period.

POPULATION IN EGYPT (1991 – 2010)

In general, the Egyptian government is accustomed to explaining the improvement in growth rates by following the correct economic reform policies, and justifying the decline in GNI growth rate by population high growth rates as the main reason. To clarify the problem of the population explosion in Egypt, the population census data in Egypt during the study period were reviewed in the following table No. 3.

TABLE (3): POPULATION IN EGYPT (1991-2010)

Source:  (Population, total – Egypt, Arab Rep.)

For more clarification, we can represent the data of the previous table in the following chart No. 4.

FIGURE (4): POPULATION IN EGYPT (1991-2010) IN MILLION

Source: Prepared by the researcher based on the data of Table No. 3.

From the previous table and figure, we find that, the population in Egypt has taken a general upward trend, rising from about 57 million people in 1991 to about 83 million people in 2010, with an average annual growth rate of about 2%.

The problem, in fact, does not lie in the numerical increase in the population, but lies mainly in the high unemployment rate and thus the lack of proportionality of the population with the national income as necessary, and the government attributes this to the large number does not qualify for the appropriate scientific and training qualifications for the labor market. While the opposition believes that this rehabilitation is one of the government’s duties, With the government’s counter-objection that its financial resources are insufficient to do so. (Zaki, 1998)

PER CAPITA INCOME IN EGYPT (1991-2010)

The per capita national income is one of the two variables on which the Kuznets curve is based on its hypothesis, and because this research examines the hypothesis and the Kuznets curve in Egypt, it has reviewed the data on per capita national income on the basis of fixed prices from 1991 to 2010 in the following table No. 4. (Data at fixed prices were used to isolate the effect of inflation)

TABLE (4):  PER CAPITA INCOME IN EGYPT AT FIXED PRICES (1991-2010)

Source: (GNI per capita (constant LCU))

For further clarification, the data of the previous table will be represented in the following chart No. 5.

FIGURE (5): PER CAPITA INCOME IN EGYPT AT FIXED PRICES (1991-2010)

Source: Prepared by the researcher based on the data of Table No. 4.

From the previous table and graph, it is clear that the per capita national income in Egypt at fixed prices has taken a general upward trend, as it rose from about 19.79 thousand pounds annually in 1991 to about 33.11 thousand pounds in 2010 with an average annual growth rate estimated at about 3%.

INCOME SHARE HELD BY LOWEST 10% IN EGYPT (1990-2010)

One of the indicators used to explore the extent of the fairness of income distribution is the share of the lowest 10% as the poorest tenth of society, and in the following table No. 5 these data will be reviewed in Egypt, these data are not issued annually but are issued every few years, so the data will start from 1990 and end in 2010 but intermittently.

TABLE (5):  INCOME SHARE HELD BY LOWEST 10% IN EGYPT (1990-2010)

Source:  (Income share held by lowest 10%)

For further clarification, the data of the previous table will be represented in the following chart No. 6.

FIGURE (6): INCOME SHARE HELD BY LOWEST 10% IN EGYPT (1990-2010)

Source: Prepared by the researcher based on the data of Table No. 5.

It is known that in the case of complete equality in the distribution of income, this category should have obtained 10% of the national income, but from the previous table and graph it is clear that this category gets less than half of that during the study period, although there has been a noticeable improvement in its share in The period between 1990 and 1995, when their share increased from 3.8% in 1990 to 4.2% in 1995. After that, the share of this category decreased to 3.9%, which is almost the same as its share in 1990, and this situation remained constant until 2008. Then it rose again in 2010 to reach 4.1%, meaning that it almost returned to its position in 1995.

INCOME SHARE HELD BY HIGHEST 10% IN EGYPT (1990-2010)

On the other hand, there is the top 10% of the national income category, and its data in Egypt is also intermittent, so it will be reviewed from 1990 to 2010 intermittently in the following table No. 6.

TABLE (6):  INCOME SHARE HELD BY HIGHEST 10% IN EGYPT (1990-2010)

Source:  (Income share held by highest 10%)

For further clarification, the data of the previous table will be represented in the following chart No. 7.

FIGURE (7): INCOME SHARE HELD BY HIGHEST 10% IN EGYPT (1990-2010)

Source: Prepared by the researcher based on the data of Table No. 6.

It is assumed that this category would receive 10% of the national income in the case of complete equality in the distribution of income, and it is clear from the previous table and figure that it was receiving more than double its share during the study period.

The share of this category decreased from 26.7% in 1990 to 26% in 1995 (it is noticeable that this is the same period in which the share of the lowest 10% category improved) and then rose to reach its value of 28.3% in 1999, after which it took a continuous downward trend until it reached 26.1% in 2010 and it is noticeable that it is higher than the percentage it was in 1990 and almost equal to the percentage it was in 1995.

GINI INDEX IN EGYPT (1990-2010)

To measure the extent of equality in the income distribution, we use the Gini Index, which is zero when absolute equality is achieved and equal to one true or 100% in the case of absolute inequality, which is the case in which one individual receives the entire national income. (Samuelson & Nordhaus, 1995).

Due to the release of Gini index data every few years, the Gini index data in Egypt will be reviewed intermittently during the period from 1990 to 2010 in the following table No. 7.

TABLE (7): GINI INDEX IN EGYPT (1990-2010)

Source: (Gini index)

For further clarification, the data of the previous table will be represented in the following chart No. 8.

            FIGURE (8): GINI INDEX IN EGYPT (1990-2010)

Source: Prepared by the researcher based on the data of Table No. 7.

From the previous table and figure, it is clear that the income distribution improved between 1990 and 1995, as the Gini index decreased from 32% to 30.1%. However, it deteriorated in 1999 to reach 32.8%, and then took a general trend of improvement, as the index continued to decline until It reached 30.2% in 2010, which is almost the same as its value in 1995.

KUZNETS CURVE IN EGYPT (1990-2010)

In order to draw the Kuznets curve in Egypt, data on per capita income will be used at fixed prices (table no. 4) on the horizontal axis, and data on the Gini index (table no. 4) on the vertical axis, and the following figure shows what resulted from the application of this graphically.

            FIGURE (8): GINI INDEX IN EGYPT (1990-2010)

Source: Prepared by the researcher based on the data of Tables No. 4 & 7.

It is clear from the figure that the Kuznets curve did not apply to Egypt during the period between 1990 and 1995, but it clearly applies to it during the period between 1995 and 2010. There has been a deterioration in the distribution of income with the growth of per capita income during the first four years, and then the situation turned into a slow improvement over the next 11 years. At the end of the period we find it returned to the level it started from in 1995, as if Egypt had followed an economic reform program in which it endured difficulties in order to return to the same starting point with regard to income distribution, and perhaps this is one of the economic justifications for the people’s explosion of revolution on the twenty-fifth of January 2011, when they realized that they had endured 15 years of trouble in the hope of reaping the fruits of the government’s economic plan, but it turned out that the plan had failed.

CONCLUSION

This research aimed to examine the applicability of the Kuznets hypothesis and its economic curve to Egypt during the period of economic reform that extended from 1991 to 2010. He reached a number of results, the most important of which can be summarized as follows:

• The growth rate of the national income decreased at the beginning of the implementation of the economic reform program, then fluctuated after that between decline and rise.
• The per capita national income has taken a general upward trend during the study period.
• The Gini index improved at the beginning of the economic reform program, in the same period in which the growth rate of national income rose, contrary to the Kuznets hypothesis.
• Kuznets hypothesis began to be applied and curved from 1995 to 2010 and the inflection point was at 1999.
• The main problem that the economic reform program faced with regard to income distribution, is that it returned to almost the same point from which it started, meaning that it failed to improve income distribution, despite its success in achieving good national income growth rates.
• Based on the previous results, the research recommends adopting better policies with regard to improving income distribution in any upcoming economic reform programs in Egypt, such as focusing on direct taxes, raising the ceiling of exemptions for low-income people, reducing dependence on indirect taxes, increasing wages and financing that from raising commodity prices. and public services not to put pressure on the public budget, and to increase pensions through a policy of redistributing income from the rich to low-income people, while working to control prices in the market, fight monopoly and firmly protect competition, and other necessary measures to improve income distribution and thus improve the standard of living of citizens.

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