What is it about people who are supposedly schooled in the
arts and the sciences of economics, making big mistakes in simple matters and
tripping over them, that even a high school student would have fared better?
This time, it is Michael Tanner who is a senior fellow at the Cato Institute.
He wrote: “Egypt : Europe 's Economic Cousin,” an article that also has the
subtitle: “The unstable nation suffers from the same problems, and lacks
leadership.” It was published on May 30, 2012 in National Review Online.
He says Egypt 's
economy is in tatters and he tells why: “Real GDP growth was just 1.8 percent
in 2011, and is projected to be lower still this year. Unemployment is 10.4
percent and rising. Youth unemployment tops 25 percent. Inflation runs well
above 10 percent per year.” Hey, even if things are as bad as this, how do they
compare with “cousin” Greece
whose GDP was not expressed as a positive number but the spine chilling
negative 20 percent? He also laments that unemployment in Egypt is 10.4 percent when “cousin” Spain suffers
from a rate that tops the 24 percent level. And he reports that youth
unemployment in Egypt
tops 25 percent when it tops the 50 percent level in the European cousins.
And to say that Egypt
just had a revolution, how is that for comparing apples and oranges only to
find that Egypt
comes out smelling -- if not like roses -- at least like the blossom of fruit
trees. And the true picture of the Egyptian economy is even better than this
because the last quarter has grown not by worse than 1.8 percent as Tanner
projects but by better than 4.5 percent. And there is also the fact that in
addition to all this, you would expect that a young nation where the bulk of
the population is under the age of 30, the youth unemployment should be higher
than the geriatric populations of Europe . But Egypt beats Europe
in this classification by a factor of two. Take it from me, none of this can be
a sign of instability. On the contrary, it is a sign of fundamental stability
that the country was able to withstand a shock that would have been powerful
enough to demolish a European “cousin” had it happened to one of them.
Tanner goes on to talk about the debt and deficit in Egypt
not to relay to his readers a detailed picture of the situation in that country
but to articulate a cause he is promoting back home in America. This would be
the idea that big government, taxes and debt are bad for you. His aim is to
point to the danger of being saddled with a large debt and worse, being saddled
with the idea of unfunded liabilities which he says, reach a level that is 4
times as large as the GDP. Yes, this is bad but not so much in a country where
the population is young, where the saving rate is 20 percent, and where the
budget deficit is due in large measure to the money spent on the infrastructure
that the young population will be using for decades to come. Compare this with America where the saving rate is near zero,
where the population may be younger than that in Europe but older than that in Egypt , and where the deficit goes to fund
consumption as well as the useless wars that do not build bridges in America – not
even bridges that go nowhere.
A sign that shows Tanner is using the discussion on Egypt to push his agenda for America is the
fact that he keeps dancing around the issues. Look what he says first:
“...there has been relatively little discussion of … the need for economic
reform.” But then says this: “Egypt
had started to reform its pension system … but those reforms have been …
postponed...” Again, he first says this: “Some of Egypt 's economic problems are
obviously aftershocks from the … Arab Spring.” But then says this: “Egypt 's
economic problems existed long before … and begin with the crushing burden of a
vast and intrusive welfare state.” And this tells you that what is really
bothering him is the idea of welfare state. A message he is sending to someone
in America .
But how is this welfare state manifested in Egypt according
to him? This is how: “The Egyptian central government consumes a third of all
the goods and services produced in the country … the tax burden exceeds 23
percent of GDP.” First of all, the consumption by the government is not all
consumption but is part investment in the sense that some of it goes to build
the infrastructure as indicated above. Another part goes to partner with the
private sector in the construction of the large projects that the private
sector alone cannot shoulder, a situation you encounter in all the emerging
economies.
Second of all, Egypt is a unitary state where there is a
central government in charge of the responsibilities which are traditionally
those of a federal government plus health, education and welfare which, in a
federated state, would be the responsibilities of the municipalities as well as
the provinces (in Canada) or the states (in America). In Egypt , the
provinces and the municipalities function with the money transferred to them
from the central government. Thus when it is said that the Egyptian bureaucracy
is made of 6 million employees, it includes the teachers, hospital employees,
police officers on top of the air traffic controllers, the coast guard, the
foreign service, the center for disease control and all the other services you
know about or never heard of. When you know this, you know that 23 percent of
GDP going to pay for all these services compares very well with the other
countries in Europe where the bill may reach as high as 75 percent of GDP, and
in North America where it may reach as high as
50 percent.
Having indicated his dismay that: “...much of the attention
… is being focused on issues such as … the rivalry between the military and the
Muslim Brotherhood,” he now says this: “...enterprises … run by the military
dominate large areas of the economy.” But this is part of the current debate,
and it has to do with reforming the economy, something Tanner says is not
happening. But then, he goes on to say this: “These businesses are not fully
accounted for in measures of government expenditures (revenues from military
companies are a state secret), but are estimated to make up roughly a third of Egypt 's
economic activity.”
And this is where his entire discussion on the Egyptian
economy comes down like a house of cards. Let me begin by explaining something
in mathematics. Take a stick and divide it in three equal pieces. Now hide one
piece and look at what is left. You will find that there are two pieces left.
You know what this means? It means that what is hidden is half of what is
apparent. Expressed in percentage, it would be 50 percent. Thus, when Tanner
says that a third of the Egyptian economy is hidden, he means to say that the
real economy is 50 percent larger that what is observed. If so, none of what he
said about the levels of debt and deficit make any sense at all. And so it has
always been when the discussion pertained to the Egyptian economy because all
those that jumped into the fray, copied from each other and echoed what was
said before without thinking for themselves.
But there is more to it than that. The fact is that in all
emerging economies, a large number of people especially in the rural areas,
produce goods and services that do not figure in any ledger, therefore do not
show up in the GDP estimates. And even in the urban areas, there is what is
called the underground economy where unlicensed operations produce goods and
services that remain hidden from the taxman. When you take all this into
consideration, you realize that as the country advances, these operations are
brought into the open and they will eventually make the GDP look much larger
than it appears at this time. When they all start to pay their taxes, the debt
and deficit will be erased in no time at all. And this is something that
escapes the rating agencies who should look for something else to do.
Having denied that the two leading candidates were
interested in talking about reforming the economy, Tanner now picks on their
talking points and criticizes both sides because neither has said what would be
music to his ear. And this is to reduce the role of government to absolute
insignificance. But the choices that you make for an emerging economy are
different from those you make for a developed economy. While you can experiment
with the level of social safety net in the latter, it is much harder to do so
in an emerging economy because people react differently when they get hurt.
Whereas austerity might push an older man in Greece
to commit suicide so as not to burden his daughter, a young father in Egypt with a
wife and three children to feed will want to entertain other ideas before
contemplating suicide.
In short, the candidates over there are the best judges of
their situation, and the last thing they need is the self-serving advice that
comes from people so absorbed by the look of their bellybutton, they cannot
lift their head long enough to see a whole new and different world out there.
And what strikes you as grotesque is when the self-styled
do-gooders give their unsolicited advice then warn: “Without such reforms … the
door to extremism will open wider.” Believe me, Sir, nothing can be more
extreme than the uselessness of your
advice.