Sunday, June 12, 2011

Homely Thoughts on the Egyptian Economy : I

            While teaching at the American University in Cairo, three mornings a week I took a bus from Zamalek, an island in the middle of the Nile, to the campus in the desert far on the eastern edge of the urban area.  The newly-built or expanded freeways and roads are crowded with cars and private buses.  I had time to reflect on some of the problems of the Egyptian economy of which this is the initial installment. 
The first time I lived in Cairo for an extensive period of time was 1980.  Then foreigners were often surprised by how crowded the public transport system, almost exclusively made up of buses, was.  Buses were more than full.  Passengers felt packed in and would sometimes have to hang to each other on the steps at the doors.  Entry and exit sometimes resembled an athletic competition as the driver slowed but did not stop to allow people to jump off and on. 
            The Mubarak government solved the problem of an overcrowded public transit system: it largely dismantled it.  The two lines of the subway system that run north and south are cheap, efficient and well-run but they don’t get most Cairenes where they need to go.  And therein hangs a tale not only of urban inconvenience but also of a transit system which is, in one way that economists think about these things, highly efficient.  Unfortunately it is therefore a system that imposes profound costs on both the public and the private sectors and makes firms within them less and less profitable over time.
            Much has been written about Cairo traffic:  how much time it can take to travel even short distances, how much pollution it produces, how annoying it is.  These accounts tell us quite a bit about how traffic affects the consumer (or user, if you prefer).  People waste quite a bit of time; poor health whether due to the prompt effects of pollution or high blood pressure extract resources from society.    
            Looking at transportation, especially public transit, this way isn’t obviously wrong.  It accords with a prominent critique of economics (usually phrased as a criticism of “neoliberalism” or “globalization”) that is very popular in area studies generally and Middle East studies in particular.  Public policy, it seems, is privileging firms by making ordinary people bear the costs of transportation in private.  This looks very similar to the kinds of policies that have also led, in Egypt, to investments that have created gated communities (Dream Land) or upper class suburban environments (Qatamiyyah or Sixth of October City). 
            The provision of transportation by firms or agencies for their workers seems like a plausible work-around.  And, in a sense it is.  It’s one of those conveniences that seem to increase the income of workers.  So, too, the provision of housing or medical care, or any of the other non-cash sources of income that firms and public agencies often provide their workers.  And taking them away would clearly decrease income available for other purposes.
            But in fact the provision of transportation (or housing or any other good) isn’t best thought of as an increase in income to workers.  Historically the provision of in-kind income has served two purposes.  One is to overcome the weakness in existing markets for particular goods.  The other purpose is to tie workers to the workplace.  The second goal is usually predicated on existing imperfections or shortcomings in labor markets or product markets.  In 19th century England and early 20th century Egypt, it was common for factory owners to provide housing, groceries and other goods directly to workers.  This was frequently necessary because the available stock of housing, other commodities or services was initially so small as either to be physically unavailable or available only at exorbitant market prices.  Thus the provision of goods and services in-kind substituted for the inability of prevailing money wages to command what workers needed to live.  In such conditions, however, owners rapidly found (if they did not already know it) that the provision of such in-kind income made workers dependent on the owners and far more amenable to factory discipline.  To lose one’s job was immediately to lose one’s home or access to a store.
            In the absence of effective markets, workers accepted the provision of in-kind income but resented it.  They especially resented the control over their lives it provided owners but they were aware that they were also being provided with inferior goods at monopoly prices.  Generally trade unions attempted to end the provision of in-kind wages and substitute higher (and presumably more nearly adequate) money wages.
            Owners were also frequently more than willing to move away from the provision of in-kind income.  What owners realized was that what looked like income to workers frequently involved capital investments that were less profitable than their core business.  What looked like in-kind income to workers was often, it turned out, an unprofitable charge on capital.  Mill owners discovered they were participants in a very illiquid housing market with sunk and essentially irrecoverable capital charges.  Or they were in the grocery business with perishable goods and a workforce they found difficult to monitor. 
            Or, in the case of many industrial firms and government agencies in Egypt today, they find they are in the transportation business.  They must buy and maintain vehicles, employ drivers, insure them, and monitor them to ensure that only people who are employed are using them.  If they don't do it themselves they have to rent all these services from companies that specialize in them. Thinking of this as a charge on the firm’s capital indicates the problem:  it makes the firm less profitable by directly reducing the return on equity.  Providing transportation is a cost of doing business as much as the shipping of raw materials in or finished products out.
            In exchange for higher taxes, firms could get out of the business of running their own transportation systems.  They would leave that, generally unprofitable, business to the state.  Americans should, by the way, pay attention to this because without significant investments in public transit and rising gasoline prices it is easy to imagine that firms here will find themselves in the transportation business in the future.
            In the 1990s Egyptian policy makers made a decision to rely on private cars (including a vastly expanded taxi fleet), mini-buses and micro-buses many of which were privately owned, and a light-rail system that linked previously existing northern and southern routes.  The explosive growth of these forms of transportation has occurred thanks to subsidized prices for gasoline and diesel that are only small fractions of world price as well as the constant construction of new highways in ever more vain attempts to ease congestion.  
            Relying on privately owned small vehicles is “efficient” as economists sometimes use the term.  You can get anywhere you want to go and you can get there as comfortably as you desire.  As long as you pay the price.  Indeed you can even choose between a white cab with a meter or a black cab in which you and the driver bargain over the fare before you depart.  Efficient as the system is individually it has enormous costs socially, not the least of which is that during rush hour average speeds can drop to five kilometers an hour.  The conundrum, as in many parts of the world, is that despite the vast technical advances of the past century you must frequently travel at less than the speed a donkey or a horse would have taken you a century ago.
            There are other ways to organize transportation and many other “Third World” countries have employed them as Egypt could have.  The differences may appear to be purely technical or based on engineering, but in fact they represent very different ways of thinking about the relationship of public goods, economic development, and society.  Brazil, for example, uses dedicated bus lanes to mimic, at significantly lower cost, the rapidity and ease of light rail.  Egypt, which once had its own bus manufacturing capacity, could have done something similar.  The use of cars and privately owned buses has been a boon to cab drivers, auto importers, and investors in mini-buses.  To more than 85 million other Egyptians, not so much.

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