Can Morsi be Egypt’s Özal?

Turkey and Egypt have just signed an agreement for Turkey to extend $2 billion of credit to Egypt. This is meant to support the new economic program that the Egyptian government is trying to put together with the IMF. The program is almost complete, but there are tough choices that Egypt needs to make.

Those choices are tough because of years of neglect, if you ask me. Egypt and Turkey are decades apart, yet eerily close at the same time. Neglect is what really separates them. I believe that Morsi can close this gap through reforms and become Eypt’s Özal.

There are two types of developing countries in the world: Those that can converge to the income levels of advanced economies and those that can’t. Turkey belongs to the first group in comparison to Egypt, which belongs to the second. In 1980 Turkish and Egyptian per capita GDP were around 10 percent of that of the EU 27. That has increased to an average of 30 percent as of 2010. While Turkey’s figure is 50 percent, Egypt’s per capita GDP is only around 20 percent of that of the EU 27. Turkey converged to the EU 27, but Egypt did not. The gap between the two countries has widened in the past 40 years, which largely falls into the Mubarak era.

Egypt’s nonconvergence is a fundamental issue. What does that mean? Egyptians stayed relatively poor in comparison to Europeans and Turks because Mubarak failed to reform the economy and create a conducive environment for private sector development. Meanwhile, Turkey struggled through four decades of economic reform. Turkey converged, Egypt did not. Özal did it in Turkey. Mubarak failed in Egypt.

Yet Egypt and Turkey display striking similarities. Just have a look at the two countries’ human development index figures. They have similar health and education scores. If you look at female labor force participation rates, only 24 percent of Egyptian women participate in the labor force, which isn’t far off from Turkey’s meager 28 percent. They compare similarly to European averages. That means that Turkey achieved its reforms with a similar capability set to Egypt, even with a poorer one. That is why I believe that Egypt can also reform its policies and increase its competitiveness and growth potential.

Let me also emphasize another opportunity in Egypt: the urbanization rate in Egypt is around 43 percent, while that in Turkey is about 75 percent. This shows that internal migration could enhance productivity and growth. Migrants to the cities could see their productivity increase at least three times. That happened in Turkey. The intersectoral shift enhanced productivity, and hence, led to growth. The problem in Egypt is the disproportionate size of Cairo. Cairo is home to 32 percent of the country’s urban population, while Istanbul’s share in Turkey’s urban population is only 21 percent. This is not good for productivity. Overcrowded cities like these get congested by every additional investment and this congestion reflects in lower productivity.

Egypt now has a chance to transform its economy. Things are moving in the right direction. If I were Egyptian, I would look for an urbanization policy that goes hand in hand with the industrial policy. I suggest that my Egyptian friends look at how Istanbul did it, and also, how Seoul did it.