A historic opportunity to rebuild Egypt’s economy?

Egyptians have a historic opportunity to rebuild their economy and re-activate their investments. This is In the spirit of new beginnings promised by revolutions.

The first challenge is the passage of a comprehensive and enforceable constitution that ensures a transparent economic framework and offers practical solutions when talking about legal tools to rebuild the economy. One wonders now if this opportunity has been missed. 

The referendum of the draft constitutional will be held on January 14 and 15. Does the draft fulfill the January 25 revolution’s demands of “bread, freedom, and social justice”? Naturally, these demands cannot be reached until the economy improves.

The draft constitution is a well-crafted description of desired economic goals, but fails to specify how those goals will be achieved. Little attention has been given to economic challenges. No clear economic policy has been announced. This is important for the future of the tourism industry, development of infrastructure, tax issues, handling of bankruptcies, and improving corporate social responsibility. 

Before elaborating on the draft constitution's articles, it should be noted that the 50-member constitutional committee came under severe criticism because of the lack of transparency surrounding its work.

Public evaluation of the committee’s work is lacking. Because of this, the committee was criticized by some revolutionary groups. Another criticism aimed at the committee is the poor representation of Islamists, despite the role played by the Salafi Al-Nour party.

Regarding the measures outlined in the constitution to promote the economy, the document does not say what type of economic system Egypt should follow. Should it conform to a free market economy, social market economy, Islamic economy, or a combination of these systems?

Instead, the constitution describes the purpose of a national economic policy as social welfare through sustainable development and social justice. But it does not specify precisely how it will do this.

There is, however, a set of measures that could have been included in the constitution to boost the economy. First, declaring an economic policy framework that promotes trade would make the Egyptian market attractive to foreign as well as local investors, including the small enterprises and retail outlets that represent a huge sector of the market.

This measure would have surely corrected the negative impression associated with the private sector during Mubarak's era, when investment tools were concentrated in the hands of a tiny elite.

If measures are taken to contain and even break corrupt monopolies, the private sector could contribute to the economic welfare of society through, for example, increasing job opportunities, creating a more competitive market, and providing essential goods and services. 

Second, the tourism industry is an important part of Egypt’s gross domestic product (GDP), employing one out of every eight workers in Egypt. Tourism was hit hard by the turbulence that followed the January 25 revolution.

Yet the draft constitution ignores tourism. Investor fears need to be allayed. The constitution could have addressed concerns over the lack of legal protection in the tourism industry.

Third, special attention should have been given to the development of Egypt’s infrastructure. It is necessary, for example, to support public-private partnerships to build infrastructure.

This could be done through build-operate-and-transfer projects, where an infrastructure project is built under contract and operated by a private sector company, and later transferred back to the public sector.

Another strategy is the build-operate-own-and-transfer project, which allows the private sector to own, build, and operate an infrastructure project for a period of time (usually 20 to 25 years), during which time the private company collects the revenues. At the end of a set period, the project is handed back to the public sector.

Article 32 of the draft constitution stipulates that granting the right to a public utility shall take place by law for a period not exceeding 30 years. Prohibiting the granting of a concession to a public utility except through a separate law issued specifically for this purpose would act as a disincentive for the public-private partnership investment model.

It would also open the door for corruption, giving the granting authority absolute discretionary power to decide who can receive a license to carry out infrastructure projects. It would have been much better to limit the requirement of granting prior approvals to major projects which require certain levels of financing.

This would have helped regulate concessions for huge projects without obstructing the private-public partnership model as a whole.

Fourth, with regards to tax policies, it would have been better if the constitution laid down solid guidelines for the country's tax policy. Article 38 offers only general recommendations, calling on the government to adopt effective tax policies.

Article 38 states that the taxation system and other public levies aim to develop state resources, and achieve social justice and economic development. But the language used is too general. There are measures that could have strengthened the tax policy article.

For instance, the imposition of a tax cap that places a ceiling on the tax levied for each category of taxable activities would create transparency in connection with tax-levying rules.

My fifth concern relates to bankruptcy laws. Egypt does not have an inclusive bankruptcy law per se. It is only addressed in a non-comprehensive chapter in Egyptian Commercial Law. The absence of a functioning bankruptcy code works against the efficient restructuring of enterprises and efforts to make companies more profitable.

Further, the most important criticism of bankruptcy rules in Egypt is that they are designed to shut down businesses facing insolvency, rather than supporting their financial recovery.

Though this issue is related to the competence of the laws rather than the constitution, the constitution should have established that the bankruptcy law’s primary goal is to help businesses facing troubles resume their activities before declaring them insolvent.

Finally, there is a need to highlight the concept of corporate social responsibility (CSR). CSR aims at making businesses contribute to the sustainable development of their societies, whether through promoting human rights, working with employees, fighting against corruption, or through other measures.

CSR is useful, as it pushes businesses to be more competitive in their corporate responsibility. Article 36 says that the state should encourage the private sector to be socially responsibility, and that is about it. The constitution should have laid down the principle of drafting future laws and regulations to force the private sector to comply with global CSR standards.

This emphasis on compliance with global CSR standards would contribute to creating new jobs, reducing corruption, and improving work conditions for employees. This would also guarantee that the local business environment is of a high standard, and encourage more transnational corporations to work in Egypt.

Clearly, the economic component of the draft constitution is rather poor. It simply does not live up to the expectations of the revolution, nor does it quell the fears of investors in the Egyptian economy.

This article is based on a talk presented by the author at the “Law and Institutional Economics of Revolutions Workshop,” organized by the University of Hamburg’s Institute of Law and Economics, November 7–9, 2013.