Both the public and media have become increasingly interested in analyzing the Egyptian state’s economic performance over the past few years in response to the country’s recent economic turmoil, using a variety of economic and financial indicators. But how reflective of reality are they?
Newspapers and government officials have used terms like: gross domestic product (GDP) — the most commonly used index in classical economics — the change in unemployment rate; foreign currency reserves; the stock market index; the dollar exchange rate, and foreign investment inflows, as indicators of the improvement or decline of the Egyptian economy. Not only are these concepts tricky to understand for the average person, but they are made even more complicated when they contradict the ways in which people perceive their personal financial situations.
For instance, these are some headlines from July 2017:
Meanwhile, the economic conditions for many have declined on account of inflation and the lifting of subsidies.
So, is macroeconomic growth the end goal of reform measures? Why do indicators contradict each other? Do numbers lie? And, is there a more appropriate indicator for analyzing economic performance?
The fact is, no single indicator can be used to evaluate a nation’s economic performance as a whole.
Historically, the gross product growth rate has been the most popular global indicator of economic performance. After World War I, specifically during the 1920s and 1930s, economists came to rely primarily on the gross national product (GNP), which is the total value of goods and services produced using national resources over a specific time period. GNP became even more significant during the period following World War II until the early 1980s, when it was replaced by GDP — the estimated total value of all goods and services produced in a specific country over a specific period of time, without taking into consideration the proprietor of the resources utilized in production.
There was a prevalent perception of the gross product as a true indicator of the state of the economy, and a widespread conviction that fast growth is directly proportional to the increase in a population’s economic welfare and standards of living. This notion was based on the belief that capitalist markets drive efficient wealth distribution, namely trickle-down economics, meaning that an increase in the gross product of a certain country will without a doubt lead to an increase in its citizens’ wealth and levels of social justice.
This notion has been proven wrong over and over again in the last few decades, and the recent global financial crisis further evidenced its invalidity. With statistics becoming more readily available and accessible in many countries, researchers began to comprehensively analyze various economic and social standards. Thanks to their efforts, some of the most deeply rooted misconceptions have been challenged, such as the outdated notion that achieving quantitative economic growth is sufficient in order to improve social welfare.
In February 2008, former President Nicolas Sarkozy created the Commission on the Measurement of Economic Performance and Social Progress, which was tasked with studying the methods employed in this regard. Headed by Amartya Sen and Joseph Stiglitz, both of whom were awarded the Nobel Memorial Prize in Economic Sciences in 1998 and 2001 respectively, the commission released a comprehensive report in September 2009 that shows the risks of relying solely on GDP, citing, as an example, the healthy economic growth rates recorded in the US prior to the global crisis, which traditional statistical methods and tools failed to predict. The main conclusion of this report was that quantitative economic growth is not necessarily representative of a population’s welfare and standards of living.
An increase in expenditure on goods and services does not necessarily resemble an increase in the welfare rate. An increase in military spending during wars, for instance, often contributes to an increase in GDP that does not equal positive change in the population’s standards of living. Similarly, increased spending on a nation’s health system may contribute to a GDP increase, even if some of the population does not benefit from this increase.
Not long ago, shortly before the Arab Spring, the International Monetary Fund (IMF) hailed economic reforms in Egypt and Tunisia based on their economic growth rates, projecting that this would translate into welfare or “inclusive growth.” The story unfolded differently, as we know, as growth amid inequality and corruption only ever benefits a limited number of people.
Similarly, relying on any single economic indicator can result in seriously flawed projections. In some newspapers, for instance, stock market index increases and decreases are highlighted as indicators of economic improvement and decline. Inaccurate terms such as “profit” and “loss” in terms of the stock market only indicate changes in the total market value of traded stocks owned by individuals or entities, and are not at all indicative of actual changes in the monetary value held by investors, or the general conditions of the population.
Employment rates do not reflect the complete picture on their own either. An unemployed person may lose hope or interest in employment and exit the labor market altogether, contributing to a decrease in the employment rate.
Similarly, an increase in the nation’s cash reserves does not necessarily signify an improvement in economic performance, particularly as such increases are often brought about by the contraction of debt.
To read economic indicators correctly, one must understand how they are measured, and verify the data used in their calculation, as well as have an understanding of the general context — a process that does not come easily to the vast majority of people. This raises another issue: If traditional indicators cannot paint a complete picture, how do we assess economic performance?
Interest in exploring alternatives to these limited traditional statistical indicators has increased gradually in recent decades, and more rapidly following the 2007/2008 global financial crisis.
The most popular method is to consider a panel of different financial and non-financial indicators. The Gini coefficient (a measure intended to represent income or wealth distribution and hence inequality within a population), sustainable development, the quality of services such as health and education and the infrastructure of a country, are all indicators that have gained traction alongside traditional financial indicators such as the per capita income, internal and external debt, the inflation rate, the unemployment rate and labor force participation rate, among others. Considering such indicators contributes to a somewhat more comprehensive analysis of the economy and the impact such variables have on individuals’ lives and prosperity.
Former chair of the United States Federal Reserve System (counterpart of the Central Bank of Egypt) Janet Yellen, for instance, began to include more indicators in her economic analysis. Similarly, the British government’s 2017 annual report included 43 indicators that measure changes in welfare and the population’s standards of living. Efforts are also being made toward designing an index that encompasses all these aspects. Examples are the Sustainable Economic Development Assessment and the Human Development Index.
Why is this particularly relevant to us now, you might ask?
When officials consider a broader range of indicators, they are more likely to also consider the impact of their decisions on the population, not just the macroeconomic growth rate. If the growth rate is their main concern, most of their decisions will then be geared toward enhancing development, without contemplating income distribution or the state of the environment.
There has been an increased interest from the media and population in Egypt’s growth rates recently, especially after the IMF released its growth projections for the coming years. These figures have been used to demonstrate the viability of economic reform initiatives that may actually have a negative impact on the population’s standards of living.
As Egyptians are being asked to bear with short- and longer-term compromises for the public good, a careful assessment of the outcomes of reform initiatives and the compromises they will entail is a necessity. We must ensure that the economic policies adopted by the government are geared toward improving the lives of Egyptians and their welfare, not only increasing national growth rates.