A STUDY OF THE MAJOR CONSTRAINTS ON EGYPTIAN ECONOMIC GROWTH DURING THE PERIOD 1998-2008: Conclusion

Surveying data of the GDP growth rates of Malaysia during the period of study, we find that the speed of recovery from downturns is much higher than Egypt. Malaysia shifted the economy from agriculture to production of high technology electronics equipment giving more focus on education. The monetary policies undertaken by the government as a response of the 1997-1998 financial crises did not lead to large capital outflow or depletion of the central bank reserves. Malaysia’s ratio of the current account balance to the GDP has been higher than that of Egypt during all the mentioned period with its foreign direct investment boosted maintaining its inflation and unemployment rates far lower than those experienced in Egypt.
Analyzing growth trends between Egypt and Malaysia, we conclude several factors that have affected their GDP growth rates during the mentioned period. One major factor in Malaysia was the financial sector policies which played an important role in managing the country out of macroeconomic downturns. While in Egypt, the government financial policy played a weaker role in recovering from downturns and was not fully integrated in the international capital market, since Egypt has limited access to world capital markets and the liquidity problem cannot be solved by foreign borrowing. Furthermore banks in Egypt had their role in financing the budget deficit rather than playing an active role in financial intermediation, which ended up having a “liquidity squeeze” which is a serious matter especially for developing countries, and is sufficient to trigger a crisis.
On the other side, Malaysia with a strong current account surplus and boosted FDIs has resulted in sufficient reserves, which together with curbing inflation and unemployment has performed better in recovering from macroeconomic downturns.
Malaysia’s focus on manufacture sector and high technology products helped in boosting its economic growth.
Egypt with its exports concentrated -to a large extent- in oil products, was vulnerable to economic crises and with its large budget deficits, current account deficits, higher rates of inflation and unemployment, was unable to apply the appropriate policies to recover from downturns in the short run.
Egypt can help recover from downturns by diversifying its exports, concentrating in high technology products, but is faced with its low educated labour force lacking advanced skills to cope with high technology products, in addition to low infrastructure, insufficient financial intermediations and improper financial policies.
Since financial policies have greater effect on economic growth in developing countries, Egypt should be very selective in applying those policies, especially in crises times where foreign reserves have their importance in stabilizing the economy. If a floating regime is applied, the country will not be forced to hold large foreign reserves ready to support the value of the currency and thus foreign reserves will be available for investment in productivity and export diversification. Therefore applying limited capital controls on currency transactions in Egypt in the short run may be useful, but applying the floated regime may prove its success in the long run, benefiting from the Malaysian experience; since Investment in hard currency was not restricted in Malaysia, nor was foreign direct investment. Its capital controls have proved effective in shielding Malaysia from speculative attacks without substantially restricting foreign direct investment. Limited capital control in Malaysia was helpful to protect the local currency from speculative attacks in the short run.

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