Egypt's Mixed Messages

March 17, 2015 6:00 PM

"Egypt is open for business" was the message of an economic development conference in Sharm el-Sheikh held the weekend of March 14–15. To his credit, President Abdel Fattah el-Sisi got this message across, and the government claims to have attracted $36 billion in foreign investment. But the investment is almost entirely energy, infrastructure, and aid, when what the country needs is production and good jobs. Even so, new infrastructure and energy projects can be an important part of economic development if they build the foundation for future growth. But not all the proposals announced at the conference fall in that category.

The most worrisome plan is a new capital city, supported by funds from the Persian Gulf states. A number of countries have moved their capitals since the mid-20th century. The most similar in size and development to Egypt are Brazil (1956), Pakistan (1959), Nigeria (1975), and Kazakhstan (1997). What do these countries have in common? None were democratic at the time of their shift, and three out of four have oil. The attraction for autocracies is that building a new capital outside of the most populous city can help centralize control and offer protection against demonstrations, which are more likely in highly congested cities. A new city is also a glossy new project that can be promoted as a bold idea to show a leader's vision while solving overcrowding issues or satisfying the need to appear neutral when a population is diverse. But, moving a capital is extraordinarily expensive, so it helps to have resource revenues, which Egypt does not.

Of greatest concern, a new capital will not solve any of Egypt's serious economic problems, the greatest of which is high unemployment. A new government capital will neither create sustainable employment opportunities nor promote efficiency in a country with a bloated government known for red tape and graft. Egypt also suffers from large fiscal and current account deficits. A new capital will stress expenditures, many of which will be on imported goods and services, expanding both gaps. Egypt has too many government workers, with relatively high salaries. Building them new housing and offices will not help the 25 percent of the population living below the poverty line.

Egypt's track record on big projects is weak. The country is only now making progress on the Grand Egyptian Museum in Giza, the new home of for King Tut's tomb and other world-renowned collections—a project that has been ongoing since 2002. Meanwhile, the treasures remain in the old Cairo museum, without proper lighting or climate control. This suggests that the planned capital could easily end up more like Dodoma, the official capital of Tanzania, than Brasilia. Over 40 years and hundreds of millions of dollars after being chosen as Tanzania's new capital, the infrastructure is insufficient to accommodate the administration, and most government offices remain in Dar es Salaam.

President Sisi should stick to structural reforms and focus on infrastructure investment geared towards future growth (roads, ports, tourist sites, etc.) and the population's needs (housing, hospitals, schools, etc.). Projects should be shovel-ready to create jobs now, not future cities for coddled government workers.

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Caroline Freund Senior Research Staff

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