Chapter One. Introduction
Starting from 2015 the Egyptian government under the rule of President Abdel Fattah El Sisi started to develop new economic policies and reforms and since November 2016 it started to accelerate the implementation of these policies and economic decisions, the reforms mentioned included subsidy cuts, increased indirect taxes, and currency adjustment, all o theses have been done in order to pave the way to an agreement with the IMF for a major loan. Here comes a question about the importance of these policies and reforms and about the timing of it, why now? Why the previous government didn't adopt these policies if so important? And the answer is 'fear'', knowing that these reforms will have a cost that the population will have to bare, there was no enough courage to put another burden on the shoulder of the people if you want to maintain the power you established.
This project is examining the relationship between the reform process's cost and its impact on the middle class in Egypt under the rule of president El Sisi, specifically from 2015 and till now, is the middle class declining and suppressed by having to pay the lion's share from the cost of economic reforms? Will this lead it to vanish or it be temporarily affected before getting flourished? Will the gap between the working class and the upper class will continue to get widen causing more troubles or is this the pain of necessary surgery to cure the Egyptian economy? And if 2030's Agenda is promising the middle class of better living standards or not?
Here popped another question of why to it's important to pay such attention to the middle class and the way it's affected. And well considering the middle class as the main object of the study is due to the importance of it role:
from the economic perspective, the middle class is the primer and main tax-payer, the key interior investor. According to Journalist Chris Baker 'There are working families who can have some investments, but they depend on each paycheck for their well-being. And as the previous president of the U.S Barrack Obama mentioned in one of his speeches ' when the middle-class families can no longer afford to buy the goods and services that businesses are selling, it drags down the entire economy.'
Professional perspective: Notably, in the latest Western societies up to sixtieth of the economically active population are engaged within the sphere of services (mostly, medical and educational services; “economically-active population” is those who are aged between sixteen and sixty and engaged in economic activities). the skilled profile of the higher middle class includes professors, doctors, lawyers, and prime managers, inn-keeping, whereas the representatives of lower and middle-middle categories add retail sales, public service establishment, etc.
From a social perspective: they are the link between the working class and the upper class that brings stability and grant that the society won't be divided between the rich elite and the poor proletariat which will make both of them hostile toward the other party.
Also, middle class is considered as the source of innovation and transformation, Thomas Malthus s was the first to suggest that in the middle regions of society occur most of the intellectual improvements, McCloskey also went to argue that the rise of the middle class gets a reason for innovation. And the reason behind this is that the upper class may seem to lack the incentive to innovate and the lower class lack the opportunity, while the middle class are the ones who have the kind of opportunity and the aspiration toward improving their socioeconomic level.
Politically speaking: some argue that severe inequalities is one of the barriers of democracy and here lies the importance of the middle class balancing society and supporting democratic systems, also it's a term that politicians use in their promising speeches like Republican candidate Mitt Romney when has proposed eliminating “taxes on dividends, capital gains, and interest on middle-class families.
The following section of this paper will present some of what scholars already mentioned about the relation between the middle class and the economic reforms.
Literature review
First of all will present works that was about the Egyptian case and then we will move to see what was written about other case studies.
Under the title of 'political changes and the middle class in Egypt' Shanghai International Studies University published a paper for Xiaoqi DAI in 2012 in which the author was concerned with the history of the Economic reforms in Egypt and the main changing features in the social structure as a reaction for the implemented policies in the last two centuries, especially from Mohamed Ali's era. Tackling the post cold war context the author said that the new development model in Egypt was a result of 2 factors: oil price and the debt especially after relieving half of the Egyptian foreign debt after the war f Iraq, Egypt had to promise liberal reforms, thus Sadat went to adopt the 'open door' policies and after him Mubarak's wave of privatization turning the society from production-based to consumer-based economy which the financial oligarchies gradually taken over, and eventually it led to Economic deterioration of the social structure. and the cost of these implications was paid by the middle class nearly vanished and the gap started to get widen to the extent that the society was divided into 2 parts or classes not three, where the lower class consisted of the original lower class and the middle class, and the upper class consisted of foreign capitalists and new national capitalists.
While in the working paper that was published in 2017 under the Name of 'new developmentalist experiments in Brazil and Egypt' that was written by Judit Ricz it argued that the accumulation of economic reforms impact on society especially from Sadat and Mubarak's era led to tension and public discontent due to the clear deterioration and proved with some statistical data that despite of average economic growth rates close to 5% in the years preceding the 2011 that poverty increased sharply with estimated 10% than it was before , then it moved to investigate the heavy economic reforms of president Sisi and how this political turmoil was going along very challenging conditions, yet it managed to attain improvement in Egypt's Economy but on the social level things are not better For 11 November appeared mass protests on the social media under the name of ' Al Ghalaba movement ', such movements came from the sense that the society is divided between those poor people struggling to survive and the upper class who's living extremely luxuries life and none in between .
Also, Keith Glenn Whitmire's paper was Texas Tech University under the title of ' counter-Revolution and Egypt's lower middle class it claimed nothing different than the first two but the difference was that it was more specified by examining the lower middle class not the whole one.
The first 3 papers claimed that the main payer of the costs of the economic reforms was the middle class while in the following one it somehow differs, under the title of 'Sisi's Egypt' that was written under the umbrella of Brandies University, Crown center for middle east studies, The paper said that middle class was already 44% in 2011 and If considering the middle class are those who are not falling behind the poverty line and thus they will range from 60% to 80% and that they are divided into subgroups in which are not equally affected, while some groups of the middle class got hurt others remain disaffected or get benefitted like the military middle class who got expanded in contrast with the private middle class who found their savings losing its value as a result from floating the Egyptian pound.
Moving to Examine the middle class in another country and the impact of the Economic reforms upon it we can start with the book of ' Globalization and the middle class in India ' in which the main concern was the cultural and social implications and impact of the neoliberal reforms, the author followed the middle class, especially the lower strata and start questioning their long-run benefits of these economic reforms.
In contrast with our case in Egypt in which the doubtful long-run implications is not as much as doubting the benefits on the short run and for the current generations.
The OECD development centre published a working paper under the name of ‘ the emerging middle class in developing countries’ in which it examined cases like China, and India, and mentioned briefly Brazil, and South Korea, where in the case of China despite of being the second largest middle class in the term o size after the U.S.A, Yet the size of Chinese middle class is only 12%, Brazil managed to achieve notable economic growth and a higher per capita per year but due to income inequality middle class was estimated about 29% only,
While South Korea followed the same path but managed to produce a sizeable idle class that accounted for 53% of the whole population due to an even distribution of income.
Hence we can conclude that we have another element and important factor that affect the middle class not only the economic reforms which is inequalities of distributing resources or especially income inequality to be included with us in the conceptual framework.
Conceptual framework:
This section is concerned with defining the main concepts that this paper deal with, which are: the middle class, Economic reforms, and income inequality.
First middle class:
The classical definition of the middle class can be found within Weberian socio-economic terms. Here, the middle class is outlined as that consisting of professionals or business owners who share a culture of domesticity, sub-urbanity, and an extent of relative security (in the shape of socially desired skill or wealth) against a social crisis. Mostly, alternative sociological definitions of the middle class follow max, Weber. Some modern theories of political economy take into account a large middle class to possess a beneficial, stabilizing influence on society. On the other hand, A contrary approach is taken from FactCheck.org: it sounds negative and discouraging:
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- ?“Q: Is there a standard, accepted definition of what constitutes the “middle class
- A: No, there isn’t.
''middle class'' means various things to different people and politicians”. Taking into consideration the previous views, we come to the additional elaborative and in-depth definition of the middle class. The middle class could be a social group of individuals with an income more or less stable and adequate for the satisfaction of a wide vary of material and social necessities. The hallmark of this class is its high educational attainment. Thus the functions of the middle class embrace the introduction of new products and innovations, reproduction of expert labor, and maybe, support to long-term peace and stabilize society. The Drum Major Institute places the range for the middle class at individuals who's making between $25,000 and $100,000 a year. Where in Egypt we measure it this way: First in any methodology to identify the middle class must address the challenge of how to isolate the poor. And second is estimating the value of the upper poverty line in order to identify the second group of households that are still poor, yet are not as deprived concerning basic consumption needs as the former group. The third is to identify the upper threshold for the middle-class measurement. The upper poverty line is the minimum threshold for middle-class consumers who not only meet the basic necessities of food expenditure but they also have more expenditure alternatives on non-essential food & non-food expenditure, like for instance on better health care and education.
Hence the middle-class consumers are located between the upper poverty line and what we call the upper-middle-class line, where the household’s non-essential non-food expenditure reaches an equivalent value to that of the lower poverty line.
The expenditure bracket for the middle class in Egypt ranges between PPP$3 and PPP$6.1 in 2011. Using those thresholds, the Egyptian middle-class population is estimated to be around 44% of the whole population in 2011.
Economic reform:
What I'm concerned with in this project is Economic reforms implemented in Egypt Since 2016, and it was IMF supported program that included: the floating of the Egyptian pound in order to enhance Egypt's External competitiveness, The value-added tax, reform subsidies on energy by reducing it to fund another sector in a better way, about 1% of GDP from fiscal saving are targeting now additional food subsidy and also on the cash transfer to the elderly and poor families, and reforms in the business climate. And that's according to the formal website of the IMF website.
Income inequality:
Income inequality is defined as extreme concentration of wealth or income within the hands of a little proportion of a population. it's been represented because of the gap between the richest and the rest. Income inequality among people is measured here by 5 indicators. The Gini coefficient relies on the comparison of cumulative proportions of the population with cumulative proportions of income they receive, and it vary between 0 when there is perfect equality and 1 in the case of having perfect inequality. S80/S20 refers to the ratio of the average income of the 20% the most affluent to the 20% poorest; P90/P10 represents the ratio between the upper bound value of the ninth decile (the 10% of people with the highest income) to that of the first decile; P90/P50 is the ratio of the upper bound value of the ninth decile to that of the median income; and P50/P10 of median income to the upper bound value of the first decile. Whereas The Palma ratio is the share of aggregate income received by the 10% of people with the highest disposable income divided by the share of the aggregate income of those with the lowest disposable income which is estimated with 40%.
Theoretical framework
Broadly speaking the topic can find a place in the political economy framework, as it links the society with the state and the economy where the middle class the paper is mainly concerned with is representing the societal part of the theory, second the state that's issuing the Economic reforms and finally Income inequality which falls under the economic part of the theory.
But we will rather go for something more specific that can theoretically frame our topic, first, we can resort to a class analytic theory which assumes that Growth in income inequality is ruled by (1) changes in between-class income variations, (2) integrative changes within the relative size of social classes, and (3) changes in residual, or within-class, financial gain dispersion. This study investigates each of those trends successively and provides a proper decomposition that evaluates their relative impact on growth in income difference at the population level. But this theory is reversing the relationship we have found through spotting light on other cases like in Brazil and South Korea were income inequality is the one that is considered the main factor responsible for the changes in the middle-class estimations.
Moving to the classical school of the theoretical attempts of clarifying the relationship between Eco reforms and Income Inequality, it's claiming that reforms are likely to stimulate increasing Inequality due to: (1) the reintroduction of property income, (2) and the reintroduction of incentive payments, (3) beside the widening of wage differentials.
A helpful approach to investigate income inequality is to treat income composed of two parts, specifically wage and property income. thus the variation of personal income relies on the following factors: (1) The relative shares of wage and property income, (2) and the wage and property income differentials, (3) and also the correlation of the distribution of these two kinds of income between people.
the Brookings Institution in May 2015, as a part of its Social Mobility Memos blog series, came up with a negative correlation between Inequality and upward social mobility. Also, OECD claimed the same: “The main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socioeconomic backgrounds, lowering social mobility and hampering skills development.”Also, the negative correlation between inequality and mobility can simply reflect changes about the composition of the population, as claimed by Corak (2013).
Merging what the classical school had claimed with the correlation agreed upon from Brookings institution and OECD, we will come up with the following:
Economic reform increases income inequality, and income inequality when increasing decreases the chance of upward social mobility, and if not making the middle-class shrink at least will hinder it from growing.
Methodology:
This project will be using the archival research methodology, according to Georgia state university Archival research: is research involving primary sources being held in archives, and in special collections libraries, or even another repository. Archival sources can be manuscripts, documents, records and that's including electronic records, objects, sound, audiovisual materials, or other materials. And archives is being defined as organizations that collect the records of individuals, families, or other organizations. And repository is 'a place where things can be stored and maintained, [including] any type of organization that holds documents, including business, institutional, and government archives, manuscript collections, libraries, museums, and historical societies, and in any form, including manuscripts, photographs, moving image and sound materials, and their electronic equivalents.'
The primary resources I'm using in this project are the Central Agency for Public Mobilization and Statistics (CAPMAS) , data obtained from The Organisation for Economic Co-operation and Development (OECD), and the formal website of the Egyptian ministry of supply and internal trade, the IMF formal website.
Chapter two
The debate about the impact of floating the Egyptian pound:
The liberation of the Egyptian pound exchange rate in 3rd November 2016 had been one of the most controversial procedures among the economic reform program the Egyptian government started to implement to rescue its economy, furthermore, it created 2 blocks, One supporting and see this step as a necessary hard surgery to save the Economic body and the other argues that it will rather cause more problems than it solves, in this section, we will present both arguments and see whether such an economic decision benefit or squeeze the middle class.
Against floating of the currency argument:
The flotation of the pound stimulated a wave of high inflation, unmatched with the past seventy years. In July 2017, inflation reached its peak at 35.8 % before bit by bit falling to 11.5 % in May 2017. nonetheless, inflation began to rise once more in June once the government reduced subsidies on fuel, and then by electricity. The rate of inflation hit 15.4 % in September 2017, whereas the International Monetary Fund projects that the rate for 2018 can reach 20.9 %.
In the lead-up to the flotation, economic experts have warned of the negative consequences the move would possibly have on consumer costs and standards of living, significantly since Egypt is severely dependent on imports for basic commodities. A devaluation in currency is sometimes tied to a raised demand for exports, that become relatively cheaper abroad. nonetheless, as Samir Radwan, an economic expert and also the former minister of finance, noted within the months preceding the flotation, this wasn't essentially true in the Egyptian case.
This may work in Switzerland, for instance, or in China, as a result of they have an outsized production & export capability, and once the rate drops, demand for their own exports will increase, Radwan declared in an interview with Al-Wafd newspaper in May 2016. We don't have that, we import 60 % of our needs, and 40 % of the elements that enter our exports are foreign. This means that floating the pound will increase import bills and inflation, and therefore the victims are going to be the poor and people with the lowest incomes.'
In his book, when will Inflation end in Egypt (2017), Mohamed Gad, who's a journalist and economic research worker, explains that wages have 2 values the primary may be a nominal value, that is that the numerical value we tend to use in our daily lives. as an example, one may say, My monthly earnings used to be LE500 before it had been increased to LE1,000. the other price is the real value, that is that the actual price after deducting inflation. individuals sometimes get frustrated once the real value of their wages deteriorates whether or not the nominal value is constantly increasing.
Eight years ago, employees vigorously petitioned for a minimum wage that will guarantee good living standards for families. In an effort to fulfill those demands, the state went for adopting an extra bonus incentive that will raise the wage of state employees to LE731, which was less than the worker's demand of LE1,200.
Then in early 2014, the shifting government at the time set to move toward A level of equal pay by introducing a wage bonus, which might make sure that, altogether with other pay-rises, The minimum wage will effectively be LE1,200.and actually There hasn't been any more increase since then. Yet when resolving in inflation, it'd take LE1,500 in 2014 to be equal to the same purchasing power as LE1,200 in 2011.
When put next to the current day, verity price of LE1,200 in 2011 rises to a whopping LE4,500.As a result, incomes that were till recently considered to be spare, cannot offer protection to the middle class, or even the higher classes, from the implications of inflation. The living condition of every socioeconomic class is bit by bit fall to those on the rung below.
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