Box S.1 - Structural transformation and job creation in Egypt: a missing link

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Structural reform

A key challenge facing Egypt is how to achieve more inclusive growth which both raises productivity and creates good jobs. High unemployment is a long-standing problem and has become increasingly urgent over the past two and a half years, rising to 13.2 per cent in 2013, up from 9 per cent in 2010. The economy needs to grow by around 6-7 per cent annually just to absorb the 700,000 new entrants to the labour market every year. Furthermore, many jobs created in recent years have been in low-wage sectors such as agriculture. Unless new opportunities become available to the growing numbers of jobless young Egyptians, social unrest may further undermine the likelihood of a stable transition.

Egypt's difficulties in creating high-quality jobs partly reflect an incomplete structural transformation. Low-productivity sectors continue to dominate job creation, while the employment shares of manufacturing and services remain low (see Chart S.1.1). This contrasts with the experiences of many emerging market economies, which have boosted per capita income and high-quality job creation by reallocating labour to more productive sectors.¹

Charts S.1.2 and S.1.3 contrast Egypt’s economic transformation with the experiences of Thailand and Turkey, which had levels of purchasing power parity-adjusted GDP per capita in the 1990s that were similar to those of Egypt in the 2000s. Those countries experienced large increases in the employment shares of relatively productive sectors – in particular, manufacturing and tourism – which offset large contractions in the employment shares of agriculture. This improved the distribution of jobs and allowed increases in wages and value added.

In Egypt the decline in the employment shares of low-productivity sectors has been slow. In 2010 over 50 per cent of employed Egyptians still worked in agriculture or the public sector. The largest increase in the share of jobs had been in construction, which was an unproductive sector burdened by a lack of modernisation and an abundance of unskilled workers. Meanwhile, the employment share of private sector services had almost stagnated, contrasting sharply with other emerging economies.

This experience underlines the need for structural and business environment reforms in Egypt to enhance the quality of job creation and boost potential growth. The agriculture sector is hindered by antiquated farming practices, a lack of skills and land fragmentation. Land consolidation and the modernisation of farming practices could improve productivity and allow a better reallocation of labour across economic activities. Similarly, public-sector employment should be reined back in favour of a more dynamic labour market conducive to long-term growth and the accumulation of technical skills which are better aligned with private sector needs.

In particular, Egypt's manufacturing and private service sectors have the potential to create more jobs if key reforms are implemented. Businesses can be encouraged to invest and innovate by easing regulations, reducing discretionary enforcement and improving competition. Also, reducing the cost of labour in relation to other factors of production would help to increase employment. This will require the removal of distortionary energy subsidies and the adoption of more energy-efficient technologies, which could lead to the expansion of areas such as food processing, biotechnology and labour-intensive consumer electronics.

Further development of the tourism sector could foster job creation in hotels, transport and retail services, while developing modern processing, logistics, retail and distribution systems could promote the expansion of non-farm agribusiness jobs in rural areas.

1. See Hausmann, Hwang and Rodrik (2012) and Rodrik and Macmillan (2011). [back]

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