Growing Without Changing: a Tale of Egypt's Weak Productivity Growth

This paper aims to identify the reasons why economic growth in Egypt, although comparable to its peers, failed to significantly reduce unemployment, lower poverty levels or raise overall productivity. We use cross-country comparisons, counterfactual scenarios and regression analysis to demonstrate that Egypt, even during the high growth period of 2000-2010, did not experience a reallocation of excess labor towards modern, productive sectors similar to that which occurred in other emerging markets, notably in South East Asia. The results show that, while there is large potential for productivity gains in the Egyptian economy, a limited openness to trade, a low diversification of exports and deficient access to finance prevented the country from witnessing structural shift of its labor force towards manufacturing and private services, locking Egypt instead within a “low value trap.” The paper then suggests some policy implications of these findings, relating to overcoming the main impediments to preventing an efficient sectoral reallocation of workers.