Egypt has plenty to offer for essays on LEDCs

 BRIEFING

TOURISM, WHICH BROUGHT IN £14BN LAST YEAR, HAS COLLAPSED

The slow-motion collapse of Egypt

The country of 110 million people is in economic dire straits, but it’s also in a strategically crucial region that is already aflame. Egypt is simply too big to fail. Simon Wilson reports

WHAT’S HAPPENING?

Fears are growing over the slow-motion collapse of Egypt’s economy, and the possible knock-on effects on the Middle East and wider region, including Europe. For decades, Egypt has been a chronic underperformer, with a sclerotic economy dominated by state interests – in particular by those of the country’s all-powerful military. But in recent years things have taken a sharp turn for the worse. President Abdel Fattah al-Sisi, the ex-general who took power in a 2013 coup and assumed the presidency the following year, has proved a disastrous economic manager. Rather than dismantle the military’s long-standing chokehold over the economy, Sisi has reinforced it – and gone on a debt-fuelled spending splurge on prestige mega-projects that the country can’t afford. Egypt was already badly hit by the sharp rise in food prices following Russia’s invasion of Ukraine in February 2022. And now the conflict in Gaza, and its spillover into the Red Sea – restricting access to the Suez Canal – has made things even worse. 

IN WHAT WAY?

Tourism brought in about $14bn last year, accounting for 14% of dollar inflows, but has collapsed since the start of the Gaza war, on Egypt’s northeastern border, in October. The Suez Canal normally accounts for about 30% of container-ship traffic, and earns Egypt almost $10bn a year – but the attacks on shipping by the Houthi rebels who control much of western Yemen have cut traffic by about half. In addition, Egypt is home to the eastern Mediterranean’s only two gas liquefaction facilities, where it processes and re-exports gas from Israel’s southern gas fields. But those re-exports have fallen 50% as a result of war-related disruption. Egypt, already struggling with an influx of 450,000 Sudanese refugees since conflict re-erupted in its southern neighbour ten months ago, is now facing a second humanitarian crisis on its doorstep, and the possibility of more than a million Palestinian refugees. Another big source of income – remittances home from Egypt’s large diaspora – is drying up due to fears over transferring money into the country’s tanking currency, the Egyptian pound. Foreign investors are also withdrawing capital, or demanding ever higher interest rates. 

“PUBLIC DEBT IS OVER 90% OF GDP AND 60% OF THE NATIONAL BUDGET GOES ON SERVICING IT”

WHAT ARE THE FIGURES?

The Egyptian pound has been devalued three times since early 2022, losing 70% of its value. And that’s if you value it at the official exchange rate of 30-31 pounds per dollar in the formal banking sector, where the supply of foreign currency is minimal. In reality, a parallel market has emerged, with the pound more than halving again, to about 70 per dollar. The plunging currency helped push inflation to an annual rate of 34% in December, up from 6% two years ago. Over the past decade, fiscal deficits have averaged 9.5% of GDP. As such, the government has accumulated a massive public debt of more than 90% of GDP. And with the currency in free fall, it now spends 60% of the national budget servicing it. External debt, including IMF credit, rose from an average of $40bn in the early 2010s to $130bn by 2020, including nearly 70% in long-term debt. Since then it has risen further, to around $160bn, and debt repayment obligations are forecast to reach $29bn this year, or 8% of GDP. 

WHAT ARE THEY SPENDING IT ALL ON?

The “mightiest and most obscene” of Sisi’s grand projects is the new capital being built in the desert east of Cairo, says Steven Cook in Foreign Policy. With work still in its first phase, some $60bn has already been spent, but planned financing from the UAE and China has been pulled. Other costly projects include a new “summer capital” on the north coast, a nuclear-power plant (in a country with excess electricity), a new “sustainable” city in the Nile delta, and the revival of a wildly ambitious Mubarak-era project, known as Toshka, that would in effect create a second Nile valley by diverting water using canals. What the projects have in common is that they are all of dubious economic value, but are politically important. “The message may have been that Egypt can still do great things,” says Cook. But they’ve become “unsustainable burdens on the country.”     

HOW IS EGYPT STAYING AFLOAT?

For the time being, the Egyptian economy and government are being propped up by a mix of new loans from allies in the UAE and Saudi Arabia, and repeated IMF bailouts; it’s now the fund’s second-biggest debtor. Two weeks ago, Abu Dhabi stepped in with $35bn of investment, a sum that should help secure further IMF support. In the long term, the country’s prospects depend on cutting the role of the state and bureaucracy, controlling the public finances, and building on its growing sectors – such as agricultural, herbal and horticulture businesses, building materials, garments and light manufactured goods, and information technology. In the short run, it needs to kick-start economic reforms by devaluing its currency formally, says The Economist. But to do so would see its dollar debts surge relative to GDP, and raise the price of food, especially grains, where Egypt relies on imports. 

WHAT SHOULD THE GOVERNMENT DO?

Ideally, restructure its debts, live within its means and get the army out of business. But there’s no sign that Sisi, who was re-elected in an unfree and unfair election in December, has any intention of doing so. And indeed, “such austerity would be highly dangerous”, says The Economist – raising the prospect of years of default, mass unrest and violence. Egypt’s problems are “threatening to tip it over the edge”, and losing it diplomatic clout to the likes of the UAE and Qatar. But the same problems are, paradoxically, “increasing its negotiating power” when it comes to attracting outside help. When so much of the Middle East is aflame, a major nation of 110 million people, in such a strategically crucial location, is simply too big to fail. “So the world should hold its nose and bail Egypt out again.” 

Protectionism in its current form:

 

DOMINIC LAWSON

It’s absurd to block the cheapest electric cars

China has hugely reduced the cost of EVs — why is that a bad thing?

Dominic Lawson

Sunday March 03 2024, 12.01am, The Sunday Times

The capitalists, goes the saying attributed to Lenin, “will sell us the rope with which we will hang them”. But Communist China will get us to buy the rope. That, at least, seems to be the belief of the West’s panicking leaders as it belatedly dawns on them that Beijing will be the winner of the so-called green industrial revolution.

This is already evident in solar power: by 2022 more than 90 per cent of the solar panels installed in Europe were imported from China: that is even after, in 2013, the EU imposed anti-dumping and anti-subsidy measures on Chinese solar cells and modules.

Now the European car industry — and that in the US, too — believes it is facing a similar threat; or, to be specific, the market for electric vehicles (EVs), which our governments have declared must, by 2035, be the only new cars sold. To save the planet. But the EVs are significantly more expensive than their internal combustion engine equivalents — and that is one of the reasons for consumer resistance to the path to virtue.

Enter the dragon. The cheapest Chinese EV sells for the equivalent of $11,000, whereas the most basic Tesla in the US goes for about $40,000. And now vast, specially designed ships from China are beginning to dock in Europe’s ports — the first destined for Germany arrived last Sunday in Bremerhaven — loaded with low-cost EVs. Above all, ones made by China’s, and now the world’s, leading EV manufacturer, BYD. That stands for Build Your Dreams. But it’s a nightmare, according to the head of Tesla, Elon Musk, who, having ridiculed BYD’s first model as no threat whatsoever (“Have you seen their car?”), now says that without trade barriers the Chinese manufacturers “will pretty much demolish most other companies in the world”.

As it happens, Tesla’s own biggest plant is in Shanghai; in the first 11 months of last year it produced over 850,000 vehicles. Killer fact No 1: it churns out those EVs twice as quickly as does Tesla’s Texas plant. Killer fact No 2 (for those in the British car industry): China’s industrial electricity prices are about a quarter of those in the UK. That’s partly because China is still 60 per cent powered by coal, which remains the cheapest form of generating electricity but is now abandoned in this country — again, to save the planet.

But something is stirring in Whitehall. Last week the website Politico reported that “Britain is considering whether to investigate Chinese state subsidies for EV makers … the UK trade secretary, Kemi Badenoch, is preparing to instruct Britain’s trade watchdog, the Trade Remedies Authority, to open an investigation”. This would follow a similar action in Brussels: last October the EU launched just such an investigation into alleged “unfair” trading practices, after the president of the European Commission, Ursula von der Leyen, warned that global markets were about to be “flooded” with cheap Chinese cars.

Perhaps von der Leyen was also exercised by the fact that Uefa, Europe’s football federation, had replaced VW with BYD as its automotive partner for the Euro 2024 championship. But you don’t have to be Chinese to regard all this with a certain amount of cynicism. Roughly every second VW worldwide is sold in the People’s Republic of China, notably from the German company’s plant in Xinjiang.

It was Europe’s decision to move from the traditional form of locomotion (relying on highly complex drive trains, in which it had engineering leadership) to one of batteries on wheels; and, as the German writer Ralph Schoellhammer observed: “China has more control over these [battery] supply chains than Opec has over the supply of crude oil.”

Nor does it appear that China is “dumping” — that is, exporting products at a price lower than they are sold in the home country, or at a loss. As Estonia’s International Centre for Defence and Security noted in its recent paper “Chinese EVs in Europe: a threat to European automakers?”: “Let’s compare the prices of BYD EVs in China and Germany, taking the newly launched BYD Dolphin as an example. In China the BYD Dolphin retails for €24,400. That is €11,590 cheaper than in Germany, where it retails for €35,990. Given that BYD is a profitable company, its production cost in China is certainly lower than the inflated retail price in Germany, meaning … this cannot be considered dumping, by definition.”

These price differentials also suggest that if the EU (or indeed the UK) were eventually able to persuade the World Trade Organisation that its rules had been broken, the Chinese EVs would still be the cheapest option even with substantial tariffs imposed on them — and, to be clear, this would amount to a fine on the European or British consumer for purchasing the very sort of car we are being told to buy by the same governments.

While it is true that, in the years of building up its EV capacity, China heavily subsidised its manufacturers (though this backing has been steadily withdrawn), western governments have also given inducements to those setting up EV and battery capacity in their territories. No more so than President Biden, with his Inflation Reduction Act, putting tens of billions of dollars the way of US firms in “green technology”, above all those in the domestic auto industry. By the way, since these billions are being borrowed by the US Treasury, it is, if anything, the opposite of an inflation reduction act.

Biden had also continued with the 27.5 per cent tariff on Chinese-made cars imposed by President Trump. But on Thursday old Joe came up with a new reason to legislate against cheap Chinese EVs: they might contain technology that could spy on their American owners. Biden declared that China “could flood our market with its vehicles, posing risks to our national security. I’m not going to let that happen on my watch.” The president added that there was even a physical risk: Chinese cars driven by Americans might be “remotely accessed or disabled”.

I’m sure that is possible. But if such a thing were to happen to even one driver — and were detected — it would destroy the entire Chinese industrial strategy overnight. Would Beijing really risk that?

I was never in favour of the plan pursued by Brussels and Westminster to phase out even hybrid vehicles (I write as the owner of a still excellent 2008 Lexus hybrid). But it is preposterous to demand consumers switch to EVs and then to attempt to block the supply of the ones that are most affordable — and whose appearance in showrooms would put downward pressure on the prices of all such “virtuous” vehicles.

Haven’t our governments noticed that anything that reduces the cost of living might actually make them less unpopular?

Although this is about our pension system it is chock-full of economic info:

 

Why Britain’s state pension time bomb is about to explode

Paying for a wave of retirement has become too big a problem to ignore

Szu Ping Chan and Tim Wallace29 February 2024 • 6:00am

2438

The last Baby Boomer turns 60 this year. Many born between 1946 and 1964 have already retired, and millions more will follow in the coming years, with the number of people reaching state pension age forecast to hit a record 800,000 in 2028 for the first time. By then the earliest anyone will be able to claim their state pension will be 67, up from 66 today.

Rising longevity meant that for decades, raising the state pension age was the silver bullet that helped to defuse Britain’s demographic time bomb. But not for much longer.

Until now, a rising age limit has kept the Baby Boomers working, boosting a jobs-rich recovery in the wake of the financial crisis and keeping the economy afloat.

It meant politicians could think of paying pensions as tomorrow’s problem – a long-term challenge of slow-moving demographics that could always be left to a future government.

But that time bomb is still ticking. And Britain’s falling birth rate and life expectancy means it’s about to explode amid this huge wave of retirement.

The Telegraph is examining the future of the state pension in a three-part series that will focus on the implications for work, retirement and living standards for different generations.

In this first instalment, we look at whether the Government can keep making the sums add up when the pensioner population is expected to rise from 12m today to 17m by 2070.

Trouble ahead

The working age population is expected to increase by just over 1m to 44m over that period. 

Already, £1 in every £8 of government spending goes on the state pension. Fast forward 50 years, and that number will be more like £1 in every £6.

A wave of retiring boomers is expected to push up the pensions bill dramatically this decade. While raising the state pension age to 67 by 2028 will stem the rise in costs, the Office for Budget Responsibility (OBR) predicts overall spending on the state pension will be £23bn higher in 2027-28 than it was at the start of the 2020s. This jump is not happening within five decades, but five years.

Sir Charlie Bean, a former OBR official, says the world took a global peace dividend and era of cheap money for granted, spending extra money with abandon, which is now coming back to bite.

“If you go back about 50 years about a quarter of [state] spending was on health and welfare including pensions. That has risen to about half, essentially because of these demographic forces - ageing - and also the nature of technical change in the health sector,” he says, noting that medical innovations are often expensive.

“Three things have made room for it. Firstly, declines in public investment; secondly declines in defence spending [that came with] the cold war dividend; and thirdly a fall in contribution from debt interest.”

Suddenly those have reversed, with serious implications for spending in the next parliament at a time when money is already very tight.

The OBR believes spending on state pensions will rise from 5.1pc of GDP this year - or around £130bn in today’s money - to 8.6pc of GDP in 2073, or around £230bn. An older population also means more demand on health spending, which is set to increase from 8.2pc of GDP this year to 15pc of GDP.

While a fall in the number of young people will reduce spending on schools over this period, the surge in older-age costs will swell the state to more than half the size of the economy, up from 33pc pre-pandemic and an estimated 38pc by the end of the decade.

Governments have two choices if they want to constrain state pension spending in the future. Make people wait longer to claim it, or make it less generous.

Life’s too short

The question of when the state pension age should rise from 67 to 68 has already been the subject of two independent reviews.

John Cridland, author of the first report in 2017, suggested it should rise to 68 between 2037 and 2039. Baroness Neville-Rolfe, the author of the second, said that based on the rule of thumb that people should spend roughly a third of their adult life in retirement, it should not rise to 68 until 2041-43.

But falling life expectancy has thrown a spanner in the works, forcing Jeremy Hunt to delay a decision on when to next increase pension age for a second time.

Advances in healthcare and better working conditions have resulted in four decades of improving life expectancy. But the rate of increase has slowed, and not just because of the pandemic.

Life expectancy growth has been slowing since 2011, with pandemic deaths in 2020 and 2021 sending progress into reverse. Life expectancy is roughly now back to where it was a decade ago, according to the Office for National Statistics (ONS).

UK life expectancy at birth is now estimated to be 78.6 years for males and 82.6 years for females, according to the ONS. That’s 38 weeks fewer for males and 23 weeks lower for females compared with 2017 to 2019.

Cridland, who wrote the first report for the Government, says: “I think there’s quite a lot of evidence that the continuing increase in longevity is topping out. And that is overlaid by the pandemic, but actually the signs were already there. If that’s the case, then you could argue the trajectory for further tightening of the state pension, both in age and support, could become more muted. My instinct is that the days of big increases in longevity are fading.”

There is also the issue of how fit people remain after they retire. The ONS defines this as an estimate of how much people believe their lives are spent in “very good” or “good” health. And the evidence suggests this is also in decline, with Scots seeing the biggest deterioration over the past few years.

Britain’s not working

Sick Britain has barely been out of the headlines since lockdown, with the number of people neither in work nor looking for a job currently at a record high of 2.8m.

A rise in back and neck pain among older workers is partly to blame. The UK is one of eight OECD countries where at least 20pc of adults aged over 65 report “severe limitations in their daily life”, according to the think-tank.

Alongside Denmark and Norway, Britain also has the highest levels of statin consumption per head in the OECD, and the third-highest use of antidepressants.

This matters because the state pension is paid from the taxes of people in work today, so the more people there are in work relative to those retired, the better.

In 2020, there were around 30 pensioners for every 100 people of working age. That has already risen to almost 32 pensioners, and will hit 35 before the decade is out – the timeline over which financial decisions at next week’s Budget are being made.

Making people wait longer to claim their pension may seem obvious, but it also risks widening the inequality gap. A recent report by the Longevity Centre suggests that people may need to work until they’re 71 before receiving the state pension to maintain the number of workers per retiree.

If that’s the case, the average person in Newton Heath and Moston in Manchester would die before receiving it. Life expectancy here is just 70.2 years old, compared with 85.6 years in nearby Deansgate.

Healthy life expectancy also varies wildly depending on where you were born. A man in Rutland can expect to live 75 years in rude health, while in Blackpool that number is just 54 years.

Even this rapidly worsening picture does not tell us everything.

Looking at the number of people of working age is one thing. Looking at how many are actually in work – and paying the taxes needed to fund the state pension – is another.

The number of working age people who are economically inactive has been rising, hitting 9.3m at the last count. That is equivalent to 21.9pc of all people aged between 16 and 64.

Lord Turnbull, a former permanent secretary to the Treasury and cabinet secretary, says major trends which have helped in past decades are no longer enough to keep the dependency ratio healthy.

“Immigration helps redress the balance, but we are now going through a phase about where have all the workers gone? There has been this huge increase in inactivity,” he says.

“By and large activity had been rising as more women came into the workforce, but inactivity turned up in pandemic and almost uniquely among comparable countries, it has not returned to its trend level - it stayed up.”

In particular, he frets that “we are the sickest country in Europe”, pushing people out of the workforce and leaving the public purse bearing the cost of healthcare bills without tax receipts.

Cridland suggests that ensuring the state pension remains fair will involve tough choices.

He says that within the next decade, if Britain wants to “start to put in place a plan to constrain cost increases without having to rob the health budget, or rob the education budget or put up taxes, the next logical thing you would do after deciding when the state pension age goes up, would in my judgment be to remove the triple lock”.

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Lock and load

The policy, which was introduced at the start of the last decade, ensures that payments to pensioners rise by the highest of 2.5pc, inflation or earnings growth, whichever is higher.

It is understood that the Conservative Party will put the commitment in its election manifesto.

A Tory source said: “The triple lock is a Conservative Party creation, has been in every Conservative Party manifesto since we introduced it, and we will commit to it again.”

Labour signalled it would do the same and challenged the prime minister to put the commitment on record.

Rachel Reeves, the shadow chancellor, says: “The difference between being in retirement and being of working age is that when you’re in retirement, it is very difficult to increase your income. And so I think that stability and certainty that your income is protected is important.

“We’ve always supported the triple lock.”

A Labour spokesman added: “The Labour Party will always stand up for working people to have a fair, decent pension and financial security in retirement.

“Rishi Sunak’s government has previously broken their promise to pensioners and now need to be clear about their intention to maintain the triple lock, to ensure pensioners’ incomes don’t fall behind what is needed to give them a decent standard of living.”

Pensions minister Paul Maynard describes the state pension as a safety net for millions of people.

“I want to ensure the State Pension remains the foundation of income in retirement for future generations in a way that it is sustainable and fair,” he says.

“This Government introduced the triple lock to do just that, and since 2011 we’ve lifted 200,000 older people out of poverty. With the full rate of the new state pension rising to £11,500 in April this is vital additional money for our hard-working pensioners who rely solely on this income.

“We are taking long term decisions to build a brighter future for millions – one that delivers for the pensioners of today and tomorrow.”

But not everyone is a fan of the triple lock. Peter Lilley, a former Work and Pensions Secretary, describes it as “absurdly generous and unsustainable in the long-term”.

He adds: “Why pensioners should get an increase when neither prices are going up nor wages are going up is absurd.”

Lord Turnbull says the triple lock is “daft, but terrifically difficult to get rid of”.

“When we get a shock, an output shock or a prices shock, you suddenly find you have significantly made the pension more generous,” he adds.

“But it wasn’t a considered decision, it just happened. It is a very silly way to do it.”

The Government is committed to reviewing the state pension age again in the first two years of the next parliament.

Sir Steve Webb, the pensions minister who helped to introduce the policy, says it’s time to look at government spending as a whole to find solutions to keep the state pension on a sustainable path.

“There’s lots of things you can do to make the state pension system more affordable apart from just hiking the pension age. One of which is making more people of working age economically active,” he says.

The OBR estimates that the total annual tax loss as a result of rising health-related inactivity and in-work ill-health is likely to stand at almost £9bn a year. This would be more than enough to cut 1p off income tax - and keep paying for the triple lock.

“That’s a far better thing to focus on than just repeatedly hiking the pension age,” says Sir Steve.

“The risk is we think that the solution to the affordability of the state pension lies exclusively within the state pension system, and it just doesn’t.”

There might be more than one solution to the problem. But the state pensions time bomb is still ticking down – and hiding from reality is no longer an option.