This post originally appeared on the Tahrir Institute for Middle East Policy blog
Over the course of the past several months, a revolt has taken place in Egypt’s banking sector. Seeking better opportunities and higher salaries in private sector banking jobs, hundreds of banking officials have resigned in protest since July 2014 legislation placed a cap on salaries for employees in Egypt’s public sector. While most public servants had little cause for concern, the law also applies to those working in state-owned companies. Suddenly executives at Egypt’s many state-owned banks would earn a maximum monthly wage of 42,000 Egyptian pounds (roughly US$6,000)—a mere fraction of their earning potential.
Former Minister of Finance Samir Radwan has spoken out against the implementation of a maximum wage, stressing that such an approach deprives public servants of their rights and does not meet demands for social justice. On February 17, a Cairo administrative court sided with workers from the Housing and Development Bank and the Export Development Bank of Egypt, ruling the maximum wage law to be unconstitutional. Tasked with fulfilling revolutionary calls for social justice and repairing an Egyptian economy on the ropes since the January 2011 uprising, President Abdel-Fattah El Sisi’s decision to cap a maximum wage at “no more than the president earns” aims to promote equality and social justice, halt the growth of income inequality, and bolster the middle class. But the actual impact of a maximum wage merits more consideration: Should there be a maximum wage in Egypt? Would the economy really be better off after capping earnings, particularly given the landscape of public and private ownership of many key sectors in the Egyptian economy?
Social Justice or Just a Wrong Economic Approach?
Under this decree for “fair pay,” no public enterprise would be able to pay its top executives more than thirty-five times the minimum wage (1,200 pounds, or around $157) received by public sector employees.
The idea behind curbing “excessive” pay is not unique to Egypt: Similar measures have been proposed in countries like China, Venezuela, France, Spain, and Switzerland. Inequality as a measure of social justice—especially when it comes to income—was one of the most important issues raised by the Egyptian revolution and one that governments grapple with as a part of a social welfare agenda. In an interview, Kamal Abu Aita, long-time labor activist and former Minister of Manpower and Emigration, called for “a maximum wage for those who live in palaces, a minimum wage for those who live in the graveyards.” Those against the Egyptian measure argue that the law hurts competitiveness by restricting the ability of state-owned companies to hire skilled staff, harms productivity by reducing incentives for employees to develop skills and knowledge, and cripples public institutions vulnerable to a lack of skilled and experienced workers.
There are many social, economic and cultural causes that affect corruption; perhaps the most important one is wage, especially with a large public sector and a poor governance system. By implementing the maximum wage law, Egypt risks fostering this scourge, as civil servants attempt to hide income in offshore accounts or through tax schemes, depriving the government of collecting income tax revenues and discouraging transparency. A reduction in the salaries of upper- and upper-middle class workers may have some negative effect on luxury and real estate markets as spending potential is reduced. The fact that corruption can be reduced by increasing public sector wages can provide an important solution to solving this problem. It is worth noting that Singapore and Qatar have been successfully able to reduce corruption levels in their country by paying public officials wages that are comparable to that in the private sector.
Effects on Egypt’s Banking Sector
In no sector are the negative implications of this law more obvious than in the financial sector. After all banks in Egypt were nationalized under Nasser in the 1960s, banking remains dominated by state-owned enterprises in competition with global counterparts.
This stark and sudden reduction in income sparked controversy and led to a massive number of resignations in state-owned enterprises. By December, over 140 officials in the central bank and other major public banks had resigned. These included employees of the National Bank of Egypt (NBE), Banque Misr, and Banque du Caire, among them four of the highest-ranking officials from the public banking sector: Nidal Assar, Deputy Governor for Investment and Foreign Relations in the Central Bank; Hazem Hegazy, NBE’s Head of Retail Banking Sector; Soha Soliman, Director of SME Finance Department at NBE; and Zeinab Hashim, NBE’s Treasury Manager.
The competition for talent in stronger private and foreign banks threatens to leave institutions bereft of talent; this brain drain impedes banks’ ability to provide quality services to clients. This problem is particularly acute in a country like Egypt where talented employees are sorely needed at state-owned companies. Under the new law, for instance, the head of the National Bank of Egypt would earn $72,000 annually to oversee assets worth $48 billion.
Maximum Wage as a Populist Approach
Running a bank is difficult for top executives, as failure can be personally devastating. In such cases, high salaries are an appropriate compensation for taking these risks. It is true that top executives of state owned banks make huge salaries in comparison to their lowest level employees; however, by removing an incentive to work harder or better, the maximum wage policy could reduce productivity and innovation among skilled workers in demanding jobs and remove an incentive to work harder. This decline in innovation and productivity, combined with the high number of resignations, could be problematic as innovation and productivity are sources of economic growth.
Thus, a maximum wage for state-owned companies has the potential to slow economic growth in the medium and long terms; the decision to enact a maximum wage was based on neither sound economics nor a consideration of Egypt’s indigenous economic context. Rather, the decision can be viewed as a populist move seeking to gain political loyalty of the middle class, as an attempt to consolidate the idea of social justice and soak the rich. This approach is also evident in other economic policies. For instance, in May 2014, former Finance Minister Hani Qadry announced fiscal reform on an additional five percent income tax hike on the richest individuals with incomes in excess of one million Egyptian pounds (around $140,000).
Statistically speaking, according to figures from the Ministry of Finance, in 2010-11, a large share of the government spending goes to the public sector to pay salaries, pensions, and retirement benefits to more than six million public sector employees. According to President Sisi three quarters of Egypt’s budget goes to subsidies, debt service, and wages. In Egypt, the root cause of the public sector crisis was a set of government policies enacted under former President Hosni Mubarak which had several implications for Egypt’s economic performance, but a maximum wage law will only hurt public servants, employees at state-owned institutions, and ultimately the Egyptian people. Populist reforms may be a way for President Sisi to position himself as a defender of the middle class and a fighter against social disparities, but far from soaking just the rich, the wage ceiling will harm middle-class and low-income workers as it slows economic growth.
Alternatives Exist: National Productivity Pact
While reforming the civil servants law and other economic legislation, there is also a need to reform labor laws and institutional settings for worker representation, allowing labor unions and syndicates the power and appropriate channels to negotiate for their rights and involve them in the decision making process. This consensus–building option, through organizing discussions with stakeholder groups and implementing successive salary reviews, would contribute to a favorable economic climate and confront social inequalities, rather than populist quick-fix solutions (which may lose their effectiveness over time) like a maximum wage that leaves Egypt’s institutions vulnerable and its economy uncertain.
Instead of capping wages, sound reform of the wage system in the public sector would begin by implementing a competitive compensation system based upon achievements and performance, keeping the basic salary of workers constant and linking a designated percentage of variable pay to performance in order to encourage them to work harder and boost productivity. Apart from reforming the wage system for the public sector workers, the government could also embrace a new national competitiveness agenda Labor unions, private sector, and government should work together and agree on a national productivity pact that addresses issues of social justice, provides more and better jobs, changes the work culture, reduces the actual discrepancies between public and private wages, and reduces disparities in human capital. This pact would boost Egypt’s competitiveness, labor productivity, keep wage growth moderated, improve social inclusion without harming the economy, and reposition the Egyptian market on a sustainable and offensive footing in international markets, performance, efficiency, and effectiveness. All of these are geared toward the benefit of all stakeholders, including the Egyptian bureaucracy.
Since many groups in Egyptian society—public employees, business owners, and private-sector unions—are affected by the maximum wage law, the government ought to consult with economic experts before attempting something as sweeping as the recently scrapped maximum wage law. This, however, requires the government to reconsider the maximum wage reform and establish new strategies and feasible policy solutions to tackle social justice in consultation with all these stakeholders. Reforming the pay system requires adopting a comprehensive vision toward civil service reform that would satisfy the complex needs of all stakeholders.
CIPE-Atlas Corps Think Tank LINKS Fellowship brings talented young professionals with strong research backgrounds to shadow researchers and experts at leading U.S. think tanks for six months. Hiba Safi is serving at the Tahrir Institute for Middle East Policy.