74. Poland’s track record in restructuring and privatizing its public-sector enterprises may serve as an example to the Egyptian government as it illustrates an additional potential policy tool to expand fiscal space. While the revenue from the public enterprise sector may fall (resulting in an initial drop in overall government revenues), the proceeds from privatization can be allocated to reduce the existing stock of debt or at the very least, slow down the accumulation of newly acquired debt. This would not only directly provide additional fiscal breathing space for the government, but the moderation in the government’s need for financing would also assist in reducing interest rates in the domestic market – in turn, stimulating investment by the private sector. As the Polish experience demonstrates, one of the most beneficial outcomes brought about by the privatization program (as well as the deliberate reduction of the role of public enterprises in the economy) was the unleashing of the country’s entrepreneurial “animal spirits,” which drove growth to unprecedented levels.

75. While the Egyptian government’s expenditure structure is largely comprised of nondiscretionary spending (such as wages) and dominated by non-negotiable interest expenses, there is scope to introduce stronger controls on spending as well as monitoring systems in order to effectively widen the fiscal space. Policy options could include shifting to a top-down rather than bottom-up approach to budgeting and adopting program budgeting (with six line ministries in Egypt having already taken part in a pilot project to test out this approach). Korea adopted such measures relatively early in its development process in efforts to ensure that the government maintained fiscal discipline.

76. Additionally, the implementation of controls to impose greater discipline and surveillance surrounding the government’s capital investment program would allow Egypt to optimize its limited fiscal resources. For example, this could entail a cross-ministerial framework to evaluate the various investment proposals as well as developing a robust mechanism to monitor the performance of investments on an on-going basis and track the distribution of benefits to targeted constituencies (particularly if the investment efforts are aligned with those areas needing more resources as shown by the SDG trajectory analysis in the preceding sections). In this regard, a strong capacity to gather, evaluate, and monitor household and regional-level economic data is crucial to enable the government to better design its policy interventions and measure their impact.

77. As a prime example of the Asian model of economic development, Korea has powered its rapid and sustained growth on the back of investment and exports. Figure 9 depicts Korea’s much higher investment to GDP ratio compared to Poland and Egypt. In addition, the role of merchandise exports, as shown in Figure 10, illustrates that both Korea and Poland quickly developed successful export platforms in the early phase of their development, while Egypt has primarily been inward-looking (merchandise exports make up less than 10 percent of GDP and manufactured exports also represent a far lower proportion of merchandise exports in Egypt’s case). The outward orientation of the Korean and Polish economies – in each case supported by a competitive, market-based exchange rate regime – was instrumental in forcing the economic actors in these countries to focus on productivity in order to compete internationally.<sup>27</sup>

> 27 Dani Rodrik argues in a study published by the Brookings Institution titled “The Real Exchange and Economic Growth” that an undervalued exchange rate in a developing country setting might be justified as a way for compensating the tradable sector for institutional weaknesses and existing product-market failures (Rodrik 2008).

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