prudent and adequate both in terms of the fiscal and monetary stimulus (see section on the assessment of the crisis). Yet, while these features have sheltered Egypt from the impact of the financial crisis, some of them, namely, limited financial development and low private investments have also been constraints to long-run growth.

The impact of the crisis fell squarely on the activities that experienced rapid growth in recent years. Only two sectors’ output fell: oil refining (-4.2 percent) and Suez Canal services (-7.2 percent). Restaurants and hotels managed to maintain positive but very low growth at 1.3 percent. On the contrary, some sectors such as construction and building outpaced the previous year, up by 20.2 percent in FY09 compared to 15.7 in FY08. Other sectors kept growing at almost the same modest pace, such as wholesale and trade (at 5.8 percent), agriculture (3.2 percent) and real estate ownership (3.8 percent), while others like the financial services have seen their growth rate declining (4.6 percent compared to around 7.6 percent in FY08).

A World Bank private sector survey (World Bank 2009c) showed that small enterprises’ sales (a proxy for output) fell by more than large enterprises' sales. Sales of small enterprises fell by 32 percent, while those of large firms dropped by 19 percent. Given that the shock was mostly to the tradable sectors, and large firms comprise the majority of exporting units, this was possibly due to the lower initial productivity level of smaller firms. In any event, if output contraction in small enterprises continues, the rise in unemployment will be larger than anticipated.<sup>9</sup> Any policy should, however, be directed towards increasing productivity in these units rather than artificially maintaining unproductive ones in operation.

Input utilization, especially of labor, has been slow to react; this implies lower factor productivity or, alternatively, higher real costs per unit of output.<sup>**10**</sup> The private sector survey showed that the median firm decreased its sales by 29 percent<sup>11</sup> , while employment fell only by 5.6 percent. Hence, while output (measured by sales) fell quickly, employment has been slow to adjust, and the capital stock remains fixed, increasing the cost per unit of output. The fall in measured productivity resulting from external shocks has been documented before. For instance, Calvo et al. (2006) documented it in countries that suffered sudden stops in capital flows.<sup>12</sup>

> 9 El Mahdi and Rasheed estimate that 39 percent of total employment is in SMEs, or enterprises with fewer than 50 workers.

> 10 Harberger (2005) uses interchangeably the terms "productivity growth" and "real cost reduction" (RCR), arguing that growth and production take place at the enterprise level and that the second term is better understood by entrepreneurs.

> 11

> This figure drops to 20 percent when sales-weighted results are considered. Inventories increased moderately by 4 percent, hence the drop in sales implies a fall in output.

> 12 Other studies are: Conesa _et al._ (2007) studied the case of Finland after the collapses of its major trading partner, the Soviet Union. Also, Bergoeing _et al._ analyzed the case of Chile and Mexico after the interest-rate shock of the 1980s.

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