For decades, emerging economies, in particular, have subscribed to the idea that making the rich richer will trickle wealth to the lower classes. “Elected officials fall back on it because they can understand the simplistic logic of cutting taxes and regulations to provide incentives to workers, businesses, and investors to be more productive,” David Madland, a senior fellow at the Center for American Progress, wrote in Democracy, a Journal for Ideas.
However,, IMF calculations show “trickle-down” economics do not benefit GDP growth in the long term. “Making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage point,” the IMF said. “Making the … middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage point [annually].”
That class will be critical as Egypt Vision 2030 aims to “achieve an average constant … GDP growth of 6% to 8% [annually].” This fiscal year, GDP growth projections from the World Bank, IMF, and EBRD range from 2.5% to 2.7%, rising to between 3.5% and 4% in the following year.
Why the middle?
A standout feature of members of the middle class is they “tend to consume a higher fraction of their income than the rich,” the IMF paper said. “If more money flows to these segments of society, they will consume rather than save, raising demand and spurring aggregate growth in the short run.” Alternatively, the “wealthy save more than the middle class and … consume less,” John Keynes, author of the “General Theory of Employment, Interest and Money,” said.
Accordingly, a growing and vibrant middle class is essential as “consumption needs to be sufficient to dispose of the current output of industry in order to make new investments profitable,” Keynes explained. “This is why during a recession policymakers seek to stimulate demand in the hopes of raising consumption.” Throughout the COVID-19 pandemic, the U.S. government disbursed over $800 billion to support the country’s middle-class households, divided across 476 million payments, according to the U.S. Pandemic Oversight portal.
A thriving middle class also would boost free-market dynamics, attracting investments. “Having adequate financial resources and stability, but not enough to allow for a life of leisure, fosters attitudes and behaviors that are essential to building a healthy capitalist system,” Madland said.
Those benefits are sustainable, creating a positive domino effect over time. “If families move out of poverty, their future perspectives change,” Amadani said. That would invariably lead to “higher levels of education [as] parents who attended elementary school … may aim to have their [children] complete high school or even university.”
That means the next generation would contribute more to society than if their parents had stayed poor. When they graduate, Amadani noted they will likely receive higher salaries than their parents, increasing their consumption and allowing them to improve their own kids’ education prospects, ultimately creating “a more skilled workforce.”
Having a sizable middle class also means less brain drain. “If workers find benefits that improve their living conditions close to home, they will typically remain in that area,” Amadani said. They can “support their families [while] keeping the household together, thereby providing children a healthier environment.” Lastly, middle-class families tend to “look for ways to help [others] who live in poverty.”
Confusing prospects
An October white paper by Oxford Economics, a global advisory firm, said, “Much of the excitement about the middle class in emerging markets used to be focused on consumers in Africa, where a strong population and GDP growth supported rising numbers of consumers opting for Western goods for the first time.”
That perception proved incorrect as “volatility in economic performance across the region has meant that projections for long-term growth in the addressable market have not always delivered consistently,” it said. That resulted in a “very small … addressable” middle class despite metrics indicating otherwise. For companies that “made it challenging to invest resources on a large scale into any individual country and achieve a guaranteed return on investment.”
The white paper highlighted Egypt, noting “several reversals in middle-class growth due to the pound devaluations and high inflation.” That movement has been exacerbated by the huge discrepancy between economic “boom and bust cycles” due to massive changes in exchange rates every time the government “floats” the pound.
Egypt is currently in a “bust cycle” from ongoing structural reforms and quadrupling of foreign debt since 2015, according to official data, taking a toll on the country’s middle class. “The middle class has already eroded as a result of the continuous decline in the value of the pound and the deterioration of economic conditions in general,” noted an investigative report in The Arab Weekly in July. “Members of the middle class [are] set to worsen with future devaluations of the pound.”
The report stressed that while rising prices of staples, such as bread, which tripled in 2024, mainly hurt lower-income classes, they are “now seeping into the middle class, which faces hardships” from hikes in discretionary items. Al Monitor’s Haitha El-Tabei reported that the rising cost of living is “turning … necessities … into luxuries” for middle-class families.
Despite those troubling indicators, “steadfast implementation of the reform package underlying the program is critical to restoring macroeconomic stability and investor confidence,” the IMF said in its FAQ section about Egypt. Those reforms would ultimately “bring down inflation.”
Oxford Economics is optimistic, saying Egypt’s “solid productivity levels, currency stabilization [even if artificial] and relatively strong GDP growth [would] support growth in middle-class households” despite the economy’s mismanagement.
However, as it stands, multinationals should “either moderate expectations about the size and growth of the addressable opportunity in the market or [strategize to] capture the low-income segment of the population,” Oxford Economics advised.
Downward spiral?
Egypt’s shrinking middle class will eventually hurt local top-tier private-sector education. Patrick Jack, a journalist for Times Higher Education, a specialized news portal, explained in April that “if the depreciation of the Egyptian pound persists, it will increasingly challenge … Egypt’s middle-upper class … families’ ability to afford sending their children [to attain top-tier] education.”
Fueling higher fees is the fact top schools’ payroll and equipment expenses are likely to be denominated in a foreign currency, Jack said.
Accordingly, some education facilities may downsize, merge, or close. The ones that survive would have a more challenging time “participating in research on a world stage,” Jack said. “The cost of equipment when converted to Egyptian pounds and [other relevant] costs [make] it more difficult for local faculty members here to continue conducting research and disseminating it.”
In the long term, that decline in quality education will make it increasingly harder for any country to recover its middle class, and with it sustainable GDP growth.
Government push
Realizing the need to support Egypt’s ”middle class,” the government announced in February that civil servants and other public workers would receive a minimum salary bump between EGP 1,000 and EGP 1,200. In April, the state increased the national minimum monthly wage 50% to EGP 6,000.
However, Madland of the Center for American Progress stressed those measures are insufficient to grow the middle class. “Politicians typically see the middle class as something to create with the gains of economic growth,” said Madland. “But in fact, the opposite is the case: The middle class is the source of economic growth.”
This article first appeared in January’s print edition of Business Monthly.