The mass uprising consuming Egypt brings to light a simple fact that has been hiding in plain sight: In the last decade during which China has brought more people out of poverty at a faster rate than ever in human history, in a period of time where economic development has been sweeping the world from Brazil to Vietnam, Egypt has remained on the sidelines.
This is not to say that Egypt has not grown. In the 1990s Egypt began an extensive privatization and liberalization programme. Efforts to attract foreign investment have been recently renewed and are largely successful.
In the follow up to the BRICS report, Goldman Sachs included Egypt as one of the 11 growing economies of the world. It is urbanized, open to trade with a growing economy with the highest population in the Arab world. It grew at an average rate of 7% from 2006 to 2009, at 4.9% in 2009 despite the global economic crisis and is expected to grow at 5% again in 2011. The economic reforms in 2004 that included the creation of a new foreign exchange market, reduction in tariffs, revision of tax code, reforms in registration of property, privatization of banks were the main stimulants of this sustained growth and improving macro economic conditions. The nationalization of banks in 1950’s and 60’s was reverted in mid 70s and again in 2004 to allow foreign participation and joint venture companies to improve liquidity, transparency and performance.
A Gateway House research study comparing banking systems in emerging countries such as Brazil, Russia, India, China and NEXT 11 countries such as South Korea, Turkey and Pakistan versus developed countries such as USA, Canada, Germany, Egypt rose from a ranking of 5th in 2005 to 2nd in 2009 falling behind only Brazil and Turkey. With such a market environment, projected growth and active reforms, Egypt seemed fit for any multinational company looking to gain experience in an emerging market.
The reality of emerging markets is that they are, well, emerging. And while the terms BRICS and NEXT 11, coined by Goldman Sachs, are used feverishly to identify frontier markets that investors and public policy analysts must look out for, neither of these original papers delve into the political and socio-economic conditions on the ground.
View from Cairo Tower
Namely, that growth has failed to improve the quality of life and bring prosperity for a large majority of its 83 million citizens. Instead, the gains have increased inequalities and according to World Bank data, Egypt’s top 20 per cent of the earning population has received a greater share since the 1990s. But the same is not true for those at the bottom of the income pile. Also a dangerous antecedent to the protests is the maleficent issue of youth unemployment in Egypt. A staggering two thirds of Egyptians are under the age of 30 and they constitute 90 per cent of the unemployed. Worse still, a whopping 40 per cent of the country lives on less than $2 a day which means Egypt as a nation, is still relatively poor.
The roots of Egypt’s labor unrest go back to the liberalization of the Egyptian economy. In order to promote a market economy with less state control, many state owned entities were sold. This led to an increase in unemployment. Without a parallel plan for fostering new jobs, the average citizen could not immediately bear the results of economic reform. In short, liberalization made the inequalities more pronounced.
Another complication has been the careening increase in food prices in the last year. Analysts such as MD Nalapat, director of the School of Geopolitics at Manipal University in Manipal, India, point to the problem of commodity speculation by global hedge funds and financial firms as a reason for the high prices. Also causing food prices to jump has been basic economics; the issue of demand and supply. Last year saw floods in Australia and Pakistan, and droughts in Russia. Many areas of the world are diverting crop production to biofuels rather than food. All these phenomena together have skewed supply, which is why the price of oils, sugar, and grains have all recently hit new peaks. And as the world’s biggest importer of wheat, Egypt is facing the brunt of these price rises.
Could this simmering economic strain have been foreseen? The global economic giants were too busy putting their own house in order to have noticed the spark from Tunisia that set Egypt aflame. While Goldman Sachs may not have directly addressed the probability of such large scale political risk in their analysis the truth is that growth causes disturbances, agitates the stale, sluggish system and creates inequalities and instabilities. Growth also makes citizens desire for freedom of choice; they have fresh expectations, desires and needs. Alexis de Tocqueville once observed, “The most dangerous moment for a bad government is when it begins to reform itself.” Political scientists refer to this marvel as “a revolution of rising expectations.” As Egypt moved from an emerging market to a more developed country, the call by citizens for political reforms and empowerment was bound to come.
The World Bank and IFC place Egypt at a ranking of 94th out of 183 countries for 2011 in their Ease of Doing Business Index up from a ranking of 99 in 2010. This is because Egypt has made strides in reforming its Property, Construction and Licensing laws. Compared to the rest of the Middle East, Egypt is the easiest place to start a new business. However, as with the other reports, it misses assessing the larger risk of a systematic political upheaval.
The Credit Rating agencies are no help either. FITCH downgraded its assessment on Egypt to “negative” last Friday. Similarly, Moody’s reduced its debt rating for Egypt to “negative”. It downgraded the country’s debt rating one notch from Ba1 to Ba2. Moody’s said the cut was “prompted by the recent significant rise in political event risk and concern that the policy response could undermine Egypt’s already weak public finances and that the government may offer generous subsidies to try and appease protestors.” However, having this assessment after the event has happened may be helpful to investment analysts; it is clearly not a useful indicator for those in the governance, public policy or international relations domain.
This political correction may well be a good thing for the Egyptian economy. The recent changes toward a more open and free-market economy have also created a new business elite that is invested to some extent, in a progressive, constitutional and liberal structure.
But the continuity of economic reform is not assured and there is a very real chance it may come to a complete end. As in many nations, policies that encourage subsidy reversal and take apart protected industries can lead to tremendous public outcry and stringent opposition, especially from business oligarchs . But Egypt needs economic growth. It is unlikely that it will be able turn back the clock and its march toward freer markets.
For the near future, whichever government sits in Cairo should continue to promote and expand the information technology, communications and telecom (ICT) industry, which has already produced the tech-savvy demonstrators of the uprisings. The industry has high growth – over 10% in 2010 – and has the potential to absorb the educated and currently unemployed youthful workforce. Egypt still has an educated elite to guide the economy, which can be galvanized by an infusion of high and low-tech enterprises. These can follow the India model by creating new tech back-office and outsourcing businesses, which will bring in much-needed foreign exchange, and lead domestic e-governance initiatives which reduce c
orruption, a scourge on Egypt’s economy and a key demand of the protest movement. Longer term, Egypt will have to focus on increasing agricultural output in order to control inflation and soaring food prices. Here, partnerships with Indian agricultural research institutes and colleges can help develop affordable techniques and solutions. Finally, reducing subsidies and reforming rigid labor laws are absolutely necessary to undo the larger macro-economic distortions of the economy.
What is happening is clearly a natural evolution for a country like Egypt with a rising population, rising inflation and unemployment. It also serves as a crucial training ground for the multinationals working in an emerging market. So, far the protests have been relatively civil, foreigners have been largely safe (aside from journalists) and strategic assets such as the Suez canal, oil and gas explorations and ports are functioning.
The fact that those gathered at Davos had very little to say about Egypt is an indication of how surprised leaders are about ground realities. This should be a warning signal to all at Davos who think that the understandings reached by leaders within Davos are reflective of those they represent.
What about India’s stake in Egypt? Currently, there are about 291 Indian companies in Egypt. For instance, GAIL has an equity and management stake in two gas distribution ventures in Fayoum and Cairo as well as in Natgas. OVL (ONGC Videsh Ltd.) and its partner IPR Red Sea Inc. are running oil exploratory missions. Gujarat State Petroleum Corporation Ltd (GSPC) has also signed a Concession Agreement for two oil and gas exploration blocks in Egypt. Others include Egyptian- Indian polyester company EIPET, Alexandria Carbon Black, Dabur, Marico, Sanmar Group, Satyam Computers, WIPRO, Oberoi, Kirloskar, Ashok Leyland, Tata Motors, Maruti Suzuki and Mahindra & Mahindra, etc. Although, India is the 4th largest trading partner, even with the above mentioned companies, it remains a small investor in Egypt. If there is a regime change, citizens may demand a review of foreign companies in Egypt especially if they are based on licensing or natural resources such as gas.
Developmentally, there are some commonalities between India and Egypt. One is the growing embedding of implementation loopholes that enable the crony capitalism which drowns out well-intentioned programmes. But the difference is that the Indian political and bureaucratic leadership has understood the need for “inclusive growth.” Initiatives such as the National Rural Employment Guarantee scheme which promises a daily wage to all skilled and unskilled workers in villages, Right To Education which promises access to education for the poor and Reserve Bank of India’s proposals on Financial Inclusion are all initiatives that, at least, in principle, seem to be targeted at the same socio-economic issues Egypt is facing.
As the protests draw more attention and participation, the Egyptian government should stop trying to retain power and work towards an orderly transition. More violence and surprises of any kind would be bad for business and international investors. So far only a couple of Indian companies have closed their operations and most businesses remain optimistic to continue business once the dust settles. This is the time when Egypt can show that a civilized orderly revolution is possible without damaging its image as an economically promising country.
Akshay Mathur is Head of Research at Gateway House: Indian Council on Global Relations.
Shloka Nath is a Senior Researcher at Gateway House:Indian Council on Global Relations
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