Saudi Arabia Found in America the Appropriate Partner

Saudi-US ties have never been better. Saudi Arabia will be President Donald Trump’s first stop in his first overseas tour. The Saudis have laid out a massive red carpet for Trump and his business delegation with multiple events. It’s emblematic of the importance the Saudis have bestowed on Trump and the rebirth of its relationship with the US. It’s not unusual for a US president to visit Saudi Arabia — President Barack Obama, who was viewed cautiously by Riyadh, came more times than any of his predecessors. It is, however, a first for a US president to be visiting the kingdom on his maiden trip. Business comes first.

Bilateral trade between the two nations is strong, amounting to almost $40 billion in 2016, according to the US Census Bureau. In fact, last year was the first time in 21 years the US sustained a trade surplus with Saudi Arabia, mainly due to lower oil prices.

For Trump, Saudi Arabia is a long-term business partner offering enormous potential for US companies as the Middle East nation prepares for its post-oil future. Attracting US investment is vital for its foreign-direct investment programs and successful implementation of Saudi Vision 2030. Taking a leading position in Saudi Arabia’s business opportunities is on the table with officials planning to privatize four sectors this year, including Saline Water Conversion Corp., a power generation company under Saudi Electricity Co., grain silos and sports clubs.

During Deputy Crown Prince Mohammed bin Salman’s March visit to the US, Trump supported the development of a new US-Saudi program in energy, industry, infrastructure and technology valued at more than $200 billion in direct and indirect investment over the next four years. Trump, in turn, has said he intends to push for $1 trillion in US infrastructure investments over the next decade, with $200 billion coming from taxpayers and the rest from the private sector. Saudi Arabia, through its Public Investment Fund invested $3.5 billion in the US ride-share company Uber Technologies Inc. in 2016. Assisting Saudi Arabia in the successful transitioning of its economy beyond oil is a boon for all.

Saudi Arabia’s economic direction is clear: rid itself of oil dependency, while becoming a logistics hub, develop upstream and downstream mining capacity, deepen the tourism sector, build up the indigenous entertainment sector and increase local military manufacturing capacity. Officials and ministries are far more accountable via several new institutional mechanisms than at any time in the past. There is a sense of hope among young people that the country is changing and is addressing issues such as labor and female participation.

The Saudi Aramco initial public offering is another opportunity. It showcases the importance of US financial services in what would be the largest IPO thus far, expected to reach $100 billion. There is much to like, as a possible dual listing in Riyadh and on the New York Stock Exchange will only help to deepen the solid business relations of the two countries. The NYSE is the world’s largest stock market and includes oil majors such as Chevron and Exxon Mobil among its listings. Saudi Arabia has provided ample business to US investment banks and financial advisers working on the Saudi Aramco IPO. Two of the three leading underwriters are US firms — JPMorgan Chase and Morgan Stanley — the third is HSBC. A New York listing will bolster Trump’s business first motto.

For the Saudis, there is much to like in Trump. In Riyadh, the Obama administration was seen as being too pro-Iranian, confusing, and raised doubts about the wider role of the US in the Middle East. Trump represents the opposite.

The strategic-military relationship is central to the Saudi-US partnership. For decades the US has been a crucial supplier of land and aerial equipment. Saudi Arabia wants more sophisticated equipment and Trump has promised to stimulate the US economy by generating more manufacturing jobs.

Saudi Arabia is looking for partners as it constructs its post-oil economy and it’s almost certain that it found it in America’s Trump.


Saudi Arabia’s inevitable reforms under the leadership of Abdullah Bin Abdulaziz

Saudis have shown loyalty to their country and the ‘Day of Rage’ turned into a ‘Day of Unity.’ One factor ignored is that Saudis want to see King Abdullah bring change and reform. Saudis are also savvy in knowing that the violence in Libya and Yemen, uncertainty in Egypt and Tunisia are not sought by most. In today’s Saudi Arabia, the political will is there for economic reforms to unfold. There is no better evidence than a constant change in the welfare of society recently announced by King Abdullah: unemployment benefits enacted for the first time, extra capital for housing lending projects, social benefits, debt forgiveness for the needy and civil service wage increases. These projects amount to 8.3% of the country’s GDP.

The Saudi monarchy has brought change and reform in critical moments in the history of the country. It was all too easy to call for the collapse of Saudi Arabia prior to 9-11 as oil revenues were subdued and Saudi Arabia run consistent budget deficits. It is true that Saudi Arabia hit the jackpot since 2003 due to oil prices rises. But money was saved and invested toward building its human capital.

During the wave of terrorist attacks from 2003-2005 there were also plenty who were ready to call an end to the House of Saud. It is easy to discount the resilience of Saudi Arabia as its inevitability for change. It is too easy to call for increasing instability to rise within Saudi Arabia as Yemen’s domestic political labyrinth gives ample sparks for centripetal actions. Just like during the post-2003 Iraq, pundits were ready to call for political instability in Saudi due to external forces. Saudi Arabia withstood the shocks and managed superbly internal terrorist threats due to change and resilience. At every point in the history of Saudi Arabia, difficult internal and external challenges compelled policy makers and Royals to inevitably change for the better.

The economic challenges facing Saudi Arabia today are plenty but manageable. The youth bulge of Saudi Arabia is an opportunity for the country as well as a challenge to find them jobs and endow them with the right skills. Change is inevitable for Saudi Arabia. The recent history is a telling example: more than 100,000 young Saudis are sent abroad under the government’s scholarship program. These young Saudis are an important engine of change. The labor market is on an inevitable path of reform as the current dynamics are very telling: in the private sector for every nine jobs going to expatriate workers only one goes to a Saudi. Labor market reform is a necessity as more Saudis will be joining the labor force over the next decade. More than two-thirds of Saudis are below the age of 30. Given the right incentives Saudis will find employment in the private sector. Although female participation rate in Saudi Arabia is among the lowest in the Middle East, economic necessity will compel women to look for jobs. In the early 1990s, only around 5% of the labor market was comprised of women, today it has increased by three-fold. No longer can a Saudi household live off from a single bread winner. Women have to contribute as well. Life has become more expensive.

Housing as well as the energy future of Saudi Arabia necessitates inevitable changes. Affordability of housing is an issue for today’s young Saudis as most are opting to rent or stay with their parents for longer periods of time after marriage. The passage of the mortgage law as well as allocation of more land by the state for real estate development is inevitable.

Saudi Arabia is working toward its energy future knowing that its current reliance on hydrocarbons is not sustainable. If its current oil consumption continue unabatedly, by 2028 Saudi Arabia will have capacity to export no more than 7 million barrels a day and its population increasing from 27 million today to 34 million then. As a result, Saudi Arabia is working towards an inevitable future in clean and green technology.

Moreover, Saudi Arabia today is very different from the 1950s in terms of institutions, knowhow and capital resources. The institutions managing the economy in all its facets have greater depth and continuity. The financial crisis which shocked the advanced world since 2009 did little damage to the Saudi banking system. Banks and regulator alike learned well from the systemic excesses of the 1980s. Today Saudi Arabia is standing on solid macroeconomic ground with 10.2% of government debt to GDP, which is among the lowest for a member of the G-20. It is has also made sure that the more its foreign assets, currently greater than 102% of its GDP. Saudi Arabia has always met all the global oil supply calls over the decades. Recently, Saudi Arabia invested more than $63 billion toward increasing its oil capacity to 12.5 million barrels per day when few did so.

Saudi Arabia’s future is far brighter but more inevitably bound to change than people can forecast.

Saudi Arabia: To spend or not to spend?

Spending and taking additional measures to filter down the wealth by oil exporters is a necessity, not an option. As the Middle East is grappling with social unrest, Saudi Arabia has no choice but to spend and generate confidence. Handouts and the start of structural reforms are well placed. The country’s political outlook is stable as regional uncertainty continues.

In the space of less than a month (23 February to 18 March) King Abdullah of Saudi Arabia announced a total of 41 Royal Decrees, which include various handouts and socio-economic support programmes. They vary from one-off public sector workers’ bonuses, building half a million housing units, injection of fresh capital into the state’s real estate fund, creating a housing ministry and an anti corruption commission which reports directly to the King, healthcare services, newly-established unemployment benefits, minimum wages for Saudis (public and private), hiring of security personnel and others. The measures aim to lend confidence, and begin to address structural challenges in labour market reform and job creation, affordable housing for the low- to middle-income Saudis as well as addressing filtering-down mechanisms for the oil wealth.

The estimated USD129bn total package amounts to 84% of announced 2011 budget expenditures. The total bill of measures is a substantial fiscal undertaking on top of a budgetary trend which exceeded actual spending over announced spending by an average of 22% over the past five years. However, we believe the fiscal burden will rise but remain manageable. We estimate 31% of the total bill of projects expended in 2011 and 11% in 2012. This year’s actual budgetary breakeven, excluding the new measures, will reach USD80/bl for WTI. Mostly foreign assets (USD444bn) will be deployed to pay for the announced measures. Medium-term fiscal risks loom if extra outlays are added and restraint is not exercised. The measures will cause higher private consumption, leading to higher inflation. Import cost pressures will rise. Inflation is now forecast to rise from 5.3% in 2010 to 5.6% in 2011. Saudi Arabia’s political outlook is expected to remain stable.

Abdullah Bin Abdulaziz: Commitment to growth and progress

Saudi Arabia’s King Abdullah unveiled on Friday additional financial support measures estimated to cost SR350 billion. An estimated SR135 billion worth of measures were announced some three weeks ago. The latest measures (21 Royal Orders in total) are significant in size as they amount to 21% of the country’s 2010 GDP or 56% of last year’s actual budgetary expenditures. In total, both measures amount to 29.7% of last year’s GDP and more than half of the $203.2 billion in oil export revenues accrued during the past year. We believe the measures can be comfortably sustained as WTI is above $103 a barrel and Brent crude climbing to more than $113 a barrel this week. High oil revenues could be used to support the announced spending as well as tapping into the country’s $444.5 billion in foreign assets.

The authorities are aware that both measures cannot be carried out in their totality over a year or two. Some are short term and others will take time to unfold. Due to the size of the announcements, we expect some measures to be carried out over some years. For example, the announced housing measures will take some time to implement and they will require additional coordination between the government bodies, contractors and developers. Bonuses and other current expenditure measures will be implemented immediately and/or during the near term. Moreover, we believe the authorities are aware that expenditures of this magnitude if carried out over a short period would have significant inflationary pressures. Wage increases always have some inflationary pass through effect as they can directly impact consumption. We do believe inflationary pressures are on the increase due to global commodity price pressures that will be reflected later this year. Wage benefits and bonuses as well as an increase in the total civil service will add to some inflationary pressures.

The measures are geared to support the economic inclusiveness of the population and increase the filtering down process. Some of the measures have a direct hand out character but others such as housing and medical services are attempting to address essential sustainability issues. The announced social policies are designed to ease the burden of high property prices and housing market imbalances, while helping its young population cope with a mounting unemployment challenge. We find the additional housing benefits for those in need to be well timed and place. Some SR250 billion will be allocated for housing measures (to the Ministry of Housing formerly known as the General Housing Authority) as well as ordering the building of 500,000 housing units. However, we do not have any clarity about the beneficiaries of planned housing units. Also building half a million units takes time. The Real Estate Development Fund will increase the maximum facilities provided from SR300,000 to SR500,000. We believe housing is a very crucial component of the economy even if the half a million units will not be constructed in one year. The Real Estate Development Fund has received an injection of fresh capital of SR40 billion as part of the February measures.

Additional measures include, two months bonus for all civil servants, students (in public universities and part of the 106,000 studying abroad under King Abdullah’s scholarship program), as well as all armed forces personnel (active and retired).The King ordered the creation of 60,000 new security jobs within the Ministry of Interior. Unemployment benefits of SR2,000 for those seeking jobs in the public and private sector. Benefits will start in the new Hijri year. A SR3,000 is set as the minimum wage for public sector employees. The previous minimum wage was SR2,185. The creation of a national body to fight corruption and for all government projects to be checked by the anti-corruption body are important steps in order to control public corruption. Additional measures included additional spending on medical facilities (SR16 billion), building religious police facilities (SR200 million), refurbishing and building mosques (SR500 million), increasing the maximum loan facilities for private hospitals (from SR50 million to SR200 million) and higher penalties for merchants who engage in price manipulation.

The initiatives announced on Friday appear to target a comprehensive range of concerns among Saudi citizens and lend support particularly to those in lower income brackets who would benefit tremendously from an expansion in social security benefits and housing. The government must continue to make targeted efforts to entice and support those most in need of assistance. The changes required are structural and require long-term planning. Housing cannot be fixed in one or two years but the attention given by the government at this stage is on the right track. We do believe more economic measures will be announced in the following weeks, including a cabinet reshuffle.

Middle East is able to impose its presence in the global economy

Over the last few years the economies of the region witnessed growth. Tunisia and Egypt were seen as rising economies, with the stock market in Egypt even receiving emerging market status. Meanwhile the Gulf oil states boomed. Yet this economic growth was uneven, unequal and failed to satisfy its populations. Now, urgent reforms are needed, or the positive changes sweeping the region will be undone by economic malaise.

The basic facts are clear. Unemployment did fall over the last ten years; youth unemployment remained in the high double digits. Underemployment also rose, along with a sense of economic exclusion and loss of dignity. Facing challenging demographic trends, governments were incapable in addressing equity, distribution and welfare.

Oil importers (Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia) attempted to move from state-owned enterprise model to private capitalism. But these processes of privatization and opening up favored mostly the cronies of the regime who were willing to pact with the ruling elites. FDI did enter the region but most went in the hydrocarbons sector which created few jobs for nationals. Meanwhile bloated bureaucracies were not reformed, while real estate also became the prerogative of the few.

For the oil exporters (Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, UAE, Yemen) hydrocarbons were both blessing and curse, given they cushioned states from reforming and diversifying. Waste and lack of governance was also high but just like the oil importers, populations have grown.

As their economies grew, the future for the oil exporters has been convoluted by inordinate planning. In the latest oil boom of 2003-2008, the oil exporters of the Gulf competed on the same sectors head to head, wasting time and resources. Financial centers, tourism, real estate, airlines, industrial parks and aluminum smelters were viewed as the center points of growth by all.

Extensive foreign investment, which was concentrated in the hydrocarbon sector, didn’t help to increase economic diversity. Critically, Gulf oil exporters became overly reliant on expatriate labor for its private sector as nationals found refuge and protection in the public sector.

More destructively, all of the economies were handled from a distance by their leaders, entrusted in the hands of “technocrats”. Most of the leaders in the Middle East exhibited a sense of ownership amongst their own elites which was observed by society. This mean all these economies failed to compete in the global economy. In 2003, the Philippines had more manufactured exports than the entire Middle East. Pockets of excellence are found in some countries, but these are exceptions.

To succeed, Middle East economies now need a vision that it’s not hijacked by crony or other incumbency interests.

Public institutions have to be reformed and become effective and pro-business. Corruption has to be tamed by enforcing oversight rules which exist and making everyone more accountable.

For the oil exporters the road is very challenging as they need to instill urgency behind economic reforms without getting hallucinated by oil revenues.

Unlike the oil importers, the oil exporters have a huge capital base, which they now need to invest more in areas such as quality human capital in order to uplift education and training as per international standards. Also, the region has to move away from cheap infrastructure mentality to quality projects.

Renewable energy and technology could offer a better future for the oil exporters. Replacing expatriates with nationals in the work force is a key element of success. Open migration has to end and phasing out existing expatriates over a period of time will compel economies to move from low wage/low skill wage expatriate equilibrium to high wage/high skill national workforce.

For the oil importers, access to capital is a more important issue while grappling with far larger populations is not an easy task. They would have to look to global markets and make their economies friendly and accessible to international investors.

Especially if oil exporters hire more nationals, fewer nationals from the oil importing countries will not find easy jobs in the Gulf in the future. Expansion of labor-intensive export activity and entrepreneurship can absorb many new labor force entrants. Incentives given towards capital goods and intermediate goods could help incentivize local businesses and SMEs. Productivity gains are paramount as the region tries to become more globally competitive and transparent.

Businesses will become more productive and less parasitic as the government steers the development project, escaping from the trappings of special interests and rents. The region has to maximize all the economic tools available. If the employment challenge is properly addressed Middle East economies can look forward to the benefits of the “demographic dividend.”

The region has multiple chances to make it in the global economy as long as rulers and society move together in one direction.

Restructure the labor market in a revolutionary way

The current state of the GCC labor market dynamics is not sustainable as the labor force is growing increasingly. However prior to any labor reform there has to be a vision about where policy makers want to drive these economies. Dependence on expatriate labor for private sector employment and the public sector acting as the employer of first and last resort for nationals is not viable. Unlike the oil importers of the Middle East, the GCC economies are creating jobs but they happen to foreigners not nationals. In Saudi Arabia alone, some 847,000 jobs were created in the private sector in 2009 of which all went to non-Saudis. At the core of the problem it’s not the businessmen, as businessmen the world over are profit maximizers when given the opportunity. The private sector in the GCC is taking advantage of the incentives structure. Cheap and abundant foreign labor that is supportive of any undertaking. The national whose trying to look for a job will not be able to compete as the wage entry point is far higher. In fact, the nationals are unsuccessfully competing with prevailing wages in India, Pakistan and the Philippines, is a battle lost from the outset. As long as expatriates exist in abundance there will always be a shift in the labor price curve that will remain unmatched by nationals. As the cost of labor is rising for some in the sub-continent the shift to cheaper labor providers in South East Asia is obvious. The easy access to such labor is one part of the problem. The current incentives in the private sector in the GCC is for low skills and basic education supported by low wages. The challenge is to move to high skills and university education. In this environment there is little competition taking place on productivity or technology usage level and more on who hires the cheapest foreign worker. Training is little and usage of technology becomes a subsidiary input as low wage expatriate labor supplants many other inputs. And there is another predicament created in this low skills-low wages environment: potential job seekers don’t invest in their education nor are employers. If the demand of skills is low so will the supply of skills will be low so will the level of education required and sought by job seekers will be low. It is also the case that the supply of adequate skills by the education system in the GCC is meeting the requirements of the private sector. There is a skills gap but that should be addressed as more are being educated abroad now but also as a result of the greater demand within for an educated cadre of nationals. Restructuring the labor market and creating high skilled/high paid jobs for nationals will lead to greater domestic consumption and multipliers. Higher incentives could lead to higher productivity and work ethics will increase.

Moreover, employers don’t invest in training, as expatriates are not perceived as a long term investment and nationals have a tendency to job-hop, so no incentive to train nationals.

Measures have to be taken to stop the constant inflow of foreign labor together with a phasing out policy of existing foreign labor in the GCC countries. Labor laws which tend to favor and protect nationals and much less so for foreigners have to change. Firing and hiring nationals has to become far easier so as to instill a higher work ethic amongst nationals and foster labor competition. The private sector will shout and complain about losing its competitive edge and they will alarm policy makers about the threat of inflation as higher wages are paid for nationals. Inflation will not necessarily rise due to the replacement factor of expatriates with nationals. Simply put, if one national is hired for every eight expatriates that will not create inflation. The private sector will see profit margins falling and they might want to raise prices to maintain their margins instead. Policy makers might be concerned about the reaction of the business community but hiring nationals is a greater goal than high profit margins. What if students are trained in universities in their respective countries or abroad if they cannot find employment back home. As long as open migration is the preferred policy a low wage economy based on low skills and low productivity will dominate. Nationals will neither have the desire nor the incentive to compete in such a low wage environment. The much touted SMEs will not take off as long as low wage incentives exist. The spirit of entrepreneurship is stifled in such an environment. Without labor reform the public sector will increasingly have to employee more nationals. There has to be a concerted effort to phase out expatriates over time so that the private sector prepares and the economy moves to a higher wage equilibrium. The GCC economies should focus on their people.

What is next for Saudi Arabia?

Markets are beginning to price a shift of contagion from North Africa to some of the Gulf economies, principally Bahrain and Saudi Arabia. The possibility of contagion spreading to Saudi Arabia remains low although markets are pricing a higher risk premium. Bahrain’s future is a leading indicator but there is not enough clarity about short-term political outcomes.

If we learned anything during the most recent financial crisis it is that markets can get it wrong. During the recent Egyptian crisis, oil prices spiked over concerns about the transshipment of oil via the Suez Canal. Markets today are beginning to price contagion effects spreading from North Africa to, principally, Bahrain. Although it is hard to predict the political outcome in the Gulf island, markets are pricing a premium on the risk of contagion to neighboring Saudi Arabia. Aside from making any definite calls on the future outcome of Bahrain, we remain reassuring about Saudi Arabia. The chances of disruption to oil production remain distant as is the likelihood of major unrest. Markets have a tendency to differentiate less during crises and, as we saw during the Dubai debt crisis in 2009, risk premiums spiked for all. Differentiation took time, however.

Saudi Arabia’s ability to carry out distributive policies is obvious, particularly in areas that have important social significance. The government announced an estimated USD36bn spending programme (as much as 8.3% of last year’s GDP) on housing, education and social welfare on top of a 2011 budget which is the largest in its history. Saudi King Abdullah recently unveiled a string of financial support measures geared towards citizens through new unemployment benefits that stand to help youths facing double-digit joblessness rates; expansion of social security safety nets set to target lower-income Saudis; and substantial funds allocated to writing off the debts of deceased borrowers and prisoners. The royal order, which includes 19 components, strives to promote job creation, expedite the supply of housing, and improve funding for education, charity associations, cultural and sporting clubs, and professional associations.

Moreover, Saudi Arabia has the capacity to underwrite similar distributive policies, without resorting to domestic or external financing. Central bank foreign assets (SAMA) were at USD444.8bn as at December 2010 (102% of 2010 GDP), which provides ample fiscal buffers. The package announced at end-Feb will be financed from these reserves. Hence Saudi Arabia is forecast to witness twin surpluses (fiscal and current account) as oil prices continue their buoyant performance. Hence, the state has the capacity to tap into its huge deep pockets to support any short- to medium-term emergency spending programmes. We believe that the chance of major unrest within Saudi Arabia is not probable. The economic changes desired and needed are not predicated on calls for a change in the leadership structure. A cabinet reshuffle is a welcome step towards political refreshment. However, the leadership cannot afford complacency and neglect as events in the wider Middle East necessitate change. Events in Bahrain should be closely watched as they could act as a regional ‘self-reflection exercise’ for the political landscape.

There is no doubt that uncertainty about the wider Middle East will continue to impact Saudi Arabia’s CDS or could at some point impact SAR forward rates, should uncertainty escalate further. The strength of events in Tunisia, Egypt, Bahrain, Libya as well as Yemen has led most to expect the worst to come for the rest. Differentiation and re-classification of risk is warranted, but it takes time for the dust to settle. Regional stock markets will continue to reflect the higher perceived risks.

We think that markets will continue to price additional risk premiums despite the arguments put forward about Saudi Arabia’s fiscal and political capacity to weather the regional crisis. The CDS spreads have widened recently. However, they remain far below the level they reached during the Ma’an – Qussaibi defaults. Spread could remain large or widen further in the short term.

Saudi Arabia’s systemic role in the global oil market is paramount for the world economy. The kingdom’s extra capacity is 4mbpd, which can be put on to the market in a short period of time and is more than twice the total current production of Libya. We think that Saudi Arabia’s oil facilities remain under no threat and the country’s oil production will remain uninterrupted. However, the market may think otherwise at some point, should tensions rise further in the Gulf.

The role of the US in the Gulf is expected to be more vigilantly active. In the case of Tunisia and Libya, the US’s role has remained subdued due to its modest historical and diplomatic ties. However, the role the US would take in the event of Bahrain’s political landscape being radically reshaped, as it is the base for the fifth fleet, remains to be tested. There is little evidence to lead us to anticipate Saudi Arabia being the next country to face domestic unrest, turmoil, violence and calls for regime change. We do believe that Saudi Arabia will embark on various economic and reforms that have a wider inclusive and distributive purpose. However, the end-game for the rest of the Middle East is far from clear at this point.

Five ways to bring investors back to Egypt

What are investors to make of the transfer of power in Egypt?

Confidence and credibility are important hallmarks that international business needs to protect capital. The military can instill a sense of security and safeguard the state, but governments must create confidence in the system through deeds.

Although the U.S. has been Egypt’s ally, it failed to bring any meaningful economic change to the North African country since the 1980s. Decades of U.S. aid helped create a parasitic class of beneficiaries and an economy that urgently needs to discover new ways to revive its engines of growth.

How can it be that Turkey has a slightly smaller population, but its gross domestic product is almost four times bigger than Egypt’s? The answer lies in five obstacles that the new regime in Cairo must tackle immediately.

First, the crony capitalism that defined business-state relations since the 1970s and grew stronger during the Mubarak era must be given clear limits. Favoritism was rampant under President Hosni Mubarak, so much so that even the businessmen who are today touting democratic values were once the former president’s beneficiaries. The new regime should be careful not to embark on a witch-hunt that targets the very elements that the country depends on for its economic recovery.

Justice for All

Weeding out corruption after the departure of Ferdinand Marcos in the Philippines and President Suharto in Indonesia has been a long process. Bringing everyone to justice isn’t easy because cronyism often doesn’t breach any laws. The government must define the limits of the state in accordance with the demands of the protesters.

The second challenge is Egypt’s economic direction. The entrepreneurial spirit has to be enhanced. Banks must support such efforts and gear less capital to large and well-established firms, and more toward small and medium-sized enterprises. Egypt’s advantage is clearly in tourism and services, and some manufacturing. The nation can build on that and begin to increase the opportunities for small entrepreneurs to create businesses in the tourism industry.

The third challenge for Egypt is job growth. Currently, the country needs 650,000 to 700,000 new jobs each year and it barely generates half that. Even with strong growth, the private sector has failed to create enough employment. The labor market suffers from a mismatch between demand and supply of adequate skills. Underemployment is pervasive and the phenomenon of the working poor is rising.

Impossible Task

Creating enough jobs in the short to medium term is almost impossible. The economy will have to grow about 11 percent a year in order to employ those currently out of work and new arrivals in the labor market. The growth of the Egyptian economy over the last few years was 5 percent to 7 percent but it didn’t help much of the population. Income inequality rose and the perception of inequality grew even more.

The fourth challenge is income distribution. Society has to realize that building an economy is much harder than just destroying the figurehead of a regime. Inflation, particularly food prices, is a sticky issue that has to be addressed as it has hit people on low incomes. In a country where agriculture is an important contributor to economic growth, it is baffling to see food prices surge 18 percent.

Equitable Distribution

Inflation is unbearable for most Egyptians and has forced real incomes to fall. At the same time, capital concentration in the hands of the top 20 percent of the population has doubled and, as a result, the middle class has shrunk. More equitable wealth distribution will take time.

Fifth, red tape is stifling growth. In a policy speech in 1989, President Hosni Mubarak said Egypt’s bureaucracy “seeks to make the easy difficult and the possible impossible.” Bureaucratic procedures and an overlap of conflicting jurisdictions among ministries is a structural problem with no quick solutions.

Many people were ready to draw parallels with the fall of the Berlin Wall in 1989. Yet few remember that once the euphoria settled, Germany paid a hefty bill for its unification. Egypt doesn’t have a much wealthier half in waiting.

Above all, Egypt needs a Mandela-like figure who can unite the country and patiently push ahead. Even with such a leader — and there are no signs of one so far — the road won’t be easy.