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.
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.
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.