Wednesday, March 30, 2011

Potential economic benefits from uprising in Egypt


                             fig 1 : Egyptian Flag ( source: 1uptravel.com)

In the last blog, the author discussed about the short term loss on account of the Arabic Uprising. Though there have been losses of high magnitude, destabilizing individual economies for the time being, the uprising can bring a new change in the entire region, not only in socio -political sphere, but also in the economic one. The region, known for autocratic governments, corrupt bureaucratic machinery and lack of liberalization always struggled hard in achieving its full potential. The given uprising followed by regime change in many of the individual nations can help building a new Middle East, marked by transparency, efficiency and inclusive growth. The following blog will do a brief analysis of  the future prospects for Egypt, one of the largest Arab state and focal point of this uprising.  

Egypt

Egypt had been the focal point of the latest Arab uprising. The protest, breaking out in January end, finally ended up with extirpating the Mubarak regime. Though facing the heat of high inflation and huge loss in tourism sector, one of its prime sectors, Egypt holds a strong future ahead, provided the much needed transition into a stable and transparent democracy happens as soon as possible. 

Recent Situation #

Egypt is a US $ 188 Billion economy (nominal) with a population of 84 Million and a per capita income of US $ 2,450. In recent years, it had shown a decent growth in the range of 5-7% (fig 2), coupled with reform majors taken by the Mubarak regime; nevertheless 30% of population is living below the poverty line (Stuart Kauffman, 2011) with around 11.9% of the active population unemployed. In terms of various human development indicators, it had so far shown sub standard performance with a literacy rate of 66%, internet penetration of 21 % and had been ranked 101 out of 169 nations in the Human Development Index indicator (HDI). With a rank of 96 out of 179 nations in the “Economic Freedom Index”, it is considered as a less free economy. Tourism plays an important role in the economy, generating around US $ 10.8 Billion as revenue in 2009 and employing 12% of the work force. Another major source of revenue is oil and petroleum exports, (fig 3 gives a brief analysis of export items of Egypt in the year 2007) though Egypt is not considered among the major global petroleum exporters, yet valued at US $ 8 Billion, oil and petroleum exports constitutes around half of Egyptian exports. Other areas of foreign currencies are remittances from Egyptians living abroad and Suez Canal. (Dinarstandard, 2011)


fig 2: GDP Growth Rate of Egypt (source: Gafi.net)

                                        fig 3: Major export items of Egypt in 2007

Though Egypt had shown strong growth in the recent times (as shown by the figure as well), its economy has some major flaws, which are as follows (Isobel Coleman, 2011):        

 Egypt had grown with the rate of 4% during the 90s. In 2004 the Mubarak regime implemented major reforms, including institutional changes and reduction of tariff and taxes, there by making a growth of 6-8% in recent years, even during the global economic slowdown Egypt maintained a decent growth of 5%, but in spite of such growth there is a huge amount of economic inequality in Egypt. Much had trickled down to the poor populace.
  •        Recently the food inflation had been very high in Egypt. Egypt is one of the major wheat importers and spends around US $ 15 billion in food subsidies for the people living below the poverty line. 

  •           Egypt had made phenomenal progress in its education sector, with near 100% enrollment of girls and boys in primary schools. Even the enrollment for tertiary education has increased from 14% to 28%. In spite of such commendable success, there has not been a very concrete link between the education system and growth of the nation. The education system had been unable in equipping its populace to be employed by the private sector. Hence the rate of unemployment is around 30% among the university graduates.  

  •             Though Egypt seems comparatively liberal on paper, most of the businesses are still run with the help of personal contacts in the govt. authorities, there by undermining the innovative and entrepreneurial  abilities  of the educated youth.    

Current economic turmoil


Egypt had been hit hard by the uprising. It had been calculated by a French bank that at the height of revolution Egypt was loosing US $ 300 Million a day (Heather Murdock, 2011). Uprising, which happened during peak tourist season, ended up one Million tourists leaving Egypt, there by hitting hard a very important source of foreign currency. As an after effect of political turmoil; banks are conscious of lending and there had been a significant decline in credit growth; in the light of more govt. spending, the fiscal deficit of the govt. is expected to touch double digit; food supply had been affected in many areas, resulting in high price of food items; the Egyptian stock market was closed for five weeks, resulting in huge losses whose exact value is not known; many of the international corporations like Coca Cola, Volkswagen, General Motors, Marico etc have discontinued their operation for the time being. The annual growth rate, expected to be 6% in the beginning of the year had been revised to 4%. (Dawn.com, 2011)    

The way ahead: a new begining

Egypt had definitely been affected by the uprising in the short term; the stock market plunged by 9 % on 23rd March, 1st day of opening of stock market after two months. As described earlier the growth forecast had been revised by one third of the earlier projections. It is expected that it will take another one/ one and half years for the Egyptian economy to fully stabilize. In the midst of the present crisis there are some signs of recovery: many of the multinationals like Shell, Nestle, Asian paints etc have resumed their work, industrialists have vowed not laying of workers and to get back to the original condition soon, tourism business is expected to restore soon. But what is really exciting is the great change expected from the impending socio political restructuring and constitutional reforms, coupled with economical reforms and institutional changes. If every thing falls in place, this short term economic turmoil will evaporate sooner or later giving way to a democratic, transparent and development oriented Egypt where the benefits of growth, developments and liberty will be equally shared among various sections of the society. The following points can play an important role in defining future, desired by the Egyptians in large: 

·        Providing stability: Mubarak regime was providing the needed stability at the surface, but beneath, there was a tremor, resulting from the collective rage of the people, towards the corrupt and authoritarian Mubarak regime. This would have been making investors wary of investments, fearing that a wide spread protest might spread anytime, making the current system collapse (and the same happened). If after the uprising Egypt successfully transforms itself into a stable, transparent and liberal democracy, there will be a boost in the investor’s confidence in the market, leading to an increase in investments over the period of time.

·        Further education sector reforms: Egypt have made considerable investments in the education sector, there by achieving high enrollments in schools. But as discussed earlier, the system based on rote memorization, does not help individuals, getting job with the private sector. Egypt needs to further reform and streamline its education system, helping individuals in getting jobs with the private sector and benefiting from more globalization and privatization. (Knw@asb, 2011)

·        Making Egypt more competitive: Egypt along with other countries in the MENA region had not been benefited much from globalization owing to its poor competitiveness. So far since 1990s the region had just been able to maintain its share of per capita export where as many other emerging economies have doubled it. In order to alleviate poverty and provide job for its vast pool of youth, Egypt needs to become more competitive by reforming education sector, further integrating its economy with the world economy, streamlining further deregulation and investing in infrastructure. (Knw@asb, 2011

·        Cutting subsidies: Egypt provides petroleum products at deep discounts there by benefiting its rich class, since petroleum is primarily consumed by the richer sections of the societies. Rather than this, the given money can be diverted to labor incentive economic policies, there by enabling Egypt in employing its vast mass of youth and also boosting exports.

·        Silicon Valley of Middle East: The offshore outsourcing industry at Egypt is valued at US $ 1.1 Billion with global players like Microsoft, Google and Hewlett Packard ,having its operation units in Egypt. On the A T Kearny index of 2009, it ranked 6th as a global outsourcing destination, ahead  of countries like Jordan, Israel and Morocco. Egypt on account of its; vast pool of multilingual people speaking a wide range of languages such as English, Arabic, German, French, Spanish etc; proximity to major European business centers; overlapping time zones and working days on Saturday and Sunday (Egypt has non working days on Thursday, Friday) has the potential to transform itself into silicon valley of Middle East.   (Thomas White Global Investing, 2010)

·        Integration with Israel: during the past few years there had been some warmth in the Israel-Egypt relationship with Egypt supplying natural gas to Israel. The new govt. at Egypt must try carrying this relationship forward. Both, Egypt, on account of its large pool of hardworking people and natural resources as well as Israel, on account of its technological know how and Western orientation has ample space for economical integration. This will not only bolster peace in the region but will also make huge economic sense for both the strong forces from the Middle East. 

·        Using Turkey as the role model: After the revolution, Egypt basically can have  two role models for guiding itself through the future, Iran and Turkey and it must reject the former while select the later. Turkey, a very moderate, liberal and prosperous Islamic society with Western orientation can provide guidance  to Egypt in deciding  its future course of action. The Turkish model will ensure prosperity and liberty for Egypt along with commitment to its rich religious and cultural heritage. (Knw@Asb, 2011)      


# : most of the data are with respect to the year 2009

Reference:

1>  Stuart K, 2011, A new economic future on the horizon, npr.org, available at < http://www.npr.org/blogs/13.7/2011/03/07/134127499/egypt-and-israel-a-new-economic-future-on-the-horizon. >

2>  Dinar Standard, 2011, Egypt revolution: business facts and updates, available at < http://dinarstandard.com/challenges/egypt-crisis-business-facts-updates/ >

3> Heather M, 2011, Egyptian economy: facing the unknown, voiceofamerica.com

4> Dawn.com, 2011, worries about fallout of unrest on Egyptian economy, available at < http://www.dawn.com/2011/03/10/worries-about-fallout-of-unrest-on-egypts-economy.html>

5> Isobel C, 2011, Egypt’s uphill economic challenges, www.cfr.org, available at  

6> Knowledge@ Australian school of business, 2011, Uprising in Egypt: Rebirth of an ancient land, available at < http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1332>

7> Knowledge@ Australian school of business, 2011, Uprising in Egypt: Rebirth of an ancient land, available at < http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1332>

8> Thomas White Global Investing, 2010, Egypt: the new outsourcing hub, available at < http://www.thomaswhite.com/explore-the-world/postcard/2010/egypt-outsourcing.aspx

9> Knowledge@ Australian school of business, 2011, Uprising in Egypt: Rebirth of an ancient land, available at < http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1332

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