March 29, 2011

USIP’s Raymond Gilpin, co-author of “Defusing Egypt’s Demographic Time Bomb,” discusses how proper management of Egypt’s economy can help ensure a stable future.

• How much is the future of Egypt dependent on economic factors?
• What are the economic dimensions of democracy struggles we are witnessing in Egypt and the region?
• What barometers matter in conflict-affected countries like Egypt: stock markets, employment rates, GDP?

How much is the future of Egypt dependent on economic factors?

Protesters cited the Mubarak regime’s inability or unwillingness to tackle corruption and unemployment core issues underpinning the events that have unfolded in Egypt since January 25, 2011. Corruption, poverty and unemployment in Egypt have a lot to do with the structure and management of the economy.

Even though Egypt’s gross domestic product (GDP) had been growing by over five percent each year and billions of investment dollars were flowing into the country, most citizens did not enjoy the benefits. While a small group of connected Egyptians got richer and corruption was rife, most citizens found it hard to make ends meet or find jobs. This created a powder keg of discontent which sustained the revolution and contributed to the ousting of the Mubarak regime. The success and sustainability of ongoing reform in Egypt will depend on the extent to which these economic factors are satisfactorily addressed. Reformers should not only focus on macroeconomic aggregates like annual growth in productivity, unemployment, inflation and stock market indices. They must drill deeper and ask questions like: Which sectors are growing and which are being left behind? How is government revenue most effectively spent? How could income inequality gaps be bridged? What mechanisms are most effective at improving transparency? How could vulnerable groups (youth, women and the elderly) be provided with adequate social ‘safety nets’? What additional steps need to be taken to promote and facilitate the creation of private sector jobs?

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What are the economic dimensions of democracy struggles we are witnessing in Egypt and the region?

The recent political upheaval in North Africa and the Middle East speak to the heart of political economy analysis. Citizens are increasingly demanding three things: first, a voice in determining how they are governed; second, assurances that natural resources and public funds will not be misused or abused; and, third, equal access to economic opportunities and wealth creation. Thus, the development of more participatory and accountable forms of governance must be complemented by economic growth that is inclusive and led by the private sector. The three most important dimensions at this stage are: ensuring that robust economic growth translates into broad-based economic development for all; introducing strategic measures to progressively reduce unemployment and underemployment; and designing targeted mechanisms to protect vulnerable groups. A new political dispensation is unlikely to succeed if these economic issues are not addressed.

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What barometers matter in conflict-affected countries like Egypt: stock markets, employment rates, GDP?

All of the indices matter. Let us consider each metric. The stock market provides some indication of investor confidence in the economy. Egypt’s stock market reopened on March 27 since trading was suspended on January 27. Although there has been some volatility, most observers are generally pleased with the performance of the EGX100 index which had been buoyed by an injection of $250 million by the Egyptian government and regional investors looking for cheap stocks. These developments bode well for wealth creation and overall productivity. However, the more important ‘sub barometers’ would be: Are small and medium scale enterprises involved in this wealth creation? How fast is the gap between the rich and poor widening? Are transactions transparent? Are oversight and regulatory mechanisms effective?

According to most estimates, Egypt’s GDP is forecast to fall to roughly three percent this year and possibly rebound to six to seven percent in 2012 if all goes well. This suggests a slow-down of economic activity over the short term. A closer look at these projections would reveal that sectors like tourism and agriculture are likely to recover more slowly than the petroleum sector. Rather than target a significant GDP increase in 2010, Egypt should be putting strategies in place to foster more balanced and inclusive growth. It is of paramount importance to have growth that would put more Egyptians to work and generate more wealth for the emerging middle class.

Reducing unemployment is going to take a while in Egypt. The government should resist the temptation to create government jobs for the unemployed youth as this is not necessarily sustainable, efficient or productive. The emphasis should be on creating a pro-business environment that would enable the private sector to create jobs. Reducing corruption, rationalizing the regulatory framework and facilitating the adoption of skills and technology would go a long way in establishing such an environment.

In Egypt, as in most conflict-affected economies, the barometers matter --- but the story behind them matters much more.

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Explore Further

• Eye on the Middle East and North Africa
  USIP Experts Comment on Libya, Syria, Yemen, Egypt and More | March 2011
• Defusing Egypt’s Demographic Time Bomb
  Peace Brief | March 2011
• Is Egypt 'Too Big to Fail'?
  On the Issues by Raymond Gilpin | February 2011