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Egypt's Uphill Economic Struggles

Author: Isobel Coleman, Senior Fellow and Director of the Civil Society, Markets, and Democracy Initiative; Director of the Women and Foreign Policy Program
February 2, 2011

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The youth-led demonstrations that started in Tunisia in December and spread to Egypt in January have likely claimed two governments. Egyptian President Hosni Mubarak announced yesterday that he would not seek office again, signaling the beginning of transition in Cairo. Still, crowds swarm the streets of Egypt's main cities and no doubt will continue to do so until they are assured of real political change--not just a passing of the baton to a hand-picked Mubarak crony, but a wholesale restructuring of the government, complete with constitutional reforms that allow for open elections.

Much has been made in the press about the economic roots of the revolutions underway in the Middle East, and these are certainly a significant factor, but what has been sustaining the protests is a quest for freedom. Indeed, Egyptian demonstrators have been singularly focused in their demands since they first took to the streets: No more Mubarak. This week, the swelling crowds had a near-celebratory air about them, as they appeared to inch closer to their goal of saying good riddance to the only leader they have known for the past thirty years.

No matter what emerges from this upheaval, it is likely that any jubilant mood will dissipate as Egypt's harsh economic reality sets in. As revolutions in other parts of the world have shown, removing a corrupt, authoritarian leader through people-power is the easy part. Constructing a new system with inclusive, transparent institutions that can meet the heightened expectations of the people is far harder. Resorting to populist economic strategies--in particular, a return to higher subsidies for basic commodities and higher public sector wages--will be tempting, but no more affordable than before the revolution.  Any new government still has to find ways to feed its huge population and deliver basic services.

Egypt faces three distinct economic challenges that point to tough times ahead. First, rising income inequality and a failure to address root poverty have given rise to widespread economic grievance. Gains from structural reforms and increased growth in recent years have not trickled down to the population at large. Beginning in the 1990s, Egypt began to implement a series of reforms in line with terms set by the International Monetary Fund and other institutions, in particular reducing debt and encouraging privatization. Liberalization picked up steam after 2004 when Mubarak put in place a so-called "dream team" of economic ministers who relentlessly slashed tariffs and taxes, courted foreign direct investment, pursued trade agreements, and tackled the country's stifling bureaucracy. (A group of Egyptian entrepreneurs recently boasted to me that it now only takes a few days to set up a new business, although it still takes two years to shut one down.) After averaging about 4 percent in the 1990s, growth shot up to 6, 7, and even 8 percent in the years prior to the financial crises of 2008. During the global downturn, Egyptian growth slowed but did not turn negative, and economists were predicting growth of 5-6 percent for this year. However, ordinary Egyptians felt they were not reaping the benefits of this expansion.

It is the widening of the gap between rich and poor, as much as the absolute disparity, that has fueled frustrations propelling the current uprising.

During a visit I made to Egypt last week, the contrast between rich and poor was readily apparent. On the road from Cairo to the new campus of American University in New Cairo, gated communities with names like Beverly Hills, Mayfair, and Le Reve are under construction, with stand-alone villas going for anywhere between $250,000 and well over $1 million (before the unrest). Meanwhile, in the small town of Darshour we visited forty kilometers south of Cairo, families live in mud houses along potted dirt roads lined with garbage and raw sewage. They have few material possessions, apart from cellphones and television. In other words, while they are poor, they're connected to the outside world in unprecedented ways, reinforcing a sense of relative deprivation.

Poverty has long been a challenge in Egypt, with the worst levels of poverty among rural poor in Upper Egypt. (By most estimates, more than a third of Upper Egypt's population lives below the poverty line.) Urban poverty has also been a chronic issue, with ever-expanding slums around major cities as more of the population leaves the arid countryside for cities every year. But while the percent of the population living below the poverty line decreased over the past decade--falling from about a quarter of the population in 2000 to less than 20 percent before the 2008 global downturn--it jumped back up a few points in the past few years, even as per capita GDP increased countrywide. It is the widening of the gap between rich and poor, as much as the absolute disparity, that has fueled frustrations propelling the current uprising.

Second, rising commodity prices have exacerbated Egypt's economic situation and stirred instability. In early 2008, grain prices soared, leading to bread riots throughout the country and clashes in the Nile Delta city of Mahalla al-Kubra. Egypt is the world's largest wheat importer, buying about half of its wheat and other staples from abroad to feed its population of eighty million people. It spends upwards of $15 billion a year on food subsidies--an economic lifeline for those living at or below the poverty line. In recent years, inflation has become more acute, climbing to 12 percent in 2009 and 13 percent in 2010 in a period where wages did not keep pace and unemployment increased.

Third, while Egypt has expanded access to education, it has failed to improve quality and link progress in education to the needs of the economy. Starting from very low levels four decades ago, Egypt has now achieved near-complete enrollment of boys and girls at the primary level and similarly large gains at the secondary level. Even tertiary education has doubled since 1990, from 14 percent to 28 percent.

Reports by the World Bank (PDF) and private consultancies (PDF), however, have pointed out the inability of Egypt's education system to produce sufficiently prepared graduates, as well as the inability of the country's private sector to absorb qualified graduates. They attribute this in part to the private sector's exclusivity. The most successful companies are those with cozy relations with the government, usually based on personal ties and informal influence. This incestuous business environment prevents the easy entry and exit of firms. It also discourages entrepreneurship, because the public perceives that connections are more important than competitiveness. As a result, even though unemployment is roughly 5 percent among the poor and illiterate population, it exceeds 30 percent for university graduates under the age of thirty. Unemployment is also extremely high among youth in general, exceeding 30 percent for 15-24-year-olds. Due to the country's youth bulge, this means unemployment is highest in the largest segment of the population. Again, the result is a big gap between expectations and reality.

Reports by the World Bank and private consultancies have pointed out the inability of Egypt's education system to produce sufficiently prepared graduates, as well as the inability of the country's private sector to absorb qualified graduates.

While the eventual political outcome of the current unrest remains unclear, the economic repercussions are all too apparent. Uncertainty is reflected in the price of oil, which this week topped $100 per barrel, partly on concerns about the stability of Suez, through which the majority of Europe's oil passes. It is also reflected in Egypt's stock market, which has fallen 17 percent since January 24. Coca-Cola, General Motors, Volkswagen, and other international corporations are closing plants and sending workers home or flying them out. As for the Egyptian economy itself, it has ground to a halt. Many banks and ATMs are closed, limiting options in this predominantly cash society. People do not have enough money and are having to cut back on meals. Food stores are running low in major cities.

Whatever government emerges from Egypt's turmoil will inevitably have little economic room to maneuver. The country relies heavily on trade through the Suez canal, which generates $5 billion in shipping receipts alone and generates much more in other economic activity. Tourism is another economic driver, employing 12 percent of the country's population and yielding over $11 billion annually. Foreign direct investment has also been a growth spot for Egypt in recent years, rising nearly 10-fold over the past decade to $7 billion last year.

Egypt's new government will be under immediate pressure to restore the confidence and stability required to keep shipping, tourism and foreign direct investment humming. Its ability to address the longer term, structural factors of persistent poverty, vulnerability to rising commodity prices and an uncompetitive educational system will determine whether it can meet the demands of its people.

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