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Arab Economies Ignored

Ignore the economy at your peril. That is the lesson Arab leaders of transitional countries should learn from the Egyptian military’s removal of Mohammed Morsi from power, but one that continues to fall on deaf ears.

Rather than embrace the economic demands of protesters from across the “Arab Spring” countries in 2011, the new governments of Egypt, Tunisia and Libya have failed to address the key economic problems that brought people out to the streets in the first place.

Instead, they’ve done something much more uninspiring, which is to plaster over the status quo, and present it as a new package. 

The result is angrier, more frustrated citizens and Arab economies that are just as unsustainable as those in 2010.

In Tunisia, the country’s chronically high unemployment, high prices and slow economic growth has triggered a touch of nostalgia among some for the reign of Ben Ali. Meanwhile in Libya, despite impressive economic growth numbers, the country continues to face a fragmented political landscape and tribal power struggles, which the IMF says “complicate efforts to reestablish security and the rule of law”, and make for a vulnerable oil price.

Egypt is the most worrying of all.

The huge numbers of people appear to have embraced the military, believing the generals are acting in the national interest. Nothing could be further from the truth.

Successive governments have repeatedly crafted messages intended to tug on the patriotic heartstrings of the people, ignoring the real economic challenges for as long as they can and until someone else takes over.

Islamist president Mohammed Morsi presided over almost two sets of ministers after just one year in power, as political tensions alienated large sections of Egypt and led to mass resignations. And his plans for an “economic Renaissance” were exposed for what they were: a mirage. He did not have any control over the economy and instead, wasted his presidency trying to please his Islamist base.

But in the aftermath of his downfall, egos have quashed rational thinking and a naive optimism that Egypt is now saved by the army has blinded some of the best Egyptian economic thinkers.

PIMCO’s Mohammed El Erian, writing in the Financial Times, talks of the main factors that will drive “Egypt’s eventual recovery” (Rebel Economy’s own comments in square brackets):

First, Egypt has several economic growth, income and employment engines that can be easily restarted once calm is restored. [Egypt isn't going to be "calm" for a long time, and do not convince yourself tourists will think any different]

Second, the country’s internal finances, while messy, are not beyond repair. [He partly means subsidy reform, which no one has been able to touch for 60 years...]

Third, Egypt can alleviate immediate foreign reserve and currency pressures through emergency financing on highly attractive terms. [How convenient! Enter the sugar daddies, Saudi Arabia, the United Arab Emirates and Kuwait. Because pumping billions of dollars into Egypt's coffers really helped last year too.]

Aside from coming across as grossly misinformed about the ability of Egypt’s new interim leaders to tackle problems that would be difficult to implement even without the backdrop of a military-led coup, this type of thinking comes down to plain, old gloating.

And nobody likes someone who dwells on another’s misfortune with smugness.  

For example, Egyptian billionaire Naguib Sawiris, whose family is the richest in Egypt, says he will invest in Egypt “like never before”. But this says more about the blurred lines between Egypt’s biggest business empires and the ruling government, than an endorsement for a popular new leader.

The last years of the Mubarak era were marked by increased public resentment against the perceived growing influence of businessmen on government, and not something the new interim administration should repeat.

Hazem El Beblawi considered part of high-powered economic team
Hazem El Beblawi considered part of high-powered economic team

And take this highly-politicised investor note from Pharos Holding, a Cairo-based brokerage firm, which describes the new prime minister [Hazem el Beblawi], his advisor [Ziad Bahaa El Din], the finance minister [Ahmed Galal] and the planning minister [Ashraf al-Arabi] as the “fantastic four”:

It is day 17 and the light at the end of tunnel is getting brighter, despite sporadic incidences of violence. Egyptians are no longer willing to see their lives put on hold. It has already been put on hold for almost two years and a half.

Now that the final structure of the interim government is almost complete, we view the economic team as significantly more coherent and competent than all the teams appointed post the Jan 2011 revolution.

The fact that they are well-qualified doesn’t overshadow the very real polarisation in Egypt.

How can these economists enact their ideas if the streets are awash with blood and Muslim Brotherhood leaders are locked up without charges? Morsi’s failure was not being able to bring disparate groups together to focus on rebuilding Egypt. What sign is there that a new government will do any better, considering the dramatic exclusion of the Brotherhood and their allies?

In fact, the planning minister, Mr Al Arabi, has already made it clear there is no need for an International Monetary Fund loan now.

That may seem like a very good move, considering Egypt has just received $12 billion in loans, deposits and oil from the Gulf, but that money is sure to run out in a few months, and then Egypt will be asking for more money from its sugar daddies.

Adlyaid

Let’s be clear about Mr Al Arabi’s motives.  He is playing a political game, and not working in the best interest of the country.

The IMF loan is highly unpopular but one of the few chances Egypt will get to rightside its budget and seriously sort out its deficit by implementing energy subsidy reform, correcting the tax collection system and raising taxes for the middle class and wealthy.

The effect of IMF-mandated reforms is not to make Egyptians poorer, but give the government room to spend its revenues in the right place. Healthcare and education are being neglected so that Egyptians, rich and poor, can have cheap fuel. Cutting that subsidy will hurt but it will also make life better for Egyptian children who face the very real prospect of no jobs when they graduate from substandard universities and high schools.

Some economists argue that Egypt may need to negotiate a larger loan now given its fiscal needs.

It’s also politically advantageous for the interim government to hold off on any contentious talks until elections in February. Why would the temporary government do anything to push through reforms if they have the option of passing the buck?

And what happens when people rise up against another government that fails to improve daily life? Will they call for the military to rid Egypt of the same government they ushered in?

The outright refusal of an IMF loan sets a worrying precedent for economic recovery in Egypt. Mubarak, too, was not keen on the IMF loan, and instead appeased the masses by pouring money into the public sector and systemic reforms.

It’s becoming increasingly clear that  Mubarak-style economic policies are likely to return, minus the big businessmen of the past like Ahmed Ezz.  That might be good for the Sawiris’ of Egypt, but it won’t be for the ordinary Egyptian. Mubarak’s neo-liberal policies helped increase gross domestic product to $145 billion but only widened the gap between rich and poor.

Some are relying on the idea that the trained economists appointed to a technocratic government will have a methodological approach to the economy, without politics playing a role. But this is very hard to believe.

As Avi Asher-Schapiro writes in the Jacobin blog:

Technocrats, of course, are not above or outside of ideology and they do not operate apart from politics. They preside over a system that distributes resources and divides political power. By their very nature technocrats are antithetical to revolutionary politics; they grease the gears of the machines that revolutionaries seek to dismantle.

The developments of the last fortnight are emblematic of Egypt’s struggle to impose any alternative economic plan.

With the budget deficit expected to hit 12% and economic growth still stagnant, jobs are hard to come by and the country is turning to the Gulf for a “quick-fix” to its energy and hard currency shortages.

Instead of just accepting whoever is made minister, prime minister and president, Egyptians (including high-profile members of the business community) should hold the interim government to account.

Mr Beblawi and his team should be grilled for answers and a plan, not adorned with praise.  



5 Comments


  • Wael Fayek Saleh
    Posted July 16, 2013 at 6:40 pm | Permalink

    Dear Farah,
    A very good sensible analysis of the situation over here. I think that real changes will be unlikely. This is likely to fuel continuing unrest further. It is my gut feeling that the MB know well the above and are playing on it. The Interim gov. are giving them their best chance to return back. We have been trapped in-between.
    Thank you and your views are great to read.
    Wael

  • Posted July 17, 2013 at 4:32 pm | Permalink

    While everything you said is true and factual, when you have someone drowning with an anchor tied around his neck, your first priority is to throw him a life line, just keep him alive, vis a vis discussing his future and what he will do for you if you saved him, as a precondition to get him out of the waters. I think these “sugar daddies” aren’t merely charitable, rather they have had enough economic sense to see that it is not a country beyond repair.
    However an interim cabinet should not negotiate debt for the next one, that shouldn’t even be a mandate, all they should do is stabilize the country, get people of the streets, back to work,reassure local investors, may be a few willing Arab investors, and keep the deficit at bay.
    Yes, they have no choice but to keep the subsidies for the next 6-12 months.
    My second point is, Egypt in not beyond repair if you look at what Greece went through (and still to a degree), a much worse crisis. Their bailout needed 3 enormous packages, very similar to Egypt in many ways, the EU (sugar mama) forced creditors to accept 50% write off. (yet they pulled it off)
    I think Egypt’s industrial infrastructure and labor cost for future investors, is far more attractive than Greece or Cyprus. (tourism on the other hand is a lost cause)
    I am sure you are familiar with the saying: you can’t have your cake and eat it too!
    Either democracy and pain or autocracy and prosperity (China, Russia, Turkey… i might add).
    I think we need a new term for Egypt politics. Egymocracy, Egyptocracy, Egyptatorship.( to borrow a page out of the great English writer, Paul Johnson).
    Getting out of the waters and keeping the victim alive for should be your first priority at all cost.
    it would be advisable for the next government should be put to working NOW on negotiating with the IMF independent of the interim one before they take over,
    That can be done by grooming the next group for the job asap.
    it is Illogical and unfair to task and interim administration with saving the economy knowing it has a 6 months shelf live.
    Don’t write their obituary yet!
    Good luck!

  • Posted July 18, 2013 at 7:40 am | Permalink

    There is no point blaming a country’s economical failure on a president, a political party, or a government. There is no government who can magically create job opportunities, attract investments and boost the economy while there is continuous instability. Egypt’s current situation is a bunch of political parties fighting for power with no one having their interest on Egypt’s Economy, and the well being of the Egyptian People.

    I personally think Morsi’s presidency has failed, however, I do believe that the right step was to wait for the next election period, meanwhile work hand in hand with the government, maintain security to protect the backbone of Egypt, it’s touristic sector
    http://mecometer.com/country/egypt/economy/
    http://mecometer.com/whats/egypt/gdp-decomposition-by-sector/
    http://mecometer.com/whats/egypt/unemployment/
    http://mecometer.com/whats/egypt/gdp-growth-rate/

    http://mecometer.com/image/linechart-country-historic/egypt/gdp-growth-rate.png
    http://mecometer.com/image/linechart-country-historic/egypt/unemployment.png

  • Farah Halime
    Posted July 22, 2013 at 9:50 am | Permalink

    Very valid points Mr Maximus! Thanks.



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