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EGYPT: Unrest poses short-term economic challenges, long-term opportunities

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[Editor's note: Analysts at the Carnegie Endowment for International Peace are included among contributors to Babylon & Beyond. Carnegie is renowned for its political, economic and social analysis of the Middle East. The views represented are the author's own.]

Carnegie logo Egypt’s nationwide protests have come at a significant cost in the short term.

Economic growth is projected to decline, job losses and poverty to increase, inflation to heighten, and the budget deficit to expand. If mass protests continue, the economic damage may be considerable.

But if a smooth transition takes place quickly and the right reforms are implemented, Egypt’s economy will come back stronger.

The unrest in Cairo, Alexandria, and other major cities has disrupted production and service deliveries, spread fear among tourists and led investors to reallocate their portfolios away from Cairo’s stock market to safer destinations — all hurting Egypt’s economy.

Most shops and markets have been closed. Food prices have soared by more than 15%. Tourism — which provides more than 2 million jobs and around 10% of the country’s economic output — has also suffered, with Egypt losing an estimated $100 million a day since the uprising began.

In addition, Egypt’s stock market has plunged by 21% since early January.  Large outflows of foreign portfolio investments from Egypt to alternative markets are likely. And Egypt’s sovereign credit rating was downgraded by international rating agencies, making it more expensive for the country to borrow money.

Faced with this situation, the government will need to address major economic challenges and deep social imbalances in the coming years. Its short-term priority, however, should be to return Egypt to “normal” economic activity.

Egypt’s government will need to restore economic confidence by signaling to domestic and foreign investors that the country is heading toward a stable, transparent and competitive business environment. With that confidence, tourists will return to the country, outflows of foreign exchange reserves will cease and economic growth will resume.

When the new government is elected, it must focus on social issues by fighting poverty and inequality and stimulate the creation of decent jobs. Today, more than 40% of Egyptians earn less than $2 per day and large inequalities exist between rich and poor.

To do this, Egypt will need to reform its tax system, crack down on tax evasion, and adopt a progressive and redistributive taxation scheme. Egypt must also revisit its universal subsidy system that absorbs more than 8% of GDP and over one-third of public spending. Though politically popular, studies show non-targeted subsidies benefit the rich more than the poor.

To mitigate the impact on the poor, Egypt must increase the minimum wage in both the government and the private sector and implement appropriate safety-net mechanisms. Finally, policymakers should shift fiscal resources from subsidies to public investments in health, education and employment policies. These steps will help prepare Egypt for a brighter economic future long after the crisis has passed. 

 -- Lahcen Achy in Beirut

Photo: Pedestrians walk past closed electronics stores with empty displays in Cairo on Feb. 7. Credit: Shawn Baldwin/Bloomberg

Comments () | Archives (2)

Egyptian economy was growing rapidly during the last years. The problem is primarily demographic in its nature. The workforce is expanding too fast. It should take at least a decade for the rate of new entrees on the labor market to stabilize. Raising the minimum wage or diverting investment into so called descent jobs can only exacerbate the problem since what Egypt needs is low paid low tech jobs that give maximum return in terms of new workplaces created per unit of investment. The media is concentrated too much on educated graduates who dominate the demonstrations. Yet, 30%-40% of Egypt's population is illiterate and many others don't have university diplomas and these people also need jobs.

Egypt is suffering from inflation and external deficit. Under such conditions boosting the purchasing power of lower classes can only lead to more of the same. It may be true that Egypt needs to sort its subsidies out and basically gradually phase them out completely, but this is exactly what's not going to happen if the opposition wins. Neither the opposition is likely to undertake other painful but necessary reforms such to continue trimming the state payroll. In short, a lot of wishful thinking here and we all love democracy, but the common sense says the triumph of democracy will come at the expense of the economic growth and job creation.

Unfortunately, unrest in Egypt is just the tip of the iceberg. Most Middle East nations face the same demographic issues as Egypt; a massive number of young people who simply cannot find jobs and are extremely unhappy with their inability to start families or purchase homes. Here is a look at just how desperate the situation is for young and highly educated Egyptians:

http://viableopposition.blogspot.com/2011/02/egypt-unemployed-population-cohort.html


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