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After the Egyptian Revolution, will an Economic Revolution follow?

Guiding Principle

This article is discussing the status of the Egyptian economy after the 25th of January 2011 revolution and the expectations for the Economy after such hold back.

To avoid losing directions, following the outbreak of the Egyptian Revolution of January 25, 2011 a new mainstream should be created for society; a mainstream conscious of the need to put an end to the old economic system, which was based on organized corruption; and which protected monopoly and covered up for illicit gains. A new system is now required to encourage investment, prioritize productivity and promote private citizens’ profits while ensuring society’s earnings. Egypt suffers from a stagnant economy and it should not be surprising that a lack of economic opportunity contributed to the unrest. A very important question – above all for Egyptians, but also for other developing countries (and for development experts) – is the economic impact of its revolution.

There’s no doubt that the economic development will underpin the various conversations about how to improve the lives of Egypt’s many impoverished citizens. The center of national debate should be the legitimacy of the economic system, simply because without being able to allocate resources to the various production and services sectors, the various provinces and the various generations of society, it would be impossible to achieve any of the system’s basic goals. The system’s basic goals include economic and national security; modernizing Egypt’s industry and economy; generating intensive-production and high-salaried job opportunities; promoting competitiveness; fighting monopoly; ensuring fair distribution of income and wealth; controlling price increases; supporting the weak and countering foreign economic threats.

Economic growth and the distribution of that growth offers a better picture of an economy’s health and, importantly, the political economy of a country.

However and as others have noted, not everything is well in the land of the pharaohs. Poverty has crept up in the last few years and unemployment is skewed. The United Nations says that 90 % of unemployed Egyptians are under the age of 30. In a consumer survey released last month, Credit Suisse found that citizens across every strata of wealth expect shrinkage in household income in 2011. Double-digit food inflation has hit Egypt hard, especially since food comprises an astonishing 40 % of household spending. Most important, Egypt’s economic structure does not appear particularly conducive to individual economic initiative. The country ranks No. 96 in the Index of Economic Freedom (out of 179 states), and No. 94 in the Doing Business rankings (out of 183 countries). As measured by the World Bank, Egypt’s "entry density" (new ventures registered per 1,000 people of working age) is 0.13, meaning it has among others the lowest start-up rates in the world.

The absence of economic efficiency in Egypt has been reflected in recent international competitiveness reports. The figures of the Ministry of Economic Development show a rise in real estate investment in the five-year plan at the expense of industry and agriculture. In addition, and according to the quarterly report published by the Ministry of Industry and Trade and the indicators noted in the World Bank’s annual World Development Report, industrialization in Egypt is declining.

Egypt’s new economic system should have a social dimension through highlighting production-oriented investments. It should be furthermore pointed out that associating economic efficiency with social justice under globalization and information economy; which is a term that characterizes an economy with an increased emphasis on information activities and information industry, requires us to multiply information products and exports, while maximizing the added value of tourism, services and the diverse sectors of Egypt’s economy. Whatever type of political regime succeeds, there may be no doubt concerning the nature of the economy that has to be developed in Egypt. It should be a political regime that is premised on entrepreneurship as it is the driver of economic growth. Karl Marx famously insisted that a society’s workers, not the bourgeoisie, must own the "means of production." But for broadly shared growth to take hold for entrepreneurial capitalism to develop the people must own the economy in a different manner. They must have the opportunity and the motivation to start and grow new companies.

Hence, how can the country end this severe dearth of entrepreneurship and get itself on the right path?

The country may begin by making it easier to start and operate a business. In Egypt, it takes only six steps and seven days to start a company. However the cost for the incorporation is uneven. Seen Egypt in its entirety it, e.g. costs just 6 % of one’s annual per capita income to start a business, meaning just above the 5 % cost in most advanced economies. So far in Cairo, the metropolitan area in which roughly 25 % of the country’s entire population lives, budding entrepreneurs may need to spend more than 25 % of their annual income to launch a business; residents of Alexandria face a similar cost barrier. Far from being e-ngines of economic growth, Egypt’s leading cities are stultified.

Once a new company manages to become well-established the environment is not nearly as friendly as it needs to be. Egypt gets extremely poor marks in four categories of the World Bank indicators, dealing with construction permits; paying taxes; enforcing contracts; and closing a business Egypt gets extremely poor marks. The requisite time for complying with the tax code is twice as long as other countries in the Middle East and North Africa, not to mention in developed nations. Start-ups need improved access to financing as well. In surveys, far fewer Egyptian companies report the use of credit, loans and banks than in neighboring countries. To be sure, entrepreneurship cannot solve all Egypt’s problems and on several indicators tracked by the World Bank, the country looks not worse than any other nation. Nevertheless without the ability to start and grow a business and to allow it to fail, no country will enjoy either economic growth or political stability. That is why economic freedom is the handmaiden of political freedom. If Egypt’s next government wants to satisfy its citizens, it will start with entrepreneurship.

The Egyptian revolution is political, but not yet economic. In case the revolution leads to a more open, democratic, middle-class-oriented political system, in which enough people believe that they have a stake in the government’s continuity, the economic benefits for Egyptians could be large. Financial markets will more likely flourish and more rapid and equitable development will more likely follow.

October, 2011 Mansour Elaraby
  Meyer-Reumann & Partners -Alexandria
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