Analysis: The economics of the Arab spring

Posted on October 9, 2011

Egyptian protesters in Tahrir Square, Cairo

Egyptian protesters in Tahrir Square, Cairo

On the face of it, it was a statement of the obvious. When Hazem el-Beblawi, Egypt’s new finance minister, warned at the end of last month that lawsuits against foreign businesses were shaking market confidence in the country, he was expressing the sentiment of many investors. Additional remarks that the Arab spring had not been a boon for the economies of the region were also seemingly unsurprising.

Not, however, in Cairo. In the Egyptian capital his comments provoked a furore, with outrage pouring in online and in calls to television chat shows. How dare the minister criticise what popular opinion considers necessary justice against the corruption of the Hosni Mubarak era, or cast doubt on the achievements of the revolution that this year deposed the long-time president, the people charged.

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Essam Sharaf, the prime minister, posted on his Facebook page on Monday in an attempt to calm the outcry, saying Mr Beblawi had no intention of undermining the revolution, which he insisted “We are all proud of.”

The controversy testifies to the testy mood in post-revolution Egypt, a country in a state of ferment since the February ousting of Mr Mubarak, the most important political change in the Arab spring sweeping the Middle East and north Africa. Newly won freedoms have led to an explosion of demands for retribution against former officials and businessmen, further bruising a battered economy – and have generated social expectations that are colliding with the current economic reality.

As the Arab world’s largest nation struggles to restore normality, many within Egypt and abroad fear that the inability to deliver the economic dividend is threatening an already fragile political transition.

Pledges of tens of billions of dollars of financial support have been made by western and Arab governments mindful of the need for a stable Egypt, though little of the funds has been disbursed and much is in the form of long-term development assistance. In the short term, however, overcoming the economic impact of change after three decades of Mr Mubarak’s rule, and in a country in which 40 per cent of the population lives below or near the poverty line, is proving daunting.

Unlike many of its oil-rich neighbours, Egypt has a diversified economy with a large domestic market. Located at the crossroads of Asia, Africa and Europe, it has often been singled out as having the potential to become a regional powerhouse. But along with a lack of vision under Mr Mubarak, the country has been held back by bad economic management, excessive bureaucratic control and poor education.

The uncertainty of the revolution meant the economy contracted 4.2 per cent in the first three months of this year and the unemployment rate shot up to 12 per cent from 9 per cent. Investment has ground to a halt and tourist numbers have plummeted. Foreign direct investment inflows, which peaked at an annual $13bn before the 2008 global financial crisis, have evaporated. Egypt has, meanwhile, lost one-third of its foreign exchange reserves. The International Monetary Fund expects a slow recovery and continued balance of payments pressures.

Mr Sharaf’s administration, which took over in March, has failed to quell strikes that have hit public and private factories and ports as emboldened trade unionists seek to boost their pay and get rid of unpopular managers. Mr Beblawi’s comments were an attempt to calm foreign investors’ jitters, amid an avalanche of lawsuits from workers fired years back and court orders challenging Mubarak-era contracts.

“The revolution has branched out into mini-revolutions throughout our investments in Egypt,” complains a big Arab investor whose five-star hotel was occupied in August by staff demanding a pay rise as well as the replacement of the manager.

It has not helped investors that the generals now ruling Egypt have little economic (or indeed political) experience. Some of the top brass in the Supreme Council of the Armed Forces are said to have been opposed to the liberalisation of the economy during the Mubarak years. Of greater immediate concern, however, is that their stewardship has been hesitant and confused, seeking at once to satisfy popular demands and revive economic growth, but achieving neither.

One of the generals’ first acts was to raise public sector wages by 15 per cent, a much needed increase in a country where years of fierce food price inflation have eroded purchasing power. Less praised, however, was their decision to give 450,000 contract workers permanent jobs, adding a longer-term burden to future budgets.

Some steps were quickly reversed. In an effort to meet demands for increased social spending, the government drafted an expansionary budget for the fiscal year that started in June. To help plug a predicted 10.6 per cent deficit – up from 8.6 per cent last year – it negotiated a $3bn standby facility from the IMF. Three weeks later, however, Egypt turned down the loan because the military council did not want to lumber its successors with debt. Cairo also scrapped plans for a $2.2bn loan from the World Bank. The budget was trimmed back and the projected deficit reduced to the 2010 level.

Yet as the heavy cost of domestic borrowing becomes more apparent, officials now say they might go back to the international institutions after all. “The hesitancy has an impact,” says Nada Farid, economist at Beltone Financial, an investment bank. “The mere fact that you change the deficit figure down a few days after announcing it shakes confidence.”

Ahmad Galal, managing director of Cairo’s Economic Research Forum, compares the military rulers’ dilemma to someone tossing and turning in bed in search of a comfortable sleeping position. “For 30 years there was a stable arrangement: no one bothered to think which side of the bed to sleep on,” he says of Mr Mubarak’s rule. “Now we’re starting all over again and finding the right position.”

The stability that Mr Mubarak offered, however, concealed a growing malaise and sapped the real potential of a $225bn economy with its mismanagement and corruption.

In the last five years of the Mubarak era, with much growth coming from tourism, textiles and construction, the annual increase in real gross domestic product averaged 6 per cent. But that was still short of what Egypt needs to absorb the 650,000 entrants into the workforce each year. Promoting the liberal policies that underpinned this growth, moreover, had much to do with advancing the political prospects of Gamal Mubarak, the former president’s son and at the time his apparent heir, who was the champion of a reform-minded economic team in government. The policies also benefited the rich, many of them the young Mr Mubarak’s friends, and did little to close the income gap.

In the wake of the revolution, Egyptians have sought revenge against the Mubarak cronies, triggering a series of criminal actions against ministers and businessmen including Ahmed Ezz, the steel magnate who was the chief strategist of the former ruling party and engineered its victory in heavily rigged elections last year. Mr Ezz was sentenced last month on corruption charges to 10 years in prison and ordered to pay a fine of $110m. He is appealing against the conviction.

“Businessmen fear they could be next even if they are innocent of any wrongdoing,” says a senior banker in Cairo. The construction sector has been hard hit after activists launched legal challenges to the land holdings of some big developers, alleging that these were obtained from ministers cheaply in sweetheart deals, often without competitive bidding. Business chiefs say cabinet ministers now suffer a “shaky hands syndrome”, reluctant to make any decisions for fear of future punishment.

Past privatisations too have come under scrutiny. A court in Cairo ruled last month that three industrial companies sold over the past 20 years should be returned to the state because of irregularities during the privatisation process.

The economic uncertainty created by the legal challenges has been exacerbated by deteriorating security and a shifting political agenda. The police are still smarting from their humiliation during the revolution when they failed to quell the protests and stood accused of killing demonstrators. The subsequent lack of efficient policing has brought higher crime levels, with armed gangs robbing motorists and attacking factories and warehouses.

The initial timetable for the political transition was six months, after which the military authorities were supposed to hand over power to a civilian government. Parliamentary elections are, however, due only at the end of November and the generals now suggest that a president who will take over from them might not be elected before the end of next year.

“We have no clarity on how [the new Egypt] will be governed, by whom or what discourse will frame the new political agenda,” say HSBC analysts in a recent report. Elections will also bring a strong emphasis on “enhancing social justice”, they note, which would chime with popular expectations but might disappoint those hoping to see an acceleration of economic reform.

Masood Ahmed, in charge of the Middle East and central Asia at the IMF, says policymakers in Cairo now face the additional challenge that the worsened world economic outlook will impact on the recovery of tourism and investment flows. An immediate priority is to ensure adequate financing to protect the economy over the next year. But he says it is also important to begin addressing the medium-term agenda, such as reforming the subsidies system that is a big drag on the budget, and putting in place policies for higher and more inclusive growth, including easier financing and regulation for smaller companies that now struggle to secure bank credit.

As Egypt’s new rulers try to balance the conflicting pressures, analysts argue that both the generals and the people have to keep in mind the big picture – that the country is in the midst of a historic change and that change comes with a price. “People are impatient – everyone was telling them economic growth is high, life is wonderful and they didn’t see it; now they say ‘it’s our turn’ and I understand,” says Mr Galal of the ERF.

“But during a major change in society it would be a mistake to compare what you have to what you had before,” he adds. In Egypt’s transition – which was set in motion in rather more peaceful a manner than elsewhere in the region and was in many ways less tumultuous than similar upheavals elsewhere in the world – “the economic cost is much lower than the cost paid by others”.

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Tunisia: Elections are just first step

Youth joblessness was one of the main triggers of Tunisia’s January revolution. Since then, amid strikes and rural roadblocks, with investments on hold and European holidaymakers staying away, unemployment has climbed higher. The employment ministry says that by the end of this year, a record 19 per cent of the workforce could be out of a job, writes Eileen Byrne.

These jobseekers, numbering around 700,000, will include about 10,000 whose jobs disappeared in instability following the revolution, 150,000 new entrants to the job market (including 80,000 graduates) and tens of thousands who arrived home from war-torn Libya. It is hoped, however, that jobseekers and businesses may find opportunities in a newly liberalised economy in the neighbour to the south, as the conflict there ends.

Tunisian policymakers are resigned to the reality that investment in their own country – whether foreign or domestic – is unlikely to pick up significantly until they too have a stable elected government. The official forecast for growth in gross domestic product this year has been adjusted downwards to zero, and even this could prove optimistic after the economy contracted 2 per cent in the first half.

The main political parties appear to have understood the need for urgency. In September they agreed on a road map that implies there will be an elected parliament and government in place before the end of 2012. The vote for a constituent assembly on October 23 is the first step along this road.

Spending on accommodation, goods and services by thousands of middle-class Libyan refugees cushioned the impact of a catastrophic summer for tourism, where receipts were more than 40 per cent down on last year. The sector faces a winter season still overshadowed by political uncertainty, although Mehdi Houas, the tourism minister, points out that during the first nine months “we managed to welcome 3.2m tourists without incident”. The crisis is also raising questions as to whether Tunisia should move on from the cheap-and-cheerful model that had boosted numbers.

Ahead of the election, wildcat strikes and roadblocks appear to be abating and the UGTT union federation is backing the interim government on the need for stability. More than 150,000 youths are receiving a new jobseekers’ allowance, a further 50,000 are in apprenticeship schemes or paid internships and 34,000 civil service posts are being created.

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