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Egypt: Beyond Tahrir Square

Mert Yildiz, an economist at Renaissance Capital, argues that Egypt is at a pivotal point and could potentially be the success story of the decade, provided it travels down the right economic/political path.

It all started when a Tunisian street vendor said “khalas”, a commonly used Arabic term, meaning enough.

A man that very few knew, in a city that very few had heard of, set himself on fire in front of a Tunisian governor’s office on 17 December 2010, instigating what came to be known as the Arab Spring.

Mohamed Bouazizi was a street vendor who was forced to feed a family of six siblings and a mother on his meagre earnings of US$140 per month. When harassed by local officials for not having the appropriate selling licences, he went to complain to the governor of his hometown, Sidi Bouzid. The governor refused to see him. Bouazizi went to a local gas station, bought some petroleum and set himself on fire. The people of Sidi Bouzid did not turn their backs on their fellow townsman. The protests that began in Sidi Bouzid within hours eventually spread all over the Arab world . . . from Morocco to Oman.

On 14 January 2011, no longer able to calm protestors through the extension of subsidies and free money, Tunisian President Ben Ali fled the country. Shortly after, on 25 January 2011, thousands of Egyptians marched to Tahrir Square in Cairo, on what was called the “day of rage”. Seventeen days of protests later, Egyptian President Hosni Mubarak ended his 31-year rule of the country, handing power to the country’s military.

By the nature of an autocracy, every revolution aimed at bringing it down ends in either another autocracy (e.g. the history of Cuba and Indonesia, as well as the African continent, provide many examples) or a power vacuum. In Egypt’s case, it seems that elements of both situations have occurred. Even though the current military government is autocratic in many ways, the public’s view seems to be that the country is without a government. However, the transitory military government has promised free and fair elections later this year.

Many analysts link the future of Egypt to the outcome of the upcoming elections. I believe that the Egyptian people have shown that they can take matters into their own hands. Establishing democracy and consensus will take time, which is why I’m cautious in the short term. But it will happen. And when it does, I believe Egypt will not only be a strong economy, but also a regional manufacturing and services hub.

Egypt – the next Indonesia?

The history of international autocracies provides ample guidance on the potential paths Egypt could take. Despite being worlds apart, Egypt’s population make-up, as well as its history, has a lot in common with Indonesia. A high and very young population that is divided along religious lines (10% of Egyptians are Coptic Christian vs 12% in Indonesia, while the rest of both countries’ populations are predominantly Muslim), similarly low GDP per capita, a history of colonisation followed by dictatorial rule . . . the list goes on.

When the Asian financial crisis hit Indonesia, the rupiah collapsed in value. GDP shrank, foreign investment and funding dried up and unemployment rose as a result. Food prices were on the rise and poverty was widespread. The shooting of four student demonstrators in May 1998 caused riots across the country. When the events got out of control, Suharto (the country’s dictator at the time) ended his 30-year rule and retired.

It took a couple of years for Indonesia to fully embrace democracy and stabilise. Violence between Christians and Muslims grew for a few years after Suharto’s resignation as the lack of authority allowed extremist groups to act freely. But, in mid-2001, with the election of President Megawati Sukarnoputri and her pro-western policies, the country started to stabilise. Due to her mediocre successes, the Indonesian people elected Susilo Bambang Yudhoyono as their next president in the first direct presidential election in 2004. Yudhoyono has done an excellent job in reviving the country’s economy, which today, along with China, is one of the fastest-growing Asian economies. Since the early 2000s, the Jakarta Stock Exchange has also been the highest returning Asian market. I see a similar future for Egypt, with obvious nuances.

Elections and the power of Tahrir Square

The first free elections in Egypt for the past few decades will have a bearing on the economy and how the country performs in the short term. Some fear extremist groups, such as the Muslim Brotherhood (MB), will dominate as they are the most organised. The MB not only has a history of violence – which it currently denounces – but also an extremist agenda. Some voice concerns over former-National Democratic Party (NDP) members making it back to parliament, yet others are okay with this if they denounce their links to Mubarak. Some say independent candidates (according to Egypt’s constitution, one third of parliament must be made up of independents) will make decision making difficult.

Looking at Egypt’s historical voting patterns, which are obviously skewed due to Mubarak’s grip on power, I see little reason to think the MB can achieve an outright majority in parliament. Even though they have never contested an election due to a political ban, their members have made it to parliament as independent candidates. As such, I assume their voting base in Egypt is roughly 20%.

Even if the MB did manage to secure an outright majority, I do not think their policies will be extremist. For starters, I think it would cause widespread frustration in the liberal-minded community of Egypt, which could start another wave of protests. Second, there seems to be a division among the MB’s leaders on the direction of policy. The party is currently divided between old-school conservatives and the entry of new more moderately viewed candidates. This dynamic should ensure the MB puts aside its ideological goals for the time being, in my view.

Whoever wins the next election, parliament’s first obstacle will be to rewrite the constitution, elect a president and commence with structural reforms. I believe it was a combination of bad economic and political models that brought the regime down, and fixing it should be the priority of all policymakers in order to avoid another catastrophe.

Restarting the old engine

Once a decent constitution is in place, Egypt needs to start rebuilding its economy.

Egypt needs to first and foremost further open its borders. The flow of foreign investment into the country, especially into the latent sectors of infrastructure and finance, could help increase employment. Appropriate allocation of credit combined with cheap labour could also see the manufacturing sector in Egypt pick up. Rising trade with regional partners should also help in this respect. Given the rising needs of the youth, I expect a steady pick-up in the services sector, which is already mature.

On the fiscal side, the government needs to get the ballooning budget deficit under control. On the expenditure side, the large food and energy subsidies to households currently in place should be retargeted towards the more needy (currently the wealthy benefit from them) and in the medium-term the subsidies should be phased out. On the revenue side, the privatisation programme – halted in 2008 – needs to be put back on the agenda. The government needs to allocate its capital more efficiently as well. This means privatising the inefficient state companies. Banque du Caire and Banque Misr are two state-owned banks that if privatised would provide a major boost to the government’s revenues in the short term.

One big advantage for Egypt in the period ahead will be its low debt levels. Egypt currently has relatively low public debt and very low external debt, which suggests to me that it can borrow if it needs to.

I see Egypt’s banking sector as adding value and offering opportunities for growth in Egypt. Despite the high level of non-performing loans in the system, I think the banking system is still pretty safe. Egypt needs to develop its banking sector and increase financial intermediation, so that efficient investment projects can commence.

The bumpy road to salvation

None of this will come easily. Egyptians will need to bear the burden of a revolution and politicians need to start acting soon. The leaders of the country have to understand the needs of their people, leave their ideological differences aside and respond accordingly. If Egypt were to unleash its full potential, I believe it could be the success story of the decade.

This article is an edited extract from Mert Yildiz’s report on Egypt, titled Egypt: Beyond Tahrir Square.

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