Tag: economics

Carnegie: The political economy of reform in Egypt

From a recent report by the Carnegie Endowment:

As a result of reform efforts, and over the past three years, Egypt has managed to stabilize the economy, increase foreign currency reserves, and achieve steady growth. Reform programs have introduced effective amendments in the social contract between the state, market, and society. Yet little if any progress has been made in the fight against corruption and in creating an enabling and competitive business environment. The current institutional environment poses critical questions about the capability of the Egyptian economy to sustain growth; to create decent jobs for the unemployed, the underemployed, and new entrants into the labor market; and to alleviate massive poverty. These failures to address socioeconomic problems and curb the side effects of economic reform are proving key impediments to accelerating the reform process in Egypt.

The reform process in Egypt suffers from the lack of a consensus on the meaning and ramifications of reform among key national stakeholders. Debate with the state over economic reform is more or less limited to major private- sector actors, who are often close to the regime or part of it. This debate centers on the costs and benefits to these actors. The majority of the private sector, represented by small and medium-sized enterprises (SMEs) and members of civil society, especially workers and grassroots organizations, is excluded from the debate with the state over Egypt’s economic reform strategy.

The report provides an history of economic reform in Egypt since the 1970s and gives a cursory look at the practices of cronyism in the business world. While it won’t give watchers of Egypt’s economy any major new insights, it is worth highlighting in that foreign coverage of economic reforms in Egypt have largely been superficial and reflexively positive — due, I think, to the real if limited achievements of the Nazif cabinet coming as such a relief for those in the business and analyst community. But then again, although this report ignores some of the bureaucratic improvements made in recent years for investors, I don’t think any serious person could deny that Egypt’s number one problem, an opaque and corrupt general business environment, has not been really seriously addressed.

So what’s the solution?

On the one hand, Egypt lacks the institutional capacity to design and implement comprehensive reform programs. On the other hand, current institutions have neither been able to adapt to changes resulting from reform programs nor mitigate the negative spillover from reform policies. Therefore, if Egypt is to meet its current economic challenges and engage in comprehensive reform, special attention should be paid to developing a set of formal and informal institutions that can define the rights and obligations for all actors in the economy and regulate the process of reform.

Read the report for the details, but special kudos for highlighting the need to give representation to civil society elements, notably workers, in hammering out a new social contract. For too long the only people at the negotiating table have been the government, the business community (both protectionist and market-oriented) and international financial institutions. To put it another way, the solution towards forming a consensual economic reform policy is creating the vehicles for genuine consultation. That sounds an awful lot like democracy.

Egypt and China – a win-win situation?

German scholar Thomas Demmelhuber recently presented an interesting paper on Egyptian-Chinese economic relationships at the German Orientalists Day in Freiburg, Germany.

These are the main points:

The rise of Egyptian-Chinese economic relations needs to be seen in the context of the Nazif cabinet which took office in 2004 and tries to orientate the Egyptian economy towards foreign trade. But it is also a political manoever, a message to the established partners EU/US.

However, the reality does not live up to the bullish statements made by economy minister Rashid and others on the potential of Egyptian-Chinese trade. Up until early 2006, China was only the 29th largest foreign investor in Egypt.

Now a few committees and investment zones were created, and Chinese investment as well as mutual trade is likely to grow.

Personnally, I don’t see a lot of trade potential for Egyptian companies here, other than production joint-ventures in Egypt, which could serve Chinese companies well to re-export to Europe and Africa, while creating desperately needed jobs for Egyptians.

Other then that, Egypt will remain a market for cheap Chinese products (I guess nowadays few products under LE20 are sold in Misr which are not ‘Made in China’) which is smuggled into the country via the Gulf (much of Dubai’s rise is down to smuggling).

I heard from European diplomats that most of current Egyptian-Chinese trade takes place outside statistics, and I’d love to know how much Chinese companies are truly selling in Egypt (and elsewhere in the Middle East).

Zoellick, the World Bank and the Arab world

The WSJ is running an interview with Robert Zoellick, the new president of the World Bank,in which Zoellick’s idea of increasing the Bank’s focus on the Arab world is explored, albeit briefly. The impression I get from the interview excerpts below is that Zoellick is very much informed by his experience as US Trade Representative in the Bush administration, which coincided with the launch of a Middle East Free Trade Area and US policy of aiming at bilateral FTAs that would eventually create a super-FTA between the Middle East and the US.

While the Europeans have been aiming at something similar for a while to encourage both EU-Arab world trade and inter-Arab trade, much attention was given to the new US policy because it was implicitly and explicitly tied to other Bush administration aims, notably the “Forward Agenda for Freedom” and its desire to cultivate “moderate” regimes with a commitment to economic liberalization. For those who followed the US-Egypt trade relationship in the last few years, it was notorious that Zoellick was often exasperated with his Egyptian counterparts and dealt very brashly with them. Eventually, one of his successes was pushing for a QIZ agreement with Egypt and Israel (arguably something that Egypt needed to do anyway to protect its garment and textile industry, but that is another argument.) He also cultivated that part of the Egyptian regime that was willing to carry out economic reforms, and helped them to some extent face off more conservative elements.

One then wonders, then, whether Zoellick might not pursue, even more strongly than his disgraced predecessor Paul Wolfowitz, aggressive promotion of neo-liberal economic policies and tie them to political reform issues. Considering the debates that have taken place in the World Bank in the past decade (Wolfensohn, Stiglitz, Sachs etc.) one might be tempted as this trend as going to the bad old ways of the 1990s, with a pro-Israel element to boot. Not that, mind you, Zoellick is wrong to say that the Bank should play a role in boosting social peace by promoting job creation and so forth. But one wonders what strings will be attached.

WSJ: You’re interested in putting together an initiative aimed at the Arab world. Tell us why?

Mr. Zoellick: This is a set of countries [that have] probably been underserved by the bank, and so what I’m trying to identify how can we work with some of these governments and the private sector to create additional opportunity and development. I think you have a changed approach among a number of these governments, that they’re trying to pursue economic reforms to create opportunity, create jobs, but — critically important — also meet social development needs. If you look at Egypt, one of the challenges will be, can people create jobs and opportunity and have a sense that the government is meeting social needs? [If not], others will try to meet those needs, as you have seen elsewhere in the Arab world.

WSJ: Does your work as U.S. trade representative inform your ideas?

Mr. Zoellick: The U.S. Congress had created something called QIZs, qualified industrial zones, which Jordan used to great effect. What they permitted was duty-free access to the United States for goods produced in these zones. But the country had to work out with Israel a certain percentage of Israeli investment, and that was to be negotiated by the countries.

Egypt had held off, and so one of the last things I did [as U.S. trade representative] in 2004 was to participate in an event in Cairo with [Israel’s Ehud] Olmert, who was then the trade minister, and [Rashid Mohamed] Rashid, who was commerce minister, to create a number of these QIZs.

What stuck in my mind is that as I was leaving for the airport, there were reports of two demonstrations. One was of about 300 intellectuals that were protesting Egypt’s doing an agreement with Israel. The other was thousands of workers who were protesting that there weren’t more QIZs, because they wanted the jobs. It’s a good example of how economic development is not only necessary to drive jobs, but fits into hope and better relations as well.

Also from the article that accompanied the interview:

Mr. Zoellick says he plans to focus more on the Arab world and encourage the kinds of reformers he met when negotiating free-trade pacts with Oman, Bahrain and Morocco and pushing for stronger trade ties among Egypt, Israel and Jordan. Boosting employment is a huge challenge in the Middle East, where the birth rate is high and economic growth isn’t. Mr. Zoellick believes that focusing on labor-intensive export industries, like textiles, could help. His theory: The bank can help “create societal cohesion by giving people the chance to have opportunity and development.”

To come up with specifics, Mr. Zoellick has consulted his onetime economics professor at Swarthmore, Howard Pack, now at the University of Pennsylvania’s Wharton School. Mr. Pack says trade liberalization won’t work unless other changes are made too, including building better ports and roads and making customs systems less corrupt. Education and social mores are critical, too. When Asian nations in the 1970s and 1980s jumped into textiles and manufacturing, they began with workers trained in manufacturing and women willing to work outside the home. That is often not the case in Arab nations.

One thing about Zoellick is that he was always one of the best elements (in terms of talent and ability to get things done) of the Bush administration, and appears to be a much more skilled, and tougher, operator than Wolfowitz. So this kind of initiative could really have legs, for better or worse.

Moroccan Unrest Over Bread Price

Moroccan Unrest Over Bread Price:

CASABLANCA, Morocco — Violent protests over the cost of bread prompted the Moroccan government to annul a 30 percent price hike linked to soaring global grain costs.

Protesters clashed with police, cars were torched and buildings damaged in the demonstrations Sunday in Sefrou, 120 miles east of the capital Rabat. Some 300 people suffered injuries, Moroccan newspapers reported Tuesday. The state news agency said more than 30 people were arrested.

The government held an emergency meeting Monday, and Interior Minister Chakib Benmoussa ordered the price hike canceled, the Interior Ministry said.

Amid rising world prices for wheat, the government authorized a bread price rise of 30 percent on Sept. 10, soon before the start of Ramadan. Moroccan consumption of breads and pastries rises sharply during the Muslim holy month, as families hold large feasts after sundown to break the all-day fast.

In the past, bread riots were violently repressed in Morocco and the continuation of this trend could point to a return to the social instability of the 1980s and earlier. Morocco is relatively unique among Arab countries in being extremely exposed to rises in fuel and other prices, with the resulting pressure on the state budgets and on social peace. As in Egypt, which remains much, much more subsidized than Morocco is, there has been a grassroots movement growing over the past two years against the cost of life. Drawn largely from the ranks of the left (notably ATTAC Maroc) and associated with the Moroccan Association for Human Rights (AMDH from its French acronym), in a sense it has been more active on this crucial issue than Islamist parties such as the PJD or movements like Adl wal Ihsan. Last May, five protesters from the AMDH were given a ridiculous three-year sentence for chanting slogans hostile to the monarchy, one of the many signs that Morocco has not entirely stopped the bad old practices of the Hassan II regime.

A situation like the current one, with genuine economic pressures on a technocratic government keen to balance its budget and on a population finding it ever harder to make ends meet (just as the small upper middle class is encouraged to consume ever more — there are advertisements for bank loans to buy plasma screen TVs all over the place in the big cities — could develop into a very serious issue for the new government of Abbas al-Fassi. No doubt Morocco will be appealing to major grain producers to provide some relief.

Major strike at Nile Delta factory

Hossam is writing a lot today about a massive strike taking place at Ghazl el-Mahalla, apparently the biggest such strike at a major textile factory since the beginning of the year. He has videos and complains the issue is not getting international press coverage. From an activist’s account:

After the first day of the strike and sit-in, the picture inside the factory is really amazing. 10,000 people breaking the fast together in Tala’at Harb Sq, located inside the company compound. It’s a scene, which I find no words to describe it with….

The government has started to present some compromises via the head of the Factory Union Committee Seddiq Siyam, in exchange for disbanding the strike. But the stupid forgot he was asking this (strike suspension) while the workers’ emotions and zeal are running at the highest peak you can imagine.. The inevitable happened.. the dude was screwed. The workers almost killed him, seriously I’m not joking. But he was saved at the last moment by the strike leaders.

Al-Masri al-Youm has coverage of the strike, saying there are 27,000 workers partaking (which might make it the biggest strike ever) who are protesting the non-payment of performance-related bonuses. They have made eight demands, including one of political significance such as the removal of the company’s chairman and the withdrawing confidence from their representatives in the official (state-controlled) union — a step that would encourage the formation of independent, parallel union structures. No wonder considering the official union said the strike was illegal and blamed the Muslim Brotherhood and other opposition political movements was behind the strike.

One might ask whether this is going to be different than any previous strike, where generally the government made major concessions fairly quickly. Perhaps not, but it strikes me [no pun intended] that every time you have this kind of situation you have the potential for things to get out of hand and escalate unpredictably…

Update: Hossam has some more thoughts on making the link between economic demands and political change.

Investor confidence and the succession issue in Egypt

One of the interesting things that has come out of the recent rumors that Mubarak was on death’s door is that, for the first time publicly at least, a link is being made between presidential succession in Egypt and investor confidence. Quite aside from ordinary Egyptians on Facebook or newspaper editors, this is now an open subject of discuss for the financial press and analysts. This Reuters story from earlier this month quotes a Standard & Poors ratings director as saying this has kept Egypt’s rating down:

But Egypt has not made clear what would happen to the reform process if Mubarak, 79, who has ruled for a quarter century, leaves office, Farouk Soussa said in an interview.

“The main constraint at the moment is the question of succession,” Soussa said. “Trying to determine what will happen on key policy issues is like gazing into a crystal ball, and it shouldn’t be that way.”

Standard & Poor’s rates Egypt BB+ for foreign currency and BBB- for local currency with a stable outlook.

Likewise, a Forbes story today predicts investor worry about the post-Mubarak period, considering that Egypt’s own Central Bank (foolishly?) has said that the recent rumors cost a loss of $350 million:

“Foreign investment really has to do with the stability of the country,” said Arsene Aka, analyst with Global Insight. Although he found the central bank’s readiness to put a figure on the cost of freedom of speech “a bit disturbing,” he admitted that from an economic standpoint, it did make sense.

According to Aka, the $350 million figure was probably a rough calculation of what a few days’ rumors could cost Egypt’s already impressive achievement of $9 billion in foreign direct investment so far this year. “If Mubarak dies, investment will halve,” he warned.

My own experience in talking to Egyptian businessmen is that they are relatively confident a transition will take place without any serious disturbance to the country’s economic policy. But, arguably, the way Egypt is currently run (with an increasingly obvious delegation of economic decisions from the presidency to Gamal Mubarak and the Nazif cabinet) is not exactly optimal, especially since getting a presidential go-ahead is sometimes necessary for major investment projects. Investors have complained of inexplicable delays in decision-making, and I’ve even heard of cases where an investor with cash in hand simply left because he was tired on waiting for clearance from the presidency.
The question is, at what point does it become necessary for the country’s economic stability that a clear succession plan (if not a specific successor) be outlined? Or will financial analysts and investors will continue to make educated guesses (but in the end still quite uninformed guesses since there is little solid information) about Gamal Mubarak or Omar Suleiman scenarios? Sure, Egypt’s not badly at all in terms of attracting investment despite the current uncertainty, with some long-term projects (e.g. petrochemicals, LNG, etc.) seeing the light of the day, but I’ve often wondered why the succession issue was not a major concern of investors, or rather why most were pretty confident succession would mostly provide continuity with current economic reform policies. Perhaps that is now changing.

The markets

Is it just me or do banks, hedge funds and other financial companies always cry out against government intervention, except when they need a bail-out or central banks to intervene in the markets to restore stability after their irresponsible unfettered speculation blows up in their face? Just asking.

WWII mines Egypt

I have this article on qantara.de on the WWII mines and other ammunition left behind on Egypt’s North coast. The Egyptian government wants to re-launch its efforts to clear the zones that are affected, but wants to have it all paid for by its international donors.

As Egypt has brought to perfection the art of donor-shopping probably more then any other nation, I guess in the end they’ll find someone stupid enough to pay the bills submitted by the Egyptian army.

In contrast to what appears to be common in other countries, the Egyptian army maintains its monopoly over mine-clearing. Which is why not much has happened until today and which is why most donors rightfully so are reluctant to contribute.

Excerpt from the English translation:

It was not until 1982 that the Egyptian government acknowledged the problem. “It was a question of costs and priorities,” Fathy El Shazly, director of the national northwest coast development program, frankly admits.

He refers to the history of his country, which after the Second World War was first busy gaining independence and then tied up in four wars against Israel. A bit more haste would have been advisable, though.

According to the NGO “Landmine Monitor,” there have been 8,313 mine-related casualties in this region since 1982, including 619 deaths. As can be observed again and again whenever natural disasters or accidents occur, however, the Egyptian government evidently does not place much importance on its own citizens. It has done little to help the victims to date.

The Egyptian army did clear some 3.5 million pieces of ammunition out of the desert between 1982 and 1999, but since then a lack of funds has slowed down their efforts – at least that’s the official line.

Since things are moving much too slowly for the private sector, which has great plans for the region, some hotels and oil companies have begun to remove buried ammunition at their own expense in order to build access roads to their projects.