The Happy Arab News Service

Friday, December 22, 2006

Lame Tigers and Broken-Leg Gazelles

This post was inspired by this article published on YNet - Kibbutz youth on 'Journey of Peace'. In particular, by the following lines:

More than 800 12th graders from kibbutzim will take off Monday morning on a 'Journey of Peace' along the Israel - Egypt border.

. . . The participants will try, among other things, to shake hands with Egyptian soldiers across the border.

I dedicate this post to all young people of our country who want peace and for the sake of achieving it are ready to spend years at our borders, waiting for an occasional Egyptian soldier or Hezbollah militant, who has lost his way and by mistake wandered into our territory, to take him by surprise and shake his hands before he realizes his mistake and flees back.

To all the peace stalkers, peace talkers and other men of peace: Salam !!! Warahmatulla aleikum wabarakatu !!!

This is a synthesis of my three previous posts, the list of which can be found at the bottom.

Despite its impressive economic growth Egypt appears far from having secured its place among the economic tigers of these days. In fact the very low productivity growth as well as the fact that the growth is restricted mainly to the gas industry and construction, indicate that the bulk of the economy is as stagnant and inefficient as ever. With such a limited growth base Egypt can be no economic tiger or China of the Middle East. The growth in its present form is unsustainable. But Egypt has got even worse problems that this. --> Continue Reading

While Egypt enters the period of the fastest economic growth in its history, the budget deficit is still hovering around 10% and the situation is predicted to worsen. With the inflation already rising, hard landing of the economic miracle is looming on the horizon. But if the general economic conditions take turn for the worse, due for example to a US led global slowdown, hard landing may quickly degenerate into crash landing.

Egypt is known to have been pegging its currency to the dollar the same way Argentina did and with similar negative results, only on a smaller scale. Pegging the local currency to the dollar is a risky policy and requires a considerable fiscal discipline on the part of governments that try to tread this tricky path. In many respects it's the same as trying in reverse to peg the dollar to the local currency and governments should exercise extra caution if they don't want to find themselves in a situation like this:

However, Serhan Cevik, Vice President of Morgan Stanley for the Middle East and North Africa, says:

There is no denying the fact that exchange-rate flexibility, albeit limited, and bureaucratic reforms played a role in jump-starting the engines of growth, but Egypt's staggering performance is mainly a result of expansionary macroeconomic policies and the global liquidity injection.

From Cevik's words it appears that at some point Egypt has relaxed its exchange rate regime and so managed to steer the economy away from an Argentina style collapse. Yet the country has not escaped the danger zone as the rising inflation and other statistics indicate.

The problem with Egypt's finances is probably akin to what happened in other countries that went through a similar transition to free market economy from a very unfavorable starting position. The budget deficit is probably a result of losses the state enterprises suffer from the increasing competition coming both from inside and outside of the country. The mounting losses of the state behemoths may be the main factor that's pushing the state finances into the red line.

For decades Egypt has been abusing the state sector to fight unemployment. It's impossible to estimate the scale of the hidden unemployment in Egypt but it may be reaching between 1/4 and 1/3 of the workforce employed by the state. These people not only do not contribute to the national economy, they actually detract from it.

The common misconception about hidden unemployment is that it means that some people are paid money for doing nothing. This is wrong. It means that some people are paid money for causing damage. These people should be kept busy and they keep themselves busy by interfearing, as anybody, who has ever had business with the Egyptian bureaucracy, learned on his own skin. Inside the state enterprises these 'hidden unemployed' 'contribute' to the production in much the same way. To sack these people should be the first priority of any government that gets serious about reforms.

It is clear that for Mubarak it's now a one way road since he cannot back down. If he does not establish control over the government's expenditures, the monetary situation may get out of control. The only way for these reforms to proceed now is by laying off dozens of thousands of workers, closing the most hopeless of state companies and selling the rest into private hands.

But while Mubarak's team is planning to tackle the problem of the state sector head-on, the Muslim Brothers, who consolidated recently their control over the trade unions, are already waiting for Mubarak around the corner. The Brothers temporarily kissed good-bye to their support for free market economy (not clear what this support has actually meant anyway NB) and stated their opposition to privatization or any other attempt to slim down the state sector.

The Egyptian society is ill prepared for shock therapy in any form, and actually to any therapy at all. Strong work ethics and entrepreneurial spirit are not outstanding characteristics of the Egyptians. These are people who want stability first of all, people who want to stay put in the same place while watching their living standards miraculously improving year by year. These are no Chinese. Even if the reforms succeed, the uncertainty they will bring (which is part of free market economy), as well as dislocations and economic migrations may increase even further the dislike of the regime by the population.

One should really think too much of the Egyptian society, as actually of any other Arab society, to believe that when the pain of reforms hits them hard, the Egyptians can face it with patience and understanding. It's not hard to imagine what a regular Egyptian should think about Mubarak and his team. That they are corrupt thieves, stealing the riches of the nation while the ordinary people eat shit. Any reform that hurts ordinary people is interpreted as another attempt by the ruling elite to squeeze more money from the poor people for the sake of building their villas and yachts.

But Egypt may soon find itself facing an even worse situation - when the pain of reforms is accompanied by a low economic growth brought upon by tough anti inflationary measures. The regime can hardly expect any favours from its population on a regular day, but in this situation the Arab street would turn even more hostile and volatile.

The options of the regime are limited. To reverse or to freeze reforms is hardly possible and so the regime should press ahead, behind its back lurking the danger of economic meltdown. The regime has to move quickly to dismantle the huge bureaucracy and state sector in order to rescue the budget. But for Mubarak to proceed with his reforms is like for the IDF to venture into Palestinian camps where militants are always ready for its arrival. On the way ahead the Muslim Brothers are already waiting for Mubarak and his reforms to come, ready to ambush him with their trade unions. The trade unions now under their control, the Brothers are in a perfect position to confront the regime the very moment it makes the first move. The Arab street is their territory and Mubarak should better know this.

Related Posts:

Sheep in Wolf's Clothing

Lame Tiger on the Nile

Muslim Brotherhood in Ascent in Egypt

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Proclaimed Unknown at 11:30 PM