Isobel Coleman

Democracy in Development

Coleman maps the intersections between political reform, economic growth, and U.S. policy in the developing world.

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Egypt’s Economic Woes

by Isobel Coleman
May 20, 2011

In his major speech yesterday on the Middle East, President Obama acknowledged that while the protests gripping the region have been driven largely by politics, economics have also played a prominent role. I discussed some of the economic challenges facing the region in this video interview:

To assist transitions to democracy, Obama pledged that the United States would support economic development in the Middle East. “Just as democratic revolutions can be triggered by a lack of individual opportunity, successful democratic transitions depend upon an expansion of growth and broad-based prosperity.” To that end, he called for debt relief for Egypt to the tune of $1 billion, another $1 billion of loan guarantees to finance infrastructure and job creation, and a $2 billion OPIC facility to support private investment across the region. He also announced the launch of a new Trade and Investment Partnership Initiative in the Middle East and North Africa designed to promote intra-regional trade and also greater integration with U.S. and European markets. The president noted that when you take oil out of the picture, the Middle East with 400 million people exports about the same as Switzerland, with a population of 8 million.

Egypt in particular is staggering economically, and an economic meltdown would throw the country into further turmoil, opening the door to dangerous populism and extremism. Since the protests began in Cairo in January, tourism receipts and foreign exchange reserves have declined significantly and are expected to continue doing so throughout this year. The economy contracted 7 percent between January and March; although it has now stabilized, it is expected to grow by only about 1 percent this year—not a catastrophe, but well below recent growth rates of 5-8 percent and certainly below what is needed to put a dent in its high level of unemployment.

Promoting economic reform, trade, and investment in Egypt—along the lines of what the United States did in Eastern Europe after the fall of the Berlin Wall—are certainly worthy goals, but will face enormous challenges.  Egypt had been pursuing economic reforms, at the urging of U.S. officials, for the past several years, with some success. However, the gains of those reforms went largely to cronies associated with the Mubarak regime, causing great resentment. American economic advice is viewed with suspicion these days in Egypt. Obama’s economic pledges will also run up against resistance in Washington too. The mood in Congress is not supportive of new assistance programs and trade deals. There are already three free trade agreements languishing on the Hill (those with South Korea, Columbia, and Panama); Obama did not mention renewing efforts at striking a free trade agreement with Egypt—that seems not to be in the political cards right now. Making the new trade initiatives more than rhetorical will be tough. The uncertainty around what type of new government might emerge in Egypt does not help matters. The recent protests in front of the U.S. Embassy by extremist groups like Islamic Jihad (which assassinated President Anwar Sadat in 1981), demanding the release of Sheikh Omar Abdel Rahman, the radical cleric imprisoned in New York for the first World Trade Center bombing, will likely give some policy makers in Washington pause.    However, a few billion dollars to help stabilize Egypt’s economy is a price well paid to avoid the rise of radicalism and bolster the forces of moderation and democracy.

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  • Posted by Stephen R. Ganns

    This post gets it right.
    Here is a comment from 3 February 2011 which you may find relevant:

    The Real Effects of Global Imbalances:e.g. Egypt 2011
    by Stephen R. Ganns on February 3rd, 2011

    There are some including the IMF, as well as a cadre of preeminent central bankers and economists, who have pegged the true cause of the current financial crisis as trade imbalances which left the world awash in too much currency–the effect of which lowered rates on investments and fueled significant “fat tail distributions” (or bubbles as they are called these days). This is a limited view of significant proportions: however, it contains at least a modicum of truth. But let’s briefly look at the real “imbalance” problem, which if not handled, threatens the entire geo-political landscape.

    In the Post on this website entitled, Speculative Economics…, Section IV. , a few countries are represented in terms of their 2009 GDP. The U.S. is first at $14.25 T, followed by Japan at $5T with China a close third at $4.9 T. Lower on the list is Iran, at $330B. To our point, Egypt’s GDP is $217B. Also included in the same Post is the population of each country. This very bluntly, tells an interesting story–quite relevant to the current social unrest occurring in Egypt today.

    The U.S. has a population of some 313M with a yearly per capita GDP of about $46,000. Two current examples of social unrest in the Middle East are Egypt and Iran. Both have populations of about 80M. Per capita GDP is approx. $2,770 and $4, 100 respectively. Yemen has a per capita GDP of $1,230 and Jordan’s is $4,400– however, in its Palestinian sector, it fares much worse. We could go on about other parts of the world. But the truth: most of the world lives in poverty and yearns for a livelihood, freedom and government infrastructure stability.

    In contrast, Kuwait’s per capita GDP is $54,000–no social unrest. Saudi Arabia’s per capita GDP is around $26,000–some social unrest. The relative correlation of per capita GDP to social unrest would be an interesting study and could conceivably be predictive (a priori) rather than reactive (posteriori) in the universe of geo-politics.

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