Maged Shawky is the former chairman of the Egyptian Stock Exchange.
The search for a more open, democratic government has brought millions of our fellow citizens into the streets. But if we are genuinely seeking democracy in Egypt, we must look forward to what will make it work and how it will look. Democracy will not emerge on its own; it will require hard work.
The coming months will be challenging for all. The resiliency of Egyptian citizens will certainly be challenged through the period of slower growth and lower investment. If the economy doesn’t grow, it affects us all: businesses can’t create much needed jobs and poverty continues to spread. Without jobs, citizens often find themselves more dependent on the government and the question is whether that government can meet those expectations.
So while we are all hopeful that in the long term the events of the past few weeks will certainly lead to much needed reforms that create jobs and reduce poverty, in the short term we should expect that things could get worse; that there will be difficult and challenging times in the days ahead.
The government recognizes the problems we are all facing – a lack of jobs and economic opportunity. It has announced a new policy to spend more on public services, salaries and pensions, extend subsidies (at a time when commodity prices are in an exponential growth), and increase the minimum wage.
For the last decade Egypt has been trying to adopt a free market model. This has not received a warm welcome by the majority of the Egyptians, as the gap between the rich and the poor widens, the trickle down mechanisms don’t work, and many people remain stuck in their current situation without opportunities to make their life better.
But the criticism of market economy is misguided – in many cases, what has been responsible for the plight of regular citizens is too little of market economy reform, rather than too much.
The experience of many successful emerging economies that go forward with the free market and move way from socialist or communist models can be applicable to Egypt. Take Brazil and India for example. Although they are much larger in nominal terms, the characteristics of these economies are close to Egypt: high population growth, significant poverty, and a sizeable gap between the rich and the poor. Yet Brazil and India have consistently moved towards opening up their societies, promoting more open and democratic forms of government, and establishing clear and fair rules in the economy. In the process they have seen successes in growing their economies and reducing poverty and creating jobs.
The Egyptian government may be getting the signals, but they are responding by investigating income sources of wealthy businessmen, a signal that might remind us of the period of Nasser regime with what had been called Al-Moday Al Eshtiraky. This action might be on the right track to reduce corruption; however, it fuels private sector doubt that the government really serves the community.
What needs to be done is to remove barriers to business growth and development, which include reducing bureaucracy. We need to have a business community that is vibrant, that can create and innovate and attract and develop new talent and compete not only in Egypt and other Arab economies, but globally. This is what India and Brazil have been doing. It is very surprising when political and economic analysts here in Egypt compare South Korea’s success story with our country. Both countries might have started the reforms in the same era, at a period of time both income per capita were very close to each other; however each are distinct to an extent that they can’t be compared.
The government in Egypt is trying to fill the current economic vacuum through more spending. It may help deal with the problem in the short term, but it doesn’t solve the problem of “why can’t business grow? Why can’t people get credit to finance their micro & small business, though it is much easier instead to get credit for buying consumer goods? Why can’t businesses create jobs or compete globally?”
Another question is how the increased spending can be financed in the long term. Normally, it has been financed by frequent issuing of treasury bonds, purchased by both local banks and foreign investors. With all three bond rating agencies – Moody’s, Fitch & S&P – downgrading Egypt, treasury bond prices will fall, thereby raising interest rates and making private sector financing even less attractive then it already is given the political situation.
Some economists may consider this a crowding out effect (replacing private sector debt with the government debt), and it might be the short term solution until investor confidence is regained. However, the budget deficit as percent of gross domestic product was already skewed to a high level. In fact, the International Monetary Fund April 2010 recommendations were to work on reducing the deficit by reducing subsidies and to continue on taking measures to increase the tax revenue. Either of these recommendations will be feasible in the current situation.
Some suggest that Egypt should adopt socio-capitalistic model like most of the Nordic region, Germany and France; but for us it is a question of affordability. Can the country afford to adopt this model? Wealthier countries like Saudi Arabia might be able to afford it, as well as the Gulf states where the population is very small and poverty levels are not the same.
What a new Egyptian government will have to recognize is that small businesses are struggling. They need market institutions to grow and survive. The millions of business people, such as vendors, shoe-makers, bakers, small shops, small manufacturers, etc. have tremendous knowledge and desire to move our country forward. They need a government that supports their activity, not the one that creates barriers and problems.
To establish a free market capitalist model, Egypt must have the proper efficient institutions to regulate and monitor. If these institutions are there, do they work efficiently? If they are not efficient, is this inefficiency due to lack of skilled labor or corruption? These questions should be answered very frankly and honestly. Honest answers to these questions will shape Egypt’s road ahead.
Published Date: February 17, 2011