Down to a Trickle

As journalists like to put it, "experts disagree" on the prognosis for the Egyptian version of Arab Spring. But pretty much everyone does agree that the chances for a happy ending - i.e., a liberal democratic one - turn heavily on Egypt's ability to get the economy back on a rapid growth track. And while that is certainly possible, it won't be easy in the nation where trickle-down isn't working.

Bear with a little history here. The Nasser years were a disaster in economic terms; Egypt's experiment with full-throttle central planning led nowhere, slowly. Anwar Sadat's successor regime was able to tap foreign banks to augment spending. But this financial house of cards collapsed in a tangle of IOUs, and the economy stagnated through much of the 1980s.

Thereafter, Egypt caught a break. Much of its crushing external debt was forgiven by western governments in return for Egypt's participation in the Gulf War. And the IMF restructured much of the rest in return for promises (largely kept) to restrain spending and contain inflation. Between 1991 and 2001, per capita GDP calculated in terms of purchasing power rose by almost half - albeit to a still-meager $3,700.

With the introduction of serious market-based reforms in the last decade - privatization of most state-owned industry, deregulation of agriculture, encouragement foreign investment -- the pace of growth picked up considerably, reaching near-Asian (7 percent) rates. This was especially impressive in light of the fact that Egyptians save a far smaller proportion of income than East Asians and thus depended on foreign investors to meet the demand for capital.

Mubarak's technocrats also deserve credit for skating through the global recession without a pratfall, responding in timely fashion with domestic stimulus (mostly in the form of accelerated infrastructure investment) that largely offset declines in private investment and exports. The growth rate never fell below four percent. In 2010, per capita GDP (again, in purchasing power terms) exceeded $6,000, which bumped Egypt up to "lower middle income" status in the World Bank's pecking order.

Tahrir Square knocked the stuffing out of projections that Egypt would return to pre-2009 growth rates in 2011/12. Tourism, a mainstay of both employment and foreign exchange earnings, has taken a huge hit. And nobody with serious money has been in the mood to bet on the outcome of the revolution. The big question is whether the economy can get its mojo back once investors can be reasonably certain that the political rules won't change anytime soon.

Viewed from a proverbial 40,000 feet, the economy looks to be in a pretty good position to manage that. Egyptian manufacturing, aided by preferential access to the U.S. textile market, is sufficiently productive to be reasonably competitive at home and abroad. Trade and investment ties with both Europe and the Arab states are strong. Domestic oil and gas production aren't adequate to make Egypt a net exporter of fuels, but do protect the economy from energy price spikes. Consider, too, that some four million Egyptians live abroad (most of them in the U.S. and the Gulf), delivering some $8 billion or so annually in remittances.

But there's a darker side to this coin. For while Egypt made great strides in the last two decades in building a diversified market economy, it did not shed many of the liabilities that typically dog developing countries. Corruption pervades every aspect of economic life: Egypt's public sector ranked 112^th of 183 countries on the Transparency International's Corruption Perceptions Index in 2011, behind ethically challenged countries such as Gabon, Albania and Jamaica.

Not coincidentally, Egypt ranked 110^th out of 183 countries on the World Bank's 2012 Ease of Doing Business index. It takes an average of 214 days to obtain a building construction permit, and a typical contract clash requires almost three years to settle in the courts. Indeed, one has to wonder how the economy made it this far.

12NEXT