Walter Rhett

In Egypt, Economics, Not Politics, May Force A Turning Point

In Business, Living, Perlo on February 11, 2011 at 9:47 am
Cairo, Egypt
Egypt is an economics lesson being missed. The classic models of the interplay between income, exports, government spending, investment, interest rates and banking reserves fall woefully short in understanding or interpreting the economic clash for power taking place in Egypt. More than the social protests and the threats and physical violence returned by the state, this clash is using economic levers and these may ultimately determine who will control the apparatus of state.

Egypt is a fascinating study of a revolution. It pits a very rich despot against a population whose economy is losing $310 million a day, whose wages and commodities are unavailable even as their speech is made free. Despite the live video feeds of chanting, prayers, and marches, the revolution is being fought off screen by calls to central bankers. Through collecting non-transparent promises and pledges, Mubarak will reinforce his hold on power. Framed as a family squabble between wise battled tested elders and raucous youth and moral reason, it is really a huge battle over the family estate.

Egypt has the largest non-oil GNP in the Middle East. Years ago, it reduced its massive external debt, began to nationalize and privatize key economic sectors, and opened its doors to foreign investments.

Egypt’s GNP Growth

Recently, according to World Bank figures, Egypt’s GDP doubled between 2005 and 2009, from $88 billion to $189 billion. Against this phenomenal raise, Egypt lost 5 percent of its purchasing power in 2008. That means consumers and workers experienced an income decline. Since 2008, average income have only risen from $US5500 to $US6200 in 2010. Egypt has the world’s 21st largest labor force, but ranks a dismal 136th in per capita income. Unemployment rates for the nation’s 37 million workers are 50 percent in the service sector, the economy’s largest. Forty percent of the population lives at or near poverty. Yet CIA data says Egypt ranks 40th in the world in the value of traded shares.

 
 

Egypt's Purchasing Power

 A man with $70 billion (Bill Gates has $54 billion) stockpiled can rest comfortably and wait patiently while the rest of the country is squeezed and starved to preserve his power. No doubt, Mubarak’s team has called the world’s central bankers, finance ministers and heads of state to secure favorable treatment during the campaign for democracy. Do you think they haven’t?

These calls have deep historical roots in the Middle East, a region which is home to many sophisticated techniques and practices incorporated into modern Western markets. But none are more important or older than hawala, a business practice that depends on informality, loyalty, and honor as the cornerstones of its financial transfers. Hawala has many illegal uses, including money laundering and financing illicit kickbacks, overpricing, and marco-theft. Terrorists use it, but governments can too. This practice shadows formal state systems and acts to signal the arrangements needed that will preserve power and profits for players on the team. You don’t accumulate $70 billion over 30 years with developing loyal relationships and using more than a bit of hawala.

 

 

Egyptian students listening to US President Barack Obama during a speech at Cairo University, June 4, 2009.

At what point will the national campaign collapses from the economic squeeze the state is tacitly being allowed by all parties to play out? For example, massive humanitarian aid could sustain the campaign for democracy against the government’s forces. The US could pledge such support; Egypt would look foolish to decline it.

Already in the push back, those loyal to the regime are being rewarded while the state plays chicken and risks its financial health in the world markets by dragging its feet. The state, the gateway for basic services and food, is creating higher prices and false shortages to squeeze those who are insisting that its leaders step down.

Companies inside and outside of Egypt are profiting from the political unrest and are using these profits to stop the movement of the Egypt toward democracy. Rising costs are used to leverage world-wide governments and create popular pressure to stifle the movement, while the companies applying this pressure through price increases benefit on their bottom line.

The flip side of Egypt’s authoritarian threats allows time for the society to be undermined by silent economic treachery: the state’s purpose is to let the protests stall the economy until the movement runs out of steam. In revolutionary economics, political economy is a wielded to psychology and culture. The world and the media are focused on the use of force; but in 2011 the winning weapon is money. As long as Egypt is true to its character and the people remain polite and at peace, in the end, economics, not politics, will force a turning point and may deal the winning hand.

 

Egyptian Market Spice Bazaar

 

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  1. Despite the live video feeds of chanting, prayers, and marches, the revolution is being fought off screen by calls to central bankers.

    You don’t accumulate $70 billion over 30 years with developing loyal relationships and using more than a bit of hawal.

    Almost 7 billion people, many of us watching and waiting, many of us holding our breaths—many of us struggling with the basics that make our own lives possible day after day. Even without knowledge of the details, most people of age, reason and experience with the world of ‘give and take and take’ are very aware that chanting and prayers have no effect on a dollar. While every breath of every life must be paid for with something, most of us know that civilization is a fragile agreement that takes more than dollars to sustain. We understand.

    Maybe some of us are hoping those important old relationships—and conversations that are certainly happening—are not being lost to the vain insanity of dying old men determined to have their kleos, nor to the full-throttled greed of the inexperienced. Even a prison guard on death row realizes that a man without hope cannot be controlled. What will happen when billions are finally without hope? What happens when the chanting, prayers and singing all stop?

    Silence is not always golden.

  2. What evidence do you have of Mubarak engaging in hawala?

    • None. He didn’t have too. The post points out that others believed this as the case. It simply cited the variety of views circulating at the time. Thanks for your question and for reading.

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