Uprising in Egypt: Rebirth in an Ancient Land?

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The breathtaking events in Egypt this past week are likely to lead to long-term economic benefits for frustrated citizens long accustomed to living under the thumb of a corrupt system that has disproportionately benefited the military, left millions of young adults jobless and instilled a sense of hopelessness for the future.

But the much-needed reforms essential to Egypt’s political and economic transformation will take many years to unfold. In the meantime, the country will face short-term risks and uncertainty, and much of what takes place in the weeks and months to come will depend on how military leaders want events to play out.

Those conclusions emerge from lengthy interviews with experts on the Middle East at Wharton and elsewhere, who universally welcomed the outpouring of emotion on the streets of Cairo, Alexandria, and other ancient cities that have sat at a key crossroads of international trade for millennia.

These scholars also say that while the turmoil in Egypt has rattled energy markets and sent the price of oil soaring to above $100 a barrel for the first time in two years, they do not expect shipments of petroleum from major Middle Eastern producers to be disrupted. Moreover, Egypt’s economy itself is not large enough to send any negative reverberations throughout the global marketplace.

On February 2, the Egyptian military called for the massive demonstrations to cease so that everyday life and commerce could return to normal. The call came one day after Hosni Mubarak, the embattled Egyptian president, had announced he would not seek reelection in the fall after 30 years in power. It remained unclear whether his proclamation, followed by the military’s plea for normalcy, would satisfy angry but peaceful demonstrators who amassed by the hundreds of thousands in Cairo and other cities for more than a week, demanding that Mubarak leave office. The mass movement among Egyptian citizens began to take shape after a similar citizens’ uprising in Tunisia — another Arab country with an educated populace, a middle-class and a desire for reform — forced the ouster of President Zine al-Abidine Ben Ali, who fled the country on January 13.

Ann E. Mayer, professor of legal studies and business ethics at Wharton and an expert in Middle Eastern and human rights law, is thrilled to see Egyptian citizens take to the streets to protest the government.

“I am very happy to see a movement develop that could potentially communicate to the despotic rulers of the region the message that there could be accountability for the pattern of really egregious human rights abuses in their countries,” says Mayer. “To date, the model has been often very much like that of the old East Germany, where the idea was that the party of the elite can live in a cocoon of privilege by setting up a huge, expensive and aggressive security apparatus to monitor people and terrorize and punish anyone who doesn’t meekly submit to the system they have set up that serves their interests.”

Mayer’s joy at seeing Egyptians protest for change was echoed by others. “It’s awesome. They are the same kind of demonstrations we saw in central and eastern Europe [in the late 1980s] that took us to the edge of our seats,” says Philip M. Nichols, a professor of legal studies and business ethics at Wharton who conducts research on emerging economies. “People all over the world want honest, accountable, responsible government [that includes] themselves.”

According to Wharton management professor Mauro Guillén, change in Egypt is long overdue. “Hopefully, they will start taking steps now, and all of the various influential institutions like the military, the opposition and the present regime will agree to a transition and agree to elections so that the country can reinvent itself as a place where peaceful transitions of power take place every four years. It’s about time. Egypt has come a long way.”

“I’m incredibly optimistic about what’s happening in Egypt; it’s the best thing to happen to the country in 50 years,” states Ragui Assaad, professor at the Humphrey School of Public Affairs at the University of Minnesota and a non-resident senior fellow at the Brookings Institute in Washington. “Of course, it’s going to have short-term painful consequences, but I think the quicker Mubarak leaves, the faster the country will get back on its feet.”

Assaad, a native Egyptian, says he had been in touch with relatives in Egypt — his wife, mother and siblings are there — who gave him first-hand accounts of food shortages, empty cash machines and rising prices for gasoline and goods, but only one night of serious looting. “Most people I talk to say they are willing to deal with all this for the sake of what’s going to happen.”

Jobs Lacking for the Young

Egypt’s economy has been experiencing healthy growth in recent years, but it has not produced jobs for young adults. Many protesters cited a dearth of economic opportunities as a major reason for their desire to see Mubarak depart.

“This has been coming for 30 years,” says Paul Dyer, a fellow at the Dubai School of Government and an expert on Middle East labor and demographics. “The economic structures in the Middle East haven’t changed much since they were put in place. They worked well from the 1960s through the 1980s, buoyed by oil. The state was basically redistributing wealth.” Today, Dyer adds, the younger population is “socialized into thinking public sector jobs are the only good jobs. But the ideals largely behind the state can no longer be met — job provision, subsidization, free health care and education.” 

Egypt’s annual gross domestic product (GDP) in 2010 was estimated at $500 billion (adjusted for purchasing power parity), ranking it as the 27th largest economy in the world. Egypt’s GDP grew by more than 7% in 2008 due to Mubarak-initiated reforms aimed at attracting foreign investment, but GDP growth slid to about 5% in 2009 and 2010 following the global financial crisis, according to the Central Intelligence Agency’s World Factbook. The country’s unemployment rate was about 9.7% in 2010.

Egypt’s economy relies heavily on tourism and other service-sector jobs and on agriculture. Unlike its Arab counterparts in the Persian Gulf, Egypt is not a major oil producer. It produced 680,500 barrels per day in 2009 (ranking it 29th in the world) and has proven reserves of a modest 4.3 billion barrels (27th largest).

But Egypt is a major conduit of oil. It is home to the Suez Canal and the Sumed Pipeline, which connect the Red Sea with the Mediterranean. Both are guarded by the Egyptian army and are unlikely to face disruption, according to a report issued by Samuel Ciszuk, a senior Middle East analyst with IHS Inc., a global economic and risk analysis firm based in Englewood, Colo. Some 1.8 million barrels of crude move through the canal each day, and about 1.1 million barrels a day are transported through the pipeline.

“The risk of global crude and refined products supply disruption is not that high, as even the temporary closing of the Sumed Pipeline and the Suez Canal would only result in tankers having to go around Africa, thereby taking a longer time and adding to costs, but only delaying rather than disrupting supplies,” writes Ciszuk, whose report was cited in the Houston Business Journal.

Although the economic reforms initiated under Mubarak have generated noteworthy GDP growth in the last few years, Egypt and other countries in the so-called MENA Region (Middle East and North Africa) are not realizing the full benefits of globalization — in terms of income and employment gains among their citizens — due to a lack of competitiveness, according to a report issued in 2010 by the International Monetary Fund. The MENA region includes Algeria, Bahrain, Djibouti, Egypt, Iran Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, the West Bank and Gaza, and Yemen.

On average, the MENA countries “score poorly on most indicators of competitiveness and, therefore, face difficulties competing in global export markets,” wrote Masood Ahmed, the author of the IMF report. “This is evidenced by their relatively low export market shares: Since 1990, the MENA region has only managed to maintain its share of global exports on a per capita basis, while other emerging and developing economies have succeeded in almost doubling theirs.”

Ahmed’s study noted that the MENA nations face “the sizable challenge of having to create 18 million jobs for [their] growing labor force by 2020. High and sustained growth is a precondition for such large-scale job creation and for raising incomes. This, in turn, can be achieved by strengthening trade competitiveness so that the region can better benefit from globalization and the dynamics of today’s high-growth regions.

“Improving education outcomes and ensuring that graduates acquire the skills needed by the private sector [are] key to attracting firms that can compete in the global marketplace. These firms also seek business-friendly environments, calling for further streamlining of regulations and additional investments in infrastructure — including through public-private partnerships or by encouraging private sector investments — to increase the region’s competitiveness. In this, the region can build on successes already achieved.”

Dyer notes that historically, “the state promoted and invested heavily in education, but that was rote memorization and facts, and the skills to be a bureaucrat for the public apparatus. It was not big on critical thinking, and didn’t prepare students to participate in a globalized economy. It was great, though, on creating a sense of social justice.”

Howard Pack, professor of business and public policy at Wharton, agrees that Egypt and other Arab economies face the daunting challenge of creating jobs to meet a population increase of 150 million before the end of this decade.

Many commentators in recent years have bemoaned the economic conditions in the Arab world, but Pack holds a somewhat contrary view. He says growth in economic and social indicators, including poverty and education measures, in Egypt and many other Arab countries has been good over the last five decades — below that of East Asia but not much different from Latin America. Economic conditions in Egypt, while an important impetus behind the recent street protests, took a backseat to unhappiness over their lack of political freedom under Mubarak, he suggests.

The Egyptian economy “has actually done reasonably well,” Pack adds. “Although Egypt has a lot of inequality by the standards of many countries, it’s not particularly unusual. For example, its literacy rate is really quite good” compared with that of other Middle Eastern countries. “The deep issue is political. People are tired of Mubarak.”

Nonetheless, Pack underscores the importance of creating jobs to meet the growth in population. In their 2007 book The Arab Economies in a Changing World,” Pack and co-author Marcus Noland argue that growing prosperity, confidence and optimism about the future could underpin movement toward greater political openness and tolerance across the Arab world. But that vision will not be achieved unless Arab countries generate jobs in order to avoid “despair” on the part of young adults.

To generate an increase in employment of the needed magnitude requires Arab nations to duplicate the “miracle” economies of Korea and Taiwan, according to Pack. These Asian countries grew their economies and improved the lives of their citizens by expanding labor-intensive manufacturing and service-sector exports, often in conjunction with foreign investors and indigenous entrepreneurs that integrated with global supply networks.

Progress in the Arab world is inhibited by two factors — one institutional, the other political, Pack says. Outside of energy production and tourism, Egypt and other Arab countries score poorly on a range of indicators relating to cross-border economic integration and the transfer, dissemination and application of technological know-how and innovation.

Assaad, the professor at the University of Minnesota, sums up the goal that Egypt should be striving for this way: “Stop subsidizing the rich and focus on economic policies that are labor intensive.” One specific step Egypt can take is to eliminate its subsidy on energy products. Petroleum products are sold to all Egyptian citizens at deep discounts from international prices, but it is the wealthy who mostly benefit from the subsidy since they are the ones who own large houses, cars, air conditioners and the like, Assaad says.

“The energy subsidy is equal to what the government spends on education and health twice over,” according to Assaad. “If that subsidy is removed, it could help the poor. Subsides are common among countries that think oil doesn’t have an opportunity cost. It’s okay for Saudi Arabia to do it, but in Egypt, it has a tremendous regressive impact.”

The Role of the Military

Matthew Axelrod, who served as North Africa and Egypt director in the office of the U.S. defense secretary from 2005 to 2007, says Egypt’s military will play a pivotal part in Egypt’s future. That role will be compounded, however, by a sensitive and curious tension: Like the street demonstrators, many officers in the military are weary of Mubarak’s rule and support the protesters, but these officers and others have benefitted financially under Mubarak.

“The military has two major interests,” notes Axelrod, who is now a graduate student in the Joseph H. Lauder Institute of Management and International Studies, a joint program of Wharton and Penn’s School of Arts and Sciences. “One is to maintain their credibility with the Egyptian people and to defend the people, the state and the constitution. The other is to look out for their own economic interests. The military is not going to easily give up the reins of power without assurances that their way of life will not come under too much scrutiny, at least in the short term. It is significant that the military has been siding with the people, up to this point. It’s not surprising the military have not attacked the people who were demonstrating because attacking people would vaporize their credibility immediately.”

It isn’t that Egypt’s military is corrupt in the sense that generals demand bags of cash for favors from businesses, although that may indeed occur, Axelrod says. It’s mostly that the military owns so much land and has its fingers in virtually every sector of the economy — so much so that the money it takes in each year from its business ventures pays for a good part of military operations.

Axelrod gave an example of how the military generates revenue for itself. “Let’s say you’re a tourist company or a real estate company and you want to buy portions of land. Well, the Egyptian military owns the land. So you have to deal with them. It’s not that they’re taking bribes; they are your business partner and you have to deal with them. The Egyptian military represents a vast economic apparatus and they want to keep that apparatus untouched. The military produces and sells goods to the military, ranging from military equipment to shoes. They have their own social clubs that are cordoned off. They get subsides for housing and automobiles. This has evolved over the last 30 years. The military is not as wealthy and powerful as they used to be, but they are insular and have a lot to lose with a regime change.”

Axelrod, who wrote an analysis of the Egypt crisis that was posted January 31 on the website of Foreign Policy magazine, tells Knowledge@Wharton that there is no question in his mind that Egypt must liberalize its economy. “Right now, if you want to start a business, you would have to deal with the political players in the regime in a corrupt manner. All that needs to change. There needs to be a lot more transparency in business dealings. That’s the more fundamental issue. Over time, it would be beneficial for the military to transition its economic activities to the private sector. But that can only happen if the defense budget is sufficient to sustain the military. I don’t see that type of reform happening any time soon. Just because the current central government changes doesn’t mean that all the governors and tax collectors and municipal government will change quickly. This transition will take a decade or more if it begins now.”

The Turkey Model

Waheed Hussain, professor of legal studies and business ethics at Wharton, says he has watched the demonstrations in Egypt with great interest because it is such an extraordinary occasion. He hopes that if democratic reforms occur in Egypt, its citizens will look to Turkey as a model of a politically free and economically prosperous Islamic society.

“There’s nothing really comparable in the Arab world to this kind of popular uprising in Egypt,” he says. “There have been lots of military takeovers, but the only one to arise from below was the uprising in Iran. If Mubarak goes, the best hope is that Egypt moves in a direction like Turkey. I’ve talked to people who say they’re afraid of the Muslim Brotherhood [coming to power] in Egypt. But it’s possible the Muslim Brotherhood will become more moderate. I think Turkey is the hope.”

Wharton’s Mayer concurs that Turkey would be an appropriate model for Egypt to emulate. “If you give Egyptians opportunities, they are extraordinarily creative, dynamic and hard-working; it’s just so hard for people to get anything accomplished in Egypt. That’s what’s holding them back. Iran is trying to position itself as the model for Egypt, and some say the turmoil stems from that. That’s nonsense. The model, I am sure, for most Egyptians is Turkey. Turkey is a democratic country. Turkey has a flourishing economy. Turkey has been doing much, much better through the global economic crisis than the countries that used to lecture Turkey [about its economic policies].”

Mayer noted that for centuries, Egypt was part of the Ottoman Empire, and she predicted that today’s Egypt will look to its former ruler for guidance. “Egypt will look north to the country that was their master during the Ottoman Empire,” she says. “And there is a chance, if the pieces come together in the right way, that in about 20 years we’re going to see an Egyptian success story along the lines of what we see in Turkey.”

But Mayer says Egypt will face tremendous uncertainty in the coming weeks and months as changes in the government unfold. Indeed, on February 2, supporters of Mubarak took to the streets to battle Mubarak opponents. “I’m very anxious about the next chapter because there isn’t any Nelson Mandela who can walk the nation through the transitional stage. I fear there could be many, many more bumps in the road before things settle down.”

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