Reference no: EM131552177

Case Study: Revolution in Egypt

With 83 million people, Egypt is the most populous Arab state. On the face of it, Egypt made significant economic progress during the 2000s. In 2004, the government of Hosni Mubarak enacted a series of economic reforms that included trade liberalization, cuts in import tariffs, tax cuts, deregulation, and changes in investment regulations that allowed for more foreign direct investment in the Egyptian economy. As a consequence, economic growth, which had been in the 2 to 4 percent range during the early 2000s, accelerated to around 7 percent a year. Exports almost tripled, from $9 billion in 2004 to more than $25 billion by 2010. Foreign direct investment increased from $4 billion in 2004 to $11 billion in 2008, while unemployment fell from 11 percent to 8 percent.

By 2008, Egypt seemed to be displaying many of the features of other emerging economies. On Cairo's outskirts, clusters of construction cranes could be seen where gleaming new offices were being built for companies such as Microsoft, Oracle, and Vodafone. Highways were being constructed, hypermarkets were opening their doors, and sales of private cars quadrupled between 2004 and 2008. Things seemed to be improving.

But appearances can be deceiving. Underneath the surface, Egypt had major economic and political problems. Inflation, long a concern, remained high at 12.8 percent. As the global economic crisis took hold in 2008-2009, Egypt saw many of its growth drivers slow. In 2008, tourism brought some $11 billion into the country, accounting for 8.5 percent of gross domestic product, but it fell sharply in 2009 and 2010. Remittances from Egyptian expatriates working overseas, which amounted to $8.5 billion in 2008, declined sharply as construction projects in the Gulf, where many of them worked, were cut back or shut down. Earnings from the Suez Canal, which stood at $5.2 billion in 2008, declined by 25 percent in 2009 as the volume of world shipping slumped in the wake of the global economic slowdown.

Moreover, Egypt remained a country with a tremendous gap between the rich and the poor. Some 44 percent of Egyptians are classified as poor or extremely poor; the average wage is less than $100 a month. Some 2.6 million people are so destitute that their entire income cannot cover their basic food needs.

The gap between rich and poor, when coupled with a sharp economic slowdown, became a toxic mix. Nominally a stable democracy with a secular government, Egypt was, in fact, an autocratic state. By 2011, President Hosni Mubarak had been in power for more than a quarter of a century. The government was highly corrupt. Mubarak and his family reportedly amassed personal fortunes amounting to billions of U.S. dollars, most of which were banked outside Egypt. Although elections were held, they were hardly free and fair. Opposition parties were kept in check by constant police harassment, their leaders often jailed on trumped-up charges.

Given all of this, it is perhaps not surprising that in January 2011, popular discontent spilled over into the streets. Led by technologically savvy young Egyptians-who harnessed the power of the Internet and social network media such as Facebook and Twitter to organize mass demonstrations-hundreds of thousands of Egyptians poured into Cairo's Tahrir Square and demanded the resignation of the Mubarak government. There they stayed, their numbers only growing over time. For weeks, Mubarak refused to step down, while the demonstrations gained momentum and Egypt's powerful military establishment stood on the sidelines. Foreign governments, including the Obama administration in the United States, long one of Egypt's most important Western allies, joined the chorus of voices calling for Mubarak to resign. In the end, his position became untenable, and he stepped down on February 11, 2011. The Egyptian military took the reins of power, vowing to do so for a short time while it organized a transition to democratic elections in the fall of 2011. In March 2011, Egyptians voted on a set of proposed constitutional amendments designed to pave the way for the elections in late 2011. This was the first time in six decades that Egyptians had been offered a free choice on any public issues.

Does this mean that Egypt is now on the road to becoming a democratic state with a vibrant economy? That is still far from clear. In mid-2012, moderate Islamists from the Muslim Brotherhood won the most seats in the country's first democratic election, and the Brotherhood candidate Mohamed Morsi won the presidential election. However, the Morsi government struggled. By 2013, the economy was in deep trouble. Unemployment was as high as 20 percent, the Egyptian currency was steadily losing value on foreign exchange markets, and inflation was increasing again. Tourism, which previously had accounted for 8 to 12 percent of GDP, evaporated. Foreign investment stalled, and the country's foreign reserves were falling fast. Meanwhile, the Morsi government failed to enact any meaningful economic reforms. It was unwilling to remove politically popular food and fuel subsidies totaling $20 billion a year, even though the country clearly could not afford to pay for them. Government debt was increasing, and the annual budget deficit now accounted for more than 12 percent of GDP. Many successful businesspeople left the country, fearing reprisals for their role under the Mubarak regime. Court rulings overturned privatization deals from more than a decade ago, effectively moving several enterprises back into state hands. In June 2013, protestors again took to the streets, and with the backing of the still powerful Egyptian military, Morsi was removed from office in early July 2013. As of early 2014, an "interim" government is now running the country, although in Egypt, unelected interim regimes have a history of becoming permanent authoritarian governments.

Questions

1) What were the underlying causes, economic and political, of the collapse of the Mubarak regime?

2) What do you think the Egyptian government needs to do in order to get the economy growing again and to attract foreign capital? What are the risks to the government of taking such actions?

3) What dangers do you see in the current trajectory of the Egyptian economy? What are the implications of these dangers for foreign companies that might consider doing business in Egypt? What do you think it would take to encourage more foreigners to visit, invest, and do business in Egypt? Would such inward investment be good for the Egyptian economy?

4) Political risks in Egypt seem to be increasing again, and the country seems to be retreating from democracy, largely due to intervention by the military. As a manager in an international business, how would the current turmoil and political uncertainty in Egypt influence your investment decisions, and what does this mean for the future of the Egyptian economy?