Egypt's Future Looks Terrible, With or Without Reform

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For those seeking context, clarity and a glimpse of Egypt's (and the Middle East's) future, you'll find it here, in an excellent and very pessimistic piece in the Asia Times by economist David P Goldman.

His conclusion: Egypt is a failed state, and its failure will grow more pronounced over time, with or without a President Mubarak. Those hoping protests in Egypt will encourage a transition from a closed and backward kleptocracy to a more open, forward-looking democracy and capitalism should not get their hopes too high -- to put it mildly. Egypt is economically desperate and ripe for the empty promises of demagogues, fanatics and socialists -- a country more likely to throw its support to the Muslim Brotherhood or some other person or group along those lines.

It isn't as though President Mubarak hasn't tried to modernize and reform the country. A quick perusal of the Index of Economic Freedom shows Egypt has registered some of the biggest business-climate improvements in the Middle East or Africa.

Country 10-year improvement in economic freedom (in index points)
Rwanda 17.3
Syria 14.7
Qatar 10.5
Yemen 9.9
Mauritius 9.8
Cape Verde 8.3
Egypt 7.6
Madagascar 7.3
Nigeria 7.1
Iran 6.2

Source: Index of Economic Freedom

Goldman's contention is that Egypt's (and the Middle East's) biggest problems are deep-seated cultural defects that currently go beyond the realm of economics or even politics and undermine efforts at reforming both.

His main points:

--Egypt is currently the world's largest importer of wheat

--Most Egyptians live on less than $2 a day, with food taking up nearly half or more of average budget.

--Wheat prices, which have doubled over the past year, are slipping beyond the means of average Egyptians due to a permanent increase in demand for wheat and wheat-based products (beef) from an increasingly prosperous Asia (particularly China). The widening prosperity gap between Egypt (as well as the wider Middle East) and Asia (and much of the rest of the world), will further price food like wheat out of the average Egyptian budget.

--Asia's rising prosperity will make commodity price shocks stickier, more protracted and sustained since Asian consumers are in a stronger position to absorb those price shocks (making Asian demand is more inelastic), leaving countries like Egypt more exposed to future shortages.

--Egypt has little or no human capital, and therefore little or no value added to offer the hypercompetitive global economy. 35% of all Egyptians and 45% of women can't read. The talented few have, for the most part, abandoned the country for the West. The trade deficit, already large, will become larger with a plunge in desperately needed tourism revenue.

--Egypt is culturally backwards which, among other things, limits the progress of its women, squandering much needed potential (I will spare you one particularly gory example of that backwardness from the article).

--Egypt's real unemployment rate may be as high as 25% among men and 60% among women.

--Egypt has a shrinking financial capacity to shield its population (via subsidies) from commodity price shocks. Its public debt is 74% of GDP and it's under growing scrutiny from creditors (as evidenced by widening credit-default swaps and rising local rates over LIBOR), pushing up its borrowing costs and threatening the stability of its currency. Its foreign exchange reserves are thin, insufficient to withstand a full-blown panic and capital flight.

The key quotes:

To expect Egypt to leap from the intimate violence of traditional society to the full rights of a modern democracy seems whimsical. ...Egypt is wallowing in backwardness, not because the Mubarak regime has suppressed the creative energies of the people, but because the people themselves cling to the most oppressive practices of traditional society. And countries can only languish in backwardness so long before some event makes their position untenable... Episodes of privation and even hunger will become more common. The miserable economic performance of all the Arab states, chronicled in the United Nations' Arab Development Reports, has left a large number of Arabs so far behind that they cannot buffer their budget against food price fluctuations.

Asians now are wealthy enough to buy all the grain they want...If wheat output falls, for example, due to drought in Russia and Argentina, prices rise until demand falls. The difference today is that Asian demand for grain will not fall, because Asians are richer than they used to be. Someone has to consume less, and it will be the people at the bottom of the economic ladder, in this case the poorer Arabs...Financial crises, like epidemics, kill the unhealthy first. The present crisis is painful for most of the world but deadly for many Muslim countries, and especially so for the most populous ones.

There is no solution to Egypt's problems within the horizon of popular expectations. Whether the regime survives or a new one replaces it, the outcome will be a disaster of, well, biblical proportions.

The situation was bad enough, even before the crisis, that it took a mere whiff of large-scale protests for President Mubarak's son (and, before the protests, his heir-apparent) and family to flee the country. President Mubarak is quoted telling ABC's Christiane Amanpour last week:

I am fed up after 62 years, I have had enough. I want to go, but if I resign today there will be chaos.... I told Obama, 'you don't understand the Egyptian culture.'

That may tell us all you need to know about Egypt's stability and its prospects, from those presumably in the best position to know.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.