The “Arab Spring” and Economic Development

One of the hopes associated with the political changes in Egypt during the “Arab Spring” of 2011 was that there would finally be an overhaul of that country’s economic system that would allow entrepreneurship to flourish.  Economic progress is crucial in a country with a young population floundering under the highest youth unemployment rate in the world—25% as of August 2011—and observers warn that unless Egyptians begin to see real changes in their livelihoods the overall situation in the country will continue to be unstable.  However, commentators have pointed to a significant number of issues and challenges with respect to the environment and infrastructure for entrepreneurship in Egypt: few sources of capital, a poor education system that is failing to produce anywhere near the level of skilled workers necessary to launch the economy, poor productivity and corruption among government bureaucrats and an unwieldy set of laws and regulations that are costly to comply with and result in excessive delays for new businesses and existing businesses looking to expand.

Egypt is not alone among Arab countries in the Middle East when it comes to overcoming historical problems with respect to economic policies.  Many countries in the region have been able to avoid dramatic structural problems with their economics because of the revenues from oil sales; however, they now find that they have fallen far behind other parts of the world, notably Asia, with respect to competencies necessary for global competitiveness and supporting larger numbers of entrepreneurs.  Leaders in Arab countries have often been corrupt and ineffective and have embraced “state-dominated” economic models that favored only a select few and cut off opportunities for inbound foreign investment and development of a healthy private sector.  In the meantime, developing Asian countries, such as China and Korea, have vigorously pursued integration into global supply chains and invested in the human and other resources required to provide goods and services to industrialized countries.

The failure of Egypt to move quickly to identify and install a new set of political leaders after the departure of former President Mubarack has not helped the situation and, in fact, legitimate concerns have been raised about whether any of the gains expected from the Arab Spring will be realized.  Even if new leadership does appear it is an open question as to whether they will have skills, experience and political courage to dismantle what remains of the “old system” and institute the tough reforms required to put Egypt on a new economic path.  Among the more important areas of concern are the following:

  • Tapping into the small group of young and educated Egyptians interested in using their training to start and manage new businesses.  This requires liberalization of governmental regulations and enlightenment among bureaucrats.  In addition, establishing a safe and secure environment for foreign investors would provide these budding entrepreneurs with access to capital not currently available inside Egypt.
  • Establishing programs that will quickly address the high levels of unemployment in Egypt, including infrastructure projects and initiatives that will provide the basic training necessary to begin improving the quality of the workforce to the point where Egypt can begin to compete with other countries for the interest of foreign investors.
  • Addressing the issues that have made Egypt one of the lowest performers in the World Economic Forum’s competitiveness survey—ranking below countries such as Guatemala, Kazakhstan and Rwanda—including intrusive, inefficient bureaucracies, weak legal systems and feeble infrastructure.
  • Reforming an education system that has created a significant gap between the qualifications of graduates and the skills needed for the economy to develop.  Local firms need to have access to engineers and others with the background needed to develop and manage technologically advanced manufacturing systems.  As it stands now, companies doing business in Egypt need to spend large amounts on training for new employees, an expense that is particularly challenging new firms struggling to catch up with competitors in other countries.
  • Leveraging “assets” that can provide much needed revenues and other resources from foreigners, including revitalizing the important tourism sector and opening opportunities for foreign investors to set up businesses in Egypt to tap into the 84 million members of the country’s consumer market.  This will require quick and aggressive steps to alleviate concerns about security and remedy the infrastructure problems mentioned above.

There is no doubt that Egypt faces significant hurdles to effectively reforming its economic system in ways that will benefits a larger segment of the population.  Decades of past practices must be overcome and history predicts that it will take time, more time than protestors may be willing to provide, before changes can be observed.  Other countries and regions that have gone through similar upheavals, such as Indonesia and Eastern Europe, struggled for years before they were able to get their economies on to a steady path for growth and development.  It should be noted that global institutions such as the International Monetary Fund have also counseled Egypt and other Arab countries to endorse trade liberalization and privatization and subsidies from these institutions will be accompanied by conditions on development plans that have been crafted with the input of local political leaders, a strategy that puts even more pressure on Egyptians to make the right choices regarding their political framework in the days to come.

To learn more see the recent articles published in TIME magazine and KNOWLEDGE@WHARTON.

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