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Untitled Document

Thinking positive thoughts about Middle East unrest

Tammer Qaddumi, Private equity analyst, Abu Dhabi

I for one am pretty convinced that the Egyptian Facebook Revolution was everything right and nothing wrong. There are countless angles to what happened, and I'm sure you all have heard many of the storylines and have considered what they mean: the revitalization of the Arab street; poor triumphing over the rich, unification of masses around demands instead of ideologies; achievement of goal through peaceful protests; the new era of accountability from Arab leaders; and the shifting geopolitics of Israel, the US, and the Middle East.

International editorialists have been having a field day with these themes. And, granted, each is a riveting topic and deserves a discussion or two of its own. Moreover, with Libya now in basically an all-out civil war, the relatively civil manner in which events proceeded in Egypt seems even more remarkable.

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But given the amount of analysis being churned up, cut up, turned over, flipped around, and re-presented on an hourly basis, there is still one topic that no analyst can seem to get comfortable grasping, which is the question of the economic impact of the revolution. I'm not referring to the 18 days of economic shutdown experienced during the protest period, the total impact of which is expected to bring Egypt's growth rate in 2011 down from 5% to 2%.

With the Egyptian stock market now set to finally re-open, the question remains: how does the fall of the Mubarak regime impact the economy of Egypt and the economic relationship of Egypt to the rest of the world on an ongoing basis. This theme itself has many different angles. As someone who spends his nine-to-five looking at investment opportunities in the Middle East, one of the more interesting economic angles to this revolution is its impact on Egypt's fledgling capitalist system. I mean, I'm as rah-rah American as the next guy. Isn't capitalism what we spent the last 50 years fighting to preserve?

One of the few defendable aspects of the Mubarak regime, and a point people keep coming back to, was its ability to ensure a stable economic base, facilitating easy access to Egypt's 80 million people, receptive to foreign capital and cooperative with regards to international trade flows that depend on Egypt (most importantly, access to the Suez Canal).

Throughout his tenure, Mubarak instituted structural reforms, a business-friendly regulatory framework, privatized many state-owned enterprises, all of which encouraged foreign investment. It was a capitalist success story, and the numbers proved it. GDP per capita quadrupled during Mubarak's duration as president. Sure, this figure wasn't really a per-capita achievement. No one doubts that the severe income inequality was an unfortunate byproduct of Egypt's growth, but hey, what nascent capitalist society gets everything right in the first 30 years?

And bolstering the importance of this Mubarak accomplishment, it trailed Gamal Abdul Nasser's Arab Nationalist movement, which was basically socialist in nature. Moreover, word on the street is that the Egyptian armed forces tend to lean that way as well. Who knows what economic philosophy whoever ultimately rises to power will hold? Could the fall of Mubarak signal the end of Egyptian capitalism?

To be clear, antebellum Egypt wasn't exactly good clean capitalism. The Egyptian economy was characterized by a small number of extraordinarily wealthy captains of industry, who largely benefitted from a virtuous cycle of regulatory support, state-tendered contracts, and guaranteed government off-take. Each layer of government-corporate "cooperation" would typically involve a full slew of payouts and kick-backs, sizeable enough to pile a reputed $70 billion into the Mubarak family bank accounts.

Moreover, this oligarchy proved unable to provide employment for huge numbers of Egyptians. There was a massive underclass of government civil servants earning around 200 Egyptian pounds or $35 a month (fixed at the same rate for 20 years) for government doctors, teachers, police, etc. Almost needless to say, the primary purpose of this bloated government job apparatus was to reduce rampant unemployment. On top of that, the government provided subsidies for certain commodities, including wheat, to subsidize the cost of bread uniformly across the population, irrespective of means. As my Egyptian-American boss so eloquently phrased it: "All of these [policies] and more were kept in place by the previous regime in an effort to keep the poor on the hamster wheel of life just trying to make it day to day."

These points notwithstanding, Egypt's mega-corporates, the Ezz Steels and the Orascoms and the EFG Hermes', had the scale, stability, and competitive advantages to make international investors salivate. Here you've got company x, needing a certain amount of money in order to develop project y or roll-out product z, which it would sell, at unchallenged prices, to a population four times larger than any other in its region. And the whole operation would be supported at multiple phases and all but guaranteed by the government, which happened in fact to be strongly backed by the United States.

From a risk standpoint, this is what you call appetizing. For countries of the GCC, that generate billions of oil royalties annually and that have recently begun dumping more of their cash into regional as opposed to international investments, Egypt represented without a doubt the most attractive investment market in the Middle East.

So now the fear is that the fall of the Mubarak regime and the rise of a Government of the People, who happen to be extremely resentful of those privileged institutions, will not only strangle the virtuous cycle, but castrate the surviving beneficiaries. Whatever foreign capital is still in the country is yanked, Egypt's economic prospects tank, and you're left with, well, who knows? Qaddafi? Or wait, that didn't work out so well either…

On the contrary, in the opinion of this unbiased observer, the Facebook Revolution will ultimately be good for Egyptian capitalism in the same way that the trust-busting of Rockefeller, Vanderbilt, Carnegie, Morgan, and other gilded-age industrialists at the turn of the 20th century benefitted the US economy in the long-term. Standard Oil was split up, spawning a number of offspring which, nearly a century later, continue to drive energy innovation forward as a means of remaining competitive.

In addition to spawning the direct descendents, Roosevelt's big stick removed barriers for smaller, more technologically focused companies to emerge, encouraging the US's highly praised pattern of creative destruction. The churn continues until today, with startups now at the vanguard of solar, bio-fuel, and other innovative sources of energy.

I have hope that the inevitable scale-down of Egypt's industrial oligarchy will result in a similarly positive economic force. Egypt has a young, educated, wired-in and, as we've all seen, empowered population. And it's big. Moreover, Egypt still has its incredible assets: strategic geographic location, the Nile, the Suez Canal, unparalleled tourist attractions. The field is now wide open for new businesses to stake their claim, developing and marketing innovative products and services which will ultimately enhance the lives of Egyptians.

If foreign capital remains wary of the current "risky" environment, then allow economic growth to be driven by Egypt's massive captive demand. It would be organic growth, and its gains would almost certainly flow through the population, achieving one of the primary demands of this revolution. As the economy matures, there is no question that foreign capital will come back, and possibly at better terms for Egyptians.

Mubarak did indeed do a lot to build the framework and infrastructure for privately driven economic growth in Egypt. If the successors to the regime can tweak and refine that framework in a way that encourages sustainable competition, the real victory of this revolution could yet be realized.

About the author

Click to EnlargeTammer Qaddumi is an investment analyst with an international Abu Dhabi-based private equity investment company. A native of Houston, he is a graduate of Memorial High School and Yale University.

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