Party Likes It's 1962

The clock on economic policy in Egypt (and for what counts these days as governance more generally) is not being turned back to 2010, 1990 nor even the 1970s - it's going all the way back to the command and control hey-days of the early 1960s.

It was a failure then.  It is a failure now.

Neatly stored cans

Economic policy كده

Q:  How will you deal will deal with poverty?
A:  I will provide for refrigerated carts to distribute meat at half their current market value.
Q:  But how will that work?
A:  كده

Q.  OK. How about dealing with the constant power outages?
A.  Everyone will use energy-efficient light bulbs.
Q.  But how will you ensure people actually buy and install these energy-efficient bulbs?
A.  كده

Q.  Right. So what about unemployment and water shortages?
A.  I will solve both at once by increasing by more than 50% the amount of arable land and moving Gouna into some miserable Upper Egyptian province.  
Q.  But haven't these ideas been promised over and over and never happened? How will it happen this time, especially given the constraints that already exist on the Nile?
A.  كده

Ben venunti a Qena

Egypt Makes No Sense

Emerging markets are on the precipice of calamity, or at least that is what those driving money flows are trying to signal. China is slowing down, Turkey's currency is in a free-fall, Brazil, India, Russia, South Africa, Argentina and virtually every other leading developing country economy is suffering a crisis of some sort. In industrialized economies, the situation looks marginally better, but fears prevail about the pending end to the Federal Reserve's lax monetary policy.

Defying gravity

So what about Egypt, a country that in the past three years has gone through three constitutions, six prime ministers and seemingly endless acts of political violence, where there are shortages of basic commodities and falling exports, where a bloated public sector and unsustainable subsidy system plod along unreformed? No crisis here, at least if you believe the equity markets. The stock market is at an all-time high, flush with cash from friends from the Gulf and beyond whom, for a variety of reasons, remain desperate to prop up the country. Times are so good, and the line of donors so long, that Egypt can afford to return billions of dollars in concessionary loans from out-of-favor parties. 

Asphalt Legacies

The commemoration of the opening the military's new Cairo-Ismailia highway, attended by the First Deputy Prime Minister and his presidential aid, provides occasion to look back to the master of road-building ceremonies and marvel how much "revolutionary" Egypt has changed.

Now

Fanila Fantasy - The Case of Omar Effendi

Dusty

As Egypt's political soap opera lingers on, a recent decision of an economic administrative court carries potentially far more lasting consequences to the lives of ordinary Egyptians. The affirmation of the annulment of the privatization of Omar Effendi -- a heavily indebted, overstaffed and low-quality department store chain sold to a Gulf investor in 2006 -- sends out a troubling signal to the market over the direction of Egyptian economic policy making.

Deeply flawed on procedural and substantive grounds, the Omar Effendi case has became a rallying point for the retrograde revolutionary activists promising a return of the Egyptian economy to its illusory socialist hey-day. The fact the all-powerful rulers allowed for this decision to be rendered is revealing of their control-and-command mentality, the same mentality that set the country so far back for sixty years. A security-first instinct mixing with interventionist populism is unwinding the tepid market-based reforms undertaken in Egypt over the last decade, further setting back the cause of reform.

Egyptians cannot afford more of these delusions, no matter the excuses and no matter how many stop-gap grants the country bribes out of the world. There are no shortcuts to market reforms; the longer Egypt waits, the harder they will be to implement.  

Egypt's Unfantastic Economic Policy

Dr. Doom looms

Based on early indications, the vision of the economic "Fantastic Four" in Egypt's new cabinet is no better than that of predecessor governments. Their priorities lie squarely on finding scotch-taped solutions to an economy that instead requires radical structural change. 

Subsidizing bread instead of flour (inviting further state intrusions), centralized targeting of commodity levels (might work in the military, does not work in a market economy), seeking out billions in aid and concessionary loans to finance an unsustainable and distorted fuel market (which will not be made any more sustainable by cracking down on smuggling), setting a national minimum wage (which won't be enforced and anyway fails to address chronic unemployment and underemployment) and promising to support domestic industry by simply providing better physical security (as opposed to a streamlined bureaucracy, functioning infrastructure and non-corrupted legal and business environment), will not cut it. The politicized decision to put the IMF loan package on the back burner furthers the sense that this government has no real economic agenda. 

Merely not being the Muslim Brotherhood is not an economic policy. Fantastic and revolutionary this is not.  

Egyptian Monopoly Continued

With Saudi Arabia, the United Arab Emirates and others lined up to flood a post-Brotherhood Egypt with billions of dollars (that will never be repaid), substituting for the billions of Brotherhood-era dollars from Qatar, Turkey and Libya (that will never be repaid), plus the billions of U.S., European and international funds that continue to roll in whomever is in power (that too will never be repaid), perhaps Egypt is on to something. Every couple of years scare the world shitless with mass mayhem, then sit back and add up the mula. 

Revolutionary Pounds

The Sewage Canal

As Egypt frets that Ethiopian hydroelectric designs may force a rethink of its asinine aspirations to flood infertile sands to grow rice and wheat to replace asphalted-over Nile river plains (and impinge upon time-honored traditions such as aimlessly watering the street), attention has shifted away from development plans for the country's other strategic waterway, the Suez Canal. The Suez Canal Corridor Project seeks to promote public-private partnerships to develop the areas adjacent to the 160 kilometer long canal. With the exception of the harbors, liquefied natural gas container facilities and some light industry in Soukna and East Port Said, the canal area is sparsely developed. Utilizing a strategic location, which is the main trading conduit between Asia and Europe and through which $1.6 trillion in global goods flow annually, for more than collecting a relatively meager $5 billion in annual tolls would seem uncontroversial. Not so in Egypt.

Wasted gifts

Setting aside the mundane reject-at-all-costs arguments to anything and everything proposed by the government, the most substantive criticism has centered on long term land leases that would be granted to private investors. The opposition has offered nothing in terms of economic alternatives to how Egypt can develop the Suez Canal area -- or anywhere else in the country, for that matter -- without private investment, for which certainty of property rights is a must. Instead, sewer-politics has dominated, with stump speeches recklessly appealing to the country's toxic mix of xenophobic paranoia and delusive socialist dreams. 

Neatly summing up the opposition's incapacity on both the Nile and Suez Canal, one of its leading lights, hot-heated Hamdin Sabahi, has a be-damned proposal to block passage along the Suez Canal to all countries with contractors working on the Ethiopia project.  This would ensure that Egypt becomes an international pariah, and a poorer and drier one at that. Meanwhile, Morsi and his brethren have decided to shift focus entirely and sow the seeds of inter-religious strife in Syria, a conflict in which Egypt has no business in, let alone capacity for, injecting itself.  

Wheat Dreams

Food security

The topic of the day raging among the talking pinheads in Egypt is the total output of this year's domestic wheat crop. The nine o-clock news on state television started off with a full twenty minute segment on the issue. A smiling president stood in the midst of waving wheat fields confidently forecasting self-sufficiency. Predictably, the pro-Morsi crowd is pointing to optimistic measurements of record output, whereas the Morsi detractors claim the numbers are exaggerated and hearken to even more fantastic production levels that could be reached but for presidential mismanagement.  Both sides are missing the point: Egypt should not be targeting self-sufficiency in cereals.  

Nasr Automotive - The Return of the Junk Car

Bringing back the good times!

Apparently having nothing else to do given the prevailing safety and security Egypt enjoys these days, the Egyptian military has decided to have its production arm restart manufacturing of the country's very own crap-mobile, El Nasr. If anything exemplifies the utter failings of Nasserist economic policies, it is the junk car produced by the state-owned El Nasr Automotive Manufacturing Company (NASCO). Notwithstanding the advantages of massive tariff barriers, subsidized production and an effective monopoly on the domestic market for over two decades, NASCO was forced to mothball production lines in 2009, as finicky consumers turned to better produced and cheaper cars.

Egypt's Disastrous Courts

The current state of Egypt's court system is an unmitigated disaster.  A toxic blend of populism, Islamism, corruption and outright idiocy is steadily chipping away at what little credibility remains in a post-January 2011 Egypt.  Though the Muslim Brotherhood and their Salafi cohorts, as well as the military establishment and its systemic oppression, represent clear and present dangers at the constitutional, presidential, parliamentary and administrative levels, those risks are checked by at least of modicum of transparency and opposition that is entirely lacking with the self-serving, activist judiciary.  

Impossibly wide claims, fabricated evidence and reversals of the burden of proof leave defendants with virtually no chance of success.  In one recent, high-profile decision against a foreign gold mining company, Centamin, an administrative court ordered the cancellation of  a concession (which was once cited as a case study of Egypt's economic successes), because the revenue-share allocation to the state was deemed insufficient.  In proclaiming victory after the decision, the lead prosecutor noted that: 

[t]he government has pumped about 200,000 litres of diesel each day to help the company's operations over the last 10 years, that alone is worth $800 million.

Golden no more

Even taking the unlikely assumption that the fuel inputs were offered free of consideration, that would implausibly price government procured diesel at over $4 per gallon. Other high-profile decisions have ordered re-nationalizations of publicly-traded companies, voided billion dollar investments stretching over the course of a decade in a cement plant employing 3,000 people, plus taking various actions against property developers based on a repricing of once barren and undeveloped lands at current market, post-development values.  And these are just the headline cases.  Dozens upon dozens of other dossiers are in the dockets, with the overwhelming presumption of guilt driving away precious capital and even more precious brainpower.    

Free (Trade) Gaza!

There's a more practical way

The idea of setting up a free trade zone between Gaza and Egypt seems almost too sensible to ever happen in the contorted logic of the Middle East. Development in the Gaza Strip is hampered most immediately by political restrictions, but also from being pegged to the macro economy of Israel, influencing everything from currency valuation to utility, commodity and consumer product prices that are measured against an industrialized market instead of a developing one. Still, Gaza receives hundreds of millions of dollars annually in funds from international donors, and increasingly from Gulf countries, fueling a mini-boom in an area with a well-educated and young population.

Meanwhile, bordering Gaza is northern Sinai, Egypt’s most restless and most neglected region, encumbered by tribalism, a lack of investment and prioritizing of security over economics.  Yet it has massive potential, attributable to its location and the country’s relatively low cost structure. Common sense would suggest the flow of goods and services would adjust for this imbalance, and partly it has, with more than half a billion dollars said to transfer between Egypt and Gaza annually, but only through illegal, underground tunnels. 

Egyptian Monopoly

Show me the money

Global financial crisis depressing lending and investment opportunities?  Not here.  Whether it is announcements of Qatari grants, or Chinese joint ventures, or U.S. debt relief, or concessionary EU loans, or the IMF begging to offer credit at five times below market rates, everyone wants to get a piece of the action with Egypt's new ruling regime.  It is time to set the rules of the game to be graced with our attention.

Tenders will be generally awarded to the highest bid following a competitive process, the rules of which will not be disclosed and are subject to change at our sole and absolute discretion, but the general idea is to show me the money.  Conditions on funding are acceptable, provided they do not make us look bad in the immediate term.  Any questions on the specific destination of the funds once received will not be answered.

Prices are quoted on a per annum basis.

Let the bidding begin!

• Peace treaty with Israel:  Boardwalk.  $5 billion  Even if we could never actually cause much military damage, peace of mind comes at a price, and this is what it is.
  
  

• Suez Canal navigation:  Park Place.  $3.5 billion.  It does not rank in first only because there is an immediate own-goal effect if Egypt gets crazy with canal management, as ships take the longer route around Africa.  Somali pirates might become surprising more active, however, should this become a trend.
  
  

• Anti-Iran alliance:  Pennsylvania Avenue.  $1.5 billion, with a red hotel.  Egypt to share 10% of proceeds with Iran to keep everyone fretting.
  
  

Community chest

• Dialogue with the “Islamic world”:  Get out of Jail Free.  $1.0 billion.  Makes pin-headed geo-strategist Obama feel good to reduce the world into false blocks, where touchy-feely dialogue substitutes for actual engagement.
  
  
• Belly-dancers:  Community Chest.  $1.0 billion.  Gulf Arab lust satisfied, while Egyptian culture and traditions trampled upon.
  
  

Mubarak, Bread and Life

Gift of the Nile

In other news on this fateful day in modern Egyptian political history, a policy breakdown with a much more immediate impact is eating into the most essential part of life for the vast majority of Egyptians:  getting bread on the table.  Stemming from an ill-conceived control and command system fancifully designed to make Egypt self sufficient in wheat production, inflated prices offered for local wheat production are creating a cash machine for traders re-labeling foreign grown wheat as Egyptian. As consequence, the state treasury is wasting billions of scare dollars on procurements to support a hopelessly designed food subsidy system, further billions to support a hopelessly designed fuel subsidy system to run the plows and pump scarcely available water on limited arable lands, and millions and millions more on a vast bureaucracy to enforce this madness.

Strawberry Fields Forever



Perish the thought

Hold the farawla bil ishta.  The highly qualified agricultural experts of Tahrir have identified the root cause of Egypt's food problems.  The cause is not the 85 million inhabitants haphazardly living along the narrow Nile valley, the country's finite water resources, nor the distortive control and command policies that have dictated how, when, where and at what price farmers can grow and sell crops.  The cause is strawberries.

Capitalist-flavored shisha

Never mind that strawberries grow on approximately 0.00175% of Egypt's cultivated land. Never mind that the Egyptian strawberry industry is underpinned by a natural competitive advantage attributable to the country's warmth and location, which enables the delicious red berries to hit the domestic and European markets before surrounding producers can do so. Never mind Egypt is one of the top strawberry producers in the world, with products successfully marketed as far away as China. And never mind that the staple cereals that the revolutionary "experts" would like to have replace the strawberries are much more cheaply imported into Egypt, rather than seeking to re-produce the rolling plains of the American Midwest or East Asian rice paddies in a cramped river delta surrounded by an endless expanse of desert.

Left Behind: Egypt's Hopeless Socialists

The self-appointed leftist guardians of the Egyptian “revolution” are as naïve as they are intellectually bankrupt. Their vast overestimation of their evidently limited appeal, combined with their patently inadequate political capabilities, have allowed for Islamists to manhandle the social and political scene.

Tired defenses of adverse domestic and foreign agendas are made even more redundant when the Left tries to conjure up an excuse for an economic agenda. They resist acceptance of IMF loans at a fraction of the rate of domestic borrowings, while campaigning to “drop Egypt’s debt” (note to the uniformed – Egypt already has benefitted from unmatched and massive rounds of debt relief from supposedly evil Western creditors, negotiated under the watch of Egypt’s supposedly debt-crazed past governments). They now oppose the prospect of a free trade agreement with the European Union, Egypt’s largest export market, because “local shoemakers and cobblers will be out of jobs, which will set back the economy far more than the few cents consumers save buying the foreign made shoes.”

Islamic Patriot Bonds: Another Band-Aid Solution

The Pound is sinking

After maxing out on internal borrowings that are crowding out domestic lending capacity and issuing sovereign bonds at junk rate yields, the economic brain-trust has come up with another novel solution:  trying to sucker Egyptians living abroad into lending them money at below market rates.  While appealing to patriotism and religion (they will be “Islamic” bonds; i.e., effectively exactly the same as non-Islamic bonds, only the interest coupons are instead deemed as rental payments), the missing feature is the fact that Egyptians – whether within Egypt or residing abroad – are not suckers.  They, like any other investors, will conduct due diligence and invest where returns are in line with what the market dictates.

The IMF and Egypt - Helping Egypt Help Itself

In all of the desperate grasping for how Egypt can be saved from the abyss of an impoverished, Islamist tyranny, the long overdue turn of the Egyptian government to the International Monetary Fund presents an opportunity for the world to help Egypt help itself. Apart from plugging a hole in the country’s finances – caused largely by haphazard decision and indecision of the successive interim governments over the past year – IMF-linked structural reforms offer an avenue for sustained change in Egypt.

Re-nationalization: A Cotton Pickin' Mess!

Egypt's white gold

Buried under the endless commentary of the recent violence in Egypt (but not lost on investors), a decision taken by an administrative court to annul the sale of shares of a then state-owned cotton ginning company threatens to cause far more lasting damage than any demonstrations, election results or political figurehead. Taken within the context of an already toxic mix of a fiscal crisis, unstable leadership and the urge for short-term, populist policymaking, this decision (still hopefully to be overturned) sets the stage for complete economic chaos. 

The ruling itself is based on vague allegations of an undervaluation of assets and even more vague allegations of corruption, and follows a troubling trend of similarly statist edits from imprecise, activist judges (encouraged/directed, no doubt, by military insiders seeking to reassert their total control over the private sector, incompetent interim governments, as well as misguided activists in their fanciful mission against the bourgeois). Left totally unanswered are questions of how to redeem shares held and traded by the wider public and workers (who as per most Egyptian privatizations, were granted a significant stake of floated shares as an incentive to participate as part owners in their company), and the impact on creditors. Egypt's reeling stock market is being further damaged, and the uncertainty of the decision further undermines the already compromised credibility of the country's investment climate.

Buy Egyptian?

 

Not to be confused with the evil import

If the latest gimmick to jump start the dormant Egyptian economy is a sign of things to come, then we are in big trouble. No matter how many bags of kebab-flavored Chipsy (owned by Pepsico) are munched, nor colorful galabaya are purchased (typically with imported, short-staple cotton, since higher quality long-staple Egyptian cotton is used in higher end goods that are exported and produce much more value added), the “Buy Egypt” campaign will do nothing to address the structural deficiencies in the economic system. 



Mmmm

Worse, the campaign is a reflection of the quick-fix, delusional and autarkic thinking that looks to isolate Egypt from the global economy and create artificial markets, when it is precisely the opposite that is needed. Whether it is flawed ideas of disavowing foreign borrowing, fanciful and regressive notions of food self-sufficiency or grand, national schemes to create dead-end jobs, all of this is stifling the country’s potential and delaying badly needed reform.