Saturday, October 21,  2017

Economy

The “J-Curve” and Egypt

BY Ahmed Saeed

In his recent book, The J-Curve, economist Ian Bremmer describes the important but counterintuitive and often ignored relationship between a country’s stability and its openness.  He notes that “for a country that is ‘stable because it’s closed’ to become a country that is ‘stable because it’s open,’ it must go through a transitional period of dangerous instability.”  He calls this process the J-Curve because the path from closed stability to open stability first dips, like the letter J, through increased instability before emerging into the ultimately desired (and stable) utopia.


Egypt’s political transition into the post-Mubarak era has been remarkably smooth, considering the country’s legacy of totalitarianism.  The credit for this clearly goes to the Egyptian people.  But Egypt is unfortunately still on the wrong side of the J-Curve, and there will be many pressures in the months and years ahead that increase the likelihood of greater instability.  How the new government manages these tensions will determine whether Egypt emerges stronger or slips back towards a repeat of old repressions.  


The process of managing new tensions is particularly important when it comes to economic  reform.  For all the many obvious tragedies of Hosni Mubarak’s three decade rule, it is also clear that the platform of economic reforms introduced in 2004-2005, while clearly incomplete, has had a remarkable impact in a relatively short period of time.  In 2004, Egypt’s economy grew 4.5%. By 2008 this number was 7.2%, and Egypt managed stable 5% growth in the face of the strong economic headwinds of 2008-2010.


The Egyptian people are rightly focused on the fact that unemployment fell only slightlyThe most important thing the international community can do is to ask the government to develop a home grown vision that is fundamentally sound yet politically realistic  during this period, and that the benefits of economic growth did not reach the lower classes. But this only means that the economic program was too little, too late.  It certainly does not mean that these reforms were misdirected and that a new and different path must be taken. But there is a real risk that a new government will be under pressure to reverse the trend towards smaller government and lighter regulation that provided the impetus for Egypt’s recent economic robustness.


The international community can help Egypt’s new political leadership navigate through these difficulties.  Clearly there is much the international community can do to help Egypt’s economy grow.  Egypt currently has almost $34 billion of foreign indebtedness, and should push for comprehensive debt relief.  The level achieved by Iraq (80%) should be possible for Egypt as well. In addition, the United States and other countries can be asked to support Egypt’s economic transition through greater trade liberalization, ideally through new free trade agreements. Also, additional financial support could come from a number of bilateral and multilateral donors, including the IMF and the World Bank.


But as important as financial support will be the role of the international community in helping Egypt navigate the complexities of the J-Curve.  In this regard, the most important thing the international community can do is to ask the Egyptian government to develop a home grown economic reform vision that is fundamentally sound yet politically realistic.  The international community should support the implementation of such a program through technical assistance, as well as through financial assistance that is clearly tied to benchmarks that are built into the program.  In this way, Egypt’s friends can help the country stay on course and avoid the many perils of the J-Curve.  
 

 

Ahmed Saeed is a Managing Director at Nomura International. Previously, he was a senior US Treasury Department official with responsibility for the Middle East and Africa



READ MORE BY:  Ahmed Saeed

 

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