Revolution in Egypt closing case
With 83 million people, Egypt is the most populous Arab state. On the face of it, Egypt made
significant economic progress during the 2000s. In 2004, the government of Hosni Mubarak
enacted a series of economic reforms that included trade liberalization, cuts in import tariffs, tax
cuts, deregulation, and changes in investment regulations that allowed for more foreign direct
investment in the Egyptian economy. As a consequence, economic growth, which had been in
the 2 to 4 percent range during the early 2000s, accelerated to around 7 percent a year. Exports
almost tripled, from $9 billion in 2004 to more than $25 billion by 2010. Foreign direct
investment increased from $4 billion in 2004 to $11 billion in 2008, while unemployment fell
from 11 percent to 8 percent.
By 2008, Egypt seemed to be displaying many of the features of other emerging economies. On
Cairo\'s outskirts, clusters of construction cranes could be seen where gleaming new offices were
being built for companies such as Microsoft, Oracle, and Vodafone. Highways were being
constructed, hypermarkets were opening their doors, and sales of private cars quadrupled
between 2004 and 2008. Things seemed to be improving.
But appearances can be deceiving. Underneath the surface, Egypt had major economic and
political problems. Inflation, long a concern, remained high at 12.8 percent. As the global
economic crisis took hold in 2008–2009, Egypt saw many of its growth drivers slow. In 2008,
tourism brought some $11 billion into the country, accounting for 8.5 percent of gross domestic
product, but it fell sharply in 2009 and 2010. Remittances from Egyptian expatriates working
overseas, which amounted to $8.5 billion in 2008, declined sharply as construction projects in
the Gulf, where many of them worked, were cut back or shut down. Earnings from the Suez
Canal, which stood at $5.2 billion in 2008, declined by 25 percent in 2009 as the volume of
world shipping slumped in the wake of the global economic slowdown.
Moreover, Egypt remained a country with a tremendous gap between the rich and the poor.
Some 44 percent of Egyptians are classified as poor or extremely poor; the average wage is less
than $100 a month. Some 2.6 million people are so destitute that their entire income cannot cover
their basic food needs.
The gap between rich and poor, when coupled with a sharp economic slowdown, became a toxic
mix. Nominally a stable democracy with a secular government, Egypt was, in fact, an autocratic
state. By 2011, President Hosni Mubarak had been in power for more than a quarter of a century.
The government was highly corrupt. Mubarak and his family reportedly amassed personal
fortunes amounting to billions of U.S. dollars, most of which were banked outside Egypt.
Although elections were held, they were hardly free and fair. Opposition parties were kept in
check by constant police harassment, their leaders often jailed on trumped-up charges.
Given all of this, i.
Revolution in Egypt closing caseWith 83 million people, Egypt is t.pdf
1. Revolution in Egypt closing case
With 83 million people, Egypt is the most populous Arab state. On the face of it, Egypt made
significant economic progress during the 2000s. In 2004, the government of Hosni Mubarak
enacted a series of economic reforms that included trade liberalization, cuts in import tariffs, tax
cuts, deregulation, and changes in investment regulations that allowed for more foreign direct
investment in the Egyptian economy. As a consequence, economic growth, which had been in
the 2 to 4 percent range during the early 2000s, accelerated to around 7 percent a year. Exports
almost tripled, from $9 billion in 2004 to more than $25 billion by 2010. Foreign direct
investment increased from $4 billion in 2004 to $11 billion in 2008, while unemployment fell
from 11 percent to 8 percent.
By 2008, Egypt seemed to be displaying many of the features of other emerging economies. On
Cairo's outskirts, clusters of construction cranes could be seen where gleaming new offices were
being built for companies such as Microsoft, Oracle, and Vodafone. Highways were being
constructed, hypermarkets were opening their doors, and sales of private cars quadrupled
between 2004 and 2008. Things seemed to be improving.
But appearances can be deceiving. Underneath the surface, Egypt had major economic and
political problems. Inflation, long a concern, remained high at 12.8 percent. As the global
economic crisis took hold in 2008–2009, Egypt saw many of its growth drivers slow. In 2008,
tourism brought some $11 billion into the country, accounting for 8.5 percent of gross domestic
product, but it fell sharply in 2009 and 2010. Remittances from Egyptian expatriates working
overseas, which amounted to $8.5 billion in 2008, declined sharply as construction projects in
the Gulf, where many of them worked, were cut back or shut down. Earnings from the Suez
Canal, which stood at $5.2 billion in 2008, declined by 25 percent in 2009 as the volume of
world shipping slumped in the wake of the global economic slowdown.
Moreover, Egypt remained a country with a tremendous gap between the rich and the poor.
Some 44 percent of Egyptians are classified as poor or extremely poor; the average wage is less
than $100 a month. Some 2.6 million people are so destitute that their entire income cannot cover
their basic food needs.
The gap between rich and poor, when coupled with a sharp economic slowdown, became a toxic
mix. Nominally a stable democracy with a secular government, Egypt was, in fact, an autocratic
state. By 2011, President Hosni Mubarak had been in power for more than a quarter of a century.
The government was highly corrupt. Mubarak and his family reportedly amassed personal
fortunes amounting to billions of U.S. dollars, most of which were banked outside Egypt.
Although elections were held, they were hardly free and fair. Opposition parties were kept in
check by constant police harassment, their leaders often jailed on trumped-up charges.
2. Given all of this, it is perhaps not surprising that in January 2011, popular discontent spilled over
into the streets. Led by technologically savvy young Egyptians—who harnessed the power of the
Internet and social network media such as Facebook and Twitter to organize mass
demonstrations—hundreds of thousands of Egyptians poured into Cairo's Tahrir Square and
demanded the resignation of the Mubarak government. There they stayed, their numbers only
growing over time. For weeks, Mubarak refused to step down, while the demonstrations gained
momentum and Egypt's powerful military establishment stood on the sidelines. Foreign
governments, including the Obama administration in the United States, long one of Egypt's most
important Western allies, joined the chorus of voices calling for Mubarak to resign. In the end,
his position became untenable, and he stepped down on February 11, 2011. The Egyptian
military took the reins of power, vowing to do so for a short time while it organized a transition
to democratic elections in the fall of 2011. In March 2011, Egyptians voted on a set of proposed
constitutional amendments designed to pave the way for the elections in late 2011. This was the
first time in six decades that Egyptians had been offered a free choice on any public issues.
Does this mean that Egypt is now on the road to becoming a democratic state with a vibrant
economy? That is still far from clear. In mid-2012, moderate Islamists from the Muslim
Brotherhood won the most seats in the country's first democratic election, and the Brotherhood
candidate Mohamed Morsi won the presidential election. However, the Morsi government
struggled. By 2013, the economy was in deep trouble. Unemployment was as high as 20 percent,
the Egyptian currency was steadily losing value on foreign exchange markets, and inflation was
increasing again. Tourism, which previously had accounted for 8 to 12 percent of GDP,
evaporated. Foreign investment stalled, and the country's foreign reserves were falling fast.
Meanwhile, the Morsi government failed to enact any meaningful economic reforms. It was
unwilling to remove politically popular food and fuel subsidies totaling $20 billion a year, even
though the country clearly could not afford to pay for them. Government debt was increasing,
and the annual budget deficit now accounted for more than 12 percent of GDP. Many successful
businesspeople left the country, fearing reprisals for their role under the Mubarak regime. Court
rulings overturned privatization deals from more than a decade ago, effectively moving several
enterprises back into state hands. In June 2013, protestors again took to the streets, and with the
backing of the still powerful Egyptian military, Morsi was removed from office in early July
2013. As of early 2014, an “interim” government is now running the country, although in Egypt,
unelected interim regimes have a history of becoming permanent authoritarian governments.
CASE DISCUSSION QUESTIONS
4. Political risks in Egypt seem to be increasing again, and the country seems to be retreating
from democracy, largely due to intervention by the military. As a manager in an international
business, how would the current turmoil and political uncertainty in Egypt influence your
3. investment decisions, and what does this mean for the future of the Egyptian economy?
Solution
As a manager in international business, I would consider the following points before investing in
any country that is politically and economically unstable.
1. Security: abusive public (and private) security is a primary cause of concern for all the
companies that are investing in unstable countries. Allegations of beatings, killings, torture,
arbitrary arrests, and imprisonment by army or police can have a hugely damaging effect on a
company’s reputation and its operations, even if the company itself was not involved.
2. Expectations: the arrival of a major project into an impoverished area can bring massive
expectations from local populations. Investing companies may be seen as the main source of jobs
and public services such as schools, clinics and roads. Unless the area is relatively unpopulated,
no company will be able to satisfy all these expectations. Frustration amongst local communities
can quickly turn to anger and ultimately to opposition to the project. From the earliest stages of
investment companies should explain clearly to local populations what they can and cannot do.
3. Financial – higher insurance, security and transportation costs, higher wages for staff to offset
risks, increased cost of raising capital, threat of extortion
4. Operational – destruction of property or infrastructure, disruption and delays to the project;
5. Human – killing, kidnapping and injury, evacuation of staff, recruitment difficulties
6. Reputational – domestic protests, international campaigns against the company.