This graph shows why Egypt is falling apart

July 8, 2013

If you really wanted to distill the ongoing crisis in Egypt down to a single chart, you could do worse than this one:

 

In an interview last week, economist Caroline Freund explained that Egypt simply hasn't been growing quickly enough to produce jobs for everyone. Youth unemployment has soared to more than 25 percent—and that was before the 2011 revolution that toppled Hosni Mubarak. Here was a key part of our talk:

Caroline Freund: [T]his is a country that had been growing at reasonable rates of 5 percent, 6 percent a year. But because of its demographics, those weren’t strong enough rates to employ a rapidly growing population. ...

Even before the revolution in 2011, you had 10 percent unemployment and 25 percent youth unemployment. Already there was a sense of a lack of opportunity and declining social mobility. So Egypt went into its revolution when it was already in difficult economic straits.

BP: So what are those underlying structural issues? Why can’t Egypt’s economy create enough jobs for everyone?

CF: There are several features of the economy that, mixed together, create a sort of economic poison. One is that the government has long used public-sector jobs to keep the population happy — so that they’d accept authoritarian rule. That worked for a certain amount of time, but demographics ultimately bite. The government hasn’t been able to expand quickly enough to employ everyone, and the population gets upset.

People were literally queuing for good government jobs, while the private sector was not the place people wanted to work. And that fed back into education. Egypt has made great strides in educating its population, but people were still getting the wrong skills for the private sector and for the engines of growth, like manufacturing or technology.

Then there were the fuel subsidies. Egypt’s fuel subsidies were another kind of handout from the government to the population as a sort of trade-off for non-democratic government. Basically the government holds the price of fuel down. That has bad effects by encouraging too much fuel consumption, encouraging smuggling, the subsidies accrue to the wealthiest who have the biggest cars and houses. But it also encouraged investment in energy-intensive sectors, which don’t employ a lot of people. So that added to the problem.

Finally I would say the last bit is that Egypt has a private sector that’s not rules-based and easy to work in. You have crony capitalists who are able to function, but for many people, if you try to start a firm and grow that firm, every step of the way, there’s another bureaucratic hurdle. So this is another thing that discouraged Egypt’s private sector from growing and supplying jobs that one would like to see.

And the situation only worsened after the political wing of the Muslim Brotherhood took power last year. "There was the political uncertainty, the economic uncertainty, there was no policy predictability," Freund said. "Investors lost confidence and decided to wait. Because of the security concerns, tourists stopped coming — that’s around 10 percent of Egypt’s GDP."

Since the military coup that toppled the Morsi government last week, some economists have been cautiously optimistic. The country's stock market soared by 7 percent on Thursday, shortly after the coup. The BBC quotes several analysts hoping that Egypt can now finally apply for a long-stalled loan from the IMF to shore up its finances and buy time to make structural reforms.

But that's not as easy as it sounds. In our interview, Freund noted that many of those economic reforms were likely to be painful — like scaling back Egypt's fuel subsidies, which currently consume 8 percent of the country's GDP. She argued that many of these moves would likely need to happen quickly: "What we found is that in revolutions and other political transitions, speed seems to be an important factor for success." Otherwise, Egypt could keep jumping from crisis to crisis.

Now, economics obviously isn't the whole story. The revolution that toppled Mubarak in 2011, the rise of the political wing of the Muslim Brotherhood, the military coup last week that overthrew the Morsi government — it's a complicated tale. See Shadi Hamid's explainer here. But Egypt's dismal economy has been one big driver of unrest.

Related:

--Confused about Egypt? Shadi Hamid walks you through it.

--The economic roots of Egypt's crisis.

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Lydia DePillis | July 8, 2013