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'Arabellion' economies

Andreas Becker/srs
November 1, 2012

The Arab Spring forced four heads of state out of power since 2011. Egypt now has a democratically-elected government. But what does the Arab Spring mean for the economies of these countries?

A traffic jam at sunset on one of Cairo's bridges spanning the Nile River, is seen in Egypt, May 20, 2001. Five-star hotels, high-rises and fancy restaurants line the riverbank in the capital, a sign of the city's development under a modernizing economy. (AP Photo/Enric Marti)
Image: AP

The rebellions in the Middle East and North Africa have much more to do with politics than economics. Countries such as Egypt were not socialist planned economies.

"Compared to international standards, Egyptian banks are in good order," said Volker Perthes, director of the German Institute for International and Security Affairs in Berlin. "But they have only given credit to some 30 families that had good contacts with the regime."

One consequence is that 99 percent of companies in Egypt are small family-run businesses whose owners had no other choice but to be independent, according to Markus Loewe of the German Development Institute. For them, the political turmoil was tied to steep cuts.

Low growth

"For the most part so far we see all negative effects from the revolution," Loewe said. "In all the countries, economic growth has broken down."

Some sectors that primarily produced for domestic markets have collapsed.

"That's because consumer confidence has sharply decreased," Loewe continued. "Uncertainty about future developments has played a major role."

The uncertainty is also discouraging foreign investors and that lowers competitiveness, Loewe said.

"Many wages are close to the poverty line," he added. "Yet because many workers have inadequate education and training, productivity is significantly lower in these countries than in most East Asian countries."

Mohammed Morsi, President of Egypt, addresses the 67th session of the United Nations General Assembly at U.N. headquarters, Wednesday, Sept. 26, 2012. (Foto:Jason DeCrow/AP/dapd)
Morsi appears to have placated the military officials he firedImage: AP

The new government in Egypt is struggling with a growing budget deficit. Causes include the weak economy and increased costs for credit along with high state subsidiaries for energy and food.

"Subsidies make up one fifth of all government spending," said Hanan Morsy of the European Bank for Reconstruction and Development. "Urgently needed private investments, such as in infrastructure, are ignored."

Problems with energy and water

The Egyptian government wants to reform its subsidy program, and doing just that is a prerequisite for getting loans of nearly $5 billion (3.9 billion euro) from the Internaitonal Monetary Fund which it has applied for.

Needed investments in the region's infrastructure also represent an opportunity. Countries, like Egypt, are especially interested in businesses dealing with energy and environmental technology, said Bruno Wenn, chairman of the board of DEG development financiers.

"Egypt has a large energy gap," he said. "That alone keeps investors away. Moreover, the country will have a big problem with water within the next two to three years, since water is getting increasingly polluted."

Im Süden fühlen sich Touristen sicherer im Vergleich zum Norden. Das Bild wurde am 03.03.12 in Luxor, Ägypten aufgenommen.  *** Copyright Abderrahmane Ammar, DW-arabic
Revolution put a big dent in Egyptian tourismImage: DW

The country, therefore, needs investments in power plants, water treatment facilities and water-saving irrigation systems, according to Wenn.

"We as Germans have the necessary technology and the experience," he concluded. "We should use it in Egypt."

Wenn added that if there were stronger legal assurances in many Arab countries it would be easier for businesses to set up shop – as is the case in the much-loved BRIC countries of Brazil, Russia, India and China.

Political and military influence

Fund manager Fabrice Callet also emphasizes the opportunities in the region for investors. Callet works for Dubai-based Abraaj Capital, an investment company specializing in developing countries.

Callet tries to follow one rule in particular when making investment decisions in Arab countries: "We don't want to do business if there is political influence."

If a company is dependent on political developments, he said, is is very difficult for an investor to assess further developments.

"What's more, there is also the risk of corruption and exertion of political influence peddling, which we don't want," Callet added.

Before the revolution, the Egyptian army already had a large influence on the country's economy.

"After the election of the new Egyptian President [Mohammed] Morsi, we are seeing a sort of truce between the army and political leaders," said Perthes. "The president has removed the heads of the army from their offices. At the same time, he has given relatively lucrative retirement jobs to the people he has sent into retirement."

Perthes added the message to the army was clear: "We want you to be loyal. And we won't come near your economic privileges."

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