Karim Abadir on the Egyptian Economy

The article below was written by Professor Karim Abadir. I find his view interesting albeit excessively optimistic. I am sharing the article for your reference as I will soon be posting  a Q&A discussion between me and him about it. Cheers.

Any revolution is bound to have an impact on the country where it happens, and often beyond its borders. But not all economies are identical and there is no single format that can be used to assess the impacts of such momentous events. I am writing this piece about the near-term impact that the Egyptian revolution will have on the economy. One of the arguments I will use needs stressing: the well-known vulnerabilities of the Egyptian economy will actually work in its favour in the case of the current revolution, vulnerabilities such as excess reliance on tourism, on output from natural resources such as oil, etc. In this article, I am focusing on the near-term impact and refraining from looking further into the future. There are more gains to be made later with changes in economic policy, but they are not for this article.

Before I proceed, we need to draw a distinction between national income accounts and a “balance sheet” that measures the stock of wealth if ever a robust measure of this existed. Current income is undoubtedly going to be lower now, because of the reduced economic activity. But this is normal: the bad UK weather this December brought its economy to a standstill and turned its growth negative for that quarter! Both are temporary effects. Though I like snow, I’d much prefer a revolution that sets a country on the right path and unleashes the creative talent of its people and generates the goodwill that all sections of Egyptian society have started displaying, energies that can be harnessed for the good of the country after the transition to a reliable leadership for the future.

It was a peaceful revolution. The country’s facilities have not been damaged in any noticeable way. When production of goods and services restarts, it will be quickly back to normal levels. Furthermore, if (as expected) corruption levels are lower, more of the resources that are currently being leaked out of the economy in favour of a few individuals will actually be accounted for and will remain part of the economy and circulate within a virtuous circle of activity creation, hence benefit Egypt.

The same goes for tourism, where all the sites remain intact. The revolution has earned the admiration of the masses abroad and, this on its own, will generate extra tourism to the country where the first Facebook revolution took place! There is one more historical place to visit in Egypt, the Square that is truly a Liberation Square.

The damage to the financial side will also be temporary. The valuation of companies whose directors are involved in financial scandals will collapse, but these are companies that are not widely held by the middle and lower income groups, something that is also true of the stock market at large where some initial contagion will take place but it is inevitable that prices go down and up. Good companies have nothing to fear and much to look forward to, as I will explain in the next paragraph. From a wealth point of view, the damage into the future will be limited to a small group of shareholders whose consumption is a tiny chunk of the economy. But their investments are substantial and this can have a negative impact if the new government mismanages the handling of their assets. The government may seize these assets but should not attempt to run them as a going concern. It should also not use its currency reserves unwisely.

A company going bust does not mean that its business is gone for the economy: some other company could buy the stock or step into the breach and take the opportunity as a new entity. Even better, corrupt monopolies, duopolies, etc. (such as the steel industry) can be replaced by more competition, and this is good for the economy and its development.

A lot of investment was in real estate, much of it was speculative, affecting prices and valuations of property but not leading in any meaningful way to an increase in the national income that we mentioned earlier. A reduction in these valuations is not the end of the economy, as some interested parties are currently circulating.

With increased financial transparency and less corruption, genuine investments and businesses will actually be encouraged to come to Egypt. This will not happen overnight, but Egyptians build for eternity.
Karim M. Abadir (http://www.imperial.ac.uk/people/k.m.abadir) is Professor of Financial Econometrics at Imperial College London. He is credited with predicting the timing of the recent global recession and the subsequent diverging patterns of recovery in the US and Europe.


One thought on “Karim Abadir on the Egyptian Economy

  1. Enlightening and positive words. The benefits of the peaceful nature of the revolution (unlike the Libyan one) has been very well highlighted. There however remain two threats to Egypt’s economic (as well as political and social) well being – the prospect of a martial rule and the rise of the political power of the jihadists.
    I hope and wish these two threats remain just that and Egypt ushers in a new era of political, social and economic rejenuvation.

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