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Business in Egypt - Is the revolution good for business?

No one knows how many Egyptians have been put out of work since the uprising began in January.
The Economist | 21.10.2011
TUTANKHAMUN T-shirts are out; slogans celebrating Egypt’s democratic revolution are in. For 20 Egyptian pounds ($3.36), a vendor in Cairo’s Tahrir Square will sell you one showing a raised fist and the Facebook logo—a reminder of how the protesters used social media to overthrow President Hosni Mubarak.

Egypt has uncounted millions of small entrepreneurs. Most operate outside the law. Hernando de Soto, a Peruvian economist, once estimated that informal enterprises employ 40% more workers than all of Egypt’s legally registered companies put together. Throat-constricting red tape is the reason. Mr de Soto found that it took on average 500 days to register a small bakery in Egypt, or ten years to obtain legal title to a vacant plot of land. Small wonder most businessfolk opt to work without licences or legal protections. Few pay tax, either.

For obvious reasons, statistics on the informal economy are hard to come by. No one knows how many Egyptians have been put out of work since the uprising began in January. But it is clear that tourism, which provides one job in seven and 11% of GDP, has been badly dented. International arrivals were 35% lower in April this year than the previous April, according to the government. In the first quarter, the year-on-year drop was a calamitous 46%; this cost Egypt an estimated $2 billion.

In the summer, tourists from the Gulf usually flock to Egypt. This year their numbers are down, not least because the Gulf media—much of which are owned by princes—portray pro-democracy protests as terrifyingly bloody. Five-star hotels in Garden City, Cairo’s diplomatic area, have reduced their prices by 50% or more. Breaks in Sharm El Sheikh, a seaside resort that attracts more visitors than the pyramids, are also heavily discounted.

The gloom will not last forever. Egyptian tourism has been wounded before, most nastily in 1997, when terrorists killed and mutilated 58 holidaymakers in the Valley of the Kings. In that case, tourist numbers fell for about a year. This suggests that Egypt’s mix of cheap sunshine and 5,000 years of history will eventually lure back budget-conscious Europeans, who typically account for around two-thirds of visitors. In the short term, however, the loss of jobs is alarming. Some 700,000 young Egyptians enter the labour market each year. If they cannot find work, they may grow restless.

Political uncertainty is keeping investors away, at least for now. The first quarter of 2011 saw a net outflow of foreign direct investment of $163m. (In the last quarter of 2010, there was a net inflow of $656m.) Foreign firms have not been pulling out of Egypt—they don’t want to lose their foothold in the Middle East’s most populous nation. It has 85m people, roughly a quarter of all Arabs. The economic fundamentals are largely unchanged: Egypt’s location at the crossroads between Europe, the Middle East and Africa remains attractive. The country also has one of the Arab world’s most diversified economies.

Foreign development banks, eager to help democracy succeed, are opening their purse-strings. The World Bank’s private-financing arm, the International Finance Corporation, said in late July that it would invest $50m in Orascom Construction Industries (OCI), Egypt’s largest listed company, and would also lend $200m to one of OCI’s subsidiaries, a fertiliser firm. Citadel Capital, Egypt’s largest venture-capital firm, has secured $21m from European development banks for an Egyptian river-transport fund.

But investors are still wary. The corrupt and brutal Mubarak regime styled itself as business-friendly. (And indeed it liberalised investment rules and cut taxes, though it also strongly favoured cronies over independent businesspeople.) Now that the regime is gone, there is a danger of a backlash against all businesses, which are tarred by association. “Films portray everyone in a suit as evil,” sighs a banker.

Firms are doing all they can to distance themselves from the old order. Advertising billboards praise Egypt’s youth and show small children, faces painted with Egyptian flags, alongside exhortations to buy new mobile phones. This can backfire: Vodafone faced criticism in June after an advert linked it to the “people power” of the revolution. The real revolutionaries recall that their phones and internet connections were cut off, on the government’s orders, during the clashes.

The revolution could make Egypt more prosperous, if it leads to less corruption, stronger institutions, greater diaspora goodwill and a more motivated population. Citadel Capital issued a statement after Mr Mubarak was ousted arguing that democracy would be good for business. Maybe so. The head of a medical-distribution company smiles that bureaucrats are now treating people (such as himself) who run small businesses rather better. Before the revolution, he remembers, they only bothered to help the well-connected.
About the author: The Economist