Popular Economics Weekly

We now know how Egyptians plan to bring down the Mubarak dictatorship. They are on strike, despite the pleadings of Mubarak supporters who fear it will not only keep the tourists away, but bring all economic activity to a standstill. And it is the perfect event to explain what really drives economic growth.

Egyptian Vice President Omar Suleiman, a former Brigadier General, said recently the ongoing political protests in the country will sharply cut its economic growth this year.

Suleiman, who is trying to convince protesters to end the demonstrations, said Wednesday that Egypt’s economy might advance by 3.4 percent in 2011. In December, the government predicted 6 percent growth for 2011, but that was before the street protests started two weeks ago against the 30-year reign of President Hosni Mubarak.

So what really drives growth everywhere in the developed and underdeveloped countries, is the amount consumers spend and investors invest, something economists call aggregate demand. It is the amount of those assets in circulation that drives further spending and investment. Employers will not hire more employees until they see a greater demand for their products and services, in other words, and consumers will not buy more things until they have more jobs. For instance, saving or hoarding assets, as corporations and banks are now doing doesn’t stimulate growth. But spending or lending those assets so that they are in use, does.

There is also the factor of animal spirits that Nobelist George Akerlof and economist Robert Shiller conjecture in their book, “Animal Spirits”, that could account for up to 50 percent of aggregate demand. I.e., it takes a certain level of confidence to cause those monies to be put back in circulation.

And the Egyptian people know this. By bringing their economy to its knees in the now 2 week protest, they know that the Egyptian Army who is a major owner of factories, who now control from 20 to 50 percent of economic activity, must join them or its own pocketbook will be damaged.  It is an economic boycott, in other words.

Analysts at Bank of America Merrill Lynch said Egypt’s annual economic growth could slow even more, perhaps to 1 or 2 percent. The Egyptian economy grew by 5 percent last year. Thousands of workers at some key industries in Egypt walked off jobs or staged protests this week, apart from the Cairo-focused demonstrations against the government.

Egypt’s economy has not come to a complete halt with the protests, but the effects have been widespread, report various news agencies. The government reported that about one million tourists fled the country in the first nine days of the protests. The vital Asia-to-Europe shipping link through the Suez Canal is still operating but 6,000 workers in the canal zone have started a sit-down strike.

And numerous international companies have shut their operations in Egypt and laid off workers. Norway’s Statoil said it was no longer drilling in Egypt. The country’s stock market is still closed and not scheduled to reopen until next Sunday.

We therefore see that the Army, in particular, must accede to the strikers’ demands, including a lifting of emergency regulations that have been in effect for 30 years.

And the Obama Administration also knows this. "We’re certainly mindful of the economic impact. We’re certainly monitoring it closely," said Ben Rhodes, White House deputy national security adviser for communications. Egypt’s turmoil is costing the country about $310 million a day, according to an analysis from Credit Agricole bank. The impact on commerce included a 1.6 percent drop in revenue in January from December for the Suez Canal, a vital source of income.

Rhodes, speaking in a conference call with reporters, said that "insufficient steps" by the Egyptian government to meet the demands of protesters were exacerbating the economic woes. President Barack Obama and his aides have urged Egyptian President Hosni Mubarak’s government to move more quickly on a transition of power and to do more to engage a broad swath of Egyptian society in talks on the country’s political future.

"The way to move out of this period of instability into one of greater stability is for the government to take concrete action, to demonstrate irreversible political progress (and) to get into a set of negotiations with the opposition," Rhodes said. "Stability is not going to come from the status quo. It’s going to actually come from steps that demonstrate meaningful change and to channel this into a set of negotiations that lead to free and fair elections," he added.

Harlan Green © 2011