man bites dog in the ME

["Ian Murray" <seamus2001@xxxxxxxxx>]

Unrest a Chief Product of Arab Economies
By Paul Blustein
Washington Post Staff Writer
Saturday, January 26, 2002; Page A01


CAIRO -- The economic misfortunes that fuel resentment among young
Arab men emerge through the cigarette smoke at a street-side cafe,
where a table full of Egyptians in their twenties and thirties
erupts in bitterness over their dreary prospects.

"It's really degrading. The only thing we can do is move from one
petty job to another," said Fahmi Hanafi, a burly, mustachioed
33-year-old.

It is not poverty that drives their discontent so much as an
economy that provides few chances for interesting work and upward
mobility. While many countries in Asia and Latin America have taken
advantage of Western money, technology and markets as a means to
fashion dynamic economies, much of the Arab world remains stuck in
a time warp, with large state bureaucracies weighing down the
private sector and government service offering the most appealing
option to much of the workforce.

Like the others at his table, Hanafi graduated from a technical
school and expected to land a cushy, secure government job, only to
be told repeatedly by government bureaucrats that he would have to
wait. For the past 15 years he has supported himself by working a
few weeks at a time in food markets and gas stations.

"The outcome is a flat nothing -- for me, since 1986," he said.
"It's a problem that has no solution. The economic system is a
total failure."

Similar woes afflict millions of young people in the Middle East
and North Africa, where unemployment averages 15 percent -- in
Algeria, it is close to 30 percent -- and is particularly prevalent
among the relatively well-educated. Their plight was a matter of no
great interest in the West before Sept. 11, but it is stirring
anxiety now, especially since some of the men identified as
carrying out the terrorist attacks on the World Trade Center and
the Pentagon were educated -- notably their apparent ringleader
Mohamed Atta, a 33-year-old Egyptian with an engineering degree.

Economic questions about the Middle East and North Africa suddenly
loom large: Why has the region reaped such paltry rewards from
globalization? And why aren't the United States, its rich allies
and international lenders doing more to help these countries
succeed economically?

Egypt's experience illustrates some of the answers. As in most
other Arab countries (Lebanon being an exception), an authoritarian
regime has for decades maintained a heavily state-managed economy
that discouraged private investment, entrepreneurship and dynamism
of the sort that has powered growth in other developing countries.

A few of Egypt's neighbors, notably Tunisia, have dismantled much
of their state economic apparatus and enjoyed modest booms.But
elsewhere in the region, economies are often either steered by a
royal family or, as is the case in Egypt, managed by governments
that still reflect the socialism embraced in earlier decades. The
result is a private sector that falls woefully short of the
vitality needed to employ a burgeoning population. One statistic
vividly highlights the feebleness of industry in this part of the
world: Aside from oil, exports from the Middle East and North
Africa (excluding Israel) are about the same as Denmark's, a
country with less than one-fiftieth the population.

Egypt's record also shows that lifting these economies out of their
ruts will be a formidable challenge.

Thanks largely to Egypt's willingness to make peace with Israel and
ally itself with the United States, the country has received more
than $55 billion in aid over the past quarter-century from Western
governments, international lending organizations such as the World
Bank, and oil-rich Arab neighbors. Only India has gotten more.
Ironically, this aid -- motivated by a desire for stability in the
Middle East -- helped the Egyptian government maintain a system
whose failings are now recognized as a source of the alienation
that may stir unrest worldwide.

The problem is not that the system generates widespread
deprivation; on the contrary, poverty rates are relatively low in
Egypt and other Arab countries as well. But the lack of
opportunities for the young and educated translates into deeply
frustrated aspirations.

At another Cairo cafe, Hassan Saber, a university-trained engineer,
lamented the joblessness he has endured for the past two years. "I
understand this is the fate of Third World nations, but I had the
hope that things might become better," said Saber, 37, adding that
among the unemployed people he knows, a number have been drawn to
the preachings of radical clerics.

"As the economy gets worse, the religious fundamentalists and
extremists are capitalizing on it," he said. "The greater the
decline, the more violence we're going to see."

Socialism's Legacy
Charismatic and cosmopolitan, Gamal Abdel Nasser set Egypt on a
course that seemed to suit his country well following the 1952
revolution that brought him to power.

In an effort to redress inequities that had arisen during the
country's period of colonial subjugation, the state became the
engine of development. Companies were nationalized; foreign trade
and investment were discouraged. The government guaranteed a job to
every graduate of universities, technical schools and high schools.

The big-government approach yielded some impressive improvements in
social conditions. Enrollment in Egyptian primary schools more than
tripled, to well above 90 percent by 1990, and infant mortality
plummeted.

But the state's leaden presence meant that the Ministry of Industry
had to approve every business expenditure -- even a factory's
purchase of a car. Bloated payrolls and overstaffed factory floors
were the norm because of the government's job guarantee for
graduates. John Page, a World Bank economist, recalled a visit in
the early 1980s to a textile factory that appeared to have a
surprisingly streamlined workforce until the manager showed him a
room full of graduates.

"He had them all sitting at desks, like high school students,
copying out files, doing all kinds of statistical analyses of
things going on at the plant," Page said.

The legacy of Egypt's foray into socialism continues to hamper the
development of a vibrant business sector today, according to
economists and business executives who work in the country, even
though the government took some major steps during the 1990s toward
building a capitalist system atop socialism's decaying foundations.
A privatization initiative launched in 1991 resulted in the sale of
well over 100 state-owned enterprises to investors by late 1998,
but partly to protect jobs, many enterprises remain in government
hands.

The still-ponderous Egyptian bureaucracy elicits exasperation from
business managers like Mahmoud Bdeir, a Jordanian native who runs
privately owned Sipes Quality Paints. His chief gripe is how the
customs office makes it complicated and expensive to import raw
materials. This complaint is widely echoed: The onerous clearance
and inspection procedures for imported goods impose a cost equal to
an extra 15 percent tariff, according to a 1999 World Bank report.

"And anything to do with courts -- try to stay away from it," Bdeir
said, echoing another oft-voiced grievance concerning the
difficulty of settling disputes. "It takes years and years to
resolve anything. And I mean years -- two, three, four is not out
of the ordinary."

Another big drain on economic dynamism arises from the Nasser-era
guarantee of a job for every graduate, which encourages people to
wait years for openings with the government, primarily because of
the easy hours and lifetime security. Ragui Assaad, a University of
Minnesota economist who specializes in Egypt's labor markets, said
the guarantee explains why 75 percent to 95 percent of the
country's unemployed are graduates, even though they account for
less than half as great a percentage of the workforce.

Riots erupted last July, leaving dozens injured, when the
government announced that it would hire 170,000 graduates under age
30 -- letting them jump ahead of those who were older. "The
government was trying to break the implicit contract, which is that
people in the queue first get the job first," said Assaad. "That's
when people rioted" -- and the government backed down.

The Crutch of Foreign Aid
Economic problems like these can't always be fixed with foreign
aid. On the contrary, aid can sometimes enable a government to hold
on too long to outdated policies.

Ask World Bank economists why they didn't use their leverage to
induce Egypt to drastically change its ways, as they do in many
other countries, and the answer is almost invariably the same: The
World Bank lacks such leverage in Egypt, having been essentially
"marginalized" because Cairo can rely on other donors, notably the
United States and European countries, for the funds it needs.

Ask if that means the billions of dollars showered on Egypt by the
U.S. Agency for International Development have been wasted, and the
answer is an emphatic "no." World Bank economists credit USAID with
bankrolling well-designed, well-implemented projects, such as an
investment in a power system that supplies electricity to 95
percent of Egyptian homes.

But the aid has not served as a catalyst for the sort of business
investment Egypt requires to ignite its economy. That level of
success would entail much more ambitious economic reforms than
Cairo has yet undertaken -- and, privately, World Bank economists
contend that Washington's largesse has kept the Egyptians from
feeling pressured to do so.

Khalid Ikram, who retired a few months ago as the World Bank's
resident representative in Cairo, cited a conversation he had with
a senior U.S. diplomat during the late 1970s. When the diplomat
exhorted the World Bank topress Egypt for economic reform, Ikram
responded by noting that USAID's disbursements to Cairo dwarfed
those of the bank, and he asked whether Washington might
conceivably withhold its money.

The diplomat paused, Ikram recalled, and referred to Egypt's
then-president Anwar Sadat, who made peace with Israel and was
later assassinated. The diplomat said: "We believe President Sadat
is a force for moderation in the Middle East, and as long as he
continues to be a force for moderation, he deserves our support."

Setbacks for Reform
Egypt has made attempts to reform its economy, and in some ways its
most recent setbacks can be attributed to factors beyond its
control, including the vicissitudes of the global economy.

Five years ago, the government was vigorously implementing an
agreement reached with the International Monetary Fund to cut its
indebtedness and stabilize the economy. Privatization, after a slow
start, was in high gear, and economic growth surged. Foreigners,
who had shied from the country for years, sank $400 million into
factories and other direct investments in 1995, $800 million in
1996 and more than $1 billion in 1997.

"The country was starting to operate on all cylinders," said
Mohamed El-Erian, an Egyptian-born economist who was then with the
IMF. He recalled how the progress prompted Moody's Investors
Service to host a conference in Cairo in September 1996 titled
"Egypt, the Tiger on the Nile."

But suddenly the outlook turned dismal. One reason was a massacre
of tourists by Islamic extremists in Luxor, Egypt, in November
1997. Another, more powerful factor around the same time was the
Asian financial crisis. The collapse of currencies and stock prices
in Thailand, Indonesia and South Korea sent investors scurrying
from emerging markets worldwide. The resulting slowdown in global
growth put further downward pressure on the country as oil prices
slid and revenues from the Suez Canal shrank.

The Egyptian government tried to retrench -- and conveyed the
impression that it was returning to its bad old ways. It canceled
some privatizations for fear that in light of the stock market's
depressed level, it would be accused of selling the country's crown
jewels too cheaply. It imposed new restrictions on imports.

"The whole spirit of freeing up the economy was killed within two y
ears," said Heba Handoussa, managing director of a Cairo-based
think tank called the Economic Research Forum for the Arab
Countries, Iran and Turkey. "Everyone in the private sector lost
faith, and became totally suspicious of the government."

Hassan Saber, the unemployed engineer at the Cairo cafe, now
worries about a vicious cycle in which economic deterioration and
social unrest reinforce each other.

His younger brother, a fundamentalist, was arrested several years
ago, and even though the rest of the family is not particularly
religious, Saber said, he has been harassed by state intelligence
agents who come to his house to look at his books and ask
questions.

"They arrest everybody," he said disgustedly, citing a prominent
academic who has been jailed. The lack of democracy, he warned,
means that disaffected Egyptians have no outlet other than religion
for their grievances. And as businesses recognize the implications
for the country's long-term stability, that in turn will weaken
their willingness to invest.

"I'm against the fundamentalists myself, and my brother's
ideology," Saber said. "But it's the government that is creating
the conditions for the mosques to attract these individuals."



© 2002 The Washington Post Company