The Real Economic Implications of the Uprising in Egypt

Thanks to globalization, the uprising in Egypt raises serious questions about the impact on Western economies, including America, as well as Egypt’s political and economic development.   The precipitating event for the current unrest almost certainly was a facet of globalization -- steadily rising worldwide food prices which hit record levels just before the unrest broke out.   An average household in Cairo has to spend 40 percent of its income on food, so price increases of more than 30 percent in recent months almost certainly helped fuel the volatile dissatisfaction.  Outside Egypt, the economic issue is, as usual, the price of oil.  Egypt produces little of the black stuff; but unlike Tunisia, it is an important transit country for crude.   Despite media doomsayers, however, the current unrest is very unlikely to take a serious toll on Western economies.  

A full-out civil war certainly could compromise the Suez Canal and the Sumed pipeline that links the Red Sea to the Mediterranean.   If that happens, tankers carrying more than 2 million barrels of oil a day will have to add another 6,000 miles to their journeys.   Such an interruption of shipments through the Canal and the Egyptian pipeline would shake up world oil markets and set the stage for speculators like Goldman Sachs and large hedge funds to gin up a short-term spike in prices, and profit nicely by it.   And yes, oil price increases can have huge effects on the American and world economies.  The recessions of 1974-1975, 1980, and 1990-1991 were triggered by big jumps in oil prices; and what became the Great Recession of 2007-2009 also was set off by oil price hikes. 

 But in order to threaten the U.S. and global recoveries, an oil price spike would have to be both very large and persistent -- for at least four-to-six months.    Before this year’s unrest gripped Tunisia and Egypt, oil prices in 2010 had risen by about 27 percent.  That cost the United States an additional $72 billion for oil imports, an extra $70 billion for the EU’s oil imports, and $27 billion more for Japan.  That’s not peanuts, but it was still just ripples for economies of their size.  Saudi Arabia is the only country with the capacity to engineer and maintain a price spike sufficient to wreck real economic havoc – as it has the capacity to prevent any other oil-producing country from trying to do the same.   

The real economic impact here threatens Egypt, not the United States; and once again, globalization is the key.   As China, Eastern Europe and parts of Latin America attest, globalization creates a new path for rapid economic development, based on vast foreign direct investments (FDI).  Over the last decade, the world’s leading multinational companies have transferred hundreds of billions of dollars in advanced technologies and business organizations directly to developing countries, including Egypt.  But FDI goes to countries whose economic and political stability those companies trust.  The political and economic conditions that emerge in Egypt once the uprising is resolved will determine whether FDI to Egypt continues, sustaining its path to modernization, or reverses itself and puts the country on a path to economic stagnation.

These FDI transfers to Egypt swamp, for example, all U.S aid.  Over the last decade, American economic assistance to the country has averaged about $500 million per-year, and total economic and military assistance has run about $1.8 billion per-year.   Over the same period, FDI into Egypt has averaged $4.8 billion per-year, nearly three times all U.S. assistance and almost 10 times our economic aid.   Moreover, these FDI transfers increased sharply in recent years, averaging $9.4 billion per year since 2006 or 6.2 percent of Egypt’s GDP.  

There’s no doubt that the chief investment officers at the world’s largest companies have put on hold new investments in Northern Africa, at least until the outcome of the uprising becomes more clear.  Many factors go into the decisions about where to set up new foreign operations by companies like Coca Cola, General Electric, and Mitsubishi – or in Egypt’s case, by energy companies such as APA and BP, and financial service giants such as Citigroup and Metropolitan life.  The size and composition of a national or regional market count, as do a developing country’s infrastructure, the skills of the local labor force, the taxes multinationals will have to pay, and the soundness of a country’s currency.

Underlying all of these conditions is a country’s basic political stability and willingness to embrace Western businesses.  Sadly, multinational have no special preference for democracies over dictatorships, so long as both can guarantee stability and the rule of law.  To be sure, democracies tend to be a little more stable and lawful than many dictatorships, and sometimes they’re more prone to undertake the large public investments that Western companies look for.  But if the Muslim Brotherhood and its allies end up on top in Egypt, the modernizing investments now planned for there and many already in place will almost certainly go to other countries – dashing many of the hopes for a better life that have fueled the uprising.