February 18, 2011
Egypt's economy and Mubarak's fall—A Commentary by Ian Ayres ’86 and Jonathan Macey '82
The following commentary was posted on Politico.com on February 18, 2011.
Egypt's economy and Mubarak's fall
By Ian Ayres ’86 and Jonathan Macey ’82
The issue driving protesters in Egypt is the same that dominates elections in the U.S. and other democracies: concerns about the economy.
Many observers of the Middle East upheavals have focused on the Egyptian economy’s dismal performance. But the real story is far more complex. For President Hosni Mubarak’s recent successful economic reforms — and Egypt’s increasingly liberal policies toward business formation — may have, perversely, helped undermine the autocrat’s support.
Certainly, the Egyptian economy’s pervasive failures are obvious. Per capita gross domestic product is a meager $6,200; one in five people lives below the poverty level.
But this is old news. The real story is that for the past five years, Egypt’s economic development has been on a fast track — with average real GDP growth of more than 6 percent. This compares favorably with the tepid 1.4 percent U.S. rate of recent years.
Why the sudden growth spurt in Egypt? One big reason is the Mubarak regime’s willingness to implement meaningful entrepreneurial reform. During the pastfive years, Egypt, for the first time in its long history, made it far easier to start a business.
In 2005, Egypt required businesses to put up more than $11,000 in paid-in capital before they could incorporate. In the U.S. — as in most high-growth countries — there is no requirement to pony up any paid-in capital to start a business. In the U.S. and most of the West, starting a new business takes less than a week. But in Egypt, it took 43 days to start a business in 1995, according to World Bank estimates.
Fast-forward to 2010, and the Egyptian minimum paid-in capital requirement had dropped to about $250, and the time to incorporation is just seven days. The World Bank now ranks Egypt as the 18th easiest nation in which to start a business. The past five years were characterized by meaningful economic liberalization and economic growth — in Egypt.
No account of the Egyptian revolution should overlook this crucial point. In 2004, in the wake of the controversial presidential election, Mubarak installed anew, Cabinet-level economic team. Cairo reduced tariffs and taxes, improvedtransparency of the national budget, restarted stalled privatizations of public enterprises and passed economic legislation designed to reduce bureaucraticobstacles to business and foster private-sector-driven economic growth.
The Egyptian economy had steady 7 percent GDP growth between 2005 and 2008 — before the global economic crisis, which slowed the rate temporarily to 5 percent. Its economy is growing again, though it still remains burdened by massive government regulation and bloated public-sector payrolls.
Perversely, Mubarak’s opening to economic reforms very well could have played a role in his downfall. Lowering barriers to business formation often makes it harder fordictators to retain power. This new business formation creates and nurtures a burgeoning middle class, eager for even faster growth and more reform.
In addition, economic liberalization tends to embolden internal opposition groups. An invigorated private sector creates alternative nodes of power, which canultimately be turned against an autocrat.
The Mubarak regime’s fatal mistake was not its failure to pass reforms. Rather, it was that it took half steps toward liberalizing the economy — without taking the further steps required to complete the nascent democratic reforms it initiated in 2006.
The lesson for the region’s other repressive, corrupt and overregulated autocratic regimes is that half measures don’t work. If Syria’s President Bashar al-Assad cares more about retaining power than the welfare of his people, he would be advised not to follow Mubarak’s lead in opening the door to entrepreneurial democracy.
Syria hasn’t even started down the path to economic reform. The minimum capital requirement for incorporating a new business there remains a staggering $8,500. The World Bank now ranks Syria as one of the most difficult places in the world to start a new business. The lesson for the autocrats in Syria and Jordan is that trying to navigate slowly toward reform will not appease anyone.
Over the past five years, Egypt has grown approximately 40 percent faster than Jordan and 30 percent faster than Syria — though Egypt had a far larger economy to start with. In 2004, Egypt’s GDP was three times as large as Syria’s and six times as large as Jordan’s. In 2009, Egypt’s economy was about four times as large as Syria’s and 7.5 times as large as Jordan’s.
The rulers of Egypt and Jordan probably know that a lot of Egypt’s new wealth is used to fund protests for more and faster reform. The lesson that Egypt teaches may be that tentative steps to reform may be more dangerous than shock therapy.
Ian Ayres is the William K. Townsend Professor of Law, specializing in contracts and corporate finance at Yale Law School. Jonathan Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law.