Now Egypt? There Goes the Neighborhood
January 26th, 2011
January 26th, 2011
Reverberations from the violent protests in Tunisia are knocking on Egypt’s door. On Wednesday, the Egyptian authorities threatened “immediate” arrest for any public gatherings or protests in response to a massive march in opposition to the current leadership, President Hosni Mubarak.
“No provocative movements or protest gatherings or organizing marches or demonstrations will be allowed,” the Interior Ministry said in a statement. According to the New York Times, on Wednesday some protesters persevered as they chanted slogans at hundreds of security officers saying “You’re protecting thieves.”
It’s clear that opposition to Mubarak’s rule stems from Egyptians angered by the corruption and economic hardship that they face. The country’s official unemployment rate is over nine percent and in actuality is likely much higher as it continues to struggle with reducing poverty. Living conditions for the average Egyptian remain poor, despite the relatively high levels of economic growth the country has seen.
Egypt’s GDP per capita in 2009 was US$2,270. The gini coefficient measures income inequality throughout an economy where zero indicates perfect equality and 100 indicates perfect inequality. In the most recent year for which Egypt is able to provide data (2005), the country’s gini coefficient was 32, with Russia and Iran both at 38 that same year. However, this index does not paint a picture of how poor the poor really are compared to the rich. When you break down the population into five groups, or quintiles, you see that in 2005 (again the most recent year for which the World Bank has income data on Egypt) the lowest fifth of the population held 8.96 percent of the country’s income, and the highest quintile had a whopping 41.46 percent share of Egypt’s income. These indicators have most certainly deteriorated in the past six years since the data were available—indicating that, indeed, the average Egyptian faces great and increasing economic hardship.
In a recent post on Tunisia, I highlighted the volume of illegal capital flowing out of the country due to corruption, crime and illegal commercial activity, and I linked these flows to the political unrest and recent protests. High and increasing unemployment levels along with high and rising income inequality are the clear and direct drivers of massive uproars by average citizens. When a Tunisian or Egyptian can be starving and desperate for work but can look around and see opulence and wealth held by the political and corporate elite, the rage of injustice is consuming. So, how much money is the elite stealing away into their foreign coffers?
The findings of a recent report I co-authored with Dr. Dev Kar at Global Financial Integrity show that the growth rate of illicit financial flows, or illegal capital outflows, out of the MENA region from 2000 to 2008 was 30.21% outpacing illicit flows from any other developing-country region.
Comparing Egypt’s illicit flows to those of Tunsia, Tunisia experienced nominal illicit capital flight through trade mispricing, whereas Egypt sees strong and persistent illicit flows through the commercial (trade mispricing) component at US$2.54 billion per year in addition to losses due to corruption and crime. Both countries had about the same average volume of merchandise exports between 2000-2008, however Egypt has a much larger GDP. Consequently, unrecorded flows picked up through the balance of payments (due to corruption and crime) account for over 60 percent on average between 2000 and 2008 of the total illicit flows out of the country at about US$3.8 billion per year. This brings the country’s average illicit outflows up to a staggering US$6.36 billion per annum. No wonder Egyptians are upset.
In 2006, 2007 and 2008, Egypt’s GDP jumped into the hundred billion range annually. As this growth occurred, illicit flows peaked at US$13.0 bil, US$13.6 bil, and US$ 7.4 bil; respectively. Those engaging in corrupt and criminal activity were certainly getting their cut of the country’s growth.
The dip down to US$7.4 in 2008 was due in part to a sharp outflow of licit capital late in the year, when according to the IMF foreign investors pulled out of equity and government debt markets reflecting diminished confidence in Egypt and a lowered appetite for risk. “The rapid capital outflow in late 2008 was met mostly with a drawdown in official reserves and the Central Bank of Egypt’s (CBE’s) foreign currency deposits with commercial banks.” As the economy and financial markets contracted, so did the volume of money corrupt officials and criminals could break off for themselves.
Hosni Mubarak has been president of Egypt since the assassination of Anwar el-Sadat on Oct. 16, 1981, and his tenure is the longest of any Egyptian president. According to the New York Times, Mr. Mubarak steadily reduced the room for legitimate political dissent, and what was a once-largely secular society has become increasingly Islamicized. The Times Topics piece states, “Government critics are routinely jailed and freedom of expression and assembly are restricted.”
The CIA World Factbook cites Egypt as a transit point for cannabis, heroin, and opium moving to Europe, Israel, and North Africa, and points to the country as a potential “money laundering site due to lax enforcement of financial regulations.”
Reforms of the political institutions will be necessary, and apparently inevitable for Mubarak. It is also necessary for the Government to strengthen data quality and transparency. As a 2010 International Monetary Fund report urges, “there is a need for more robust CPI and GDP deflators, and for publishing higher-frequency aggregate financial soundness indicators (as planned), and encouraging banks to make available detailed performance and soundness indicators.” More transparency and government accountability to Egyptian citizens is the only sustainable road to stability.
Tyson Smith contributed research to this article.
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