Egypt's economy soars; so does misery

Four years into a robust economic expansion, this country has shaken off its history of sleepy Arab state socialism and embraced the market. A rush of construction is throwing up office buildings as fast as Western-sounding names, such as Palm Hills, can be dreamed up for them. Sluggish state-owned companies from banks to department stores are being sold to private investors, and foreign capital is flooding in, lured by the scent of certain profit.

Egypt today has all the earmarks of a gathering boom. Strange then, that most Egyptians seem so miserable. "Living conditions are difficult. Everyone is suffering because of higher prices," says a weary Gomaa Ali, a local restaurant owner.

At Ali's tiny downtown eatery one recent day, the flies outnumbered the customers. Double-digit inflation combined with stagnant wages has eaten into his business and made the government's talk of a surging economy seem hopelessly divorced from reality. "People have become more reluctant to eat out. If you'd come here two or three years ago, this place would be packed, and they'd have to line up to get a table," he says, gesturing at the empty chairs and sweating in the oppressive midday heat.

Even as the government touts a litany of impressive statistics, Ali's complaints find echoes among Egypt's long-suffering 80 million citizens. Ambitious economic reforms launched in 2004 have won plaudits from the business community but have done little for the average Egyptian. Poverty, in fact, has increased slightly over the past three years despite an economy growing at an annual rate of about 7%. That disconnect raises questions about whether the government can sustain its reforms amid mounting labor unrest and a generalized air of complaint.

Egypt's reformist prime minister, Ahmed Nazif, remains committed to the transition from a bloated state-centric economy to a more market-oriented one. But security officials worry that the danger of instability, as popular subsidies on food and energy are reduced, outweighs the potential for long-term improvement in living standards. Sharply elevated global food prices are only intensifying the dilemma, as the government opts to increase spending on bread subsidies it had hoped to reduce.

"They're reluctant to do more. … They're not in a mood to be challenging the street," says economist George Abed of the Institute of International Finance, a global association of financial institutions in Washington, D.C.

Watching closely are foreign investors who've been pouring funds into the Arab world's most-populous country. From just $450 million five years ago, foreign direct investment rose to more than $10 billion last year. One key: Egypt has been among the principal beneficiaries of a torrent of oil dollars coming from countries such as Saudi Arabia and the United Arab Emirates. The USA was the leading source of capital last year, though it ranks eighth in cumulative investment. Major American corporations such as Citibank, General Motors and Procter & Gamble have sizable stakes here.

The largest U.S. investor is Apache Corp., a Houston-based energy company that first began exploring for oil and gas deposits in 1994. About one-fifth of the company's $3.2 billion in first-quarter production revenue came from beneath the Egyptian desert.

CEO Steven Farris, 60, says Egypt in recent years has become much more "business-friendly." Proof can be found in the World Bank's annual "doing business" survey, which in 2006 ranked Egypt at No. 152 of 178 countries. After slashing red tape, Egypt made the biggest one-year gain of any country, rising to No. 126 in the latest survey, released in the fall. Significant progress was recorded in the ease of starting a business and trading across borders, the bank said. "It's a different place today than it was in '94. … Do I think they're going to continue on this road?" says Farris. "Yes, I do."

The trendiest mall

Egypt does less well on another annual ranking, Transparency International's list of countries based on executives' perception of local corruption. Of 179 nations, Egypt tied for No. 105 with countries such as Albania and Bolivia, according to the non-partisan anti-corruption group.

"If you want to succeed, you have to be in this circle of the rulers at all levels," says Yousef Zaki, 59, a local businessman who adds that bribes are a routine part of dealing with government agencies.

A continuing flow of foreign capital is critical for the government's hopes of boosting investment economywide. Investment now equals about 22% of total output, up from 17% three years ago, but still well below the government's goal of about 27%.

Egypt's location astride trade routes linking Asia, the Middle East and Europe is a key selling point when officials meet with potential investors. So far, the government has done well competing against nations such as Turkey for the right to host companies looking for an export platform to serve consumers in Africa and the Middle East. But it has lost out to fast-rising countries such as Vietnam when multinationals have evaluated potential locations all over the globe for high-tech research centers.

A large share of foreign investment has originated with neighboring Arab states that are putting their petrodollars into speculative real estate projects. Along Cairo's streets, billboards boast of the Towers Mall commercial project — "the trendiest mall" — and advertise residential developments for the city's affluent residents.

"The region is flush with money. Traditionally, this used to be destined for investments in North America and Europe," says Amer Kayani, a commercial counselor with the U.S. Embassy. "Now, these investors are increasingly looking at opportunities closer to home."

There's no question that Egypt has been remarkably successful in attracting foreign investment. But it's not clear how much of an impact the foreign capital has had on creating jobs throughout the economy.

Egypt's foreign investment — once heavily concentrated in oil and gas — has grown more diverse as investors have broken ground for factories producing fertilizers, chemicals and consumer products. But last year, more than one-third of foreign investment went into privatizations of large state-owned enterprises, such as the Bank of Alexandria and the Omar Effendi department store. Such deals typically lead to substantial job losses as bloated state payrolls are trimmed.

The past five years, the official unemployment rate has declined from 11% to about 9%. However, economists say that figure likely understates actual joblessness. And the government says it is unable to quantify foreign investment's effect on employment.

With a fast-growing population, Egypt must produce more than 600,000 new jobs each year just to keep pace with new entrants into the labor force. "That is a challenge," acknowledges Neveen El Shafei, vice chairman of the General Authority for Investment and Free Zones.

World-class traffic jams

One major Egyptian success grew out of a provision in U.S. trade law designed to promote Arab-Israeli reconciliation. In 2004, the U.S. approved plans for Egypt to export to the USA products made in special export zones. So long as the goods derived at least 11.7% of their value from Israeli inputs, they could enter the USA duty-free.

That's been a boon for companies such as Cairo Cotton Center, which makes shirts, sweatshirts and trousers for U.S. retailers such as Macy's and The Gap. From annual sales of $14.7 million in 2005, the company has grown steadily and expects this year to hit $32 million. That's expanded the workforce to about 3,000 from 1,700 four years ago and brought owner Magdy Tolba a life most Egyptians can barely imagine. One of the city's most prominent businessmen, Tolba is chauffeured through Cairo's horrific traffic in a gleaming Mercedes sedan. His son is an accomplished equestrian. His daughter enjoys a college education abroad.

Still, Tolba says Egypt hasn't fully capitalized on its opportunities. Cairo's inadequate infrastructure, which gives rise to chronic, world-class traffic jams, poses a particular hurdle in an era of just-in-time delivery. Tolba lost his entire profit on a recent order for The Gap because four of his trucks were stuck in traffic. When they were late for a rendezvous at the port, Tolba was forced to absorb the cost of shipping them via air.

The successful entrepreneur also bemoans a feeble educational system that has left the workforce desperately short of needed skills. Young Egyptians, Tolba says, want to work in a government office where little is demanded of them. That's limited the garment industry's ability to expand. "Our American buyers need capacity out of Egypt, and they don't find it. … Egypt has potential, but I am sorry to say we are not using this potential," he says.

The absence of hope

Today's popular frustrations over flat-lining living standards have been building for years. The recent boom, felt only by the already well-off, has done little to change that discontent.

In 1970, the monthly starting government salary for entry-level college graduates was enough to buy about 750 pounds of rice, according to economist Ahmed El-Naggar of Al-Ahram Center for Political and Strategic Studies. Almost four decades later, reflecting soaring food prices and wages that have barely advanced, an entry-level government clerk's pay buys little more than 100 pounds of rice.

Labor unrest has been growing for months; violent protests erupted in early April in the textile capital of Mahalla, north of Cairo. At the end of the month, President Hosni Mubarak ordered a 30% salary increase for public-sector workers. Corporate taxes will be raised and gasoline subsidies cut to pay the rising wage bill. The move was designed to take the steam out of boiling anti-government sentiment. And it may succeed; Egyptians have a reputation for bearing their burdens.

Reform backers say it may take a few more years before the benefits of the country's economic growth are felt at street level. Few here seem to anticipate any tangible improvement in their own circumstances any time soon.

On a clear, hot day last month, two brothers, Abdel Bari Hadila, 40, and Ibrahim Hadila, 32, stood in a field in the rich farmland of the Nile Delta. They spoke of the difficulty of scratching a living from the soil — at a time when the cost of fertilizer and everything else is steadily ticking upward — and their hopes to one day afford a simple brick home.

Reminded that Egypt's economy has been expanding for several years, the elder brother erupted. "This is what the government says. But we're not feeling what the government says. The likes of us who are have-nots can work for 60 years and still end up as have-nots," grumbled Abdel Bari. "People are having to resort to any means to earn a living, whether legitimate or illegitimate. Times are very difficult."