Thursday, February 03, 2011

Crisis in Egypt and its implication

The middle-east countries are in turmoil. Civil war is spreading from Tunisia to Egypt to Yemen to Jordon. Freedom has eluded the people of these countries for long. The dictators, be it Zine el-Abidine Ben Ali of Tunisia or Hosni Mubarak of Egypt ruled for decades with the help of the army. They created political parties to suit their purposes and blatantly rigged elections to win year after years. Though the people of these countries are apparently happy and well placed (e.g. Tunisia has 75% literacy rate and GDP per-capita of $9500, whereas for India it’s only $1176), but only at the cost of sacrificing their liberty. Any resentment by the people resulted in torture and detention. These despotic regimes created many extremist groups like the Islamist Muslim Brotherhood.




Frustration with the high food inflation and rising unemployment was the ‘tipping point’. It led the people in Tunisia to take to the streets and revolt, which ultimately resulted in the fall of the Abidine’s 23 year rule. It started a chain reaction. Taking cue from Tunisia, people of other surrounding countries started demonstrating against their respective governments.

This political and social uprising is taking a toll on the economy of the region. Even it’s going to impact the world economy as well. Egypt earns billions of dollars each year from payments to use the Suez Canal. In fact, the man-made canal accounts for 35% of the world trade. But the protest and uncertainty have already reduced the traffic flow. The tourism is also hit. The Indian government has brought back all Indian tourists few days back. Many companies like Coke, Nestle, Dabur, Asian Paints and Marico have suspended operations in Egypt. A handful of power and oil companies have temporarily suspended operations. The political unrest in Egypt threatens its status as rising outsourcing star and poses substantial geographical risk to IT outsourcers.

These incidents led the IMF to express concern on the sustainability of the recovery from the recession. Dominique Strauss-Kahn, MD of IMF said that the pre-crisis pattern of global imbalances is re-emerging. High food inflation is plaguing the Asian economies. US economy whose growth is driven my domestic demand has large external deficits. On the other hand growth of countries with large external surplus (China, Germany) is powered by exports. Increasing debt of the developed countries like Greece, Ireland, Portugal and Spain is a concern. Tensions between and within countries will result in protectionism and rising social and political instability jeopardizing the recovery.

At this crossroad, government and central banks need to take quick and effective political and monetary measures, respectively. Over the next decade 400 million young people will join the workforce, a challenge for the governments to provide them with jobs.  Countries need to balance inflation and growth. IMF expects the advanced economies to grow at a subdued rate of 2.5% this year; while the growth percentage for emerging economies is pegged at 6.5% (Asia excluding Japan is projected to grow at 8.5%). We have to wait and see.

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