In a refreshing departure from the norm, the Wall Street Journal (WSJ) published a piece on April 20, 2009 on the Egyptian economy, and did it in the style of good journalism. Titled "Egypt's Gamal Mubarak Aims to Underpin Growth," the piece clearly shows that when the Journal decides to do so, it can switch from a style of reporting that is dumb and juvenile to one that is smart and mature. And when it does this, it performs a valuable service to the readers who want to invest in a market they wish to know a little more about.
This being the case, it is now possible to engage in a serious discussion on what goes on in the business world of the Middle East and North Africa known as the MENA region. But before we get into the specifics, a general observation must be made concerning the developing countries. It is that they use a different approach when tallying the figures that pertain to their national economies. Unless you know this and you have a minimum grasp of the details, you cannot paint in your mind a clear picture of the business opportunities that exist out there.
It is generally acknowledged that the developing countries do not tally up all the business activities taking place within their borders because many of these activities are done on a small scale without being recorded on a ledger of any kind. In some cases as much as 50% of the business activities escape recording; therefore the value of the Gross Domestic Product can be underestimated by this much if not more. And if your business is of the type that will depend on the purchasing power of the country where you intend to invest, the GDP figures as stated can mislead you. But the factor that distorts the figures even more in some jurisdictions is the translation of the currencies; and this is the focus of this discussion.
First, we look at the countries that are affected to a minimum degree by currency translation, and they fall into two categories. There is the group that interacts very little with the outside world such as Syria and Yemen. These countries take in a minimum amount of foreign currencies and so they tally their GDP mostly in one currency, their own. Then there is the group that interacts a great deal with the outside world such as Kuwait and Dubai where they receive a great deal of foreign currencies and where the economy is practically dollarized. Here too, very little currency translation is done therefore the tally is only affected to a small extent.
Where the problem of currency translation is acute is with countries like Egypt and Morocco where there is a fairly large and diversified economy that is produced by a workforce serving the local population and the outside world. These countries receive a fair amount of foreign money from the export of goods and such services as tourism. In the case of Egypt, there is also the income received from the Suez Canal and from the Suez-Mediterranean (SUMED) pipeline.
To see how this situation can confuse the tallying of the economic figures, we take an example expressed in round figures (not too different from the actual figures) that make up the Egyptian economy. In a given year, the country’s GDP expressed in Egyptian Pounds (EP) is 850 billion. Of these, 700 billion is generated from activities pertaining to the local markets while the remaining 150 billion represent the income earned from the export of goods, from tourism and from the revenues of the canal and the pipeline. Together, the last 4 sectors bring in 30 billion US dollars which convert roughly into the aforementioned 150 billion EP.
Simple calculations will show that 82% (700 billion) of the Egyptian GDP is made of the goods and services produced for the local market while 18% (150 billion) is made of the goods and services produced for the foreign markets.
Given that this GDP is produced by a workforce of about 25 million people, when you apply the above percentages to the force, you come up with these figures: 20.5 million workers should be producing goods and services for the local market, and 4.5 million should be producing for the foreign markets. But when you check the actual figures, you find that only a million workers or thereabout are responsible for earning all that foreign money. And you get the feeling that you are missing something.
You check what skills the workers of the latter group possess that make them produce on a per capita basis 4.5 times as much as their counterparts in the rest of the economy. But to your surprise you find that the majority of these workers possess the lowest of skills. In fact you find them to be working in the hospitality industry, in food processing, farming, textile, leather works, carpet making and furniture – all of which are traditionally very low skilled jobs. By contrast, you find that those who produce for the local portion of the GDP are engaged in construction, mining, engineering and the utilities, or they are immersed in the production of heavy machinery, pharmaceuticals, transport equipment, hi-tech products and the like – all of which are traditionally high skilled jobs. And so you ask the question: What is going on?
Well, what is going on is that in Egypt as in most developing countries they maintain two systems of accounting; some would say two sets of books. One set is maintained in the local currency while the other is maintained in foreign currencies. The reason why they do this is a subject for another discussion; what is pertinent to this discussion is the distorting effect that this approach has on the figures making up the GDP. And because the figures are distorted, they project a false picture of what goes on in those countries, something that confuses potential investors and may even keep them away.
Another example of figures that baffle the people who know little about these countries came up in the April 20 article of the Wall Street Journal. It was reported that the consumption of steel and cement in Egypt has been growing by 20% or more. In fact, when you look at all the sectors of the economy, you find that many have been growing at a rate comparable to that, yet the GDP is said to have been growing by only 7%. But math and economics will say that when most of the sectors grow by 20%, it is nearly impossible for the overall economy to grow by only one third of that. You therefore conclude that something about these figures is amiss and again you ask the question: What is going on?
To answer the question we go back to the GDP figures. It was reported in the same article that the growth rate this year has been reduced to 4% from the 7% that it was before the world economic crisis hit. This means the GDP is being produced at a clip that will eventually register 850 x 1.04 = 884 billion Egyptian pounds. It was also stated (but not reported in the article) that the country’s income in foreign currencies has been reduced to about half of what it was, meaning it went down to 75 billion EP. Thus, we can find the portion contributed to the GDP by the local activities from the following subtraction:
884 – 75 = 809 billion Egyptian pounds
So then, the local portion of the economy will be growing at the following rate:
((809 – 700) / 700) x 100 = 15.57%
This is astounding but true. It says that despite the world economic crisis or perhaps because of it, the local portion of the Egyptian economy will grow at a rate that exceeds 15% during this year and for the foreseeable future. When you take these observations into account and you apply them to everything else in the country, you get an indication as to how the middle class is faring economically.
More specifically, these observations say that the purchasing power of the Egyptian people is high enough to compare favorably with a country whose per capita income looks on the surface to be five times or even ten times higher. And when you realize that Egypt has a young population of 80 million people, you see that the potential for future growth looks bright for the country and for your investment should you decide to put your money there.
In fact, when the smart money tries to determine the business opportunities that exist in a country, it looks at the state of the middle class. When you do this and you add to it the fact that Egypt has liberalized the investment procedures for foreign capital to come into the country and has allowed it to participate in all sectors of the economy, you will understand why Egypt has become the destination of choice for the smartest of money these days.
Perhaps the Wall Street Journal has realized that it is better to reflect reality and take advantage of the opportunities it offers than reflect a fantasy to score a few cheap hits and get thrilled by them. Whatever the reason for the change of heart, we should be happy for what happened and say in all sincerity: Welcome home, Wall Street Journal! May you repeat the good work again and again.