Phenomenon of the two-headed Economies

By its nature, an economy is represented by two stories. This is reflected in the two sides of the ledger: one showing the sources of national income; the other showing the areas of consumption.

Thus, you can have an economist looking at one side of the ledger and saying things look good; have another economist look at the other side of the ledger and say things look bad, and have a third economist look at both sides of the ledger and say: on the one hand I see a cup that's half full; on the other hand I see a cup that's half empty ... which is an attitude that prompted the American President Harry Truman to wish he could find a one handed-economist who would give him a simple straight talk.

In fact, the two-handed predicament has characterized the nascent industrial economies during the period ranging from about the end of the Nineteenth Century to the end of the Twentieth Century. Before that time, the economies were too primitive – based mostly on agriculture and simple crafts – to present much difficulty. After that period of time, the economies started to go global, becoming so complex they began to suffer not only from the two-handed syndrome but also the two-headed syndrome.

In addition to that complexity, the two-headed syndrome comes in two distinct varieties. There is the variety of the industrialized economies having to compete against the natural resources, cheap labor and lax rules of the emerging economies. And there is the variety of the emerging economies having to rely on the know-how, machinery and markets of the industrialized economies.

The study of two examples – Egypt and the United States – shed some light on that conundrum. In the case of Egypt, you have an economy that has gone through a difficult period and came out of it almost intact. It is now passing through the typical period of wanting to expand rapidly, except for the fact that it is tethered too much to an outside world that is itself going through a slow period.

To expand, Egypt relies on the natural resources it has, as well as a large and well qualified labor force. But in this age of globalization, Egypt also relies on the importation of the natural resources it does not have, as well as the know-how, machinery and markets of the industrialized world. Internally, Egypt works well with its own currency, mimicking the steps that were taken by the nations of the first Industrial Revolution long ago.

However, the trouble with relying solely on that approach is that it will take the country several generations to become fully industrialized. To speed up its development, Egypt had to also rely on the outside world, something it did by going global. This forced it to create a parallel economy (the second head) based on the foreign currencies it earns from foreigners – mainly the American dollar and the Euro.

Egypt earns that money by selling goods and services to the rest of the world, and uses it to buy what it needs from everywhere else. But because the world is going through a slow growth phase while Egypt is trying to accelerate, the country finds itself selling little to the world while buying a great deal from it. This is what forced Egypt to juggle the dwindling sums of dollars it earns by selling to its trading partners.

As to the case relating to the advanced economies, like that of America for example, the problem consists of maintaining a local economy that can pay high wages to its population while running a parallel economy (the second head) with nations that have the ability to provide the same American population with most of the goods and services it requires … and do so at low prices. The result is that no matter how much America innovates; it cannot offset the wage gap that exists between the local economy and the ones outside its jurisdiction.

While a few similarities can be seen in the Egyptian and the American dilemmas, there is one big difference between them. It is that the American dollar is the currency of reserve for much of the world. That is, America can simply print the money it needs and buy what it wants from the rest of the world. In contrast, Egypt must export something to earn the dollars with which to buy what it needs to keep its factories humming.

This is why a foreign debt of 500 dollars per capita is viewed as a great deal in Egypt, whereas a foreign debt of 30,000 dollars per capita is viewed as being of little consequence in America. Well, that's what some economists will say. On the other hand, other economists will sound the alarm at the mention of an average American owing foreigners 60 times as much as an average Egyptian.

That is especially true when taking into account the fact that the Egyptian economy is powered by a young population and expanding ... at a time when the American economy is stalling, and promising to remain in that mode waiting for others to catch up with it.

The result is that Egypt will have no difficulty paying back its debt whereas America will have to struggle.