Political unrest pushes Egypt towards economic meltdown By Jon Leyne

BBC News, Cairo Published duration 21 December 2011

image caption Many tourists, especially from the West, are avoiding Egypt this year

While clashes continue in the centre of Cairo, Egypt is headed towards a major financial and economic crisis.

The country is haemorrhaging about $1bn (£638m) a month in foreign currency reserves, and the Egyptian pound has fallen to new lows.

It is not just that tourists are staying away, in what should be peak season.

The political gridlock is preventing the government and businesses from tackling decades of neglect, chronic underinvestment in industry and agriculture, and disastrous planning.

Examining Egypt's problems can lead observers to shake their head in despair, as each problem leads to another - a Gordian knot from decades of bad decision-making or no decision-making at all.

Cotton 'catch'

One way through the maze is to look at the cotton industry, still responsible for the livelihoods of eight million Egyptians.

image caption Protesters in Tahrir Square accuse the ruling generals of delaying the transfer to civilian rule

At the Cairo Cotton Factory, on the outskirts of the capital, they are doing what every sane economist would suggest - adding value to one of the country's best-known agricultural products.

There is modern machinery, a well-trained workforce, and as a result the company exports clothing for big name brands to Europe and the United States.

Except there is a catch.

The factory does not actually use Egypt's famously high-quality cotton.

It has to import most of its raw material from India. Most Egyptian cotton is exported, raw, for processing overseas.

The owner of the factory, Magdi Tolba, explains that it is the result of decades of bad planning and underinvestment.

"They left the problem as it is. Now the problem is getting bigger and bigger and bigger," he says.

The problems began when President Gamal Abdul Nasser nationalised industry and redistributed land in the 1950s and 1960s.

It has left Egypt with a series of huge state-owned factories, run by political appointees, with a swollen workforce and none of the modern machinery needed to handle Egypt's particular strain of high-quality cotton.

At the same time, land redistribution has left farmers with ever smaller plots and unable to invest in modern agricultural methods.

And the lack of state support has meant Egypt has not developed the new seed varieties that have revolutionised cotton-growing in the US and India.

Instead, cotton growing has shrunk to a third of its former level.

"We are talking about a problem that has existed for the last 40 or 50 years," says Mr Tolba.

"We have very good garment production standards, but the value added in production and the supply chain are not as good as they have to be."

'Crony capitalism'

Out in the Nile Delta, I visited one of those state-owned factories - an industrial dinosaur employing 26,000 people.

Groundbreaking strikes here - in 2006 then 2008 - helped to pave the way for the revolution that ousted President Hosni Mubarak in February.

Interestingly, it was not the workers who led protesters out onto the streets in Cairo's Tahrir Square, it was originally middle-class activists.

But a deep cause of the revolution was not just the poor state of the economy.

It was a botched attempt at reform, led by Mr Mubarak's son Gamal in the last years of his rule.

It just led to a new, crony capitalism - just as corrosive as the disastrous statism introduced by President Nasser five decades earlier.

While industries were sold off cheap, workers were treated even worse than under state control - often not being paid for months on end.

State-owned factory managers could threaten their workforce - behave yourselves or the factory would be privatised, they warned.

So economists might now prescribe more private investment and less state control, but it could be a hard sell.

Magda Kandeel, a former IMF economist, says that Egypt needs to find a middle path.

"There are two ways to run the economy," she says. "Either to go to the Nasser episode, where the state was dominant... But it was very ineffective, very inefficient. And probably this is going to mean the pie is going to shrink for everyone."

"Then, when we left this episode, we went to the other extreme, liberalisation, free-market approach. We need to learn from these two episodes - it is nearly 60 years of the country's history," Ms Kandeel adds.

New 'social contract'

At the moment, there is a government with little control and no sense of direction.

Meanwhile, there is a degree of chaos, with a rash of strikes, including one even by the police force.

Change has been dramatic in some ways - 150 free trade unions have been set up.

But nothing has happened in others. The trade unions are all still technically illegal, as the government has not passed a proposed law lifting the monopoly of the state-run union.

Thamer Fathy is leader of a federation of free trade unions.

He is not the sort of cloth-capped veteran, so familiar from unions in developed countries, but a young, thoughtful, activist.

He says the economy could be liberalised, but Egypt would need a new "social contract" to reassure and provide for the workers.

"We have to, through this chaos, understand what we really want. We want social justice," he says.

Egypt's problems are so vast it is easy to despair.

A population of more than 80 million, still growing fast, mired in poverty and a pitiful education system.

Almost every aspect of life has been degraded by decades of bad decision-making and corruption.

Yet Mr Tolba also sees vast potential.

"The sky is the limit. Egypt is exporting $1.5bn worth of garments [a year]," he explains. "These figures can easily be $5bn worth of garments in a couple of years if we have the right policies."

Many Egyptians can see the problems, and even the solutions.