Solving the problem

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Solving the problem

Post by newcastle »

01/08/2016 19:32
AUC's V-Lab director, Ayman Ismail, posted a series of 'random thoughts on the economy', as the Egyptian economy plunges into desperation and foreign currency becomes more difficult to find.

As the gap between the Egyptian pound's official and black market widens to more than 40 per cent, and the Egyptian government negotiates a $12 billion loan with the IMF, a series of ‘random thoughts’ on the economic crisis posted on Facebook went viral today. The post, written by Ayman Ismail, Chair of Entrepreneurship at AUC, and founder of the university’s Venture Labs, wittily explains some of the economy’s main conundrums, in 13 clear, on-point items.

“I was sitting in a cafe and having a conversation with a friend about the economy, and as we talked, we realized that, while there is progress in many areas, we are still stuck in a bad place, and may soon be going through a tough crisis. We all know about the challenges from the decline of tourism to foreign investments, but there is more that can be done through better policies. There are certain policies that we know work, and others that we know don’t work,” Ismail tells CairoScene. “So I went back home, it was 2 am, and I started writing some random thoughts.”

As he woke up today, the post, published on his personal page, had gone viral, as over 1,200 people shared it. “I think many people felt it was a useful insight, particularly because it is non-partisan; rather than being critical, I am stating ideas that could help our economy,” he explains. His post reads:

“Random thoughts on the economy: I've been trying not to comment on the sad state of the economy for a while. So rather than commenting, let me state few things that I know are usually true, regardless of the time or place:

You can not defend your currency when you are out of foreign currency reserves and with a negative balance of payment. Sooner or later you need to float. The sooner the better. If you chase the dollar it takes you down and leaves you bankrupt with a big debt, higher inflation, and a ruined economy.

The solution to a balance of payment deficit is more exports. Help your exporters export more; give them incentives and all the support you can.

State capitalism does not work. It produces some quick results over the short term, but eventually it destroys the market and the institutions that make it work. It is easy for the state to take over the economy (or some sectors). Undoing that is hard, costly and painful.

Economic ratings are based on political stability as much as they are based on economic performance. If you read any country economic report or risk analysis you will find it starting with the political context. Democracies are at a premium; authoritarian regimes are penalized. Why? History says democracies, despite their mess, are more stable over the long term.

People or companies respond to incentives, not to orders or decrees. Give them a positive incentive to do what you want and they will do it. Order them, and they will do the opposite. They work to protect their economic interests. They will exchange the dollar with whoever gives them the higher price. They want to preserve and grow their wealth.

You can not attract foreign investors if you can't keep your local investors. The first thing a foreign investor does when he visits a new country is have dinner with some local investors. You can imagine what they talk about over dinner.

People spend and invest based on their "mood". When people are scared, they don't spend and the economy goes into recession. When the mood is scary, investors don't come (local or foreign). When the mood is optimistic, people spend and invest, and the economy grows.

Investing in infrastructure is great, when it supports more production, exports or jobs. Roads that connect an industrial zone to an export port are great. Roads that lead to no where are bad investments.

The foundation of any economy is the "rule of law". When contracts are not enforced and property rights are not protected, you are considered a risky place to invest. And even when people invest, they tend to take their profits overseas immediately.

Nobody is conspiring against you; they're just implementing their (usually public) economic and foreign policies. Others just care about their interests. They will help you or fight you if that serves their interests.

This is not the worst time to have an economic crisis: interest rates are super low (which means low cost for borrowing) and oil prices are also low (good for non-oil exporting countries). You're lucky, but don't waste your luck.

The IMF is the "lender of last resort". It was designed to rescue countries that are about to go bankrupt. The price of the rescue package is usually a painful austerity program to restore economic stability, including policies such as tax hikes, cuts in subsidies and public spending, devaluation, privatization, and all these nasty things. It forces governments to do things they ought to do, but at the wrong time when the political price is too high.

Extreme wealth and income inequalities are bad for economic growth, and they're also very dangerous for political stability. Investing in social safety nets has the highest return on investment; from economic, political and security perspectives.
31/7/2016” ... Goes-Viral

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