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Pricing Democracy; Next Stop For The Jasmine Revolution Is The Imf

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The underlying fundamentals do not bode well. The last IMF staff report on Egypt put the deficit for 2009/10 at 8.4 per cent of GDP and gross national debt at a punishing 74.1 per cent. As long as growth could be kept rolling along in the 4-7 per cent range, as it has in recent years, these numbers would not give undue cause for alarm. In time, the growth would erode the fiscal problem of its own accord.


It’s tough enough even for mature democracies such as Britain to impose the unpleasant fiscal medicine necessary to deal with an unsustainable public debt trajectory, but for a newly born democracy to force austerity on a population desperate for some improvement in living standards and filled with the hope that regime change might bring something better becomes well nigh impossible.

Charles Robertson, chief economist at the emerging markets specialist, Renaissance Capital, puts it like this: “Whether Egypt becomes a democracy, or not, any base-case scenario now should not assume rapid reform as its centrepiece. President Hosni Mubarak’s son, Gamal, had been a key driver of reform in recent years. His departure makes reform less likely. Also any government taking power now is likely to be more concerned about maintaining political support in the years ahead. Egypt’s large, subsidy-induced budget deficits of 8% of GDP a year will be hard to shift”.

This leads naturally to the question of whether it is indeed possible to have sustainable democracy in Egypt at all. Generalisations are hard to make, but one reasonably reliable rule of thumb is that the richer a country is, the more sustainable democratic government becomes. According to Mr Robertson, there is in fact only one example of a country which has achieved per capita income in purchasing power parity terms of $10,000 or more stumbling back into dictatorship, and that’s Argentina. On the other hand, countries with incomes of less than $8000 per head find it much tougher to sustain democractic government.

Me thinks something is amiss here with the figures 8% subsidising deficit and growth rolling along at 4%-7%. It appears the Egyptians have been living the life like the rest of the world on credit, it's GDP path was unsustainable, they aren't going to keep that growth rate up as part of the growth was govt borrowing.

Egypt's flirtation with democracy could be very short lived.

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