Case Study 1: Revolution in Egypt
With 83 million people, Egypt is the most populous Arab state. On the face of it, Egypt made significant economic progress during the 2000s. In 2004, the government of Hosni Mubarak enacted a series of economic reforms that included trade liberalization, cuts in import tariffs, tax cuts, deregulation, and changes in investment regulations that allowed for more foreign direct investment in the Egyptian economy. As a consequence, economic growth, which had been in the 2 to 4 percent range during the early 2000s, accelerated to around 7 percent a year. Exports almost tripled, from $9 billion in 2004 to more than $25 billion by 2010. Foreign direct investment increased from $4 billion in 2004 to $11 billion in 2008, while unemployment fell from 11 percent to 8 percent.
By 2008, Egypt seemed to be displaying many of the features of other emerging economies. On Cairo’s outskirts, clusters of construction cranes could be seen where gleaming new offices were being built for companies such as Microsoft, Oracle, and Vodafone. Highways were being constructed, hypermarkets were opening their doors, and sales of private cars quadrupled between 2004 and 2008. Things seemed to be improving.
But appearances can be deceiving. Underneath the surface, Egypt had major economic and political problems. Inflation, long a concern, remained high at 12.8 percent. As the global economic crisis took hold in 2008–2009, Egypt saw many of its growth drivers slow. In 2008, tourism brought some $11 billion into the country, accounting for 8.5 percent of gross domestic product, but it fell sharply in 2009 and 2010. Remittances from Egyptian expatriates working overseas, which amounted to $8.5 billion in 2008, declined sharply as construction projects in the Gulf, where many of them worked, were cut back or shut down. Earnings from the Suez Canal, which stood at $5.2 billion in 2008, declined by 25 percent in 2009 as the volume of world shipping slumped in the wake of the global economic slowdown.
Moreover, Egypt remained a country with a tremendous gap between the rich and the poor. Some 44 percent of Egyptians are classified as poor or extremely poor; the average wage is less than $100 a month. Some 2.6 million people are so destitute that their entire income cannot cover their basic food needs.
The gap between rich and poor, when coupled with a sharp economic slowdown, became a toxic mix. Nominally a stable democracy with a secular government, Egypt was, in fact, an autocratic state. By 2011, President Hosni Mubarak had been in power for more than a quarter of a century. The government was highly corrupt. Mubarak and his family reportedly amassed personal fortunes amounting to billions of U.S. dollars, most of which were banked outside Egypt. Although elections were held, they were hardly free and fair. Opposition parties were kept in check by constant police harassment, their leaders often jailed on trumped-up charges.
Given all of this, it is perhaps not surprising that in January 2011, popular discontent spilled over into the streets. Led by technologically savvy young Egyptians—who harnessed the power of the Internet and social network media such as Facebook and Twitter to organize mass demonstrations—hundreds of thousands of Egyptians poured into Cairo’s Tahrir Square and demanded the resignation of the Mubarak government. There they stayed, their numbers only growing over time. For weeks, Mubarak refused to step down, while the demonstrations gained momentum and Egypt’s powerful military establishment stood on the sidelines. Foreign governments, including the Obama administration in the United States, long one of Egypt’s most important Western allies, joined the chorus of voices calling for Mubarak to resign. In the end, his position became untenable, and he stepped down on February 11, 2011. The Egyptian military took the reins of power, vowing to do so for a short time while it organized a transition to democratic elections in the fall of 2011. In March 2011, Egyptians voted on a set of proposed constitutional amendments designed to pave the way for the elections in late 2011. This was the first time in six decades that Egyptians had been offered a free choice on any public issues.
Does this mean that Egypt is now on the road to becoming a democratic state with a vibrant economy? That is still far from clear. In mid-2012, moderate Islamists from the Muslim Brotherhood won the most seats in the country’s first democratic election, and the Brotherhood candidate Mohamed Morsi won the presidential election. However, the Morsi government struggled. By 2013, the economy was in deep trouble. Unemployment was as high as 20 percent, the Egyptian currency was steadily losing value on foreign exchange markets, and inflation was increasing again. Tourism, which previously had accounted for 8 to 12 percent of GDP, evaporated. Foreign investment stalled, and the country’s foreign reserves were falling fast. Meanwhile, the Morsi government failed to enact any meaningful economic reforms. It was unwilling to remove politically popular food and fuel subsidies totaling $20 billion a year, even though the country clearly could not afford to pay for them. Government debt was increasing, and the annual budget deficit now accounted for more than 12 percent of GDP. Many successful businesspeople left the country, fearing reprisals for their role under the Mubarak regime. Court rulings overturned privatization deals from more than a decade ago, effectively moving several enterprises back into state hands. In June 2013, protestors again took to the streets, and with the backing of the still powerful Egyptian military, Morsi was removed from office in early July 2013. As of early 2014, an “interim” government is now running the country, although in Egypt, unelected interim regimes have a history of becoming permanent authoritarian governments.
Questions
1) What were the underlying causes, economic and political, of the collapse of the Mubarak regime?
2) What do you think the Egyptian government needs to do in order to get the economy growing again and to attract foreign capital? What are the risks to the government of taking such actions?
3) What dangers do you see in the current trajectory of the Egyptian economy? What are the implications of these dangers for foreign companies that might consider doing business in Egypt? What do you think it would take to encourage more foreigners to visit, invest, and do business in Egypt? Would such inward investment be good for the Egyptian economy?
4) Political risks in Egypt seem to be increasing again, and the country seems to be retreating from democracy, largely due to intervention by the military. As a manager in an international business, how would the current turmoil and political uncertainty in Egypt influence your investment decisions, and what does this mean for the future of the Egyptian economy?
Case Study 2: Ghana: An African Dynamo
The West African nation of Ghana has emerged as one of the fastest-growing countries in sub-Saharan Africa during the last decade. Between 2000 and 2013, Ghana’s average annual growth rate in GDP was over 7.5 percent, making it the fastest-growing economy in Africa. In 2011, this country of 25 million people became Africa’s newest middle-income nation. Driving this growth has been strong demand for two of Ghana’s major exports—gold and cocoa—as well as the start of oil production in 2010. Indeed, due to recent oil discoveries, Ghana is set to become one of the biggest oil producers in sub-Saharan Africa, a fact that could fuel strong economic expansion for years to come.
It wasn’t always this way. Originally a British colony, Ghana gained independence in 1957. For the next three decades, the country suffered from a long series of military coups that killed any hope for stable democratic government. Successive governments adopted a socialist ideology, often as a reaction to their colonial past. As a result, large portions of the Ghana economy were dominated by state-owned enterprises. Corruption was rampant and inflation often a problem, while the country’s dependence on cash crops for foreign currency earnings made it vulnerable to swings in commodity prices. It seemed like yet another failed state.
In 1981, an air force officer, Jerry Rawlings, led a military coup that deposed the president and put Rawlings in power. Rawlings started a vigorous anticorruption drive that made him very popular among ordinary Ghanaians. Rawlings initially pursued socialist policies and banned political parties, but in the early 1990s, he changed his views. He may well have been influenced by the wave of democratic change and economic liberalization that was then sweeping the formally communist states of eastern Europe. In addition, he was pressured by Western governments and the International Monetary Fund to embrace democratic reforms and economic liberalization policies (the IMF was lending money to Ghana).
Presidential elections were held in 1992. Prior to the elections, the ban on political parties was lifted, restrictions on the press were removed, and all parties were given equal access to the media. Rawlings won the election, which foreign observers declared to be “free and fair.” Ghana has had a functioning democratic system since then. Rawlings won again in 1996 and retired in 2001. Beginning in 1992, Rawlings started to liberalize the economy, privatizing state-owned enterprises, instituting market-based reforms, and opening Ghana up to foreign investors. Over the next decade, more than 300 state-owned enterprises were privatized, and the new, largely privately held economy was booming.
Following the discovery of oil in 2007, Ghana’s politicians studied oil revenue laws from other countries, including Norway and Trinidad. They put in place laws designed to limit the ability of corrupt officials to siphon off oil revenues from royalties to enrich themselves; something that has been a big problem in oil-rich Nigeria. Some oil revenues are slated to go directly into the national budget, while the rest will be split between a “stabilization fund” to support the budget should oil prices drop and a “heritage fund” to be spent only when the oil starts to run out.
Despite all of its progress over the last two decades, Ghana still has many issues to deal with. Although Ghana ranks better than most African nations, there is still a perception that corruption is a problem, particularly in the police force and the allocation of government contracts. Inflation rose to greater than 13 percent in 2013, and the budget deficit widened to 12 percent of GDP as the ruling political party stepped up public spending in advance of presidential and general elections, which it narrowly won. Despite economic progress, as many as a third of Ghanaians still live on less than $2 a day, and Ghana still needs to upgrade its power, water, and road infrastructure. On the other hand, oil revenue is starting to flow, and will increase over time, which—if used wisely—will give Ghana a chance to fix some of its problems and solidify its gains
Questions
1) After gaining independence from Britain, Ghana’s economy languished for three decades. What factors contributed to this weak economic growth? What does the Ghana experience teach you about the connection between economic and political systems and economic growth?
2) What were the main changes that Jerry Rawlings made in the Ghanaian political and economic systems? What were the consequences of these changes? What are the lessons here?
3) What external forces helped to persuade Rawlings to change political and economic practices in Ghana? Do you think he would have made the changes he did without these external forces?
4) If Ghana had discovered large oil reserves in the 1980s instead of the 2000s, do you think things might have played out differently? Why or why not?
5) What is the difference between the approach of Nigeria toward oil revenues and that of Ghana (the Nigeria experience is documented in the country focus feature in this chapter)? Which approach is in the best long-run interests of the country?
6) What dies Ghana need to do to remain on its current track of sustained economic growth?
Case Study 3: Walmart can’t conquer all Countries
Questions:
1. Why do you think that Germany, South Korea, Russia, and India were attractive markets for Walmart? Should Walmart spend more time on one or a few of these markets to be successful?
2. Recently, Walmart is trying to engage some of these market, and other, via joint ventures or mergers and acquisitions; is this an appropriate strategy given Walmart’s historical problems in cultural differences?
3. Some companies like IKEA (which is very Swedish in management operations) can succeed by being culturally tied to their home country even in international operations. Why do you think Walmart was unsuccessful in being American in Germany, South Korea, Russia, and India?
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