Thursday, February 10, 2011

Is Egypt Hopeless?

Dan Henninger starts his WSJ piece for Feb. 10th ominously with the question in the headline.
With luck and support from the world's democracies, Egypt's people will get a credible political system. What they won't get—now or possibly ever—is an economy able to produce real jobs for their country's large, young population. Establishing a democratic system in Egypt is a walk in the park compared to allowing a 21st-century economy to come to life there. Egypt isn't just a sad story of political oppression. Egypt is an object lesson for other nations, including ours, struggling to produce enough jobs for young workers.

While Egypt has floundered, some have noted that Turkey's economy has flourished, notwithstanding a strong Islamic presence in both countries. How come? Everyone cites a favorite datum—Egypt produced Nasser and Mubarak while Turkey got Ataturk and free-market economist Turgut Ozal as prime minister in the 1980s. But here's mine: In Egypt, the percentage of the working population employed by the state is 35%. In Turkey, it's 13%.

The next paragraph is even more alarmist:
The economic literature is vast on the smothering effects of large, inefficient public sectors. If Egypt is now exhibit A for these studies in torpid economies, then exhibits B, C, D and E would be Jordan, Yemen, Tunisia and Algeria, the other nations that erupted the past several weeks. In Jordan nearly 50% of the employed population works for the state. This is an economy?

Henninger goes on to note what every Demonrat seems not to understand, unless he's a blue dog ready to defect to the Grand Old Party:
Consistent data on public work forces across nations is hard to find, but IMD, the Swiss business school, produces a comparison of public-sector employment as a percentage of total population for its Competitiveness Yearbook. It shows a striking correlation between economic success in emerging economies and relatively low populations of public employees, notably in Asia.

Korea, Indonesia, India, Malaysia, Taiwan, Thailand and even China (at 8.3%) have low public employment as a percentage of total population. In Singapore, it's less than 3%. Also on the list, below 15%, are Colombia, Peru and Chile, three of South America's strongest economies. A low number doesn't guarantee strong growth, but a high number probably kills it.

Henninger doesn't mention the two UN studies in 1991 and 2007 which single out the Arab Countries for a singular lack of economic vitality over the last half-century, but here's some of the conclusions that the UNDP study came up with, independent of Dan's own analytical acumen.
The MENA countries of the Middle East and North Africa have used public work as a form of social security and tool of political stability. Their universities fed graduates into a nonproductive but high-benefit public economy. Many Tunisian rioters were unemployed college graduates.

The argument being made here is that past some tipping point of a population employed by the state, an economy starts to choke. Egypt is far past that point. In Tahrir Square you are watching the economic and psychological dislocation caused by this misallocation of national energy. This isn't just about a new government. It is a sit-down strike for a better economy.

Egypt faces a hard economic riddle: How does any place that has passed the public-sector tipping point escape these chains? (The crony capitalism of the younger Mubarak, Gamal, merely created a school of golden pilot fish alongside the public whale.)

But the United States is in no position to lecture anybody on public unions sucking the lifeblood of an economy. The most corrupt and politically decadent states in the USA, coincidentally run by Demonrats, are in the business at the moment of committingseppuku, a slow, ritualized suicide which appears to satisfy the higher self-righteous part of the organism while destroying it as a whole.
The U.S. is hardly the place Egypt should look for an answer. Public-sector costs have driven New York, California and New Jersey to the edge of the fiscal cliff. Govs. Chris Christie and Andrew Cuomo are getting good notices for their ideas. But so far they haven't solved anything. Large populations of public workers could burden these states for years in their competition with leaner states. Hosni Mubarak also promised public-sector reform—20 years ago.

Mouthing platitudes in the face of a collapsing public sector which is slowly swallowing the rest of the economy seems to be the usual reaction of autocrats who are confronted with a stagnant economy.
But hey, there's always tourism. A major complaint from Egypt is that the protesters are killing tourism. Whether Egypt, France, Italy, or New York City, tourists' cash flow is the last prop beneath economies staggered by the weight of public costs they can't unwind. Egypt has the pyramids, New York has Times Square.

At Davos last month, British Prime Minister David Cameron eloquently sounded the pro-growth trumpet and chided pessimists who "say that slow-growth status for Europe is inevitable." But in a thought-provoking article last month for The Wall Street Journal Europe, "How Big Government Killed Britain's Regions," former U.K. economics official Warwick Lightfoot argued that years of high public-sector wage and benefit settlements had "de-marketized" labor costs in the U.K.'s regions—Wales, Scotland, northern Ireland and the north of England. "The private sector," he said, "cannot flourish because price signals cannot operate properly in the labor market."

Amid the current crisis, Mr. Mubarak decreed a 15% wage and pension increase for public workers. Decades of U.S. governors and mayors did the same thing, poisoning local markets.

California isn't Egypt, yet. But politicians everywhere make the same mistakes, thinking the real economy is always out there somewhere, producing jobs and tax revenue. They think it's sort of like magic. But it isn't.

Yep, the magic pills and the deus ex machinas which spring out of the surrounding countries to rescue the fair maiden threatened by the fiery dragon of self-cannibalism through absorption by the public sector, not gonna happen. Henninger ends his short homily with a cautionary hiccup.
The first great lesson being learned in the 21st century is that neither the state nor the stork can bring jobs to life in a modern economy. Good luck to Egypt and all other nations on the wrong end of this learning curve.

We have met the enemy and it is us.

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