3 Economic Reasons Behind The Protests In Egypt
Since 1981, Egypt has operated under emergency law in order to deal with the continuous threat of terrorist attacks. One of the most deadly occurred on November 17, 1997 when 58 foreign tourists were executed at Hatshepsut temple in Luxor. Egyptian security forces put an end to most of the violence in the Nile Valley, but there have been several bombings at resorts along the Red Sea that have killed another 121 people.

While there have been frequent calls for the overthrow of Arab governments in the past from radical Islamic ideologues, the recent protests in Egypt were fueled primarily by the general populace in Cairo who wanted President Mubarak to resign. Having lived under what they viewed as an oppressive regime for 30 years, they wanted immediate change for reasons that were deeply rooted in economics.(Find out how this commodity's fluctuating price affects more than just how much you pay at the pump.Check out How Does Crude Oil Affect Gas Prices?)

IN PICTURES: 10 Biggest Losers In Finance

1. Corruption
Over the past three decades, the United States has given Egypt an average of $2 billion every year, making it second only to Israel in foreign aid. These funds were allocated to Egypt's military for equipment and training, as well as economic aid. Some of the funds have also been spent on the promotion of democracy, a controversial policy that has been met with resistance inside the Mubarak government.

An open question is how much of this American aid has made its way to Mubarak's personal bank account. In addition, his 30 years as president and military leader have given him access to business deals and investments that required his power and influence. These investments have produced billions of dollars in profit that are believed to be held in Swiss and British banks. His estimated $40 to $70 billion fortune also includes extensive real estate holdings in New York, Los Angeles, London and along the Red Sea.

The people of Egypt have been the victims of Mubarak's dealings that have personally enriched him and his family at the expense of the general populace. There have also been claims that he rigged elections to maintain power and control and was planning to install his son as his successor. (This structure can be effective, but it is also known for its abuse of power. Check out Early Monopolies: Conquest And Corruption.)

2. Poverty
About half the people in Egypt subsist on $2 a day or less and live in rundown cities replete with beggars and thieves. As the economy grew over the past several years, the number of people living in poverty continued to increase and unemployment grew to 9.7% in 2010. Egypt is a place of parallel worlds where the wealthy thrive and enjoy access to private clubs and schools within walled compounds not far from the city squalor. The gap between rich and poor continues to grow.

Poverty is most prevalent in the southern rural areas in Upper Egypt. These areas suffer from higher rates of infant mortality and illiteracy and often lack sanitation and safe water. Most of the people in these areas engage in some form of agriculture, but the food produced is insufficient and only provides a minimal income. The small farms here are unlike the large agricultural areas of Lower Egypt that are well-developed and grow crops with higher market values. Another negative factor is the lack of rainfall, and irrigated farmland is scarce outside of the Nile River Valley.

3. Inflation
According to the CIA World Factbook, inflation in the country reached an estimated 12.8% in 2010. This condition exists in spite of a central bank discount rate that averaged about 10% from 2008 to 2009 and a commercial bank prime lending rate of about 12% during the same period.

The rise in food and oil prices has exceeded the overall inflation rate in many areas of the world, including Egypt. The index of global food prices published by the United Nations Food and Agriculture Organization jumped 25% internationally last year. Food prices really began to spike in mid-2010 as demand began to surge in China and India for beef and vegetables, exceeding historical trends for grain demand in this area of the world. Relief in food prices is not likely anytime soon.

If the Suez Canal were closed for any reason, this would further exacerbate the inflation problem. All consumer goods, food, raw materials and oil that transit the canal would be subject to much higher transportation costs, and those costs would be passed on in the form of higher prices. (Inflation is often a consequence of economic recovery. Here's how you can protect your financial portfolio. See Fight Back Against Inflation.)

Outlook
The anger and fury released on the streets of Cairo has been building for years as the Mubarak regime failed to address these critical economic issues. The people have endured poor living conditions and systemic poverty, and Mubarak maintained emergency law to restrict public assemblage and to control a special security court. The people have also complained of police brutality and torture, and years of repression by a dictator who has ignored their pleas for reform.

Egypt is already experiencing reduced levels of tourism at its many historic sites and Red Sea resorts. This is likely to continue until the country is stabilized and a new government is formed to replace the current military regime. At this point, there is no way to know what form that government will take and if it will be friendly to Western nations and visitors.

IN PICTURES: 8 Ways To Lose Money On Bonds

The Bottom Line
The grievances run deep, and meaningful democratic, social and economic reforms may be slow in coming. Those factors, combined with higher food and oil prices, are likely to make Egypt a volatile place for some time to come.

comments powered by Disqus
Trading Center