An Illusion of Success

1. The Call for a Revolutionary Macro-Economic TransitionDr. Khaled F. SherifChief Administrative Officer Africa RegionThe World Bank

2. An Illusion of Success • The Egyptian government touted economic success, and indeed, there was growth: - The gray economy grew - Wealth for insiders grew - Mass unemployment grew • The government’s misrepresentation of its success disguised the flawed base: the economy was too small to sustain a country of this size • Even at 2008-2009 levels, the Egyptian economy is simply too small to create employment prospects or wealth-generating opportunities for the population as a whole

3. 2009 $188 billion $79 billion 2004 Gross Domestic Product (GDP) GDP at Current Prices: • General Motors 2004 revenues: $194 billion • Microsoft total assets (2005): $94 billion • Amount of food wasted in U.S. (2004-2005): $90-100 billion • Amount U.S. health insurers lost to fraud in 2004: $85 billion • Public spending on R&D in the U.S. (2000): $85 billion • U.S. contributions to charity in 1999: $190 billion • Spending by teenagers in the U.S. in 2006: $190 billion • The impact of the sport of golf impact on the U.S. economy in 2005: $195 billion • Apple’s market cap: $210 billion • Microsoft’s market cap: $246 billion • Exxon Mobil’s market cap: $307 billion Source: The World Bank

4. 2008 2008 $54 billion $54 billion $18 billion 2004 Exports Exports of Goods and Services: • HP purchase price of Compaq: $25 billion • McDonald's 2004 revenues: $19 billion • American Football League's TV contract value 2004: $18 billion • Spam Costs $20 billion each year in lost productivity (2004) • Americans purchase more than $18 billion of fresh pizza every year • Combined losses of airlines in 2001: $18 billion • AIG’s loss in one quarter in 2008: $62 billion • Size of the U.S. “weight loss” market: $58 billion • Amount Indian expatriates sent back home to India in 2009: $55 billion • Size of mobile phone accessories market: $55 billion • Bill Gates' net worth (2010): $53 billion Source: The World Bank

5. 2008 $9.5 billion $237 million 2004 Foreign Direct Investment Foreign Direct Investment Inflows: • Amount of sales "Titanic" earned only in the U.S.: $600 million • Google's planned expenditures on R&D in 2005: $500 million • Amount Japan provided in grant funding for Tsunami stricken regions of South Asia: $500 million • Amount the state of Michigan will expend on road repairs in 2005: $400 million • Amount of advertising money the cancellation of this year's hockey season cost the National Hockey League: $400 million • Prince Alwaleed Bin Talal Alsaud’s net worth (2010): $19.4 billion • Annual spending on plastic surgery in the U.S.: $12 billion • Internet advertising revenues for the first half of 2009: $10.9 billion • NCAA Tournament TV Deal: $10.8 billion • Exxon Mobil’s profit in the fourth quarter of 2006: $10.6 billion • Nestle’s 2009 profit: $9.6 billion Source: The World Bank

6. 2009 $91 billion $27 billion 2004 Market Capitalization Market Capitalization of Listed Companies: • Bank of America purchase price of MBNA (2005): $35 billion • Annual trade in pirated software (2003): $29 billion • VC and investment companies spending in Asia (2004): $29 billion • Google’s market cap on the first day of its IPO (2004): $27.2 billion • Walmart’s market cap: $203 billion • Google’s market cap: $170 billion • IBM’s market cap: $161 billion • Coca-Cola’s market cap: $125 billion • Oracle’s market cap: $116 billion • HP’s market cap: $113 billion • Size of the cyber-crime market in 2007: $105 billion • Cost of smokers to the U.S. economy (in lost productivity and deaths): $92 billion Source: The World Bank

7. 2008 $34 billion $15 billion 2004 Reserves Total Reserves (including Gold): • Iran’s eight-year investment in the petrochemical industry (as of 2005): $18 billion • ChevronTexaco’s 2005 purchase of Unocal: $18 billion • Tax dodgers estimated amount owed in the U.S.: $17 billion • Australian consumers shopping in September 2004: $17 billion • Purchase price for Hertz: $15 billion • Microsoft’s cash reserves: $40.4 billion • Apple’s cash reserves: $39.8 billion • Total Wall Street bonuses in 2007: $38 billion • Warren Buffett’s 2006 contributions to charity: $37 billion • Amount of wasted food and drinks in Britain each year: $36 billion • Estimated current valuation of Facebook according to the Private Equity Data Center: $35 billion Source: The World Bank

8. 2008 $38.5 billion $15.5 billion 2004 Savings Gross Savings: • Citigroup’s 2003 profit: $18 billion • eBay’s market cap decrease because it missed its earning’s revenue by one cent: $17 billion • Airbus’ investment in the A380: $16 billion • Cost of Athens Olympic Games: $16 billion • U.S. Small Business Association 2004 loan fund: $16 billion • Bernard Madoff’s ponzi scheme: $50 billion • Size of the market for servers: $49 billion • Warren Buffet’s net worth: $47 billion • Amount that is spent on online content marketing: $47 billion • General Motor’s loss in just one quarter in 2007: $39 billion • Chinese ecommerce market: $38.5 billion Source: The World Bank

9. 2008 $58 billion $28 billion 2004 Industry – Value-Added Industry Value-Added at Current USD: • Bill Gates' net worth (2004): $40.7 billion • Microsoft dividend payment to shareholders (2004): $32 billion • Caterpillar’s 2004 revenues: $30.3 billion • U.S. pet owners spending on pets (2004): $30 billion • U.S. economy daily production (2004): $30 billion • Projected size of the mobile entertainment industry next year: $76 billion • U.S. beef and cattle industry size: $74 billion • Fannie Mae’s loss in 2009: $72 billion • Investment of mobile operators in mobile broadband: $72 billion • Amount airline passengers will pay in “ancillary charges” in 2010: $58 billion Source: The World Bank

10. 2008 $12.1 billion $4.7 billion 2004 Tourism International Tourism Receipts: • Amount of Russian transport vehicles Pakistan bought between 2004 and 2008: $12 billion • World Bank four-year program to alleviate poverty in India (2004 – 2008): $12 billion • Amount Royal Dutch Shell Group invested in the Gulf region: $12 billion • Shanghai's (China) annual overseas investment (2004): $10 billion • The demand for dental products in the U.S. (2008): $16 billion • Facebook’s valuation in 2007 when Microsoft purchased a minority stake in it: $15 billion • Cost of 2010 U.S. Census: $14.7 billion • Amount Americans are expected to spend on Mother’s Day in 2010: $14.6 billion • How much Coca-Cola paid to buy back the bottling business it spun off in the 1980s: $12.2 billion Source: The World Bank

11. 2009 $9.2 billion $3.3 billion 2004 ICT Spending Information and Communications Technology Spend: • $8 billion dollars is spent on cosmetics in the U.S. • $8 billion dollars is spent in the U.S. each year on maintenance and housekeeping • Gross profit for foods sales at convenience stores in the U.S. (2004): $7.5 billion • Verizon purchase price of MCI: $6.8 billion • $6 billion per year spent by drug companies to educate doctors (2004) • Segey Brin (Google Founder) current net worth: $17.5 billion • Size of the nutritional supplement market in Japan: $11.1 billion • Bill Gates’ charitable contribution for vaccine work only: $11.1 billion • Size of the global electric bikes industry: $11 billion • Size of the PC Gaming market: $11 billion Source: The World Bank

12. The Grim Reality • With a population of more than 80 million, and nearly 70% under the age of 30, Egypt’s 2004 GDP base could not have provided employment opportunities for its people or generated any degree of real savings. Rather, between 18 and 50% of the population lives on less than $2 per day • In 2004, FDI at $237 million was negligible, and even at $9.5 billion in 2009, assuming a project size of $1 billion, 2009 FDI equates to only ten major projects • FDI was also no real source of job creation. Applying the standard that $30,000 leads to the creation of one job, $9.5 billion produces slightly more than 300,000 jobs. With 9.7% unemployment and an estimated 80,000 new job seekers graduating each year from Cairo University alone, the result of job shortfalls compounding year after year, is mass unemployment and a disgruntled population • Egypt’s 2010 per capita GDP was $6,200 on a purchasing power parity (PPP) basis, a stark contrast with the $12,300 generated by Turkey, a country of similar population and one also focused on private-sector led growth in industrial and service sectors. Turkey’s productivity is approximately double • Egypt’s per capita GDP is closest to that of nations such as Tonga, Bosnia/Herzegovina, Armenia, Guyana and Ukraine • Given the Egyptian government’s proclaimed commitment to economic opening, to improving competitiveness, to job creation and addressing human development needs, to economic growth, and to engaging in the world economy, the result is a paltry one Sources: 2009 UN Human Development Report, CIA World Factbook, Homeland Security Newswire

13. The Call for A Revolutionary Macro-Economic Transition

14. The Call for A Revolutionary Macro-Economic Transition • Given Egypt’s low economic base, a revolutionary approach will be required to deliver the spectacular growth necessary to produce an exponential upsurge in each of the country’s key economic indicators • With a cohesive, honest and unwavering economic reform program, such growth is achievable • We look to China, with its steadfast and gradualist reform strategy, as such an example: – Since 1978 (when Deng Xiaoping and succeeding leaders turned their focus toward market-oriented economic development), China has seen average real growth of more than 9% per year, with growth in peak years of more than 13%. – Output quadrupled by 2000, and GDP increased more than tenfold since 1978 Source: The IMF, CIA World Factbook

15. China’s Reform Strategy The underpinning of China’s strategy is its opening to a market-oriented economy • Phasing out of collectivized agriculture • Formation of rural and private small and medium enterprises (SMEs) • Fiscal decentralization • Liberalization of pricing • Liberalization of foreign trade and investment • Increased autonomy for state enterprises • Increased autonomy and profit incentives for private business owners/managers • Investment in industrial production • Investment in workforce education • Consistent, interconnected and reinforcing strategy

16. Capital Investment Labor Input Higher Productivity Key Drivers of China’s Growth While the contributions of capital investment and an abundant labor input cannot be undervalued, the driving force behind post-1978 growth was higher productivity, accounting for more than 42% of China’s growth With a youthful and motivated population, this is good news for Egypt Admittedly, China’s productivity gains built upon pre-1978 capital accumulation, and for this reason, the need for investment cannot be ignored Source: The IMF

17. A Cohesive Plan for Egypt • Reinvigorate legitimate privatization efforts • Channel investment from government, foreign and local sources to value-added industries, improved technologies, job creation, and increased quality of goods • Welcome foreign investmentto fuel the economic transformation and link Egypt to international markets • Fuel productivity by granting enterprise managers autonomy and permitting private ownership and retention/reinvestment of gains • Allow markets to dictate prices, avoiding pricing manipulation favoring insiders and monopolies • Encourage SME developmentand growth to transition workers from agriculture and outdated industries to higher value-added industries • Leverage the available (and motivated) labor pool to fuel productivity, eventually driving wage growth • Decentralize fiscally, granting governorates the autonomy to implementmicro-finance strategies and to allocate funding to its best use • Prioritize local economic development strategy (micro-finance, SME-development, and local wealth creation) to address the urgent needs of local governorates

18. Extraordinary Growth Requires Fuel from All Sources National Government Investment Foreign Direct Investment (long-term capital) Local Governorates Investment Foreign Trade (exports, emerging markets funds) Multi-National Financial Institutions Domestic Private Business Investment The Populace (banking, borrowing)

19. Anathema to Growth Manipulation of Inputs and Pricing State Ownership State Intervention Wealth Creation for Insiders Thwarting Profit Incentives Gray Economy

20. Urgent Local Economic Development NeedsA Pillar of the Macro-Economic Reform Program

21. Local Economic Development: A Pillar of the Macro Program • While it is imperative for the incoming government to radically improve Egypt’s macro-economic situation, a transition such as is required for Egypt will take many years to fully materialize. Nevertheless, an urgent need exists in largely populous and poverty stricken parts of the country such as Sohag and Mahalla – Given the government’s priority to create wealth for insiders, limited progress was made in the area of local economic development. Local governorates continue to exhibit tremendous levels of poverty and to remain in a cycle of economic stagnation – Sohag is an agricultural town, and Mahalla is a “one-company town.” The ginneries and textile factories that supported these towns were public sector firms whose technology is so outdated that privatization is no longer an option. Their quality of production has deteriorated and is no longer competitive. Nevertheless, the local economies are dependent upon these industries and these outdated firms • Given the importance of rural and SME development to the overall economic reform strategy, investments to address the immediate needs of the governorates need not conflict with the broader, macro-economic strategy

22. Two Case Studies:The Governorates of Mahalla and Sohag Population: Over 3.5 million Location: Central Egypt Key industries: Ginned cotton and silk weaving Cause for intervention: Average farm sizes so small that 93% of population has too little land to produce an income equivalent to the poverty line Sohag Mahalla • Population: Over 500,000 • Location: Middle of the Nile Delta • Key industries: Textiles and clothing • Cause for intervention: Local economy fully dependent on a single industry with a disgruntled labor force

23. The Proposed LED Strategy • The proposed approach involves developing teams of experts that would work with the national and local governments, as well as local stakeholders in five key areas: • Microfinance • Wealth creation • Education • Urban Planning • Outsourcing • These teams would be operating out of each of the targeted governorates and would have an engagement period of no less than three to five years • The focus of these teams would be to help embed a local competitive framework that would stand at the core of the regional transformation process

24. Micro-Finance The micro-finance team would be charged with the development of effective micro-finance schemes targeted at the “poorest of the poor” One component would involve a tie-in to the new mortgage law, seeking to assist with helping citizens own their own homes; a second component would focus on small and medium enterprise (SME) development Nobel laureate Mohamed Yunus developed a similar program to the micro-loans initiative in this context, turning $27 in funding into $15 billion in Bangladesh The initiative would support loans of $500 or less for local populace to help them meet short-term funding needs (such as helping a daughter with a wedding, etc.)

25. Short-Term Micro-Loans The micro-loans program would involve establishing and raising capital for a small public sector banking institution that would assist in the disbursement of micro-loans to local populace who may not be in a position to provide collateral These loans would fund activities that range from buying a dairy cow to investing in small oven These programs would involve a high-level of personal attention, as evidenced by the “Yunus model” lead to very high repayment rates Yunus’ Grameen Bank off-sets weekly meetings with its borrows with high interest rates (up to 20 percent) to help the borrows succeed by leveraging the help of experts who can assist them in their business goals and have yielded exceptional results in terms of loan repayments and bringing locals out of poverty The success of this program will hinge on ensuring that the banking institution is not only a lender, but also an advisor that acts as a de-facto incubator

26. Developing a Competitive Local Economy The micro-loans program would be the first phase in a three-pronged investment strategy that focuses on developing a competitive local economy: Private Investors .Government Institutional Investors Micro-lending Own Funds SME lending Micro-leasing Hands-on training Prototype business ideas Advisory services for business planning Business Incubators Advisory services/More specialized training Office space and services Growth Development Startup Pre-start

27. SME Development SME Development would build on successful initiatives from the “Pre-start” program by leveraging a more dynamic business-enabling environment and better-suited labor force to assist local entrepreneurs take on slightly larger loans that are needed to help expand their businesses This would require changes to the local business environment: For example, the Government would facilitate a mechanism to help companies register and transition to the white economy Support services/incubators that focus on productivity, growth and SME competitiveness Following the U.S. model: teaming up and growing business base Enhance diversification, equity base, and availability of sources of finance to SMEs

28. Wealth Creation Wealth creation (NOT employment creation) would focus on identifying avenues to create and establish bases of wealth transfer to the impoverished regions The initiative would create a cornerstone of a viable business sector to grow within target cities The newly established micro-finance institutions would have a key role to play within this initiative An effort would be made to support the establishment of small businesses (e.g. for bottling juice) The institutions would provide SEED capital, and act as a partner by providing access to experts that can help instill an entrepreneurial mindset and bring experience to the table The institutions would have an ownership stake in the enterprises, with the wealth generated shared with the locals

29. The Virtuous Circle of Wealth Creation INNOVATION Providing funding Providing facilities and/or resources Providing knowledge of local markets and/or business environment Assisting in the learning or acquisition of business expertise (e.g., accounting, finance, legal..., etc.) BUSINESS VENTURE

30. Regional Transformation Process To effect any sort of turnaround in these regions, the governorates must be provided a level of autonomy, supported by strong institutions and economic structures at the national level, similar to the governance of states in the U.S. The focus of this turnaround strategy is to increase the competitiveness of these local economies, stimulate intrinsic growth, and create a modern functioning economy that leverages Egypt’s multitude of resources at the local level

31. Conclusion

32. Government Misrepresentation; Now the Need for Unprecedented Growth • The Egyptian government effectively misrepresented how well the Egyptian economy was doing – Very little trickle-down effect came of the government’s actions – None of what they managed to achieve would have helped Egypt reach a point of sustainability and growth for the populace • In actuality, we find that the Egyptian economy is simply too small to create employment prospects or wealth-generating opportunities for the population as a whole • Egypt requires an extraordinary economic transition even to sustain basic living conditions for its people, let alone generate a higher standard of living. Given Egypt’s low economic base, a revolutionary approach will be required to deliver the spectacular growth necessary to produce an exponential upsurge in each of the country’s key economic indicators • With an honest and unwavering economic reform program, such growth is achievable

33. A Revolutionary Plan Applying the lessons from China’s “miracle growth” macro-economic reform program, a program underpinned in a market-oriented strategy, we have presented a cohesive plan for Egypt Other countries have fashioned similar “growth” and “turnaround” strategies; Egypt can succeed as well – With a privatization program already underway, a youthful and highly motivated population, and well-planted seeds of capitalism, Egypt is well-positioned; Egypt can prosper An extraordinary economic turnaround will require a steadfast commitment to privatization, liberalization and capitalism, setting aside anger and fear borne of the past government’s corruption; it will require technocrats in government; it will require dynamic thinking and a clear vision for the future, one that puts forth an interconnected and self-reinforcing plan

34. Local Development as a Pillar for Growth The plan must – for the needs of the people and for the success of the plan itself – address the urgent requirements of the most poverty-stricken areas of the country Given the importance of rural and SME development to the broader, macro-economic reform strategy, investments to address the immediate needs of the governorates will serve as pillars of growth, spreading reform country-wide and bolstering the broader growth program The LED strategy we have presented will increase the competitiveness of these local economies, stimulate intrinsic growth, and create a modern functioning economy that leverages Egypt’s multitude of resources at the local level

35. A Rare Opportunity for Egypt: The Next Great Success Story This is an exciting opportunity for Egypt to move out of poverty and to blossom into a sustaining country that can feed, employ and create wealth for its people Rare is the opportunity when geopolitical forces align for a common aim The new government and the people must seize this opportunity to transform Egypt into the next great success story