Seven months ago, global investment bankers had anointed Egypt as the "next big thing" in the world of emerging-markets investing - naming it as one of the exciting "CIVETS" economies that every investor had to consider.
At that time, in a column here in Money Morning, I told you that I had my doubts, and said that "with an 82-year-old dictator and a radical Islamist movement, it doesn't look that attractive to me."
Given Egypt's uprising of the past two weeks, that call must look like it was quite prescient.
But here's a surprise: Egypt's brewing political troubles weren't the reason that I told you to steer clear of that economy. In fact, even with the escalating violence of the past couple of days, there's still another issue that remains Egypt's greatest challenge.
Investors should take heed. The challenge that faces Egypt is the same problem that plagues a number of the world's other emerging-market economies. That challenge will prompt us to question the long-term growth projections "experts" are throwing down for some of these other highly touted investment plays.
When Egyptian President Hosni Mubarak on Tuesday announced that he would not seek re-election, observers expected the nine-day-old uprising to quickly tail off.
Instead, just the opposite occurred - especially in central Cairo, where CNN.com reported that "a mob-rule mentality was in sharp contrast to the jubilant mood of tens of thousands of anti-Mubarak protesters the day before."
Here's the thing. In the 30 years he's been in office - following the assassination of predecessor Anwar Sadat - President Mubarak has actually done a pretty competent job.
Egypt ranks 98th out of 178 countries on the Transparency International Corruption Perceptions Index. That's not wonderful, but it is equal to Mexico, is better than most of its neighbors and much better than Russia or Venezuela, for example.
One would have liked to see Egypt rank higher on both lists, but let's be honest: That country doesn't come from a region with a vast tradition of success in those areas.
Overall, President Mubarak has substantially liberalized the economy - especially from dozy socialism practiced under the country's longtime ruler Gamal Abdel Nasser. Yet living standards - which had declined substantially under King Farouk I (1936-52) and catastrophically under Nasser (1956-70) - have recovered only moderately under Mubarak.
At $6,200, Egypt's purchasing power parity gross domestic product (GDP) ranks 137th in the world. And Egypt may well be one of the few countries to have lower living standards than a century ago. For some context, consider this: In 1980, Egyptians were on average almost twice as rich as their counterparts in China; now they are less than half as rich.
The reason for Egypt's unfortunate impoverishment is a simple one. It's the real reason that I seven months ago told investors to steer clear of that country. And it - not the current political unrest - remains the real obstacle that will keep Egypt from becoming the kind of emerging market that we'll want to invest in.
In short, population growth - not politics - remains this CIVETS economy's biggest challenge.
The One Red Flag to Heed
At 2% annually, Egypt's population is growing too rapidly. And at 80 million people, Egypt's population is too big.
The country's fertile land is concentrated in a narrow strip near the Nile, with some broader fertility in the Nile River Delta region. There is little rainfall, so the population must live on the 3% of the land area that is irrigated. In 1911, the country's population was 11.8 million, so the fertile land area was ample. With inexorable population growth, it is thus not surprising that today's 80 million Egyptians suffer lower living standards than 1911's 11.8 million.
You can see the scale of the problem when you realize that at Mubarak's accession to power in 1981, Egypt's population was only 44 million. Just to maintain living standards, President Mubarak's government has had to double the number of houses, double the road and rail networks and more than double the country's irrigation capacity (because new settlements are generally built further from water).
And that's not all. Egypt's government has also had to double spending on security - both physical security, in terms of police and armed forces, and social security, in terms of education especially, as new Egyptians must be readied for the work force. Mubarak's government has managed to achieve growth of more than 5% annually most of the time, but the 2% population growth means that this translates to living-standard improvements of only 3%.
Economists worry about the effect of a very marginally declining population in Japan, as its population ages. Given modern levels of health, most of those problems can be addressed by delaying the retirement age. No such easy adjustment is possible for Egypt's problem; advancing the age at which young people enter the work force merely reduces their already inadequate levels of education and impoverishes the country further.
As prospective emerging-market investors, there's a very clear lesson to be learned from Egypt's woes. And that takeaway is this: Avoid - like the plague - all countries with annual population growth above about 1.5%.
Kenya (2.6% population growth rate), Iraq (2.5%) and Jordan (2.2%) are growing too fast to achieve success - even if, as is true for Jordan, they are generally well-managed and market-oriented.
Despite their slightly lower rates, countries such as Nigeria (2.0%), the Philippines (1.9%), Ghana (1.9%), and even Malaysia (1.6%) all have population growth rates that are still fast enough to pose a serious danger to their people's welfare and to outside investors' wealth.
Even Turkey (1.3%) has population growth rate high enough to be worrisome.
Heed the lessons of Egypt. And don't get taken in by hefty growth rates and gaudy monikers (such as CIVETS) if the population growth rates are warning you to stand clear.
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News and Related Story Links:
- Money Morning Special Report:
The CIVETS: Windfall Wealth From the 'New' BRIC Economies.
- Money Morning News:
Mubarak Won't Run Again: What's Next For CIVETS-Member Egypt?
Opposing sides clash in fierce Cairo street battles.
- About.com (Middle East):
The Assassination of Egypt's Anwar Sadat.
- Transparency International:
- Heritage Foundation:
Gamal Abdel Nasser.
- Heritage Foundation:
Index of Economic Freedom.
King Farouk I.
Nile River Delta.