In the previous article, we looked how important it is for Egypt to have an economy that is resilient to external and internal shocks without unnecessarily constraining the change, innovation, openness, and flexibility necessary to create a sustainable growth. The challenge for policymakers is to find the right balance; and to help them do this, we think it important they consider an emergent concept: agility.
Most often applied to the corporate sector (the Agile Corporation), agility is also relevant to the wider macro-economy because, at its heart, it reflects the way the world is, not what we would like it to be. Part of the reason that central planning is a poor method of economic management is that economies are inherently unstable and unpredictable. These inherent characteristics mean not that it is hard to predict what will happen to an economy, but that it is impossible.
The multi-disciplinary academic field that studies this is derived from mathematics, natural, and social sciences and sees the economy as something called a complex adaptive system (CAS). In this view, economies are systems and they are complex, because the behaviour of the system cannot be predicted by aggregating the behaviour of each of the component entities. They are adaptive, because the entities in the system self-organise, react to events, and make decisions on their future behaviour based on their own prediction of the future state of the system. In addition to economies, we see CAS in areas, such as political systems, social networks and, of course, the internet.
When applied to microeconomics, CAS analysis shows that, for one example, competitive advantage is always temporary. Disruption can come from new technology, from changing demand patterns, from regulation, and from over or under-supply of key inputs, and the firm cannot know where it will be disrupted, only that it will be. Firms that are built on the model that they can capture competitive advantage in one area forever will inevitably be replaced. The examples of this are legion: digital imaging destroyed the photographic film industry, health concerns will finish the tobacco business, climate change is killing coal extraction, and the fishing industry is facing an uncertain future in the face of fish stock collapse. At a macro-policy level, this pattern exists too: no government can plan an economic mix that guarantees sustainable competitive advantage.
The solution to this problem (the proponents maintain) is to create agility in the economy. To put forward a set of policies, strategies, and incentives that create an economy, which is able to quickly and efficiently react to internal and external changes whilst at the same time mitigating the negative social impact of those changes. The key then is for policymakers to consider not what an economy should produce, but how it should be organised.
Modern economies organised on the basis of certain uncertainty allow rapid repurposing of key resources, particularly people, to reflect the fact that disruption is inevitable, and the goal is not to resist this disruption, but to move to the next iteration of the economy as quickly and with as little social pain as possible.
Economic sector diversification is a necessary, but not a sufficient strategy. Flexible labour markets are another, alongside comprehensive, and functional social safety nets and re-skilling. Better education of workforces, good core infrastructure, and a stable financial system are others. And Egypt has made and is making big improvements in all these areas—more so than many other developing and developed countries.
Where Egypt could also place emphasis is on two factors that a recent study of the relative recovery times of US states post-2008 highlighted. Those locations with the highest number of self-employed people proved to be the most agile—with the fastest recovery times and the highest post-crisis growth. Equally, those with the most decentralised decision-making infrastructure recovered quicker and better than those with highly bureaucratic systems.
Governments everywhere love to centralise—Egypt as much as any. However, the more that real economic decision-making, regulation, and oversight can be conducted at the micro-level and not the macro-level, the more agile, and therefore more fit for the inherent unpredictability that is the true character of the Egyptian economy, and of every economy.
Author is consulting editor to Euromoney Conferences; the opinions in this article are his own.
Richard Banks, Consulting Editor, Euromoney Conferences
