A STUDY OF THE MAJOR CONSTRAINTS ON EGYPTIAN ECONOMIC GROWTH DURING THE PERIOD 1998-2008: Crises

The figure shows that both countries have had their ups and downs values of real GDP (annual percent rate) in the mentioned period. In 1998 Egypt marked the highest real GDP annual growth rate in this period reaching 7.5%, while Malaysia marked its lowest rate reaching -7.4% (after the financial crises of the Asian countries in the year 1997), yet Malaysia converted this downturn to mark its highest rate in the mentioned period reaching 8.7% in the year 2000 while Egypt went down to 5.4% in the same year. It is observed from the Malaysian trend of GDP growth in the mentioned period that the speed of recovery from downturns is much higher than Egypt.
In 1990s the investment ratios in Malaysia shifted the economy from agriculture and mining to manufacturing and production of high technology electronics equipment. Aggregate domestic demand driven by the private sector activities and private consumption played an important role in the GDP growth.
The 1997-1998 financial crises that hit Southeast Asia region resulted in the collapse of the Ringgit from 2.6 to the dollar in July 1997 to 4.7 in January 1998. However Malaysia did not suffer from large capital outflow furthermore did not deplete Central Bank reserves; instead, the main reason for the decline in the ringgit was currency speculation in the offshore market located in Singapore.
The Malaysian government made offshore ringgit transactions illegal in order to shut down the destabilizing Singapore market. In addition, measures were taken to make it impossible to settle ringgit contracts except through Malaysian banks in Malaysia. Finally the Malaysian government introduced the fixed exchange rate to control the domestic situation (at 3.8 ringgit to the dollar).
Malaysia’s crisis response policies have absorbed the situation without regulating long term flows and FDI, and the currency was always fully convertible for commercial transactions through Malaysian banks. These procedures were not taken under emergency conditions to control capital outflows, or to support unsustainable macroeconomic policies, but were taken under relative post-crises response, while the crisis was allowed to run its course.
Since the Malaysian government maintained sufficient foreign reserves, the fixed exchange rate regime is considered sustainable, at least in the short run. The fixed exchange regime is used mainly to maintain the exchange rate.
If the Ringgit starts depreciating against the US dollar, and the Malaysian central bank starts defensive operations, foreign reserves may be exhausted rapidly. The above figure shows that Malaysia’s direct investment is boosting up far greater than Egypt’s, which gave Malaysia a special privilege in its economic performance, creating sufficient foreign reserves. The figure shows that unemployment rates in Egypt are higher than those in Malaysia with a general trend of increase, which hinders economic growth. Malaysia highest unemployment rate during 20032005 was 3.6% and still far lower than those experienced in Egypt. The above figure shows how the inflation rates in Malaysia during the period were kept almost at lower rates than those in Egypt with a great tendency to decrease soon as they rise. Inflation peaked in 1998 at 5.27%, and since then has steadily decreased. In 2001, Malaysia reached a seven year low of 1.4% inflation.

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