Slow Death

That beggars the government, too. In Egypt, estimates of gray-market commerce run as high as 30 percent of the official GDP of $87 billion. "What this means is that the economy does not respond to monetary and fiscal stimuli," says Mahmoud Mohieldin, adviser to Egypt's economics ministry. "Ninety percent of Egyptians don't care about a tax cut, because few ever pay taxes except for a sales tax. So you can reduce taxes as we are doing, but it will have no impact, and that erodes the credibility of the government's ability to manage the economy."

There's not much credibility left. Take forward markets, which would allow companies to hedge against currency swings that now plague the economy as the government loses its battle to protect the Egyptian pound. Egypt once had the world's third largest futures exchange, in Alexandria, but it was closed under Nasser and has yet to revive. "A forward market has been on the table for the last three to four years, but nothing is done," says Munir Fakhry Abdel-Nur, the managing director of Vitrac, a jam maker battered by the rising cost of imports as the pound falls.

The Abdel-Nur family owns 35 percent of Vitrac's listed stock, which is stable mainly because the market is in a deep sleep. The index has lost half its value over the last two years, and daily turnover has declined from $250 million to about $20 million. No one expects a turnaround soon. Egyptian shares trade at some of the lowest multiples in the world--three times earnings, five times earnings--yet still there are no buyers.

So moribund is the exchange that Naguib Sawiris--one of three brothers who run the Orascom Group, Egypt's biggest conglomerate--is trying to delist his shares by purchasing them in the market. Orascom companies account for 20 percent of the market's capitalization. "They're trading at 10 percent of their value, and [exchange regulators] are saying I have to pay the original list price," Sawiris says. "They're making it up. This is the problem with Egypt. There is no faith in the government's ability to manage the economy."

Even Lebanon, once known as the Hong Kong of the Middle East for its nimble banking system, is parched of liquidity. Nazem Ghandour returned home to Lebanon in 1992 from studying in London to help rebuild his father's sugar refinery after two decades of civil war. Within three years the mill had captured half the country's sugar market. When sales declined after the government began to subsidize smaller, less efficient refiners, Ghandour's banks called in their loans. "We took all the financial precautions," he says. "We were hedged, but the financiers failed us. That is the reason most Middle East businesses fail." Ghandour planted mushrooms on the site of the closed refinery and has since become Lebanon's top mushroom farmer--but he had to borrow the seed money from friends and family.

At least Lebanon has commercial banks. Neighboring Syria, which only just passed a banking law and is now taking license applications from foreign banks, has none. Inspired by the Soviets, the government channeled funds to state-run enterprises, in large part to prevent the Sunni business class from getting too powerful. As a result, there is no such thing as credit in Syria. Shop owners carry their take home each night in plastic bags. Couples pay for homes with suitcases full of cash. The winner of the annual lottery picks up his winnings in bundles of bills and carts them off in vinyl luggage. Syrian manufacturers are among the most sophisticated in the Arab world, but non-oil exports are worth only 7 percent of its $17 billion GDP. According to Jordanian economist Riad al Khouri, the average factory worker in Syria generated $9,900 in revenue annually in the five years ending 1999, almost no change from $9,600 a decade earlier.