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Egypt’s Improbable Path Traces Four Points: Mohamed A. El-Erian

Developments in Egypt have taken many, and possibly everyone by surprise both inside and outside the country. As such, governments and institutions around the world now find themselves playing catch-up, having to react to a particularly dynamic and unusual set of events.

For a week now, Egypt has witnessed a series of protests that are unprecedented in scope and scale. Citizens from all walks of life have marched in the street demanding change. In the process, a populace often characterized as passive and docile is driving domestic and global agendas, running well ahead of political leaders as it attempts to impose its collective will on outcomes.

The government, led by President Hosni Mubarak, has reacted with a set of measures that would have been deemed improbable, if not unthinkable, just a week ago. A new prime minister is now in place, the cabinet has been replaced and, for the first time since 1981, Egypt has a vice president. Yet none of this has served to calm sentiment in the street, fueling concerns about even greater instability in the country and region.

How Egypt evolves in the next few days and weeks matters a great deal -- and not just for Egyptians but also for the world economy. It matters in ways that are unusual and, for many, unfamiliar.

Unlike China, Egypt is not a major source of global demand nor is it a major exporter. Unlike commodity-rich countries, Egypt does not directly influence world prices. But Egypt is a critical enabler and, as such, indirectly touches many other nations.

Role in Region

With its control over the Suez Canal, Egypt is a major gatekeeper of global trade. Even more important, its role and standing in the Middle East makes it a critical participant in promoting geo-political stability in an area prone to volatility.

Where the country goes from here will have an impact on the wellbeing of the global economy and stability of the world’s financial markets. In analyzing this, there are four things to remember.

First, the concept of so-called managed change, or what some people in Washington are calling orderly transition, is critical. Everyone, including the Egyptian government and opposition movements, agrees that the country cannot simply reset to where it was seven days ago; and all wish to avoid chaos. But they differ widely in the meaning of change, and the associated journey. As such, Egypt needs a mechanism to reconcile very different views of managed change.

Next Step

Second, it matters how the opposition evolves from here. Their vocal protests must now be channeled into an actionable and detailed, forward looking agenda. This is critical not only for Egypt’s internal stability. It is also essential to counter concerns outside Egypt that what is unquestionably a secular movement could be hijacked by theocrats.

Third, Egypt is not helpless. It has solid economic foundations, large international reserves and minimal external debt. More importantly, the armed forces are respected and liked by most citizens. The military understands what is at stake. In contrast to many other developing countries, the armed forces, if asked, can help facilitate economic and political reforms, including free and fair elections.

Finally, while the instability in Egypt is being driven mainly by internal factors, it would be foolish to ignore external contributors. Egyptians are feeling the pain of surging commodity prices and food inflation. This problem will become more acute as some other governments around the world boost their stockpiling of foodstuff to guard against social unrest.

No one can predict what will happen in Egypt. The situation is unprecedented, and there are many moving pieces and legacy issues in play. My gut tells me that, over the next days and weeks, the country will find a way to manage change. And whether my gut is right or not, governments around the world would be well advised to draw lessons from these historic events.

(Mohamed A. El-Erian is Pimco’s chief executive officer and co-chief investment officer, and the author of the book “When Markets Collide.” The opinions expressed are his own.)

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