A Very Special Club

Egypt, welcome to the club. It used to be only developed economies that suffered from collapsing auto sales. So, I was surprised to learn the other day that Egypt’s annual car sales have plummeted from 250,000 to 85,000 in the past six months. I imagine there are thousands of unsold cars parked in lots outside of Cairo just like there are in Detroit.

But don’t worry, Egypt, you’re not the only new member: car sales have also fallen in China and India. In fact, you can probably find mini-Detroits all across the Silk Road as unsold cars pile up.

The middle-class dream has turned sour. How so? The rise of the Silk Road’s middle-class was one of the region’s big stories of the past decade. And, importantly, the middle-class was a big buyer of cars, whether it was China’s Volkswagen Santana or India’s Maruti 800. In fact, more cars were sold in China, Egypt, and India last year than in the United States.

Now, car sales offer a novel way to measure the relative strength of the Silk Road economies. So let me introduce the “Silk Road Car Index”. It’s like the “Big Mac” index that the UK magazine, The Economist, has made so popular―but whereas the “Big Mac” index measures relative prices between countries, the “Silk Road Car Index” measures the relative health of the Silk Road’s middle-class.

What does it tell us? Egypt’s middle-class families are hurting more than are middle-class families in China and India: passenger car sales have fallen -55% in Egypt during the past six months, whereas they have fallen a smaller -8% in China and -5% in India.

Of course, there might be a number of ways to explain the difference: for instance, Chinese car dealers could be discounting more heavily than car dealers in Egypt.

But it’s also likely that Egypt’s middle-class families rely more on debt than savings to finance their car purchases. (Indeed, savings rates in China are among the highest in the world). If so, they are likely hurting more as a result of the tightening in credit markets and slowing income growth.

There are real economic implications for the Silk Road beyond the hit taken by car dealers.

Take Ahmed Aboud. He braves Cairo’s traffic and sells gifts to idling drivers. Last month he was selling Valentine’s Day gifts. The month before that it was New Year’s Day gifts. Ahmed sets his price according to the model of the car. In short, cars say a lot about spending power of the middle-class, and if car sales are falling in Egypt then it’s likely that middle-class families are cutting back on other purchases. Ahmed might have to consider discounting.

Eventually, car sales will recover. Not just in Egypt, but also in China and India. They may even recover faster than they do in the United States. If so, the recovery will be a vote of confidence in the Silk Road story – I’ll be keeping a close watch on the “”Silk Road Car Index”.

In the meantime, I have some advice for the region’s governments. I’ve visited Beijing, Cairo, and Delhi in the past few years and found myself stuck in the same traffic jams and suffering from the same grimy pollution.

Fortunately, the economic crisis offers an opportunity to spend more money building roads and bridges. Such spending will create jobs and, better yet, help to unclog city streets and thus raise productivity rates.

It’s also an opportunity to reduce pollution levels. Simon Kitchen an economist at EFG-Hermes, an Egyptian investment bank, notes that the Egyptian government has done exactly this forcing taxi owners to replace any car older than twenty-years. It’s a good start.

The Chinese government isn’t scrapping cars. But it has cut taxes on cars with engines smaller than 1.6 liters in an effort to reduce the average size of the car on the road. It has also offered farmers one-off allowances to upgrade their polluting three-wheel vehicles.

So, there is a silver lining to current events: better roads and less pollution. Now, that would be a club worth joining.