from From the Potomac to the Euphrates and Middle East Program

The New Corrective Revolution?

September 28, 2011

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A trader reacts at the Egyptian Stock Exchange in Cairo (Amr Dalsh/Courtesy Reuters)

Outside official circles in Washington these days there is a lot of talk about the Egyptian economy.  This is hardly idle talk.  From virtually all vantage points, the economic indicators don’t look good:  Unemployment is up as is the budget deficit; total debt now equals 100 percent of GDP; capital is leaving the country; tourism, which accounts for 11 percent of GDP is down 50 percent (my guess is it is worse than that); remittances from Egyptians abroad are down, and foreign exchange reserves are down a whopping $14 billion since the uprising.  All in all, it is not a pretty picture.  I am on record arguing that Egyptians need to continue the economic reforms that began in earnest under the so-called “Dream Team” (Mahmoud Mohieddin, Ahmad Nazif, Yousef Boutros Ghali, and Mohamed Rashid) all of whom have been convicted of crimes or remain in legal jeopardy with the exception of Mohieddin who is a managing director at the World Bank.  The problem in Egypt was less economic policies than a perverse political order and unstable legal system.  Still, it seems remote that a new Egyptian government will continue the economic policies of the previous regime if only because politics dictates otherwise.


Egyptians believe that the neo-liberal economic reforms of the last decade—privatization, floating of the exchange rate, relaxing rules for foreign investors, and significant changes to the corporate and individual income taxes—may have been very good for the Mubarak boys and businessmen close to the regime, but hurt almost everyone else.  Widely held grievances about income inequality, corruption, and a general fraying of the social contract are directly tied to the economic reforms that were a hallmark of the late Mubarak era.  As a result, there is going to be an inclination among new leaders to respond these sentiments with populist economic policies.  Not only will there be greater investment in education and health care (good things), but perhaps increases in subsidies, import controls, new regulations on foreign currency, more stringent controls on foreign investment, and even renationalization.  The fact that the transitional government has not done these things tells analysts very little about Egypt’s future economic policy.  It is basically a nonexistent government with no mandate comprised of people who are not empowered to make decisions.  The next government, which will be responsible to the Egyptian people through the ballot box, will determine Egypt’s economic trajectory at least in the short run.


For these reasons, the ideas richoceting around the Beltway these days about how to help the Egyptian economy seem so divorced from reality.  Who is the constituency in Egypt (or Congress for that matter) for a Free Trade Agreement?  They are all in jail or spending their time strolling through Convent Gardens.  Who are the Egyptian partners for U.S. companies who would invest in Egypt now even with Washington’s guarantees?  In the early summer, the IMF came up with a standby agreement with relatively easy terms, but the Egyptians rejected it on political-nationalist grounds.  All of these things would benefit Egypt, but they are non-starters.  It is not that Egyptian politicians and leaders don’t recognize their economic circumstance, but  ideas and political survival are paramount now.  As a result, we should expect a new Egyptian government—whenever it assumes its responsibilities—to undertake a range of policies that Egypt can’t afford and will likely do harm to the country’s macro-economic indicators, but will do much to build a narrative for those in power that they are correcting the errors of the Mubarak era.