Shaky Economies for Egypt, Tunisia

Shaky Economies for Egypt, Tunisia

The G8 pledged new aid to Tunisia and Egypt to help their transition to democracy, but it will be a challenge to turn the aid into desperately needed jobs and an investment-friendly climate, says Mideast expert Jane Kinninmont.

June 9, 2011 1:22 pm (EST)

To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

The successful ousting of Tunisian and Egyptian leadership earlier this year has increased economic instability in both countries, and some fear it could undermine the transition to democracy, despite the fact that G8 leaders recently pledged $20 billion in aid. Billions more are also expected in the form of loans from multilateral banks such as the World Bank and IMF. Jane Kinninmont, a Middle East expert at Chatham House in London, says there are legitimate concerns about the timing of aid, since any given now would strengthen transitional governments and could result in binding agreements for future elected governments. Still, she notes, aid is needed quickly to help kick-start economies. Egypt needs investment in projects that create jobs, rather than debt relief, says Kinninmont. She says economic reforms may take a backseat in upcoming elections, but hopes that Egyptians will "think hard about what their parties can offer in terms of addressing the unemployment issue." Tunisia faces fewer economic and political challenges, but "the new government will face a lot of the problems that the old government did," says Kinninmont, including job creation for college graduates.

Some analysts say that while the G8’s pledge of billions in aid is needed by Tunisia and Egypt, if it’s given now it might strengthen the hand of transitional leaders, rather than promote needed reforms. What are your thoughts?

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That concern is important. We don’t yet have democratic governments in place. There are quite legitimate concerns [from] civil society groups in these countries about whether there will be economic conditionality to Western aid. There are questions about whether these governments, particularly the military government in Egypt, should be able to tie the country into agreements that would be binding on future elected governments. [But] the issue is that they do need economic support quickly, and once you have functioning governments, you will have probably a greater chance of getting private-sector investments going--unless those governments have very investment-unfriendly policies.

Where are these economies right now, and what are are their challenges?

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When people look at Egypt, they see a lot more uncertainty about what economic policy will be like in the future. And the military government is just not putting economic development as a top priority at all.

Overall, we can see that there has been short-term damage to the economies in both countries. There’s clearly also some upside potential resulting from this transition, but there is a big question about if it will be realized, and how long it will take.

There are definitely economic grievances that were factors [in the uprisings] in both Egypt and Tunisia. Tunisia is actually relatively well-off for a non-oil exporting Arab country. Egypt, of course, has significant poverty, illiteracy, and so on. The Tunisian population is about a tenth the size of Egypt, and the literacy rate is something approaching 100 percent. In Egypt, they have much greater economic challenges. I get asked questions about whether the protesters were more motivated by politics or by economics, and I think it’s largely an arbitrary distinction. The economic problems were very much rooted in the weak political institutions and some of the political dysfunctions, particularly the lack of a level playing field for business and the weakness of the rule of law.

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Another issue for both countries has been the unrest in Libya. Tunisians and Egyptians were working in large numbers in Libya--by some estimates over a million. Libya’s economy was growing very fast. They had real skill shortages, and therefore were reliant on bringing in quite a lot of foreign workers. A lot of them would work there and could come back in very large numbers.

The other worry is the shortage of new investment. Businesspeople don’t like uncertainty. When you talk to businesspeople about Egypt and Tunisia, they see a lot of long-term potential, but right now, they’re not hurrying to put their money into either country, because they don’t know what’s going to happen in the election.

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You mentioned a lot of returning workers. There are also large influxes of Libyans flowing over the border to both Egypt and Tunisia. What impact does that have on stability?

It’s a risk, this initial humanitarian burden. If European countries, which at the end of the day are pretty well-off and have strong social safety nets, are worried [about refugees] then it’s worse for countries like Egypt and Tunisia. They already have enormous strains in terms of the available employment opportunities, and in terms of the limited social safety net and the large fiscal deficit. The Libyan education system has not been very good, so most of the Libyans who are coming in as refugees will be, in some sense, classified as low-skilled and unskilled, and will be competing with a lot of Egyptians and Tunisians for the same small pool of jobs.

President Obama pledged to forgive some of Egypt’s debt, and debt reform discussions are underway, including at the IMF. How should the international community approach foreign debt, and what is the potential harm if it’s not done correctly?

Most of Egypt’s fiscal deficit is financed domestically. When I spoke to Egyptian economists in my most recent research visit to Cairo, they tended to see alleviating the foreign debt as welcome, but it’s not the top priority, because it’s not one of the worst economic problems that Egypt faces. On the other hand, there are Egyptian youth activists who would like [all] foreign debt canceled, and they look at Iraq as a model for that.

After the 2003 war, there was a major international campaign for Iraq’s debt to be dropped on the grounds that it had been run up immorally [by Saddam Hussein]. On the other hand, Iraq was in a very particular situation: It had not been paying its debt for years because it had been under international financial sanctions. Egypt isn’t in that position. There will be divisions in Egypt between people who continue to be influenced by what the IMF and the World Bank recommend and others, including some of the new political players, [who] would say that those policies have not served Egypt well, and have been created by the West, in the West’s interest.

The key issue economically is job creation. According to the interim finance minister, the country needs to create seven hundred thousand jobs a year in order to keep unemployment stable. The top economic priority, and maybe one of the top political priorities, is finding ways to create jobs. And perhaps more important than debt relief is finding ways to get investment going. The country needs a lot of infrastructure projects, and [the question is] are there ways that [other] countries could invest in those, perhaps exchanged for construction contracts, for instance? Are there ways for creative solutions that could be found, not so that the government has less debt to pay off, but so that job creation projects get [going]?

What has to happen to help them move them forward--particularly on this issue of job creation and economic opportunities?

Tunisia’s a simpler situation. I don’t think that there’s such a high risk to politics there, but the new government will face a lot of the problems that the old government did, including the challenge of creating jobs.

What’s going to happen is not terribly clear. It’s probably a bit clearer in Tunisia, [which has] embarked on its transition faster. There is a somewhat stronger consensus that the country needs foreign investment, [though] there are certainly important trade union movements that would question how investments have been handled in the past.

When people look at Egypt, they see a lot more uncertainty about what economic policy will be like in the future. And the military government is just not putting economic development as a top priority at all. I spoke to one businessman in Cairo who was trying to open a factory that would’ve created several hundred jobs and was finding it very difficult to get a license, because everyone was so preoccupied with politics and the political transition.

Economic policy is going to take a backseat in the election campaign (NationalInterest). People are going to be much more focused on the political issues: the role of the military, the role of Islam in politics. Economic policy will become squeezed out. Because of the dictatorship they’ve been under for so many years, the opposition parties have been deliberately weakened for decades and haven’t necessarily got well-developed manifestos for administering the country and dealing with perhaps some of the less sexy issues, like economic development.

In Egypt, there also is a lot of public animosity toward the economic policies pursued by the previous government. From 2004, taxes were cut and they increased foreign investment a lot. But inflation remained high, poverty actually became worse, and the benefits of growth were distributed, particularly among a small elite. About half the population was becoming poorer, and their purchasing power was being undermined by inflation. So, the economic reformists were saying that this was happening because economic reforms [did not] go far enough. [But] the popular perception is that the pro-business policies were just about making the rich richer. There is that risk of a kind of anti-business backlash. [However], the Muslim Brotherhood includes a lot of businesspeople [and] is quite a middle-class party. Many of them look towards Turkey’s AK Party as an inspiration. The AK Party has been really successful at overseeing economic growth and has formed strong alliances with businesspeople.

What are the trajectories of the two countries?

Tunisia’s a simpler situation. I don’t think that there’s such a high risk to politics there, but the new government will face a lot of the problems that the old government did, including the challenge of creating jobs for the graduates that the country is producing. The country produces a lot of skilled graduates, but the jobs it creates are often in very low-skilled positions. And they really need to upgrade their tourism sector. At the moment, it’s really a mass-market offering, if you contrast it with the success of Morocco at developing a really diverse and often high-end tourism offering. They will probably continue with the previous government’s ideas of trying to make it a more knowledge-based economy, develop their IT sector and things like that--which is one thing that does have quite a lot of potential in North Africa.

Egypt faces much tougher economic challenges. Egypt has this huge, young population that will be hard to find jobs for and even to feed. At the same, it is the single-largest country in the Middle East. Simply the size of that consumer market means that it’s a country companies can’t ignore. It’s also a gas exporter, and they earn decent revenue from shipping through the Suez Canal, which is something that’s there for the long term. They have one of the most diversified economies in the Middle East, and it’s one of very few places that has really succeeded in getting global, big names to set up: local production and manufacturing in quite high-tech sectors like pharmaceuticals--and if you look at the IT and software sector, they have some real success stories.

A lot is going to depend on confidence in the next couple of years, and it will be quite urgent. If I could give a piece of advice to Egyptians who are now seeking part in the elections, it would be not to neglect the economic things, and think hard about what their parties can offer in terms of addressing the unemployment issue and creating jobs for young Egyptians.


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