Sept. 2 (Bloomberg) -- Six months after the fall of the Mubarak regime, Egypt remains in disarray. Protesters continue to take to the streets demanding change, while dozens of secular and Islamist parties jockey for power with the all-powerful military in anticipation of elections in November.
Whether Egypt will then get a stable government and develop into a genuine democracy will depend not only on how it manages its raucous politics but also on whether it can fix its sclerotic economy, and soon.
Political upheaval has plunged Egypt’s economy into crisis. Since January, unemployment has climbed to 12 percent, and investment has shrunk by 26 percent. In a country in which tourism accounts for 11 percent of GDP, international arrivals have fallen a precipitous 46 percent. Given that 40 percent of the population lives on less than $2 a day, the impact of such jolts has been profound.
It gets worse: Half of Egypt’s 80 million people are under the age of 24. Among the country’s unemployed, as many as 90 percent are young, and two-thirds have never worked.
Egypt faces a vortex of poverty and instability unless it finds jobs for its rapidly growing population. To keep up with the youth bulge, the economy has to grow faster (in the range of 10 percent to 11 percent) and for much longer than perhaps has been seen anywhere in the world.
That would require radical change. Egypt would have to open its economy, shrink its bloated and corrupt public sector, reform its laws and financial regulations, invest more in education and infrastructure, and promote privatization, trade and direct foreign investment. Unfortunately, the country has been reluctant to do any of this.
This is a shame because such changes have a record of working. Economic reform was integral to democratization in Eastern Europe and Latin America in the 1990s. In those cases, the U.S. and Western Europe insisted on economic restructuring early on, tapping the International Monetary Fund and the World Bank to help with the process. Reform was not easy. It was marked with setbacks, social hardships and political resistance. But in the end, economies were transformed, and Eastern Europe and Latin America are better off for it.
The Turkish Model
Since the start of the Arab Spring, many have touted Turkey, a prosperous democracy with a moderate Islamist government, as a model for Egypt. It’s important to remember that Turkey’s transformation began in the early 1980s with an IMF reform plan and was helped since then by additional IMF prescriptions.
Egypt took a different route. With rare exception, the country has avoided IMF reforms at every turn going back to 1977. In that year, a bankrupt Egypt, buoyed by a major increase in U.S. aid that was a benefit of its peace agreement with Israel, decided not to swallow the bitter pill of IMF reforms.
That aid, and the largesse of Persian Gulf monarchies, has enabled Egypt to stumble along in a state of economic stagnation absent serious restructuring. In June, billions of dollars in assistance from Gulf donors allowed Egypt once again to turn down World Bank and IMF loans conditioned on changes.
Egypt must finally break this habit. There are three obstacles that must be overcome for this to happen: Egyptian xenophobia, greed within the country and the inattention of the Western world, which is engrossed in its own financial problems.
Suspicious of Outsiders
Egyptians are notably suspicious of outside interference in their affairs. The explanation for this contains a pinch of Arab hubris but mostly the bitter aftertaste of colonialism. This is the nation that found its voice during the 1956 Suez Crisis, when President Gamal Abdel Nasser became the hero of the Arab world by nationalizing the Suez Canal in defiance of Western powers. The idea of ceding to the advice of international financial institutions is particularly galling now, when the danger of Western intrigue is again the slogan of choice for everyone from the military high command to liberal protesters.
In addition, businessmen who grew wealthy through corruption and cronyism under former President Hosni Mubarak understand all too well that economic reform will end their monopoly on riches. And their resistance pales before that of the military, which, experts estimate, controls 80 percent of all industry and accounts for a third of all economic activity. The greed of this gargantuan cartel is an impediment to democratic as well as economic advances. There will be no end to the military’s domination over Egypt unless reform frees the economy from its clutches.
Unfortunately, Egypt’s revolution comes at a time of economic crisis in the West. The U.S. and Europe are busy with their own problems, and the resources that were available to help Latin America and Eastern Europe are not available to Egypt.
Yet the outcome in Egypt will strongly influence developments across the Arab world. Egyptian resistance to external pressure could be mitigated by emphasizing that reforms would be rewarded with significant financial support and access to markets in the U.S. and Europe.
The U.S. and European powers must come to realize it is in their interest to give Egypt the full measure of their attention and support. Neglect could prompt Egypt to return to dictatorship or to slide, perhaps, into extremism. U.S. leadership is especially important. The Obama administration should make clear its belief that democracy requires economic reform and that it would be foolish, after spending trillions of dollars over the past decade trying to change the Middle East, to withdraw support from a country that is struggling to become a genuine democracy.
The U.S. should work closely with its European and Arab allies to make sure aid to Egypt supports economic restructuring. A useful first step would be to create an international fund to which all donors to Egypt, including the oil-rich Persian Gulf states, could contribute to support development and economic reform. The IMF and the World Bank could manage the fund in partnership with the Egyptian government. This would send a clear message of long-run international support for restructuring and would also reduce the risk that aid money is squandered or lost to corruption.
In responding to the Mideast, we should bear in mind that it was economics that triggered the Arab Spring. And it is economics that will decide where the Arab world will go from here.
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