July 21, 2011

The Legatum Institute and Carnegie Endowment for International Peace, in association with the Atlantic Council, present this short report, which is the product of an exploratory trip to Egypt by the authors in mid-June 2011. Its aim is to help shape the conversation about Egypt’s economy, economic policy, and international assistance by addressing several persistent myths about the current situation.

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If the democratic transition in Egypt fails and the country adopts a repressive, authoritarian, or theocratic form of government, the consequences could be profound. Failure in Egypt could lead other countries in the region to turn away from the very idea of democratic reform. Of course, democracy in other countries will rise and fall due to local conditions. Nevertheless, if the transition in Egypt succeeds, and the country acquires a democratic, accountable, and efficient form of government, it is likely to become a powerful example and, ultimately, a stabilizing force in a turbulent region.

The grievances that led to the revolution of January 25 were chiefly political, but old economic grievances played a role as well. The rigged parliamentary elections of 2010, the ‘emergency’ repressive measures that lasted for decades, and the absence of freedom to speak and assemble robbed Egyptians of their sense of dignity. At the same time, Egyptians blamed their government for high rates of poverty, youth unemployment, corruption, illiteracy, and deep divisions between rich and poor.

The Egyptian government, which will be formed in late 2011 or early 2012, once parliamentary and presidential elections have been held, will face considerable economic challenges. Besides bringing the high and soaring public debt under control, Egypt’s new rulers must ensure that investment, economic growth, and job creation keep pace with demographic trends. This will require the creation of 700,000 new, productive, and sustainable jobs every year in the private sector to accommodate the growth of the labor force.

Because the revolution was also inspired by popular discontent with the cronyism and corruption of the Mubarak rule, the newly elected democratic government must distance itself from such practices. Egypt is not unique in this regard – corruption is rife in developing countries and common in many advanced countries. Reducing corruption requires deep changes in culture as well as economic incentives. Nonetheless, some measures can be taken immediately. Egypt’s new government can create better mechanisms of control, transparency, and accountability, in order to ensure that economic opportunity does not depend mainly on political connections.

So far, the economic policies of the transitional government have been driven by populist considerations. This is understandable in view of the fact that the government has no electoral mandate and confronts expectations that things will quickly change for the better. Nevertheless, a continuation of current policies after the elections would spell economic disaster. Large subsidies are continuing despite widespread acknowledgement inside Egypt that they need to be reduced and more tightly targeted. Food subsidies have actually been raised, in order to offset the rise in world commodity prices. An already bloated state bureaucracy of six million workers has been expanded by adding some 450,000 temporary workers to the permanent payroll.

Far-reaching reforms that stimulate private sector growth and spread economic opportunity will lie at the center of a successful democratic transition in Egypt. So far, the response of the international community, particularly the United States and Europe, has been extremely modest considering the magnitude of change underway in the region and the importance of Egypt. While the relatively small offers of cash support to the Egyptian government are understandable given existing budgetary constraints, the international community should take advantage of this unique moment to promote reforms.

Click here to read the report in Arabic (PDF)
 

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