The recent violence in Cairo and other parts of Egypt has sparked serious concerns about the direction of the country and the intentions of the Supreme Council of the Armed Forces. Not only does the lethal action the world has witnessed against unarmed demonstrators shift attention away from the electoral process and the political transition, but it further delays prospects for a recovery of Egypt’s economy—which is rapidly deteriorating.
Egypt’s economy may face a severe crisis due to persistent street protests, strikes, capital flight, rising inflation, increased food prices, and unemployment. Tourism has tanked, factories have shut their doors, and anyone with a job is clamoring for higher wages. The country has been hemorrhaging foreign reserves, and Egypt may run out of dollars in a matter of months. Mahmoud Nasr, a senior army financial official, estimated that Egypt’s dollar reserves would plummet by one-third by the end of January—reaching a paltry $15 billion. An IMF official recently estimated that Egypt would likely run out of cash in two to three months, which could prompt panic, further devaluation of the Egyptian pound, and massive inflation. This cash flow problem amplifies underlying distortions that will only be resolved by significant fiscal reform and the revamping of subsidy policies.
Buoyed by promises from Gulf countries of financial assistance, Egypt shunned loans offered by the IMF and the World Bank last June because—according to officials at the Ministry of Planning—they did not want to add additional debt burden and because conditions were “incompatible with Egypt’s national interest.” But as funds from its Gulf neighbors have not been forthcoming, Egypt will likely return to these financial institutions to renegotiate aid packages. This may help stem an acute crisis, but only as a stopgap measure with short-term benefits. Rather, what is needed is a long-term strategy—one that resuscitates the Egyptian economy in a sustainable and growth-oriented way, which will not emerge from wealthy Gulf cash transfers, loans from international lending institutions, or economic aid from Congress. The only solution is to unleash the dynamism, ingenuity, and entrepreneurial spirit of Egypt’s private sector—internationally, regionally, and domestically—to breathe life back into the country’s economy.
Economic failure on Egypt’s path forward would mean a rise in radicalism, security threats, disruption of energy flows, and migration pressure—and is simply not an option. The United States needs to engage with newly elected leaders from all parties and build relationships in order to promote the principles of democratic inclusiveness and encourage the entrepreneurial spirit that will be essential for Egypt’s success.
While the actual policies of a Muslim Brotherhood-dominated parliament remain to be seen, the Freedom and Justice Party (FJP) has been forthcoming in support for a fairly liberal, free-market approach to Egypt’s economy. Its electoral platform advocates the kind of policies a Washington-based audience likes to read: economic freedom, enhanced global competition, rule of law to regulate economic transactions, institutional reform, and the centrality of the private sector. In fact, the FJP’s economic platform is far more developed than many of the neo-liberal secular parties (al-Ghad, the Free Egyptians,the Democratic Arab Nasserites, and al-Tagammu), many of which assert the need for social protections and more equitable wealth distribution but do not detail specific trade and investment policies.
A healthy dose of skepticism may be warranted, however, since the FJP is in uncharted territory and has never been in the position of governing. Though well developed, their economic platform supports protectionist trade policies by insulating domestic industries from international competition and reducing the import of luxury goods. Given the party’s firm commitment to an equitable (re)distribution of resources and social justice, a critical question will be how the FJP envisions the government’s role in fulfilling these principles. Additionally, there is a growing fear that the demonstrated strength of the Salafi parties will prompt the FJP to move to more extreme positions on shari‘a-compliant tourism and social policies. The need to outflank the extremists may also manifest itself in populist policies to curry favor by creating new jobs, re-nationalizing industries, or increasing wages. Nour, the largest Salafi party, espouses a moderate economic liberalism, but its advisors note that shari‘a would prevent privatization of natural resources (e.g., water and gas). Their platform notes the necessity of tax reform, but does not specify what type of changes they would seek. What this will mean in practice will be seen only in the coming months.
Given this context, the United States and Europe should rally all possible diplomatic and financial resources to encourage—and then help actualize—the promised market-oriented policies of these newly elected leaders. Yet in the current climate of austerity, aid packages from the United States and Europe will be extremely limited. Even so, opening trade flows and leveraging the power of the private sector are both realistic and key drivers of sustainable economic growth. Considerable gains can be realized through economic initiatives that promote trade, support new business growth, and encourage investment—not only for companies in the target countries in question, but in the United States and Europe as well. Foreign assistance can help resolve immediate financing, but the key to long-term growth and prosperity lies in mutually beneficial trade partnerships. Perhaps most importantly, the United States and the EU need to encourage the private sector—in the West and in Egypt—to identify barriers to trade and investment and to direct attention to specific economic sectors that could provide additional growth. It is the business community, and not the government, that will be best placed to make these choices and to inject a spirit of ingenuity and initiative into the economy.
In particular, the United States and the EU should expand Egypt’s access to American and European markets and engage Egypt on an individual basis in order to negotiate free trade agreements or deepen existing preferential trade arrangements. The existing Bilateral Investment Treaty with Egypt (signed in 1992) is sorely outdated as it excludes sectors that should be covered while also lacking core protections (e.g., intellectual property rights) that the United States now requires. Now is the time to update this treaty and to initiate more ambitious agreements that would pave the way for a more robust trading relationship. Recently, the EU announced it would begin free trade talks with Egypt, Morocco, and Tunisia, and the United States should follow suit. Although the latter may be reticent to engage in negotiations while the political situation remains fluid, articulating these intentions and providing international support for Egypt’s economy is essential in order to reassure markets and offer encouragement to Egyptians that see little hope in their economic future.
Danya Greenfield is the Deputy Director of the Rafik Hariri Center for the Middle East at the Atlantic Council.
This article is reprinted with permission from Sada. It can be accessed online at: www.carnegieendowment.org/sada © 2011, Carnegie Endowment for International Peace
Photo Credit: The Egyptian Gazette