Although it is convenient to place the entire blame on the Muslim Brothers for the sad state of the Egyptian economy, it will not solve the problems ahead. Since the Egyptian revolution, the international community has failed to provide the kind of political and economic support to Egypt that would prevent it from becoming a slow motion failed state. It is time to get serious, and that needs to start with an understanding between key Gulf states—Saudi Arabia, United Arab Emirates (UAE), and Qatar—and the United States on an agreed road forward. On October 1 of last year, the Gulf Cooperation Coucil (GCC) states and the United States, in a joint communiqué of the US-GCC Strategic Cooperation Forum, pointed to "the central role that economic success will play in supporting a secure and stable transition in Egypt, and reaffirmed a shared commitment to support Egypt throughout its transition." Those words were not translated into any sort of effective joint approach. Despite little prospect of an ideal stable political climate emerging from the current wave of unrest, the time has come for some actual "strategic cooperation," not just tactical moves to muddle through or curry favor with one faction or another. Egypt’s failure would be a strategic liability for the United States and the Gulf. The Egyptian secular opposition will need to back away from its populist economic slogans and face the challenges head-on.
Not Our Problem?
Some in the Gulf and in the West defend the view that one need not be preoccupied with the fate of Egypt given its declining role as a regional power. They note the inability of Egypt to play its strategic balancing role against Iran. They lament that Egypt is no longer the cultural capital of the Arab world. They contend that dynamism has moved to the Gulf, which needs Egypt less than Egypt needs it—for hand-outs, investment, and jobs. These arguments are convenient excuses for turning away from a long political and economic revolution in Egypt.
Putting aside the strategic benefits that Israel and its allies derive from the Camp David accords, the best argument for serious engagement is the enormous resonance that the Egyptian experiment in participatory politics holds for Arabs around the region. What happens in Egypt matters to Arab leaders and populations: Egyptian politics have shaped and will profoundly shape and inform the political mood and orientation of Arabs, as far away as the Gulf. For the United States, the significance of the Egyptian experiment is no less important—though more difficult to put in context—when faced with crises in the Levant and the Gulf, and US intention to focus more on Asia. But if the United States gives up on Egypt, its already battered credibility will take a major hit, not only in the Middle East, but in Tehran, Africa, and elsewhere. As a Saudi analyst recently remarked, "even disengagement needs a strategy."
What Not to Do
Egypt will not benefit from the same sort of ad hoc, half-baked approach to stabilizing its economy that both its own authorities and its friends have exhibited since the overthrow of Mubarak. The casino approach of Qatar—place a big bet on Morsi and the Muslim Brotherhood and hope for the best—produced a good deal of resentment in Egypt, but did not buy any lasting economic or political results. Satisfied by the weakening of the Muslim Brotherhood, the UAE and the Saudis may be tempted to follow the Qatari example with another set of Egyptian clients (anybody but the Brothers), but it can expect the same negative outcomes. As Egyptian officials converge on Gulf capitals in search of help, their hosts should be aware that short-term infusions of cash may help Egypt survive, but they will not help Egypt succeed. My Hariri Center colleague Mohsin Khan estimates that it would cost the Gulf about $20 billion this year to keep Egypt afloat, with the likely perverse result that providing that amount would almost certainly delay hard choices and guarantee that they would have to provide $20 billion or more in the next year.
Meanwhile, the United States will need to quickly get past the discussion about the definition of a coup, but not simply revert to its sclerotic, micro-managed assistance programs, which, at the behest of Congress and special interests, operate seemingly for the benefit of US consulting firms and arms purveyors. These programs contain little imagination or interest in coordinating with other donors and international financial institutions to create conditions for sustained economic growth. US policymakers and legislators should not overestimate the utility of political conditionality as a reliable policy instrument. Difficult-to-meet political terms will only convince more Egyptians that the United States is an unreliable partner.
What To Do
If revival of economic growth is the key to Egypt’s emergence as a working democracy, then the Egyptians themselves will have to make most of the hard decisions. The hollow rhetoric of the Tamarod about no longer begging for loans from abroad (ignored virtually the day after Morsi was deposed), will need to be replaced with a serious strategy for attracting capital. That essentially means getting the macroeconomic signals right and improving protections for investors. The only serious alternative to begging is a surge in domestic and foreign investment, preferably focused on infrastructure projects that will have the advantage of providing much-needed jobs and paving the way for other types of investment. Such investment flows will require coming to agreement with the International Monetary Fund (IMF) on an economic reform program, with the attendant pain around cuts in subsidies for fuel and food. The civilian leadership will need to explain and sell those reforms, without resorting to claims of insidious foreign influence.
There is also a clear role for the Egyptian military in improving the investment climate—get out of business. The full picture of the role of the armed forces in the economy remains opaque, with conservative estimates assigning 10 percent of Egypt’s GDP to military-owned firms. While there may always be some role for specialized military production, competing with and crowding out the private sector does not seem to fit into the Egyptian military’s self-proclaimed "patriotic and historic responsibilities to protect security and stability." Infrastructure support from the international community should not be translated into welfare payments for current and former Egyptian generals.
US-Gulf (and perhaps European Union) cooperation to support Egypt in the next phase of its transition should focus on priming the investment pump, and not be overly distracted by short-term fixes that will not fix much. Gulf investors are looking for opportunities in Egypt and have plenty to spend. They already have bought into banks in the last year, recognizing an opportunity to buy cheaply and take advantage of high local interest rates. Saudi Arabia is already a large investor in Egypt and the UAE pledged major new investments shortly after Mubarak’s overthrow, put on hold while the UAE waited for the Muslim Brotherhood government to fail. Egyptian investors also have plenty of idle capital that they would like to put to work. But significant new investment flows into large projects have been stymied by the tangled politics, the uncertain environment, and the lack of protection for both foreign and Egyptian investors.
Savvy bankers in the Gulf advise that aid would be largely unnecessary if the barriers to investment were reduced. That proposition needs to be put to the test, and coordination between the United States, the Gulf States, and Egypt (both in official and business circles) should focus on getting the investment climate right. While there may be some benefits to improving coordination of official assistance flows, they will be on the margins. Bilateral aid is driven by political considerations, historical commitments, and bureaucratic imperatives. It has helped Egypt muddle through, but it cannot be expected to replace sustained investment-driven growth, either as a quality job producer or as a stabilizing influence during what will continue at least for several years to be a difficult political transition. The United States and the Gulf should use their Strategic Cooperation Forum during the coming three months to agree on a joint approach to be made to the emerging new Egyptian government. They need to come to the table in Cairo with a package that creates appropriate incentives for Egyptian reforms. Such a package must not only stabilizing a bleeding economy, but set it on a course that results in Egypt being a model of political and economic development against which others will want to be judged.
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