International Network for Economics and Conflict

One year after protestors forced change in Egypt citing economic and political marginalization, leaders at the 2012 World Economic Forum in Davos are echoing the urgent need for a shift to a more responsible economic framework that fosters broad-based growth while creating jobs and reducing the yawning gaps between the rich and the poor.  The protests that started in Tahrir Square in January 2011 were largely spurred and sustained by longstanding economic hardships and very limited economic opportunities for Egypt’s youthful labor force.  These protests eventually led to the outing of the Mubarak regime and appeared to put the country on track for more inclusive, effective and accountable governance.  However, deep economic schisms persist and the vast majority of Egyptians still feel economically disadvantaged.  Continued discontent could undermine fragile political gains and potentially increase the likelihood of violent unrest.

A number of reasons could explain the apparent lack of tangible economic gains for most Egyptians.  A useful starting point is Egypt’s political economy.  In other words, understanding the relationships and institutions that determine economic outcomes in Egypt could shed light on the current challenges.  Under the Mubarak regime, state institutions were more attuned to ensuring regime security than providing opportunity, security and services for all.  This was done in two main ways.  First, the state had a large role in the economy and controlled resources through state predation.  This approach stifled the development of a viable middle class and kept the elites in positions of strength.  Second, the regime used the economy to reward the elite (and elite institutions) who in turn did all in their power to sustain the regime.  Although the revolution replaced the political leadership, very little was done to effectively dismantle the extensive network of institutions, individuals and relationships that resulted in perverse governance and socio-economic outcomes.  This is partly why many of the pro-poor initiatives outlined in the first post-revolution budget (including youth training and the retention of subsidies on food and fuel) failed to be broadly impactful.  Legacy relationships and networks must be unraveled.

The May 2011 budget process could have been an excellent opportunity for Egypt’s post-revolution government to address some of these issues.  The budget included the establishment of a new minimum wage for government workers, tax exemptions for more government workers, and the retention of fuel, housing and food subsidies and significant funding for workforce training.  All laudable initiatives.  Unfortunately, they were not supported by concomitant improvements to delivery mechanisms (especially for the subsidy programs) or similar initiatives that could grow small and medium-scale businesses.  On the revenue side, increases in capital gains taxes and income tax for large corporations were announced.   The efficacy of these reforms is largely contingent upon the performance of the economy, which is yet to recover from a precipitous post-revolution slump.  GDP growth has stalled, foreign reserves have fallen from $36 billion pre-revolution to under $20 billion in January 2012, unemployment remains high and over 40 percent of Egyptians are either below the poverty line or perilously close to it.

In designing the May 2011 budget, Egypt’s new leaders were right in pointing out that business as usual is not an option.  However, appreciating what this means in post-crisis, transitional economies demands careful thought and significant political will.  Determining the role of the state in the economy is an important initial step.  The Egyptian state still accounts for over one-third of economic activity, directly.  It influences domestic prices directly (via subsidy programs) and indirectly (via domestic financing of the growing fiscal deficit).  Bold steps should be taken to reduce the extent to which the private sector is crowded out by a dominant state apparatus.  Economic transition is neither costless nor painless.  The post-revolution government could have used some of its political capital to manage expectations and push through targeted reform measures, restore investor confidence and help stabilize the economy.  By refusing to enter a program with the IMF in mid-2011, the government effectively chose to postpone difficult structural decisions.   Half a year later (with substantial economic pain and countless lost opportunities), they have resumed negotiations.

Calls for a new economic order at Davos this year are particularly relevant for transitional economies like Egypt.  Business as usual does not work.  Inclusion and tangible changes to the political economy are crucial.  Careful attention must be paid to the youth dynamic.   And, the role of the state in economic matters must be redefined.  It is clear that traditional sectors might take some time to recover, but the adoption of policies antithetical to economic freedom will prolong recovery.  In Egypt, and elsewhere, post-crisis or post-conflict economic reconstruction is not just about more foreign assistance or greater investment flows.   What is required is a smarter and more sustainable approach that encompasses most (if not all) of the issues discussed above.