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Egypt’s Economic Woes

5:07 PM, Aug 24, 2011 • By DALIBOR ROHAC
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Since the revolution in January, Egypt has been in a constant state of unrest. While the protests have been mostly peaceful, there are exceptions. The other week, dozens in one of Cairo’s slums—known as “Garbage City”—were throwing rocks at passing cars, demanding housing they had allegedly been promised by the government. This episode—as well the regular demonstrations on Tahrir Square—reveals that the revolution continues.

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Civil unrest, as well as uncertainty surrounding new political institutions, is not helping the economy, which is also likely to be hit by the ongoing global economic slump. The estimates released recently by Egypt’s leading bank, EFG-Hermes, predict that the economy will contract by 3.3 percent this year. As a result, the budget deficit, which was projected to be 8.6 percent of GDP by the ministry of finance, is now expected to be in the neighborhood of 10 percent. That is very dangerous territory for a mid-income country, with an already huge debt burden.

This fiscal problem, which will likely result in a major balance of payments crisis in the next year or two, remains the biggest threat to the economy. The interim government has no ambitions—and indeed no mandate—to address the country’s spending problem, and its actions on this front are limited to populist measures aimed at quelling unrest on the streets.

What lies at the core of the country’s public finance problem are wasteful subsidies given to energy and food products. Subsidies account for almost a third of total government expenditure, and its benefits are accrued mostly to the well off and the middle classes, together with the vast array of individuals who are directly connected to the existing production and distribution networks of the subsidized commodities.

Replacing subsidies with a less costly and more effective form of social assistance is not impossible. Egyptians could learn from a number of countries that successfully dealt with similar problems in the recent past—Jordan, India, Indonesia, or Mexico, to name just a few.

What is truly disturbing is the fact that such issues are conspicuously absent from present day Egyptian debates. Egyptians seem to prefer pondering the appropriate punishment for Hosni Mubarak (67 percent would not oppose a death sentence for the former president, according to the latest YouGov poll) to discussing the difficult questions regarding the political economy of the transition. As a result, very few Egyptian politicians seem to have the vision and commitment needed to address the country’s public finance problems. And hardly any have a clear idea of the reforms that are needed to get Egypt’s economy on a growth trajectory.

Amr Moussa’s economic program is limited, and not particularly sound. At the launch of his presidential campaign, he proposed that the government provide an average monthly allowance of LE 1,500 (U.S. $252) to the unemployed. While this is likely to appeal to the masses suffering from limited access to economic opportunity, it is unlikely to do much good besides imposing a huge burden on public budgets.

Former U.N. nuclear watchdog Mohamed ElBaradei—who is very lucid in criticizing Egypt’s political scene for its lack of clarity and its populist slogans—underwhelms when referring to the economy. He says, “all sectors without exception have to be rebuilt from scratch” and that Egypt’s capabilities are “unlimited.” But this, together with stressing the importance of social justice, accountability, and rule of law, is a far cry from articulating a coherent policy platform.

The combination of massive economic challenges and a political elite ignorant of the gravity of the situation could be lethal for the prospects for economic growth in the country, as well as for its political transition. If the new leadership fails to deliver on the economic front, and if the country faces an acute economic crisis next year, Egyptians are bound to look for alternatives to democratic forms of governance. Now is the time to reach out to the Egyptians and fund civil society initiatives and think tanks, and to engage Egyptian political elites and the public writ large in a serious debate concerning the future of Egypt’s economy.

 Dalibor Rohac is the deputy director of Economic Studies at the Legatum Institute.

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