Egypt’s economy: A clean break with the past
Ashraf Swelam, Tuesday 8 Mar 2011
Many in this country are willing to pay the price of freedom, but they should no longer pay the price of mismanagement and lack of ingenuity

In demanding and insisting on the fall of the regime for more than a month now, Egyptian revolutionaries and demonstrators in Tahrir Square and across Egypt are calling for a clean break with the past. The economy deserves nothing less.

The battle lines (excuse the expression) between those who want to bring an end to the demonstrations and those who want to see them continue or actively take part in them have been drawn, in part, over economics. The former argues that the demonstrations are bringing economic life to a standstill, an allegation emphatically denied by the latter.

Here is what we know: In the face of what can be described a perfect economic storm, Egypt is heading into a macroeconomic crisis of profound proportions, the longevity and severity of which will be determined by the decisions that are made today. Heightened insecurity, not demonstrations in Tahrir, has brought much of Egypt’s economic activity to a halt.

The mere nature of the transitional cabinet, the lack of cohesion in the choice of its members, and the absence of a strong statement from the ruling authorities in support of meaningful economic reform, all add uncertainty to what is already a very risky situation.

Although corruption charges against businessmen with strong ties to the ousted regime have provided an angry citizenry with a sense of justice and accountability, these cases are inevitably highly politicized, and have – according to some legal experts – not been following due process. A product of a system where it was difficult to get anything done without regime connections, the entire Egyptian private sector is now on guard, concerned that they could be next.

Strikes for both legitimate and illegitimate demands intensify and widen day after day, and the transitional government’s less than cohesive reaction has sowed the seeds of their continuation, at least in the short term.

To make matters worse, the Egyptian economy is also being hit with a myriad of unsettling and simultaneous external shocks. The political turmoil in Libya, and other Arab countries, has led thousands (if not hundreds of thousands) of Egyptians working in those countries to flee back to join the long ranks of the unemployed in their home country.

The political turmoil in Libya and the potential unrest in other major oil producing countries in the region (most notably Algeria, or, even worse, Saudi Arabia) have pushed global fuel prices up. Global food prices have also been rising, even prior to the Egyptian revolution.

Consequently, the Egyptian economy, both a net importer of fuel and a major importer of food, will very soon be faced with the stark choice between transferring those increases to the consumers, a virtual impossibility in the current political environment, or the more likely scenario of shouldering the bill through an expansion of government subsidies. Therefore, an already alarming budget deficit is about to get a lot worse.

Likewise, this transitional government, forced by the fluid and potentially explosive political environment, will find it necessary to take other measures, such as increasing salaries and making permanent many labour contracts, as it tries to ease the tension. What is certain by contrast is that those measures will exacerbate the very structural imbalances and chronic problems that the Egyptian economy has suffered from for decades, which brings me to my more important point.

While Egypt’s liberalization and reform efforts of the last few years have occasionally provided the economy with a much needed shot in the arm, they have fallen terribly short of laying the foundations of a modern economy: instilling a spirit of entrepreneurship and competition, significantly downsizing a bloated and inefficient bureaucracy, erecting strong regulatory bodies that guard against the excesses and deficiencies of free markets, and enforcing the rule of law (not to mention addressing Egypt’s chronic unemployment problem).

As a result, the gradual withdrawal of the state from economic activity – that started in the mid-1990s – has taken the economy only as far as allowing for the state’s partial replacement by the private sector, and, in the absence of a meaningful political and economic reform, laid the ground for wide-spread corruption, nepotism and social injustice.

After forty years of the “open door” policy (infitah) – Egypt’s economy remains heavily reliant on rents or unearned wealth. As Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, recently put it: “Egypt is unique in the multiplicity of ways that its government and economy have earned rents over several decades. It generates rents from below the ground (oil and gas), from allies (foreign assistance), from geography and location (Suez Canal), from history (tourism), and from its disaffected emigrants (remittances)… Together these various sources account for about two-thirds of Egypt’s foreign exchange earnings and a third of government revenues.”

Reliance on rents can be disastrous in at least two ways. First, it creates very little incentive for the creation and development of competent and accountable political and economic institutions. Second, it stymies the rise of a job-creating model of economic development based on the dynamism and vibrancy of a truly entrepreneurial private sector.

Rather than bitterly arguing over whether workers should demonstrate now or not, and whether to immediately impose a minimum wage (I am yet to hear anyone that links that to productivity) or a maximum wage (which I will just comment on by saying that there is no major economy I know of that applies a ceiling on earnings), I will insist that those who decide to present themselves as presidential candidates in the upcoming elections must lay down a comprehensive vision for this country, including an economic platform that has liberalism, entrepreneurship and innovation at its centre, spells out a plan for ending our reliance on rents and moving this country from uncovering wealth to creating it, and that set a timetable for eliminating poverty, illiteracy, unemployment and subsidies.

It is the implementation of such a platform, not only fair and free elections, that will determine whether Egypt can break free from its political and economic past, and whether it will be able to finally rise to the great nation it was and can be.

The writer is the director general of Egypt's International Economic Forum