Revolution in Egypt: both political and economic?
The big questions for Egypt’s political revolution seem to revolve around timing. When does the interim military government go back to the barracks? When should the constitution be amended? Voters have approved a referendum package that imposes presidential term limits and a few other reforms, but major changes are coming. Should they be made now, so that new elections (scheduled for this fall) will be held under the new constitution? Or should the elections come first, so that a new civilian government can tackle constitutional reforms with a popular mandate? Will new parties be ready for elections in a few months?
As daunting as these issues are, the economic questions are more dire for many Egyptians. Mubarak’s tight political control and the accompanying state corruption handicapped the Egyptian economy for decades. Party insiders and government officials found ample opportunity for personal gain in the state-controlled portions of the economy. A bloated public sector payroll and subsidies on food and fuel bought political support. Rising food prices had sparked protests in recent years, and the youth jobless rate was 25%.
Since the revolution, Egyptians haven’t seen the economic improvement they expected. Tourism and foreign investment plummeted during the revolution and have failed to recover: tourism is down by 40%, manufacturing by 12%, and GDP growth has dropped from +5% to -4%. The interim regime has made a few minor economic reforms.
The Economist recently argued that the interim government has lost a precious opportunity to make some of the harder choices. Most egregiously, there have been no reforms on market-distorting subsidies. Fuel subsidies (which constitute 8% of GDP – twice the education budget) are regressive, with rich car-owners benefiting more than the poor. Food subsides fail to reach many of the poorest who need them most. Reforms will be necessary but unpopular. An interim regime filled with technocrats may have room to make changes more easily than an elected government could.
However, Egypt’s military has significant economic interests that may be reducing the motivations for reform. The military owns companies in virtually every sector. These companies sell medical equipment, laptops, home appliances, bottled water, cooking oil, and more. The military might control as much as 20% of the economy, though no one knows for sure. It also controls large tracts of land, and has allowed private developers to build resort hotels along the coasts; in exchange, military officers have become shareholders.
For now, the military’s self-interest may actually be aligned with the national interest. The assets of the military-run industries must be privatized, but slowly. The economic transition should be made over several years to minimize the dangers posed by rapid structural adjustment. There must be accompanying efforts to transition military personnel (many of whom simply work in factories) back to civilian life. Finally, fuel subsidies should be slowly ratcheted down, while food subsidies must be retargeted to serve only those who most need them.
Contrary to what the Economist argued, this transition would be best managed by a popularly-elected government. Yes, these choices will be hard, but the coming civilian government will be able to chart the course over a longer timeframe. If an unaccountable military regime made sudden changes now, every newly-formed party would have reason to campaign against them. If taken over several years, these reforms will open space for the entrepreneurs and foreign investors who can truly create the economic growth that Egypt needs.
Therefore political reforms must come before the economic ones. There are three things you should not infer from this. First, don’t infer that Egyptians are more interested in democracy than livelihoods. Polls show Egyptians want political freedoms, but have greater immediate concerns with finding work and feeding their families. Second, don’t infer this as support for democracy-as-instrumental-to-development (à la Amartya Sen) over economic-development-before-democracy (à la China). Every country is unique (though evidence shows that autocracy is risky, at best).
Finally, don’t infer that the United States should be involved in the democratic transition. When USAID advertised a $65 million grant program for “democratic development” in Egyptian newspapers in March, the interim regime cried foul over this affront to sovereignty. What you may find more surprising is that most Egyptian citizens object as well: a Gallup poll found that 75% of Egyptians oppose U.S. aid to political groups. Among Egyptians who see the U.S. as a political model, the opposition was higher: 88%. American support for the previous regime is fresh in Egyptians’ memories. Egypt has also recently declined support from the World Bank and the IMF, with both government officials and a civil society coalition objecting to the conditions attached.
Perhaps counterintuitively, the best support the international community can give right now is economic. The political reforms must come first, but the country needs economic support to make it through. That means trading, investing and visiting. See the pyramids now — beat the crowds!