Revolution Leaves Egypt’s Economy in Shambles

Change may have come to Egypt, but its short-term economic prospects have worsened in the process.

Change may have come to Egypt but its short-term economic prospects have worsened in the process. Foreign direct investment has virtually come to a standstill while the tourism industry, which employs up to two million people, remains idle. Egypt’s growth has stalled and no major reforms can be expected until elections take place this summer.

Whereas high food prices and a lack of economic freedoms fueled the protests that removed longtime President Hosni Mubarak from power this year, his ouster has only made matters worse for the millions of poor and lower middle class who depend on subsidies and food stamps for their everyday needs. At the same time, workers, embolden by the revolutionary spirit, are staging strikes and demanding higher salaries which the state cannot afford.

Some reforms were enacted during the final years of Mubarak’s tenure when trade and finance were liberalized. Egypt’s 4.7 percent growth rate last year was overshadowed by high unemployment and 16 percent inflation however. Excessive licensing requirements and bribery make it difficult to set up a business and the military is heavily involved in many industries — a role that it is not likely to surrender even under a democratic administration.

The very notion of “economic reform” is now associated with the crony capitalism of the Mubarak era which makes it nigh impossible for Egypt’s future leaders to suggest more of the same. But unless Egypt’s economy stabilizes soon, it may need international support which naturally will come with strings attached — including a reduction in subsidies and privatizations.

President Barack Obama recognized that economic growth was imperative to consolidate the political change achieved by protesters in the streets in his speech last week. He promised to relieve Egypt of up to $1 billion in debt and lend or guarantee another $1 billion in borrowing needed to finance infrastructure and support job creation. In the long run, however, even Obama said that it would have to implement reforms to enhance entrepreneurship and trade. “The corruption of elites who steal from their people; the red tape that stops an idea from becoming a business; the patronage that distributes wealth based on tribe or sect” has to end, he suggested.

The goal must be a model in which protectionism gives way to openness; the reigns of commerce pass from the few to the many and the economy generates jobs for the young.

Neither Egypt’s Muslim Brotherhood nor the remnants of Mubarak’s National Democratic Party, which are both expected to do well in June’s parliamentary elections, are notable champions of free trade and openness. Amr Moussa, the frontrunner for the presidency, has no party behind him and would have to rely on a coalition of Islamists and moderates to execute an economic policy. That could well mean more pork-barrel spending and government jobs to satisfy the masses at the expense of competitiveness.