Egypt Needs Bold Economic Leadership

By Paul Salem | Vice President for Policy and Research - The Middle East Institute | Mar 14, 2014
Egypt Needs Bold Economic Leadership

Coverage of Egypt over the past three years has focused on the dramatic political events, yet it was the dire economic situation that created the pressure for the multiple uprisings. And if economic decline is not reversed over the next few years, Egypt might fall over an economic precipice that risks rendering the country eventually ungovernable. Security and political reform are urgently necessary in their own right, and will have a positive effect on the economy if achieved, but bold structural economic reform is also necessary to reverse Egypt’s downward spiral.

The Morsi presidency avoided necessary economic decisions at its peril. The enormous and wide public groundswell of opposition to the Muslim Brotherhood’s year in power was fueled largely by hostility to its exclusive and authoritarian exercise of power and alarm at the Islamist drift of Egypt under its rule, but was also driven by the lack of tangible economic progress and a perception that the Morsi presidency prioritized politics and religion and did not have an effective plan or the will to lead Egypt out of its economic morass.

Since 2011, the country’s socioeconomic situation has gone from bad to worse. Poverty (those living on less than two dollars a day), which hovered around 40 percent before the revolution, is approaching the 50 percent mark. Unemployment has increased by 57.3 percent since 2010, reaching 13.4 percent in the fourth quarter of 2013. Youth make up 69 percent of the unemployed. Moreover, these figures exclude both those who have given up on finding work altogether, particularly women, and the millions struggling to eke out a living in the undocumented informal sector.

GDP growth has declined from 7 percent in 2008 to around 2 percent in 2013, well below the population growth rate, which has remained at 2.5 percent. Thus per capita income has been dropping steadily. Budget deficits have ballooned to an official 13 percent of GDP, and public debt has approached a crippling 110 percent of GDP.

These stark urgencies were underlined in an expert panel on the Egyptian economy organized by The Middle East Institute on February 26. The panel featured Dr. Ahmed Ghoneim of Cairo University, Dr. Shantayanan Devarajan of the World Bank, Dr. Zubair Iqbal, formerly of the IMF, and Steve Lutes, director of MENA at the U.S. Chamber of Commerce.

A return to security and stability, which is not achievable without turning away from repression and finding a path back toward political inclusion, will have a positive impact on the economy. It will help revive the tourism sector and reassure investors. However, political and security steps on their own will not resolve the structural problems that hobble the Egyptian economy.

Egypt’s economic problems are principally due to the decades-old rentier and crony capitalist system that creates a managed marketplace that favors economic institutions—civilian and military—that are close to power. Such a system impedes full investment and growth; maintains an enormous public sector that eats up 40 percent of GDP and is plagued by low productivity, waste, clientelism, and corruption; and an indiscriminate energy subsidy framework that helps the poor but in its majority is spent on those in the middle and upper classes who don’t urgently need it—particularly the industries of those close to power who can increase profits by using government subsidized energy. There are numerous examples around the world of countries that reformed their energy subsidies to target those who need them—and only those who need them—thus easing the pressure on public finances and restoring fiscal balance. Energy subsidies account for over 80 percent of Egypt’s current subsidy bill; only 20 percent is spent on food subsidies, and those should not be touched.

So far, post-revolution governments—including the Morsi-era government led by Hisham Qandil—have opted for short-term palliatives, such as increasing government employment and spending and papering over gaping deficits with financial assistance from various Gulf countries.

The recent and welcome large-scale funding from a number of Gulf countries has been essential for preventing the country’s public finances and economy from collapse. Part of the assistance has wisely gone to much needed investment projects that create jobs, and part has gone to shoring up the budget to prevent default. But the backing has also allowed the government to maintain—and in some instances even increase—levels of spending. This reinforces patterns that are dangerously unsustainable and allows those in power to postpone making the hard economic policy decisions that the country desperately needs.

Whoever becomes Egypt’s next president—and it looks almost certain that it will be Field Marshal Abdul-Fattah el-Sisi—might represent Egypt’s last chance to turn the economic ship away from the sinkhole it is approaching.

What is partly confounding is that the crony capitalist system that was built under Sadat and Mubarak, which created an economy of great inequality and massive poverty, has marketed the argument that any change to the system will harm the poor. But it is the poor who are in most desperate need of real reform that dismantles the system of privileges, effectively fights government waste and corruption, retargets subsidies to those who need them, and creates the conditions for rapid and job-rich economic growth.

As bold economic reformers in various parts of the world have shown, creating dynamic market conditions, reforming the public sector, and redesigning subsidies and welfare programs to make them more targeted unleashes powerful economic growth—growth that has lifted hundreds of millions out of poverty.

The next president of Egypt has stark choices to make. The necessities of restoring security, lifting widespread repression, and returning to inclusive politics are all of profound importance, but it might be Egypt’s economy that needs the boldest leadership. The next leader could return to the economic model that prevailed before the revolution, or he could look to success stories in other parts of the world to recognize that profound economic change is both possible and necessary.

And if, as is likely, Sisi will be Egypt’s next president, he might do well to capitalize on his current popularity to put forward a bold economic vision and enact reforms that will upset some of the privileged interests. Such reforms might come at a short-term cost to the middle class, but they will serve the long-term interests of the majority for rapid and sustainable economic growth, increased per capita income, and jobs for the unemployed.

Sisi has already acknowledged the centrality of economic challenges in many of his speeches, and that is important. And he is likely to trumpet major investment projects—such as the recent $40 billion housing project announced with a prominent UAE construction company—in the lead-up to his presidency. But investment and foreign aid alone will not turn the economic ship around. He will have to tackle the deeper structural challenges that shackle Egypt’s economy. For that, he has to surround himself with able economic advisors, enunciate a clear socioeconomic vision to the electorate, and show that he is willing to take on vested economic interests.