Warsaw on the Nile

How do you get the new Arab democracies' economies in order? Look to Eastern Europe.

Traub-James-foreign-policy-columnist17
Traub-James-foreign-policy-columnist17
James Traub
By , a columnist at Foreign Policy and nonresident fellow at New York University’s Center on International Cooperation.
Peter Macdiarmid/Getty Images
Peter Macdiarmid/Getty Images
Peter Macdiarmid/Getty Images

A marshal plan is being readied for the new Arab democracies. It's not, of course, a Marshall Plan; the era when the United States had the capacity or the willingness to pump billions of dollars into the economies of vulnerable allies is long behind us. Instead, U.S. officials have marshaled the resources of multilateral bodies that did not even exist in 1947, when President Harry Truman came to Europe's rescue. It's the latest example of "leading from behind."

It was U.S. officials, and above all David Lipton, senior director for international economic affairs at the National Security Council, who coordinated the package of assistance announced last week at the G-8 meeting in Deauville, France. The International Monetary Fund will make available up to $35 billion in new loans to the oil-importing -- i.e., poor -- countries of the Middle East; the World Bank will offer $6 billion in budget support and project aid to Egypt and Tunisia, with some additional funding from the African Development Bank; the European Bank for Reconstruction and Development hopes to begin investing up to $3.5 billion a year in the region; Qatar has promised $10 billion in aid to Egypt, and Saudi Arabia has promised $4 billion. And the United States? In his May 19 speech on the Middle East, President Barack Obama pledged to give Egypt just $2 billion in debt relief and loan guarantees, but Congress is unlikely to authorize any new funds at all.

A marshal plan is being readied for the new Arab democracies. It’s not, of course, a Marshall Plan; the era when the United States had the capacity or the willingness to pump billions of dollars into the economies of vulnerable allies is long behind us. Instead, U.S. officials have marshaled the resources of multilateral bodies that did not even exist in 1947, when President Harry Truman came to Europe’s rescue. It’s the latest example of "leading from behind."

It was U.S. officials, and above all David Lipton, senior director for international economic affairs at the National Security Council, who coordinated the package of assistance announced last week at the G-8 meeting in Deauville, France. The International Monetary Fund will make available up to $35 billion in new loans to the oil-importing — i.e., poor — countries of the Middle East; the World Bank will offer $6 billion in budget support and project aid to Egypt and Tunisia, with some additional funding from the African Development Bank; the European Bank for Reconstruction and Development hopes to begin investing up to $3.5 billion a year in the region; Qatar has promised $10 billion in aid to Egypt, and Saudi Arabia has promised $4 billion. And the United States? In his May 19 speech on the Middle East, President Barack Obama pledged to give Egypt just $2 billion in debt relief and loan guarantees, but Congress is unlikely to authorize any new funds at all.

In the short term, the goal of the package, known as the Deauville Partnership — an aptly non-America-centric name — is, as the G-8 countries declared, "to ensure that instability does not undermine the process of political reform, and that social cohesion and macroeconomic stability are both sustained." Popular outrage over the failure of economic growth to touch the lives of ordinary people helped provoke the protests across the region. And those protests only made things worse by scaring away tourists and foreign investors: In Egypt and Tunisia, the two countries that have overthrown their dictators and begun the transition to democracy, economic growth is expected to be 2.5 to 4 points lower this year than last year, while increasing costs for food and fuel have forced both countries to increase spending, raising deficits to dangerous levels.

Thus the need for swift intervention. Egyptian officials have calculated their balance of payments deficit at $9 billion to $12 billion. Masood Ahmed, director of the IMF’s Middle East and Central Asia department, says that he has already dispatched a team to Egypt to calculate the exact magnitude of the gap, as well as how much of that need can be met by Egypt’s wealthy neighbors (at least half, Ahmed guesses).

This is all to the good. So far the citizens of Egypt and Tunisia have suffered for their beliefs; they may change their mind about democracy if they don’t see any benefits to it beyond the spiritual. But the deeper question is not whether outside help can stave off a reversal, but whether it can encourage reform. This is the professed goal of the Deauville Partnership, and it is what Obama had in mind when he said, "Just as EU membership served as an incentive for reform in Europe, so should the vision of a modern and prosperous economy create a powerful force for reform in the Middle East and North Africa." The aid package, that is, is intended not only to fortify Egypt and Tunisia but to bolster the forces of reform in places like Morocco, Jordan, and Algeria, where promises of change remain unfulfilled.

The analogy Obama made was not to the postwar act of reconstruction but to the help given 40 years later to post-communist Eastern Europe and Russia — a far more relevant, if more rarely invoked, precedent than the Marshall Plan. Arab countries, like those freed from the Iron Curtain, have been paralyzed by decades of authoritarianism rather than wrecked by war. Lipton cut his teeth working on the "shock therapy" in Russia and economic reform in Poland in the early 1990s, and he is careful not to overdraw the connection; but he points out that "Both regions need to change their economic structures to become more competitive." Egypt and Tunisia, like Poland and Russia, need to deregulate state-run economies and open up protected markets. Both have powerful stakeholder classes who will resist reform: "It was the nomenklatura in Eastern Europe," Lipton says, "and in Egypt it’s people connected to the political leadership and the military." And so the question is: Will what worked in Eastern Europe work in the Middle East?

Lipton observes that even Poland took almost 15 years to join the European Union, but the prospect of membership meant that any political party that proposed to deviate from the path to European integration lost in the polls. He concedes that "in the case of North Africa, we will find nothing that is as compelling as EU membership," but says that policymakers hope to build a "staircase" toward reform starting with the quick infusion of IMF money, then moving on to increased trade and investment, and help with legal changes to unshackle the private sector and improve revenue collection. The plan requires U.S. compliance as well: Obama’s proposed Trade and Investment Partnership won’t amount to much unless legislators prove more willing than they have so far to reduce tariffs on apparel and the other manufactured goods that would come from the region.

The funding will be conditioned on reforms developed in each country. The IMF will work with Egypt and Tunisia over the next year or so to put together a comprehensive plan to spur growth, create jobs, and establish a safety net other than the one endemic in the region: dead-end jobs in the bloated public sector. The World Bank has begun working out such conditions in both target countries. In Tunisia, says a bank official, the interim government has embraced the plan: "They’ve tried to identify changes that would be difficult to reverse and that would give clear signals that policymaking will be different," she says. These include freedom-of-information rules and public access to government data. Egypt, she concedes, has been "harder."

Indeed, Egypt’s interim military government may put up serious resistance to the Deauville Partnership. The Supreme Council of the Armed Forces, as the ruling clique calls itself, has proved increasingly hostile to the citizens movement that ousted President Hosni Mubarak from office in February. Even if the military agrees to surrender political power to a new civilian government, which seems less and less certain, it may do so only on the condition that it retain its vast — and disabling — web of economic privileges. "We must not allow the Egyptian military to control the economy or to retain power through privatization," says Anders Åslund, a former Swedish diplomat who worked with Lipton in the early 1990s. The "a priori answer" to whether the military will agree to surrender its economic role, Åslund says, is "no."

The premise of the plan is that the combination of political change and economic opening will produce a dynamic that ultimately forces Egypt’s own nomenklatura to abandon its privileged position. Aslund notes that policymakers in the early 1990s rightly focused on one new democracy — Poland — with the hope that others would follow later. Egypt is the Poland of the Arab Spring; but Egypt is much poorer, much more conservative, and much more mired in the past than Poland was in 1989. The country’s vast hinterland largely sat out the revolution and is available for mobilization by a range of anti-democratic forces. Democratic consolidation is going to be a lot harder in the Middle East than it was in post-communist Europe. And in any case, success in one place may not have the hydraulic effect it had two decades ago. All the international financing in the world won’t make a difference until autocrats fall in Libya, Syria, Yemen, and elsewhere.

Nevertheless, it is a sign of progress that institutions now exist with the resources, experience, and expertise to rally behind nascent and would-be democracies, and to help counteract the internal and external pressures that endanger them. It’s mortifying that the United States can offer so little to this international effort, but it’s heartening to see the care with which the Obama administration has marshaled this plan.

James Traub is a columnist at Foreign Policy, nonresident fellow at New York University’s Center on International Cooperation, and author of the book What Was Liberalism? The Past, Present and Promise of A Noble Idea. Twitter: @jamestraub1

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