The New New Normal

The Arabian Horse

Can Egypt's economy deliver on the revolutionary promise of a better future for all?


As Egypt’s first democratically elected president, Mohamed Morsy, and his newly appointed prime minister, Hisham Qandil, assume their new roles, there is broad-based recognition within the country of the critical importance of the economic situation. The economy speaks to more than the realization of the objectives of the popular uprising that erupted in Cairo’s streets in January of last year — a revolution that, in just 18 days, overthrew a president who had ruled with an iron fist for almost 30 years. Perhaps just as fundamental as political reform, Egypt’s economic strength will determine whether the revolutionary process succeeds or, instead, falls victim to counterrevolutionary movements.

Egypt’s current economic situation is far from reassuring. Growth is insufficient, factories are operating well below capacity, and investment in new industry and equipment upkeep is way too low. Meanwhile, too many foreigners, be they among the millions who each year visit Egypt’s incredible attractions or those who channel foreign direct investment into the country, are understandably nervous and staying away. In the process, they withdraw oxygen from a struggling economy.

Unsurprisingly, unemployment and underemployment are worrisomely high, constituting a huge economic and social challenge. It is not just the 12.6 percent official unemployment rate that most believe understates the extent of the problem. Among the young, many of whom so bravely led last year’s popular uprising, the jobless figure is above 25 percent. No wonder so many are frustrated at the slow progress being made in improving the livelihood for millions of Egyptians.

Meanwhile, too many of those who are employed find that the combination of years of frustration and low wages, together with new sky-high expectations, is undermining labor relations and triggering periodic strikes. The result is an economy that is producing well below potential and has an even greater shortfall relative to people’s aspirations and expectations.

Unfortunately, Egypt does not have a meaningful pool of savings to help transition through these challenging times. Too many citizens already live near or below the poverty line. Social safety nets are stretched thin. The fiscal deficit is running above 10 percent of GDP, contributing to higher borrowing costs and a weakening of the once strong debt dynamics. And over two-thirds of the country’s stock of foreign reserves has been used up in the last 18 months, reducing the stock to about $15 billion.

The longer this persists, the greater the risks to the revolution. And the implications will be felt well beyond Egypt. The country’s well-being has a direct bearing on the stability of the Middle East. Additionally, with a population over 80 million, it is not surprising that some European officials worry in private about the possibility of waves of Egyptian migrants.

Those of us who know Egypt well and follow it closely are, of course, concerned. We sense the mounting frustration of many Egyptians. We fear the high human costs. We worry about the pessimism that is starting to spread. And we recognize that the longer all this persists, the harder it is for Egypt to complete the critical pivot that follows the overthrow of a government. For it is not the topping of a regime that determines the overall success of a revolution — it’s dismantling the past in favor of a better future.

Fortunately, these concerns are not yet overwhelming, nor need they be. What Egypt faces today is similar to what other countries have gone through in prior revolutionary processes. Recall all the questions that were raised about South Africa and its ability to transition peacefully away from an entrenched apartheid regime — and about Central and Eastern Europe, where countries like Hungary and Poland faced massive revolutionary challenges. Then there are other countries, particularly among the former Soviet republics and in Africa, that have failed in, or are still struggling with, their revolutionary transformations.

Both on a stand-alone basis and relative to other countries, Egypt has many attributes that should make economic observers hopeful. These indigenous benefits suggest that, with a coherent set of policies that mobilize broad-based domestic buy-in, the economy can go from potentially undermining the revolution to not only thriving, but delivering on the revolution’s important objectives of social justice and a better Egypt for the vast majority of the population.

There are least five reasons that warrant constructive analysis and cautious optimism.

First and foremost, there is widespread recognition of the importance of the economy among Egypt’s political parties, its vibrant youth movements, its vocal media, and the Supreme Council of the Armed Forces (SCAF). They all know that, though the economy is not everything, it is key to meeting the legitimate aspirations of over 80 million citizens. Of course, this understanding does not guarantee action, but broad-based recognition is an important prerequisite that Egypt has often lacked.

Second, Egypt has the physical and human attributes to sustain high economic growth, fuel a dynamic labor market, and undertake a developmental breakout phase. Remember, this is an economy that achieved bouts of strong growth in the 1990s and 2000s, even though it was repressed and subject to resource misallocations due to corruption and the granting of monopoly powers to friends of the previous regime.

Third, the country offers investors a large domestic market, especially for consumer basics, and a pivotal foothold in a region that, especially when underpinned by stable democratic politics, will constitute an important driver of earning for multinational companies. As such, Egypt has the potential to attract sustained surges of foreign direct investment. This will bring more than capital: Technology transfers, new management approaches, and huge potential for co-investments with domestic firms will follow.

Fourth, the large Egyptian diaspora is extremely willing and able to support the country in its quest to achieve economic, financial, political, and social stability. For my part, I continuously come across successful Egyptians abroad who are looking to channel money back to Egypt. Some are even talking about returning to the new democracy, something that they admit would have been unthinkable for them just two years ago.

Finally and most importantly, average Egyptians feel that they finally "own" their country and that, now, they have a say in determining their future within it. With that, and after years of marginalization, comes a sense of responsibility that is already apparent in the surge in community service and other civic engagement. More generally, individual and collective incentive structures are changing to the better. This is no longer seen as an economy that is destined to serve only the ruling elites and their close circles. With that comes the possibility of a greater willingness to engage and, yes, perhaps even start to trust more in the rule of law.

Call me an optimist, but I believe it is not a question of whether these factors will ultimately prevail; they will. The critical challenge today is to shorten the transition period and the related human and financial costs. Here is where a more coherent policy framework can — and must — play a critical role in accelerating the benefits and maximizing the costs.

In the next few months, and as the SCAF fulfills its promise of returning to its role as the guardian of Egypt’s borders against outside aggression, the country’s newly elected leaders will need to deliver quick on four key issues: 1) design, communicate, and start implementing a coherent medium-term economic vision with transparent and understandable objectives and road markers; 2) combine this with an immediate stabilization effort to minimize the risk of Egypt slipping into a financial crisis; 3) engage foreign creditors on terms consistent with the country’s developmental needs; and 4) reorient a costly subsidy program that sends too much money to the rich and does not do enough to help the most vulnerable segments of the population.

From how to use foreign loans and revamp hopelessly inefficient social safety nets to how to better tap into areas of dynamic growth in the global economy and translate this into job creation, all this will require Egyptian officials making difficult decisions and transparently conveying their rationale to the population.

Some existing monopolies will need to be dismantled quickly, as will a whole host of regulations that were meant to protect the elites rather than encourage inclusive growth. Budgetary reforms, involving both the tax system and government spending, can ensure that Egypt’s scarce government resources are used more effectively and fairly. There are gaps in the financial system that can and should be filled to ensure better mobilization of domestic private savings and their improved allocation to productive investments.

By necessity, this is a complex and difficult endeavor. But it is also a feasible and desirable one. The gains for Egypt and the region would be substantive.

I have no doubt this is possible. The Egyptian economy resembles an Arabian horse. It struggles to gallop and can be outright skittish when the surface is uneven and the destination is uncertain. But with firm footing and a clear destination, it can run with speed, endurance, and elegance.

Mohamed A. El-Erian is chief economic advisor at Allianz and the designated president of the University of Cambridge’s Queens’ College. Twitter: @elerianm

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