Terms of Engagement

The Technocrats and Tahrir

Egypt's new rulers have $12 billion to spend. Can they make enough economic progress to stave off disaster?


As part of my ongoing effort to find something positive to say at a moment when everything in the Middle East is objectively dreadful, I would like to introduce some of the members of the new Egyptian government: Prime Minister Hazem el-Beblawi, former director of Egypt’s Export Development bank; Minister of Finance Ahmed Galal, former World Bank official and think tank scholar; deputy prime minister Ziad Bahaa el-Din, former head of Egypt’s investment authority. The modern Arab world has probably never seen a governing apparatus as well-educated and professionally competent as this.

So what? No government erected on the ruins of Mohamed Morsy’s Islamist regime will be deemed legitimate by the millions of Egyptians who believe that Morsy was toppled by a coup. Absent such legitimacy, no government can make its policies stick, however wise. Neither the military leaders who overthrew Morsy nor the secular forces who have now taken the reins show any recognition that a democratic state must include the millions of people who shared Morsy’s Islamist vision. So who cares how many degrees and doctorates the new technocrats have?

I did say I was trying to be optimistic; hear me out. First of all, the new government has something that its predecessor did not have: $12 billion from Saudi Arabia, the UAE and Kuwait, who delivered a mountain of cash (and promises of oil) as a reward to Egypt for getting rid of the Muslim Brotherhood. This lavish gift will sow yet more bitterness among the Brothers, but it also averts a crisis that has been looming ever since Egypt’s foreign currency reserves began dwindling towards zero. Egypt will not default on its foreign debt and will not suffer a run on its currency — either of which would wreak havoc on the economy and make foreign investors head for the hills.

The cash infusion also ends, for the moment, Egypt’s exhausting stand-off with the International Monetary Fund. The Morsy government, desperate for cash, had tried, and failed, to carry out the painful fiscal reforms the fund had demanded in exchange for a $4.8 billion loan. This ongoing melodrama had the effect of shrinking a very complicated discussion about economic reform into the very narrow confines of the IMF’s terms. Ahmed Galal, the new finance minister, has said that while an IMF loan is "part of the solution" for Egypt — it would be a powerful signal for foreign investors — it can be laid aside for now. This seems, on balance, like a good thing.

Whatever ordinary Egyptians think of the new rulers, investors are paying close attention. Angus Blair, the head of Signet LLC, a Cairo-based research and investment firm, says that the mere appointment of the new team has begun to change the prevailing mood among both foreign and domestic investors. Blair points out that Egypt is a "cash-rich society" primed with $18 billion a year in remittances from abroad, and with little private debt. He argues that if the government demonstrates a willingness to take tough measures, Egypt can quickly return to the 6 percent growth it enjoyed from 2006-2009. Blair expects that, by the end of this month, the government will propose new policies — including, he hopes, paring the bureaucracy, moving against corruption, and reducing the budget deficit.

The problem is that any economic measures which inflict substantial pain require a high degree of social consensus, at least in non-autocratic states. The Islamist government quickly frittered away its store of post-revolutionary goodwill, so that when Morsy tried to comply with IMF demands by imposing a sales tax on consumer goods, furious demonstrations forced him to retreat just eight hours after the policy was announced. Egypt is now running an utterly unsustainable budget deficit equal to about 15 percent of gross domestic product. The el-Beblawi government will have to increase revenues and cut costs. That means raising taxes on the rich — Egypt’s rates top out at 25 percent — and actually collecting tax revenue, which will be difficult enough. But the much harder part will be reducing subsidies on food and fuel, which now consume $20 billion a year, or one quarter of its budget. And the new interim government almost by definition cannot claim the popular mandate it would need to make those decisions stick.

Hosni Mubarak, for all his dictatorial powers, never had the courage to implement longstanding plans to reduce subsidies. Morsy tried, and balked. There is a plan on the table to provide direct cash payments to the poor to offset the loss of the fuel subsidy (no one is even talking about phasing out food-price supports), and to distribute smart-cards so that recipients can make direct purchases at stores and gas stations, cutting out the middle-men who take their own cut and often steal or divert oil and gas. It’s the cutting-edge solution currently under consideration in Jordan, India, and elsewhere. And Egypt now has the money to fund such a program. But it still won’t work absent "a major PR campaign," as Mohsin Khan, a former IMF director for Egypt, puts it. And that, he suspects, will be beyond the reach of the interim government, which is operating without a parliament, and so would have to issue rules by decree.

Of course technocratic solutions can’t heal the vast breach which has opened up in the heart of Egyptian society. But it’s also true that you can’t satisfy elemental demands for social and economic justice without sound policy. And formulating policy is one thing the A-Team can do. Ashraf al-Araby, the planning minister — and a rare holdover from the Morsy government — has spoken of laying out an economic "roadmap" and making a start on the "structural reform" Egypt needs. Those reforms include changing budgetary priorities to focus on investments that enhance growth, such as infrastructure projects; pruning the vast tangle of regulations which inhibit private investment; targeting monopolistic control of sectors like telecom; and selling some grossly uncompetitive public-sector enterprises. None of the experts I spoke to even mentioned the imperative of reducing the military’s giant role in the economy, presumably because they are practical people who do not tilt at windmills.

Even such sweeping changes won’t touch the heart of Egypt’s problem, which is the persistent failure to invest in its own people. This is no secret: The 2002 Arab Human Development Report identified low literacy rates, mediocre secondary schools and universities, a lack of intellectual creativity and openness, and above all the second-class status of women as the besetting problems of the Middle East. (Since then, Egypt and other states have made real progress on literacy rates, but little on the status of women or the quality of higher education.) With no oil wealth to fall back on, Egypt will remain locked in poverty until it can start producing citizens adapted to life in the 21st century. The current deadlock over identity and political representation only further postpones that day of reckoning. It’s yet another reason to wish for a leader that’s less chauvinistic, provincial, and intolerant that the ones Egypt now seems to have.

The experts I spoke to were hardly blinded by the dazzling resumes of the new government. "Politics will trump any attempt at reform at least for a while," hazarded Alia Moubayed, senior economist for MENA at Barclay’s Bank in London. "But the people who have been called to lead on economic policy management have enough credibility to devise proposals, though not implement solutions, in order to pave the way for the next elected government to drive reforms much faster and in a more coordinated fashion."

That assumes, of course, that there will be another elected government, and that it will be seen as broadly representative. If not, economic stagnation will be the least of Egypt’s problems.

James Traub is a contributing editor at Foreign Policy, a fellow at the Center on International Cooperation, and author of the book "John Quincy Adams: Militant Spirit." @jamestraub1
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