After the fall

First came Egypt's revolution—now for the cuts
April 24, 2013

The economic policies pursued in Egypt by the government of Hosni Mubarak helped to bring about the revolution, in January 2011, that led to his downfall. So what sort of economic development should the present Egyptian government pursue? How can Egypt’s troubled society be healed and enduring growth achieved?

Mubarak’s government set in place market-orientated reforms on privatisation and deregulation, with the intention of bringing growth up towards the 7 per cent range. There were some economic gains from these alterations, but the trickle-down effect did not happen—the benefits were felt only at the top end of society. Despite the stimulus to the economy, relatively few jobs resulted, a dispiriting outcome in a nation where, despite the years of strong growth, unemployment rarely dipped below 9 per cent and youth unemployment hovered at around 25 per cent. Finding work was extremely hard, even for college graduates.

In the past two decades, Egypt’s industrial base became globally competitive, such that average incomes were raised to what the World Bank calls “lower-middle income” levels. But the revolution was nevertheless fuelled by a widespread sense of economic injustice. In an ironic twist, the Mubarak’s economic reforms, which were designed to accelerate growth, effectively tore the social fabric of the middle class. Egyptian college graduates can no longer be sure of getting into the civil service and it remains extremely hard to start a business—deteriorating conditions since the revolution have caused the situation to worsen.

The challenge that lies ahead for Egypt is to reduce economic uncertainty. The revolutionary environment, in which citizens expect the government to address their hardships, is a bad time to start cutting spending and raising government revenues. But surging deficits will undermine the prospects of a recovery in the near term, meaning there is a need for broad reform of public finances to eliminate wasteful subsidies.

Egypt remains mired in procedural red tape that chokes business and acts as a drag on growth. It takes 218 days to get a construction permit. Registering a property takes 72 days. Such impediments are ruinous.

The country also has a tax revenue problem—this side of the ledger contracted sharply during the slowdown in economic activity that followed the revolution. But as the economy recovers, the tax base must be broadened, and corruption and tax evasion must be fought. Since the revolution, Egypt’s central bank has been using its holdings of foreign currency to buy Egyptian pounds; this has gone some way to offsetting the effects of declining foreign investment and reduced tourism. This monetary juggling act must continue, but with caution. Egypt’s stock of foreign currency reserves has been depleted to the extent that it is now barely adequate to cover three months of imports. For this reason, lines of credit must be sought from international lenders in order to stabilise the exchange rate and to hold down inflation. This policy must be retained until Egypt wins back the confidence of domestic and foreign investors. If Egypt is to fight its way out of its present economic and social problems, then it must set in place market reforms to stimulate its economy. The government should seek to restore a sense of political legitimacy without sacrificing the economic momentum that has, in many ways, changed Egypt for the better.

Perhaps the most important key to success is to convince ordinary Egyptians who have never experienced democracy before that they not only have a real voice, but also a real chance at benefiting from democratic change.