Egypt’s Economy: Bringing the State Back In

Secretary of the Treasury Jack Lew visited Cairo on Monday and no one seemed to notice or care. That’s probably because of the awful terrorist attack that took the lives of at least 33 Egyptian conscripts in the Sinai Peninsula over the weekend. Lew’s visit was not going to deal with any number of the hot topics on the U.S.

-Egypt agenda—human rights, military and economic assistance, press freedoms, and the ongoing fight against extremism, anyway. “

Economic statecraft,” it seems, is just not that sexy. Exciting or not, it is important, especially since the Obama administration seems to have come to the conclusion that the United States can be most constructive on Egypt through policies that focus on the economy.

There is an assumption among many in the Beltway policy community that at least on economic issues and their solution, the United States and Egypt can agree. Working with other countries to aid their economic development is a good idea, of course, but I wonder whether, like so much of the conversation between Washington and Cairo, American and Egyptian officials have very different ideas about the right approach to Egypt’s economic problems. Don’t be surprised, then, if the economy becomes another point of friction, or if Egyptian decision makers just ignore Washington’s advice.

It should not be a surprise to anyone paying attention that the Egyptians are not in favor of private sector-led inclusive economic growth and the range of neoliberal economic reforms that the United States and the IMF deem necessary to get there. They never really were. Anwar al-Sadat’s Infitah (opening) created a commercial economy without the institutions of a market economy.

When he came close to implementing an IMF-recommended subsidy reform on basic foods in 1977, the ensuing demonstrations shook the regime. Hosni Mubarak resisted American economic advice mightily until the early 1990s before relenting and pursuing IMF reforms for about six months before it got too hard politically.

It was not until 2003 when Gamal Mubarak (and a number of other advisors) convinced his Dad to kinda, sorta float the exchange rate. The following year, Mubarak appointed the so-called economic “Dream Team” of Ahmed Nazif, Mahmoud Mohieldin, Rashid Mohamed Rashid, and Youssef Boutros-Ghali to guide Egypt’s first-ever serious effort at neoliberal economic reforms.

The resulting macroeconomic performance was impressive, but it came at a cost—the impoverishment of many Egyptians. Crony-capitalism and the rise of the puffed-up businessmen-politicos who populated Gamal’s National Democratic Party Policies Secretariat characterized that brief era. For President Abdel Fattah al-Sisi and his mostly military advisors, the late Mubarak period was a distortion of a political and economic order that had worked (i.e., it had maintained stability) for the previous five decades.

Now they are returning to it. It is true that Sisi embarked on subsidy reform, especially in the energy sector, there have been price hikes on certain goods, and the bourse is suddenly buoyant with investor confidence, but the overall picture suggests a move back toward a more state-oriented economic approach. Here is why:

As I have written in the past, undertaking IMF reforms is harder politically for Egypt’s leaders than it is economically. It seems that to many Egyptians the Fund is an affront to their nationalist sensibilities and reminiscent of the nineteenth century British and French Debt Commission that drew European powers further into Egyptian affairs. Consequently, do not expect the Egyptians to sign up for an IMF standby agreement soon, unless of course the economy craters.

Subsidies exist not only as part of a (badly frayed) social safety net, but also as a means of political control. As a result, under current political circumstances, subsidy reform can only go so far.

The $20 billion in various forms of assistance that Cairo has received since July 2013 from the Gulfies has refloated the Egyptian economy, instilling a semblance of economic stability. It is true that the Emiratis and Saudis have talked a good game about the need for Egyptian reform and there are limits to how much aid they are willing to provide. It is also true that there are questions about the Gulf states’ capacity to deliver the amounts of assistance the Egyptians need over a long period of time.

Even so, expect the aid to continue uninterrupted. The Emiratis and Saudis want Egypt to have a functioning economy to instill the regime with legitimacy, thereby diminishing the risk of another uprising and the potential return of the Muslim Brotherhood. That’s why the Gulf states are not likely to reduce or turn off the flow of aid. Think of it this way: The relationship between the UAE, Saudi Arabia, Kuwait and Egypt is similar to that of New York banks that invested heavily in Latin America in the 1970s.

When the economies there crashed, the bankers had no choice but to extend more credit to them, otherwise they risked going belly-up themselves. The geo-political interests that have dictated the Gulf states’ huge investment in the post-July coup d’état political system are not going away, and now that the Emiratis, Saudis, and Kuwaitis have put so much money into Egypt, it is going to be extraordinarily difficult for them to get out. The Egyptians know this.

Supporters of President Sisi hailed the announcement this past summer of a series of “mega-projects,” including the widening of the Suez Canal and the revival of something called the New Nile Valley Project (also known as Toshka), which failed in the early 2000s. The cheerleaders for this stuff need to take Economics 450 “Public Investment Decision-Making” all over again. There is no reason to believe that widening the Canal will produce double the traffic and double the revenue that Cairo is predicting.

There is also no reason to believe that Toshka will be a success this time around. This likely does not matter to Egypt’s leaders, though. These big projects provide people with work even if the return on investment is not great.

Taken together, these factors suggest that the Egyptian leadership continues to put a premium on what they have always believed to be most important: stability. And just as Mubarak learned the lesson of reforms from the 1977 bread riots, Abdel Fattah al-Sisi has learned the lessons of the economic reforms of the latter Mubarak period and has decided to move Egypt back to a place where economic rationale was secondary to the political and social goals of the state.

One could argue the merits of this approach, but it reveals how far apart Washington and Cairo are on the seemingly non-controversial, though highly consequential, issue of Egypt’s economic development. I have no idea about the quality of Secretary Lew’s conversations with Egyptian officials, and I do not know if he has ever had the pleasure of visiting Cairo before, but I hope he and his staff had the chance to visit some of Egypt’s first mega-projects—the Pyramids.

Source: Council Foreign Relations