By May 31, 2013 Read More →
The Egyptian Economy in 2013

The Egyptian Economy in 2013

Over two years have passed since thousands of Egyptians flocked into Cairo’s Tahrir square, in demonstrations that culminated in the downfall of Hosni Mubarak, Egypt’s dictator of 30 years.  Chaos has become the norm as Egypt’s political players, old and new, vie for hegemony and a secure place in the emerging order.

After rising to power in parliamentary and presidential elections, a key question has been whether the Muslim Brotherhood will attempt to meet the demands of the January 25 movement – or, conversely, if the Islamists will choose a path of accommodation with the powerful Military and Security apparatus. In this regard, it is worth remembering what the revolutionaries were striving for as they spearheaded resistance to Mubarak’s police state. As Hesham Sallam rightly notes,

the January 25 Revolution and the popular mobilization it advanced were not merely the manifestation of a purely political revolt aimed at toppling a dictatorship and institutionalizing liberal democratic procedures. The target of the revolution was more than just the autocratic political system, but equally important, longstanding exclusionary economic policies that continue to fall short of meeting popular expectations for distributive justice.

Despite the momentous changes in the political arena, prospects for the Egyptian political economy remain relatively bleak. This is because the two main political players, the Military and the Muslim Brotherhood, have come to embrace a continuation of the failed economic agenda that marked Mubarak’s last two decades in office. In this sense, the Muslim Brotherhood has opted for accommodation of the existing order – as a conservative political force, they are decidedly disinclined to ‘rock the boat’.

While the political leadership dithers, harsh realities are becoming ever-more visible: Egypt’s economy is in very, very bad shape. Egypt today faces the same impediments to sustainable, balanced growth that have plagued the country for decades. These include high and rising levels of inequality; a veritable army of unemployed, in particular among Egypt’s youth; poor, deteriorating infrastructure; endemic, institutionalized corruption, and an overbearing and inefficient bureaucracy. The list could go on. These factors constitute structural impediments, and are, as such, deeply embedded in Egypt’s political economy.

I: The State of Egypt’s Economy

Interestingly, in the years preceding the revolution, Egypt was labelled a “top-performer” by international financial institutions such as the World Bank and the IMF. Quite clearly, the orthodox standards for measuring economic ‘health’ and development have fallen short of accounting for basic realities, failing to detect rising tide of unrest simmering beneath the waves. Mubarak’s Egypt was seen by many in the development community to be at the vanguard of implementing Washington Consensus-inspired reforms. In the decades of the 1990s and 2000s, market-oriented reforms and IMF-backed privatisation programmes were applied highly unevenly in Egypt – which might have been expected in an autocracy with weak legal institutions.

As Oxford university’s Walter Ambrust has observed, the only people for whom the IMF’s Economic and Structural Reform Programme worked “by the book” were Egyptian society’s most vulnerable citizens, and their experience was hardly one to write home about. Public education was neglected while the healthcare system languished as a result underfunding and poorly managed privatization. A great number of Egyptians experienced stagnant or falling wages after taking into account persistent inflation. Unemployment was estimated at over ten percent (if official statistics are to be believed) and around forty percent of the population live on less than two dollars – or less – per day.

Meanwhile, the much of the benefits of privatization were reaped by the politically well connected, who picked up state assets steep discounts only to resell them at huge profit years later. Although material well-being improved during Mubarak’s tenure in office for those at the top of the income distribution, absolute and relative poverty rates increased in the past decade. A persistently high rate of inflation has done much to erode the quality of life of Egypt’s poor, who spend a high proportion of their income on basics such as food and housing.

In understanding the root causes of the Egyptian state’s poor track record in promoting inclusive growth, another structural aspect of Egypt’s political economy is worth highlighting. Although not necessarily obvious at first glance, Egypt is a case in point of what political scientists and economists call a “rentier state” – a state which derives a large share of its revenue from sources other than a tax base. In a recent piece for the FT, Ashraf Selwam elaborates on this dynamic:

Revenues from the Suez Canal, oil and gas exports, foreign aid and remittances of Egyptians living abroad are all rents: resources that have little to do with the competitiveness of the economy or the productivity of the people, yet represent the country’s biggest earners of foreign currency… The model was simple: what the state collected in rents, it used to offer carrots in return for public acquiescence. Those who would not be bought were left with the stick of authoritarianism.

Thus has the Egyptian political system long been geared towards the dissemination of patronage in return for political support. The more organized networks of actors on the receiving end of state patronage include the state security apparatus, the public sector bureaucracy (which employs about one third of Egypt’s labour force) and the military establishment. Food and energy subsidies, which make up over a quarter of the state budget, are another prominent manifestation of state patronage.

II: A Rocky Road Ahead

The upshot is that by the time crowds gathered in the streets in January 2011, Egyptian society was at breaking point. The legacy Mubarak has bequeathed to Egypt’s highly fragmented political actors is of course not a pretty one. One of the major hurdles facing the current regime is a chronic fiscal crisis, a costly subsidies regime and dwindling foreign currency reserves to meet import needs. As Farah Halime of Rebel Economy writes, although

Egypt may not be facing the horrific consequences of total economic failure … the economy is slowly grinding to a stop, and in many ways this is more dangerous. There are not enough dollars in the market to sustain imports, leading to shortages in major and minor goods (almost all imports including for fuel, wheat, pharmaceutical drugs and fish has been impacted and small and medium sized import businesses are struggling to sustain themselves). Unemployment, particularly for those under 25 years of age, is rising steadily, and economic growth has stalled to about 2% and is not expected to do much better next year.

The magnitude of the task facing Egyptian reformers is overwhelming, and so far, the Muslim Brotherhood has proved unwilling to make the tough choices needed to reform Egypt’s economy. This is unsurprising to some – for, as the authors of a paper from Oxford’s Centre for the Study of African Economies remind us,

Revolutionary upheavals can often lead more quickly to de jure change in political institutions,  without necessarily altering the distribution of economic power. Whether it is the abolition of slavery and apartheid or the granting of voting and property rights, the underlying lesson is usually the same: de jure reforms do not automatically result in effective change. This is because elites have a remarkable ability to endure; they can reverse change or mould it in their favour. Even if old political players are replaced by new ones, this can simply lead to a reconfiguration of political power leaving the basic economic structure intact.

This brings us back to one of the main reasons for the January 2011 uprising – a call for the dismantling of the exclusivist practices of government and economic management that precludes most Egyptians from making a viable living. As Egypt’s experience in recent decades demonstrates, economic policies focusing on headline growth as a top priority – while addressing poverty mainly through supposed “trickle-down effects” – have proved woefully inadequate.

Neither are further waves of privatisation of state assets a panacea for Egypt’s problems, as the European Bank for Reconstruction and Development recently proposed. The experience of the 1990s and early 2000s demonstrated that the benefits of such programmes were largely captured by the politically well-connected, with virtually no improvements in efficiency or employment. Barriers to sustainable, balanced economic development lie more in corruption, inefficiency and mismanagement, rather than in issues of private or public-sector ownership.

Read more: 

Ziad Daoud – Will Egypt go bankrupt? – Awraq

Hazem Kandil – Deadlock in Cairo – LRB

Ashraf Selwam – Why Restoring the Old Paradigm in Egypt is Not Enough – Financial Times

Jane Kinnimont – Bread, Dignity and Social Justice: The Political Economy of Egypt’s Transition – Chatham House

Adeel Malik and Bassem Awadallah – The Economics of the Arab Spring – CSAE

Joshua Stacher – SCAF and the Muslim Brotherhood – MEI

(Image courtesy of Wikimedia Commons)

Notes:
1. Walter Ambrust, The Revolution Against Neoliberalism, Jadaliyya, Feb. 23, 2011.
Walter Ambrust, The Revolution Against Neoliberalism, Jadaliyya, Feb. 23, 2011.

About the Author:

William Oliver is Nabateans’ editor for international economics and Middle East current affairs. He obtained his degree in History from the School of Oriental and African Studies in London. While his studies focused on the Middle East in the 18th and 19th centuries, William has a long-standing interest in international finance and the political economy of development. William’s work is aimed at understanding how the Middle East integrates with the global economy, and into the wider geopolitical landscape.

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