Some two years into Egypt’s grass-roots revolution, the country’s economy is in a worrisome downward spiral. A growing number of people, inside and outside of the country, are starting to blame the revolution itself for derailing an economy that was growing, reducing its external-debt burden, and maintaining a comfortable cushion of international reserves.
Blaming the revolution is the wrong approach to Egypt’s current economic woes. Yet its appeal to some is understandable, given that the country’s economic situation has continued to worsen over the last few months. Growth is anemic, unemployment is high, and new investment has fallen off dramatically – all of which complicate already-difficult financial, social, and political conditions. The result is a growing threat of several vicious circles at once.
Domestic supply disruptions are now fueling inflation and compounding the problems of a subsidy-laden national budget. They have also aggravated the weakness of external finances, contributing to a sharp drop in international reserves that has been contained only by exceptional loans and deposits from abroad.
Inadequate growth and higher inflation impose a particularly severe burden on Egypt’s most vulnerable. Public safety nets are overstretched, with too many poor people falling through. Moreover, other support networks – including income opportunities in tourism, the informal sector, and charitable and family support – are crumbling under the pressure of growing poverty.
This broad set of spiraling difficulties has led credit-rating agencies to slash Egypt’s rating. It is also discouraging foreign direct investment, as is the discrediting of Egypt’s police forces. As a result, still more sources of working and investment capital are disrupted, amplifying the impact of domestic capital flight.
None of this facilitates the political reconciliation and national unity that Egypt needs to complete the most difficult of all revolutionary pivots: from dismantling an oppressive past to building a better future. Indeed, having suffered from post-revolutionary institutional and political dysfunctions, economic decline is now itself fueling these destabilizers.
To be fair, governments – first under the Supreme Council of the Armed Forces and now under the Muslim Brotherhood – have recognized the challenges. Their responses, however, have fallen short, following a familiar sequence that begins with waiting for an endogenous bounce and aspiring to self-reliance. When no miracle arrives, they opt for capital controls and consider asset sales and leases while courting those once viewed as having perpetuated the old order.
The post-revolutionary government’s initial narrative characterized Egypt’s economic malaise as temporary and self-correcting. Having overthrown Hosni Mubarak’s iron-fisted 30-year-old regime in a remarkably quick and relatively peaceful manner, Egypt’s revolutionary masses were to leave the streets and pursue an all-out drive for economic prosperity and social justice. Their efforts would be supported by the re-orientation of public institutions (and governance more broadly) away from benefiting the privileged few toward an ethos of service to all of the country’s citizens.
This narrative reflected (understandable) revolutionary exuberance rather than realities on the ground. It takes years to reform institutions. Economic and financial transmission lines cannot be rerouted quickly. Discredited businesses cannot be replaced overnight. Credible political parties are not easy to organize on the fly. And many of those who bravely fought for freedom had little political experience, placing an even greater premium on great leadership to channel Egyptians’ enormous energy – and their demands for greater social justice – into a shared vision and common purpose.
The resulting power vacuums were filled by those whose prior positions in society gave them an inside track at the time of the popular uprising. They assumed power with a set of ideas and operating procedures that had to catch up with the new Egypt.
As the economy struggled, optimism gave way to a more defensive and insular view that values self-reliance. Accompanied by creeping economic controls, the narrative became more nationalistic. Loyalty, rather than merit, drove key appointments, making policy management even more difficult.
With this approach offering no better chance at success, the country has been pushed back to pursuing measures that, at least in the mind of much of the public, are associated with the old regime. Securing a loan from the International Monetary Fund has become the principal objective of economic management, coupled with other anxious attempts to raise financing. But, absent a fundamental policy revamp, the most that this can deliver is a few months of relative financial calm, albeit at a cost for the subsequent future.
What Egypt needs today cannot be provided only by IMF loans and asset leases. That is the bad news. The good news is that, as someone who has followed similar cases for more than 30 years, I can say with confidence that Egypt has all the components needed to restore economic and financial stability: resources, people, dynamism, entrepreneurship, location, and regional and global linkages.
Egypt also has a powerful secret weapon that is yet to be fully deployed – a generation of young people who, after years of alienation and repression, believe that they can (and should) influence the country’s destiny. Already, some are making a notable difference on the ground, attracting widespread admiration.
Egypt is not a country where economic sectors and segments of the population can succeed despite the government. The government must provide the context to restart the engines of economic recovery; and policies should serve as growth accelerators by providing development gateways for the energetic young, the restive poor, and the pressured middle class.
This brings us back to the interactions between economics, politics, and finance, which are now fueling a tailspin that is harming Egypt’s citizens and threatening their children’s future. Appropriate political reforms must come first; when they do, Egypt’s economic and financial revival will surprise many with its buoyancy and speed.
Think of a car that can and should achieve great performance based on its strong internal engine. Egypt is capable of speedy economic growth and durable financial health. Without determined efforts at political progress and unity, however, it will remain stuck in neutral – and could slip into reverse.
El-Erian is CEO and co-Chief Investment Officer of the global investment company PIMCO.
(c): Project Syndicate
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