On the Economy, Egypt’s New Leaders Should Follow Mubarak

By Steven A. Cook - May 26, 2011

Egypt’s military rulers have just announced plans to put Hosni Mubarak, the former president, on trial for conspiring to kill unarmed protesters during the uprising that unseated him in February. This may help those who are now in charge appease a still-restless citizenry that wants to make a break with the past.

But Egypt’s leaders must ensure the prosecution of Mubarak does not distract from the need to address the country’s bigger problem: its increasingly dire economic condition.

Since Mubarak’s fall, the Egyptian economy has contracted 7 percent, and its foreign currency reserves are still shrinking. Economic growth may slow to 1 percent this year, the lowest level since 1992, according to the International Monetary Fund.

Complicating matters, the government has opened investigations into graft and corruption on the part of many business leaders in Egypt, and this has slowed commercial and financial ventures almost to a halt. Meanwhile, continued discontent among the people -- manifest in sectarian fighting, lawlessness and continued protests -- have spooked foreign investors.

Egypt’s new rulers -- the military leaders now in charge and, more important, the people the voters choose in the parliamentary elections scheduled for September and the subsequent presidential election -- must move as quickly as they can to jump start the economy and lure back foreign investment. The U.S. and other wealthy countries can help encourage this process. But mainly it will require that the new Egypt continue, rather than break with, the economic approach taken by the Mubarak regime.

Economic Reform

The former Egyptian government began pursuing economic reform with determination in 2003-04. It floated the Egyptian pound, slashed corporate and personal income taxes, reduced import tariffs, cut bureaucratic red tape, sold state-owned banks and took other steps to enhance the business climate and instill confidence in foreign investors.

These measures were generally successful. Even though high unemployment and underemployment persisted, Egypt’s debt was diminished and its gross domestic product, per capita income and levels of foreign investment all improved in the latter half of the 2000s.

Causes of Corruption

Undoubtedly, the initiatives hurt many of the country’s poor. Privatization of industries such as textiles and concrete led to a loss of jobs and the benefits that go with them. To many Egyptians it seemed that the rich were getting richer and the poor were getting poorer -- at an alarming rate. But the only evidence for this perception was anecdotal. In fact, in Egypt, unlike most other countries that have experienced sudden growth, the gap between rich and poor did not grow any wider, World Bank figures indicated.

When the new economic decision makers sit down to work after the Egyptian elections, they will need to acknowledge that the Mubarak reforms were mainly positive -- and that the changes themselves did not unleash a wave of graft and corruption among businessmen and political power brokers, as many Egyptians believe. Rather, the thievery was a function of the perverse political and legal order that existed under Mubarak.

The new leaders of Egypt should continue to sell state- owned enterprises, respect laws and regulations that have helped to open the economy to foreign investment and reduce the subsidies on basic goods that have contributed to the country’s considerable indebtedness.

The U.S. Can Help

Most importantly, the Egyptians must move to stamp out the corruption that made the crony capitalism of the late Mubarak years possible. This means giving parliament oversight on government spending, empowering central auditing authorities, requiring that political leaders disclose their sources of income, and strictly regulating the use of state assets for personal gain.

The U.S. and Europe can help. President Barack Obama acknowledged as much in his speech last week when he said "successful democratic transitions depend upon an expansion of growth and broad-based prosperity." He proposed creating enterprise funds to invest in Egypt andTunisia; an initiative to push American and European trade and investment in the Middle East and North Africa; and government guarantees worth $2 billion to encourage private American investment in the Middle East. He also said the U.S. should relieve as much as $1 billion in Egyptian government debt.

Debt Relief

Clearly, Obama sees how essential economic stability in Egypt -- home to a quarter of the Arab world’s population -- is to the future of the Middle East. It’s important that he push Congress to honor his call for Egyptian debt relief. It would be even better if he were to forgive Egypt’s entire $3.6 billion debt to the U.S. Because of the poor state of the Egyptian economy, the country’s debt is worth only about 14 cents on the dollar anyway, so the real cost to American taxpayers of writing off the whole amount would be only about $500 million.

By doing this, the U.S. could signal to its partners in the Group of 20 that they, too, should waive some of Egypt’s debt. That would give officials in Cairo some breathing room to reinforce Mubarak’s economic reforms -- and resist the temptation to bow to political expediency by ending them.

(Steven A. Cook, a senior fellow for Middle Eastern studies at the Council on Foreign Relations, is the author of the forthcoming "The Struggle for Egypt: From Nasser to Tahrir Square." The opinions expressed are his own.)

To contact the author of this article: Steven A. Cook at scook@cfr.org

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net

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