North Africa, West Asia

Egypt’s uncertain road to prosperity: economic challenges to long‐term stability

The livelihoods of the Egyptian people are a political priority. In the 1990s, at the behest of the IMF and the US, neoliberalism exacerbated the gap between the haves and the have-nots by ensuring that the primary benefactors of growth have been wealthy Egyptians.

Genevieve Theodorakis
11 May 2012

Since the Free Officers’ Coup in 1952 and the acceleration of the Cold War in the Middle East, Egypt has derived a significant portion of its economic resources from strategic rents in the form of political, economic, and military aid. Assistance was bestowed upon Egypt due to the strategic role it played in the Middle East as the ‘leader’ of the Arab world and the champion of Pan-Arabism. The concept of Arab unity took human form in Egyptian president Gamal Abdel-Nasser, who recognized the economic limitations faced by his country and therefore utilized Egypt’s tremendous influence in the region to extract much-needed rent from the United States and the Soviet Union. 

This trend continued under the tutelage of Anwar al-Sadat, whose commitment to peace with Israel has ensured $1.3 billion in annual assistance from the United States since the signing of the Camp David Accords in 1979. With Hosni Mubarak’s assumption of power in 1981, the US granted over $60 billion in aid to Egypt, in the form of a variety of resources, ranging from food to military technology. This reliance on aid left Egypt in a state of perpetual dependency on foreign powers at the expense of domestic industrial and overall economic development. 

As the second largest recipient of US assistance in the world, Egypt’s historical reliance on rents has arguably detracted attention away from the adoption of a comprehensive economic model capable of delivering development and improved living standards to Egypt’s masses. Though the economy maintained an average of 5 percent real GDP growth between 2000-10, the benefits of growth have largely failed to reach large swathes of a population still mired in poverty - double-digit inflation, particularly in food prices, has led to a significant deterioration of living conditions for Egyptians, of whom almost one-third live under the poverty line. At the same time, Egypt’s youth (citizens under the age of 30) have shouldered a disproportionate amount of economic hardship.

While total unemployment has recently hit double digits, youth unemployment is twice as high, amidst a burgeoning number of youths that constitutes over 60 percent of the population. The stark contrast between overall unemployment and youth unemployment is illustrated by the fact that in 2006, young Egyptians constituted over 80 percent of Egypt’s unemployed, though they were among the nation’s most-educated - where 95 percent had graduated from secondary school, and many had attended university. Indeed, it is estimated that every year 700,000 new graduates vie for 200,000 new jobs, leaving most to settle for low-skilled work, if available.

In Egypt, the problem of unemployment provides an example of the inability of economic growth to translate into benefits for the majority of Egyptians, a larger phenomenon that can be partly understood as a result of neoliberal economic policies.            Implemented in the 1990s at the behest of the IMF and the US, neoliberalism has exacerbated the gap between the haves and the have-nots by ensuring that the primary benefactors of growth have been wealthy Egyptians. Espousing the ideals of the free market, neoliberal policies promoted the privatization of public services, which generally increased the price of amenities such as water and electricity and complicated the ability for many Egyptians to pay for such services; the lowering of labour standards, amidst the violent suppression of unions; the removal of tariffs and subsidies that exposed small businesses to the throes of the international market, often resulting in reduced livelihoods and increased unemployment; and the implementation of tax reforms that benefited rich Egyptians while hurting the poor. 

Coupled with the adverse economic effects of rapid population growth, these reforms encouraged a form of economic growth that failed to reach large segments of the Egyptian populace, exemplified by a drop in average per capita GDP growth from 4.1 percent before 1990 to 2.7 percent after the implementation of neoliberalism. This widening inequality gap greatly aggravated the economic grievances of the average Egyptian, again, particularly among members of the youth population. These effects were characterized by former IMF chief Dominique Strauss-Kahn as a ticking “time bomb”, and youth unemployment intensified by neoliberalism arguably played an indispensable role in precipitating the unrest that toppled Mubarak’s regime. Moreover, the government’s inability to combat these challenges only served to underline the need for administrative change. 

Post-Mubarak 

Coupled with inherent tensions in Egypt, the consequences of neoliberal reforms were further exacerbated by the ousting of Mubarak and the political upheaval that followed. In 2011, the economy was projected to shrink by 3 percent, and factories were working at half capacity, as unemployment shot up and the budget deficit worsened. The tourism industry, which employs almost 1 in 9 Egyptians and generated $12 billion, or 5.3 percent of GDP in 2010, declined by almost half in the beginning of 2011, and lost revenues are estimated to cost Egypt $1 billion a month.

Though an oil producer, Egypt is now a net importer of petroleum, and expenditures spent on fuel subsidies add up to a fifth of total annual government spending, or approximately $16.6 billion. Turmoil in the region has also had significant repercussions for Egypt’s economy. A decline in remittances from Egypt’s estimated 1.5 million migrants working in Libya’s oil industry dealt yet another blow to foreign currency reserves, which fell from $36 billion in January 2011 to $15.1 billion in March 2012. These indicators attest to the deteriorating state of the economy and have been felt heavily amongst the populace; millions survive on bread and fuel subsidies, and according to the World Food Programme, poverty and malnutrition has been on the rise since the 25 January revolution, with 25.2 percent of Egyptians classified as impoverished in 2010/2011, compared to 21.6 percent in 2008- 2009.

Though Egypt is likely to continue receiving US aid and has made provisions to sign a $3.2 billion loan with the IMF this year, the leadership cannot rely solely on aid and loans to successfully navigate the storms of economic turmoil. The critical question at hand is how the new political establishment will aim to tackle the multitude of economic challenges present today. The Freedom and Justice Party (FJP), the political arm of the Muslim Brotherhood, succeeded in obtaining 47 percent of parliamentary seats in the

January election, and irrespective of the outcome in the presidential race, the FJP will play a key role in shaping Egypt’s trajectory, both in political and economic terms. While the FJP’s potential political platform has provoked much discussion at the domestic and international level, the economic agenda has received comparatively little attention.

Regarding its plans for development, there appear to be two economic tendencies favoured by the FJP. The first can be interpreted as an interventionist strategy, wherein the governing party encourages productivity by selecting sectors of strategic importance for guidance and monetary support. The second qualifies as a rough continuation of the free-market economic order under Mubarak, exemplified by a recent statement from the Muslim Brotherhood that voiced approval for Mubarak’s neoliberal policies, stating they were “on the right track”. Khairat al-Shater, the deputy chairman of the Brotherhood, upholds an interpretation of Islam that promotes free markets, deregulation, and the role of the private sector in enhancing the competitiveness of Egyptian industries. 

Much is at stake with the rise of a new, democratic administration, and the government’s ability to tackle two specific challenges will validate the efficacy of the chosen economic model and determine the level of stability and prosperity enjoyed in the future Egypt. The first could arise from the side of the military. Since the time of Nasser, the military has steadily increased its stakes in the Egyptian economy, and it is estimated that the institution controls 30 percent of Egypt’s GDP, owning a plethora of economic entities ranging from bakeries to beach-house rentals. If the FJP’s reforms infringe upon the economic interests of the military, the conflict that might result from such a clash could potentially destabilize the entire country and derail Egypt’s democratic experiment. Indeed, it is questionable whether the military will relinquish economic control to the civilian government in the first place; rendering the possibility of infringement obsolete and thereby inhibiting a clear break from Egypt’s political past. 

Second, and more importantly, the new regime must ensure that the benefits of growth reach all segments of the population, stimulating increased productive employment and better living conditions. Egypt’s ranking in the United Nations’ Human Development Index has slid down to an undesirable 123rd place, and ranks tenth in the Middle East, only one notch above Yemen. Millions of people recognized that the status quo under Mubarak was no longer tolerable, and through their own perseverance and hardship – beatings, torture, and for some, surrender of the ultimate sacrifice, life – Egyptians made the prospect of political and economic transformation possible in a country that had not known change for decades – and in the process, inspired people across the region and the world to vie for their own destinies.

The new government will be presented with a unique opportunity to determine the course of Egypt’s future and the fate of generations to come, and it will be evaluated by its ability to bring lasting, positive change to the lives of its people. If the Muslim Brotherhood proves unable to deliver economic results, it will fail just as its predecessor did.

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