Halving American economic assistance to Egypt in the absence of a free trade agreement is the wrong move, argues Ashraf Swelam* Launching what can easily turn out to be a new chapter in Egyptian-US economic relations, a few weeks ago the United States Agency for International Development (USAID) revealed its plans for the future of economic assistance. The scheme, announced by USAID mission Director Hilda Arellano, calls for halving the economic component of the annual assistance package from its current level of $415 million to $200 million. The new assistance levels, included in the Bush administration's budget request for next year, would be maintained for five years, after which the entire programme would be terminated. Washington's plan also calls for establishing an endowment, the resources of which would ensure the successful completion of USAID-funded projects already underway. USAID's announcement, however, does not address American military assistance to Egypt, which both governments agreed to maintain at its current levels of $1.3 billion -- at least for the foreseeable future. The plan represents the second major reduction in the history of the US's economic assistance to Egypt. The first reduction took place over the course of the last decade, following a 1998 understanding between the two sides which halved assistance levels at the time, namely $815 million in 1999. Compared to the 1998 understanding, USAID's new plan is significant in at least three ways. First, this time halving the assistance is immediate, taking effect next year -- assuming congressional approval. This is in sharp contrast to the gradual 10- year reduction (of $40 million annually) which characterised the 1998 understanding. Second, the plan has the effect of creating, for the first time, a negative cash flow between Washington and Cairo. At a $200 million level, the deficit between assistance levels and the annual Egyptian debt repayment on US loans is approximately $150 million. Third is the manner in which the plan was announced. Contrary to the 1998 agreement, approved by the Egyptian Government, the US administration and Congress, the new proposal clearly lacks a nod of approval from Cairo -- at least judging by statements attributed to high-level Egyptian officials. For better or worse, economic and military assistance has always been central to Washington's relationship with Cairo. The generous annual aid package -- for years second only to Israel -- was viewed as a reward for Egypt's bold initiative which culminated in peace with Israel. It was a means of bolstering Egyptian stability and economic prosperity, and also as a symbol of the US's ongoing commitment to a friendly regional power which shares some of Washington's key interests in the region. The first Gulf War reinforced these notions, reinvigorating Egypt's position as a reliable friendly nation in an otherwise risky and unstable Middle East. A decade later, the Soviet Union is gone, Egypt is no longer the sole signatory of a peace treaty with Israel, and the events of 11 September overshadowing -- if not dictating -- Washington's views of the world and the nature of threats to its national security, cracks began to surface. American and Egyptian voices started to question the relevance of the relationship. The current disagreement over future assistance levels is in fact the latest of a series of jabs between the two capitals, reflecting what commentators point to as an increasingly testy bilateral relationship. One one hand, the last few years saw repeated congressional attempts to cut, withhold or condition assistance to Egypt, both economic and more recently military, coupled with American open -- and at times harsh -- criticism of Egyptian domestic politics. In Cairo, there is a growing chorus of politicians, intellectuals and economists who reject what they perceive as unacceptable American meddling in Egyptian domestic affairs -- especially after the US adventure in Iraq began to go south. This is coupled with public questioning of the US assistance's real contribution to the Egyptian economy. At its pinnacle, this reaction has gone as far as calling for severing the aid relationship, deemed by many as of limited economic benefits and mounting political costs. With those calls in mind, maybe it is time to set the record straight. First, US economic assistance, an impressive total of $28 billion over the course of 33 years, has significantly contributed to Egypt's economic growth. It provided vital resources, both financial and technical, which helped overcome critical bottlenecks. It supported the growth of a vibrant private sector, setting the stage for its current remarkable success. Moreover, the list of USAID-funded projects which contributed to the development of major sectors of the Egyptian economy, including infrastructure, health and education, is simply too long to deny and too substantial to dismiss. For all of the above, USAID deserves much more credit than what most Egyptian, as well as some American, commentators are willing to give. Second, Egyptian-US economic ties are indeed maturing to a point that begs for shifting gears. US investments in Egypt are currently at the $6 billion mark, while trade is quickly approaching $8 billion. Trade and investment, not aid, is the future, argues a growing group of Egyptians and Americans inside and outside government. While they are right, it is also true that much hasn't really changed. "Trade not aid" has been the crying call for years, and can actually be traced back in the context of Egyptian-US relations to the mid- 1990s. But with the exception of the Qualified Industrial Zones, the sole institutional achievement of the last eight years, Egypt and the United States have very little to show for in terms of unlocking the potential of their economic cooperation. What's possibly new is that, contrary to times past when launching free trade negotiations seemed like a moving target with the list of US conditions getting longer and longer every year, US officials now admit -- and have been doing so for a number of years -- that Egypt is ready and the United States is not. The shifting dynamics of trade politics in Washington simply would not allow it, some say. Whichever the case, the result is the same: No Free Trade Agreement (FTA) between Egypt and the United States is in the works, not on Bush's watch at least. And not for some time to come following him, I dare argue. If that is the case, and with both sides agreeing to the continuation of the military aid relationship for the foreseeable future, I think it is high time to look at the future of the economic aid relationship anew, placing it for a change in its right context, which is and should have always been, US's economic relations with Egypt. Halving America's economic assistance to Egypt at a time when free trade prospects are dimming is the wrong move. It takes something off the table without replacing it. It responds to short-term concerns and circumstances, such as an increasing demand on the US's tightening financial resources, rather than a long-term vision that has the expansion of Egyptian- US shared interests as its objective. As the events of the last few months clearly show, Egypt's biggest economic -- and indeed political and social -- challenge in the next few years will be to maintain a healthy balance between pushing forward with the next batch of economic reforms and addressing mounting social dislocations and imbalances which it creates. The fear right now, and for good reason, is one of returning to the on again- off again reform drive of the 1980s and 1990s, characterised by the lack of political will to push ahead with needed, and more often than not painful, reforms. Can the US help? Absolutely. To start with, it should reconsider policy options with the objective of finding the right mix of policies which can positively affect developments in Egypt. With free trade moved to the backburner, the US's ability to play a meaningful constructive role is in many ways limited to its economic assistance programme. This is not only in terms of the focussed financial resources it provides in support of jointly agreed upon reform measures, but also -- and possibly more importantly -- by providing a much needed platform on which current reforms could be locked in and secured, and future reforms pursued. That said, it is my conviction that the interests of both countries would have been better served if the Bush administration passed the buck to the next administration, by either freezing further reductions or extending the application of the 1998 understanding for one or two additional years. The new administration, equipped with a better appreciation of the potential for launching free trade negotiations with Egypt, preferably carried out in the context of an overall re-examination of relations with Cairo that takes stock of the tilts and turns in the global and regional environments, is simply in a better position to take such decisions. "Trade not aid" remains the right direction for the future, but with the Egyptian- US trade agenda hardly keeping up, maintaining the centrality of aid might very well turn out to be the right policy. * The writer is executive director of Egypt's International Economic Forum (EIEF). The views presented in this article are those of the author and do not necessarily reflect the forum's position. Comments to [email protected]
