The Carnegie Endowment for International Peace recently released a study about the Egyptian economy titled, “Egypt's Democratic Transition: Five Important Myths About the Economy and International Assistance.” The report begins by saying that should Egypt fail in its democratic transition, this “could lead other countries in the region to turn away from the very idea of democratic reform.” Conversely, Carnegie argues that should Egypt succeed in establishing a “democratic, accountable, and efficient form of government,” it is likely to become a powerful example and a stabilizing force in a “turbulent region.” It adds that while Egypt's January 25 Revolution was chiefly motivated by politics, economics also played a part. And Egypt's new government faces staggering economic challenges: “Besides bringing the high and soaring public debt under control, Egypt's new rulers must ensure that investment, economic growth, and job creation keep pace with demographic trends.” While the economic politics of the transitional government have understandably been driven by “populist considerations,” the Carnegie report says “a continuation of current policies after the elections would spell economic disaster.” Fear of a witch-hunt among Egypt's business community is also destabilizing. What's more, if the new government does not manage to meet Egyptians' high expectations of improved economic conditions, “the sense of economic crisis could foster support for authoritarian populists, radical Islamist politicians, or a reversion to military rule,” Carnegie says. The report then goes on to discuss the five ‘myths' about the Egyptian economy. 1. Egypt's economy is a basket case. The Carnegie report argues that although Egypt faces serious challenges economically, “the situation is not nearly as dire as it is often portrayed.” The report highlights Egypt's solid economic growth for the past seven years. It says that while poverty levels remain high, data shows that “there was no widening of the income distribution, suggesting that the gains from economic growth were fairly widely distributed.” The report also notes that while Egypt has an extremely high debt, the vast majority of that debt is domestic. Unlike many highly indebted nations, Egypt's foreign debt to GDP is as low as 15 percent. 2. It's time to focus on politics; economic reforms have to wait. The second point Carnegie makes is that economic reforms do not – and in some cases should not – wait until political issues in the country are settled. The Egyptian economy “is capable of resuming fairly rapid growth, but for this growth to be sustained, far-reaching economic reforms are needed,” says the report. “Some of these reforms cannot and should not wait.” The report notes that the public sector remains “remains highly inefficient, corrupt, and heavy-handed.” Some 82 percent of private businesses are run informally, and 61 percent of Egypt's work force are not formally employed. Carnegie suggests that “popular anger at the Mubarak-era cronyism” can be used to “foster a more transparent and accountable public sector.” What's more, “poor Egyptians can be rapidly empowered if they are given legal titles to their property and encouraged to join the legal economy.” Carnegie notes that an extraordinarily high percentage of Egyptians do not hold legal titles to their property. Finally, the Carnegie report says “Egypt needs a reform of the bankruptcy law, a reduction in the time and costs of opening and closing a business, lower hiring and firing costs, and reforms to protect the independence of judicial inquiries into corruption and graft.” 3. Key fiscal problems – such as subsidies – cannot be tackled any time soon. The Carnegie report says the problem of subsidies and other major fiscal issues cannot be put off. Even with a relatively high growth rate, “a debt-to-GDP ratio of over 80 per cent and a projected budget deficit of 8.6 per cent of GDP in the fiscal year 2011/2012, cannot be sustained.” “Without greater control of its deficit, Egypt remains vulnerable to domestic or external shocks,” Carnegie says. The report adds something that Egyptians and observers already know: subsidies are wasteful, widely inefficient and benefit the middle classes far more than the impoverished they are intended to aid. Reforming subsidies, however, can be a touchy task, but the government should attempt to target low-income groups more directly. In the past, it has been difficult to reform subsidies “for fear of attacking the vested interests that benefit most from the present system: not the poor, but relatively affluent energy consumers and companies that are directly involved in the production and distribution of subsidized food and fuels.” Carnegie adds that “A new government with an electoral mandate may find itself in a stronger position than the transitional government to tackle these thorny issues.” 4.The Egyptian government needs budget support urgently. This myth was dispelled when Egypt's ruling military council rejected large loans offered by the IMF and World Bank. The council sent the cabinet back to draft a new budget, which the cabinet did, managing to reduce government spending. Carnegie argues that “significant pledges of aid from Arab governments may have been a factor contributing to the abrupt reversal” in the need for loans from international financial institutions. 5. The international community has done all it can to help the transition. Thus far, the response of the international community has been “extremely modest,” according to the Carnegie report, which continues to argue that “the international community should take advantage of this unique moment to promote reforms.” For the U.S. and Europe, this means increased trade. “A free trade agreement with Egypt would be the best way to signal a deep and durable commitment by the United States to the success of the Egyptian transition,” says the report. “Future trade arrangements with Egypt should be designed to increase the access of Egyptian agriculture and labor-intensive manufactures to American and European markets and to simplify rules of origin,” it adds. “Of course,” the report continues, “the international community can only help Egypt in the areas where Egyptians want to act and be helped.”
