Friday, February 18, 2011

More work in store for Egypt now

Business Times - 19 Feb 2011

More work in store for Egypt now

Following the overthrow of an authoritarian leader, it needs to fire up an underperforming economy


AS EGYPTIANS and others celebrate the downfall of former president Hosni Mubarak, they need to recognise that the overthrow of an authoritarian leader is not a guarantee that his oppressive rule will be replaced with liberal and democratic institutions. In fact, the overthrow of the monarchy in 1952 brought to power a military regime. And it has remained in control - even now, after Mr Mubarak's resignation.

Moreover, free and open elections are only one element of a functioning liberal-democratic system that includes among other things, independent political institutions, a free press and the protection of the rights of women and religious minorities. Without a political culture that nourishes and upholds these freedoms and a set of constitutional and legal constraints on the government, the election of anti-liberal political forces - not unlike the Hamas in Palestine or the Muslim Brotherhood in Egypt - could create the conditions for new forms of oppression.

That the freely elected Islamist Party ruling Turkey has not pursued a non-liberal agenda is a reflection of the powerful liberal and democratic institutions that have been operating in that country as well as the more recent evolution of free-market oriented economic policies. Through trade and investment ties, Turkey has been integrated into the global economy and remains a candidate for membership in the European Union (EU).

Indeed, the vibrant Turkish middle class that includes entrepreneurs and owners of small businesses has been the electoral backbone of the Islamist Justice and Development Party (AKP). Its leaders recognise that any attempt to force Islamist rule is a prescription for economic ruin - not to mention the potential for a devastating electoral backlash.

It's not clear if the military that remains in control of Egypt's statist economy - the state employs more than 30 per cent of the population - has an interest in liberalising the economy, a process that will benefit many of the young professionals who led the uprising and who could help launch new liberal political movements that would counter the power of the Muslim Brotherhood.

From that perspective, the huge American financial assistance to Egypt - that has gone to support the military and, by extension, the state-controlled economy - has created disincentives for the required political and economic reforms that Egypt needs. In 2010, US$1.3 billion of US aid went to strengthen Egyptian military forces while another US$250 million went to economic aid, according to the Congressional Research Service. Another US$1.9 million went for training meant to bolster long-term US-Egyptian military cooperation. Egypt also receives hundreds of millions of dollars' worth of excess military hardware annually from the Pentagon.

While American defence contractors may benefit from this massive US aid to Egypt, there is no indication that it helps to advance the interests of the American people, especially at a time when Congress is looking for ways to reduce the massive federal budget deficit.

Moreover, the rationale for this aid - that it helps secure Egypt support for its peace agreement with Israel - is skewed. Egypt ended its state of war and made peace with Israel because it was in its interest to do so: The costs of fighting a war with Israel were becoming too high to sustain. In any case, Israeli military power, including its nuclear arsenal, should serve as deterrence against a possible Egyptian military threat. Moreover, Egypt is also worried about other regional military threats, such as that of Iran, and if anything, it should have an interest in working with Israel and other Middle Eastern states, including oil-rich Saudi Arabia, to contain Iran.

What Egypt needs now is not more outside economic aid but a new commitment to start reforming its underperforming economy along the lines of the successful policies pursued in China, India and Brazil and by other Asian and Latin American governments in the last two decades or so. Egypt has been experiencing the expansion of a new generation of young people, many of whom have been migrating into the large urban centres of the country, and that includes a large number of unemployed university graduates. Unless the Egyptian economy is able to provide new employment opportunities to them, the country is bound to face even more political instability.

As they try to pursue those kinds of economic reforms - challenging an entrenched bureaucracy, providing incentives for foreign companies to invest in the country, creating a new and productive class of entrepreneurs - the Egyptians and their leaders need to demonstrate the same kind of commitment to change that was displayed by the protesters in Tahrir Square. There is no reason why Egypt, a large country with a rich history and a unique geographical location between Asia, Africa, and Europe, and a population that strives to improve its economic conditions, is not able to attract global investors and join the ranks of other successful emerging markets.

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