Egypt's Economic Winter

Morsi's power grab has made headlines, but the world's most populous Arab country has even bigger problems on its hands.

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Amr Dalsh/Reuters

The international media have made a huge story out of Egyptian President Mohamed Morsi's power-consolidating decrees and the balloting on his proposed constitution. How the fundamental political disputes -- between factions of the religious and secular, Islamic and Christian, and civilian and military, and between rich and poor and urban and rural -- will be resolved in the Middle East's most populous nation is seen as a harbinger for the political impact of the Arab Spring.

A companion story has received much less mainstream media attention: Egypt's escalating economic crisis since the Tahrir Square uprising. Yet the question of whether and how Egypt deals with these economic issues is deeply intertwined with the salient political questions, and has significant implications for the future. Indeed, a lack of economic opportunity was arguably as significant a cause of the Egyptian "revolution" as political repression.

The downward spiral of the Egyptian economy is reflected in almost every economic indicator. GDP growth has declined from over 5 percent to under 2 percent. Unemployment has climbed to 12 percent, with half of those aged 15-24 lacking jobs. Inflation has spiked to over 10 percent. Foreign direct investment has withered from $2.9 billion in the first quarter of 2011 to $219 million in the first quarter of 2012. Foreign currency reserves have dropped from $35 billion to about $15 billion, as both tourism and foreign investment have suffered a precipitous decline. The total market value of stocks traded on Egyptian exchanges has declined by more than half. The budget deficit has climbed to 11 percent of GDP. Twenty-five percent of the government's $84 billion in annual outlays subsidize food and energy, not just for the poor but for better-off Egyptians. Yet the number of those who are poor or near poor has climbed to nearly 50 percent of the population of 80 million. These trends have continued unabated from a year ago.

The fundamental dilemma facing Morsi after his election was a choice between market economic reforms on the one hand, led by economists and business people to promote growth, jobs, and trade, and a command-and-control statist economy on the other, which provides subsidies for essentials like energy and staples like bread, rice, and sugar and also provides sinecures for ex-military officers.

Three waves of market reforms enacted starting in the seventies did increase growth and investment. But they were associated with "crony capitalism." These changes benefited an elite close to power (including Mubarak's son Gamal), increased corruption, and, with their pursuit of efficiencies, hurt employment. They did not benefit the poor or the millions who were employed by government. Nor did the "statist" economy, with its high subsidies and high deficits, its favoritism for the military, and its support of a creaky government machinery, create conditions for new industry and new employment. That failure means today that the conditions are not in place for the high growth necessary to reduce current unemployment and create new jobs.

After assuming power, President Morsi indicated that he would try to steer Egypt toward market reforms to increase growth. These ideas were set out in some detail in a social and economic program called al-Nahda ("the renaissance"), which certain elements of the Muslim Brotherhood had been developing for years. The hope was that those who benefited from dynamism in the private sector might well be Islamic, or might share the goals of greater equity in the creation and distribution of wealth.

Presented by

Ben W. Heineman Jr.

Ben Heineman Jr. is is a senior fellow at the Belfer Center for Science and International Affairs, in Harvard's Kennedy School of Government, and at the Harvard Law School's Program on Corporate Governance. He is the author of High Performance With High Integrity.

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