Nine months after angry crowds brought down the administration of long-time dictator Hosni Mubarak, political and economic uncertainty hang heavily over the future of Egypt.
The impact of the unrest on trade and economic growth has been significant. After expanding about 5 percent in 2010, Egypt’s GDP will likely be flat, and grow by at best 1 percent in 2012, said Mohsin Khan, a senior fellow at the Peterson Institute for International Economics.
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Egypt, the most populous Arabic-speaking country, with the largest economy outside the oil-rich sheikhdoms of the Persian Gulf, is still ruled by its Supreme Military Council. The country’s long-anticipated democratic constitution and new president are unlikely to be fully functioning until the end of 2012.
U.S. exports to Egypt in August 2011 amounted to only $493.7 million, down from $579.6 million a year earlier. U.S. imports from Egypt in August 2011 also declined, totaling $135.7 million, compared with $191.7 million in August 2010.
Joseph Lee, managing director of APL Logistics for the Middle East and Africa, said his company’s volumes of imports and exports declined in the first quarter of 2011, but “the volume of business is definitely picking up during the second half of this year. We haven’t lost any customers, which is a good indication that they have confidence that Egypt will recover.”
Egypt is an important global source for apparel raw materials, such as cotton, as well as semi-finished apparel and T-shirts.
Nevertheless, Egypt’s economic and political challenges are formidable. In the vital tourism sector, about 2.2 million people visited Egypt in the second quarter of this year, down from 3.5 million during the same period in 2010. Overall, 20 percent of Egypt’s 80 million people live in poverty. Some 332,000 university graduates enter the labor market each year, but the unemployment rate among college graduates — who helped fuel the anti-Mubarak protests — is hovering around 35 percent. According to the International Monetary Fund, Egypt must create 9.4 million jobs by 2020 simply to absorb its jobless and new entrants into its work force. To achieve that goal, Egypt’s GDP would have to grow almost 10 percent a year.
It could get worse if Egypt’s leaders turn their backs on the economic reforms launched by Mubarak. Between 2004 and 2011, the Mubarak government streamlined the country’s regulations, liberalizing trade, opening access to foreign exchange, and privatizing some inefficient state-owned corporations. More such reforms were expected in coming years under Mubarak.
“The big question now facing the new government will be: What is the new economic model? Will they continue with these reforms, or will they reverse these reforms?” Khan said. He said the government faces huge pressures to pursue a more populist course by expanding its already bloated public sector to give job opportunities to critics of the Mubarak reforms.
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Paying for new jobs would require expanding the government deficit. “In the past, university graduates were all assured of a government job, even if they majored in Arabic literature,” Khan said. The stakes for the entire region are huge, he said, because if Egypt reverses course, “then it is likely that other countries in the Middle East will follow in its path.”
For many Mubarak critics, capitalism and corruption have become synonymous. “Privatization is now associated with corruption and crony capitalism,” which lined the pockets of a small group of businessmen who acquired privatized assets, Khan said.
According to Jon Alterman, director and senior fellow for the Center for Strategic and International Studies’ Middle East Program, “The old order in Egypt was connected to the private sector, which was integrating Egypt into the global economy.” In a newly democratic Egypt, many voters will likely view any pro-capitalist “reforms” as innately corrupt, rather than a genuine effort to transform Egypt into a modern, competitive nation.
“One danger is that Egypt will fall into an economic system that is indifferent to foreign capital,” Alterman said, in which foreign investments aren’t fully protected. Such an Egypt isn’t likely to attract the larger volume of foreign investment the country needs to build a modern economy, he said.
U.S. policymakers have been discussing possible incentives for influencing Egypt’s leadership to pursue a moderate course, so that it “at least does not undo” the reforms of the Mubarak years, Khan said. One possibility is to expand the list of items that qualify for duty-free access to the U.S. according to the terms of Egypt’s Qualifying Industrial Zones. Expanding the QIZ program could be the first step toward offering an even better incentive: a full-fledged free trade agreement with Egypt.
In 2005, negotiations on a U.S.-Egypt FTA were completed as part of President Bush’s grand plan for a regionwide free trade zone. Unlike successful bilateral pacts with Jordan, Bahrain, Qatar and Morocco, the Egypt agreement never made it to the U.S. Congress, after it was discovered Mubarak had rigged his latest presidential election.
Egypt needs new foreign markets more than ever to support job creation, and duty-free access to the U.S. could be a tempting incentive to stop short of rolling back previous reforms. No longer would such a pact be tainted by any association with the Mubarak regime. For all that, it remains to be seen whether such a pact could win congressional approval; representatives from the Carolinas have voiced opposition to trade pacts that could undercut the competitiveness of textile firms based in those states.
If the U.S. and Egypt manage to seal an FTA, Egypt’s first democratically elected government still would face huge challenges attracting foreign direct investment, said Jeffrey Schott, senior fellow in international trade policy at the Peterson Institute for International Economics. The stock of U.S. foreign direct investment in Egypt totaled only $9.8 billion in 2009 (the latest data available), up from $8.4 billion in 2008. That figure was slightly less than the $10 billion U.S. companies had invested by 2009 in neighboring Israel, which has only about one-tenth the population of Egypt.
The Egyptian military, which will rule until the protracted electoral process concludes, does not want to pursue the same goals as Egyptian colonel-turned-president Gamal Abdel Nasser, who imposed state ownership over industry — and nationalized the Suez Canal — during his administration of 1956-70, Alterman said. “The military is not a bunch of Nasserists who want to turn the clock back to the 1960s,” he said. “What it wants is to return to 1990, which means it (just) wants its interests to be protected.”
Nowadays, Egyptian generals realize that “if everyone goes on a government payroll (as under Nasser), they will become the responsibility of the military,” Alterman said. Rather than take such an extreme position, the military is merely “calling for some sort of social safety net” for the poor.
The Egyptian military is reluctant to make any dramatic changes in economic policy “before there is a genuine civilian government” in place by the end of 2012 or early 2013, Alterman said. “The military doesn’t feel competent to make macroeconomic decisions, and the ministries don’t feel they have the authority” yet, in the absence of an elected government.
However, populists could attract sizable electoral support in the upcoming parliamentary elections, which begin on Nov. 28, Khan said. “No one in Egypt will run on a platform of fiscal austerity; they might lose their lives if they do,” he said. At the least, Khan expects Egypt’s new leadership to pursue expansionary monetary policy and increase imports by reducing import tariffs, thus lowering prices.
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Meanwhile, the Egyptian government is “burning through” its foreign reserves, “and it can’t continue on that trajectory,” Alterman said. Egypt’s net foreign reserves dropped to $24 billion in September, down $12 billion since the start of the year, after the Supreme Council drew down its international reserves to cover the estimated balance of payments shortfall in 2011-12. In June, the Egyptian government rejected the offer of a $3 billion loan from the IMF because of widespread disapproval with the rumored terms and conditions attached to the loan. Without such funding, Egypt will struggle to fill the gap.
“Egypt must make sure that it doesn’t run into a payments problem since the country has taken a big hit on its tourism sector,” Schott said. Because of the deterioriation in their foreign reserves, Egyptians realize they may need some short-term assistance, he said.
Schott is optimistic the Egyptian government “will be more pragmatic,” rather than reject IMF assistance. Even if the IMF winds up imposing some conditions on Egyptian economic policy — such as some spending cutbacks — in return for an IMF loan, Schott believes those conditions won’t be onerous, because the consensus is that the decline in Egypt’s tourism revenue is bound to be temporary, and that will make it easier for Egypt to repay that loan. “Tourism should come back, depending on how quickly they can restore a sense of calm,” Schott said.
“The Egyptians will need to create an attractive, secure investment climate,” he said. That may not be possible, if capitalism continues to be viewed as a dirty word among veterans of the Arab Spring.
Contact Alan M. Field at email@example.com.