Al-Ahram Weekly Online   3 - 9 March 2011
Issue No. 1037
Published in Cairo by AL-AHRAM established in 1875

Babies, bathwater and Egypt's new economy

Akrum Bastawi argues that changes to economic policy should look at fixing what was not working with the system rather than to superficially presume that everything was wrong

Not too long after the collapse of the Soviet Union in 1991, various iterations of a simple joke were making their way across Russia and its neighbours. "What has a year of freedom and capitalism done that many decades of communism could not do?" the joke went. "Make communism look good!" was the punch-line reply. Of course Russia and most of its neighbours have made arguably enviable strides since that era. It would be a grand disservice to the hundreds of Egyptians who gave their lives, the thousands who have been injured, and the millions who have risked almost everything, if Egypt ever seriously yearns for an encore of the Mubarak era. That is why the lessons of managing parallel economic and political changes to systems are important for a re-born Egypt and its economy.

First, the anti-corruption momentum should continue. It is paramount that this process is not sidetracked, but it should also avoid disintegrating into a vendetta-driven crowd-pleaser, because that will not bode well for investment in the economy, whether foreign or local.

Second, changes should not be driven by reactionary zeal that seeks to distance itself from the recent past. Instead, changes need to be surgical, efficient and based on objective and clear criteria. At the risk of uttering blasphemy in the new Egypt, it is a generally-recognised fact that a significant number of the reforms of the last half of the Mubarak era were actually sound macroeconomic policy. For example, those included serious reforms in trade policy (specific tariff reductions, procedural customs reforms, the development of institutional capacities, etc.), in monetary policy (the shift from fixed exchange rates to a semi-floating currency as a good first step) and in fiscal policy (the reduction in various corporate income tax rates to stimulate investment within the economy) among others. Instead, there should be a focus on fixing how these policies were designed to work so that there is no favouritism for any stakeholder at the expense of the vulnerable members of society and the larger objectives of credible, long-term economic development. One way to do that is to examine, adapt and establish special and Egypt-specific, measurable indicators of economic performance linked directly to poverty reduction and job creation, instead of the former government's excessive reliance on international indicators.

Third, the international community's support should be welcome, but again, where economic policy is concerned, changes to both the "assistance mix" and structure of conditionalities might best be gradual in the short-run. Both the interim government and its international partners should recognise that the risk of backtracking on key reforms increases during major transitions if support for the momentum disappears when the national budget is already under pressure. Real international support will be more focussed on contributing additional resources where the interim government and partners find there are critical gaps worthy of an immediate focus. Democracy-focussed conditionalities should neither be prescriptive nor excessive: with Egypt being in transition, an elected, civilian administration will have greater legitimacy in negotiating such "attached strings" than the interim government. Perception, especially in times such as these, can be very important indeed.

Fourth, contrary to the recently expressed opinions in much of the international media, the Egyptian military's commercial role in the Egyptian economy should not be a priority focus area for reform. Each nation has its own model for national security. Egypt's military has long been active in the economy for it is a core part of a model which has contributed to peace. If there are debates about the military's role in the economy, they should be distinctly Egyptian and involve both an elected government and the military itself. For now, there is little evidence to support the notion that the military's active (but limited) role in the economy as such, while it presides over an interim government at the same time, will somehow thwart economic reform as there are other risks to reform listed above.

Fifth, Egypt is the longest constantly-existing market in history, international business and investment should keep that in mind. With a growing population of over 80 million, Egypt is a market to be in, not to run from at the first sight of political risk. Businesses that invest for the long haul will be better positioned to benefit from what can only be a better, brighter future.

In conclusion, it is advisable not to throw the baby out with the bathwater: changes to economic policy should look at fixing what was not working with the system rather than to superficially presume that everything was wrong with the economy itself. One hopes that when the celebrations are held for the first anniversary of the revolution, there will be no jokes about the past being better than future, only about why Egypt waited so long.

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