Egypt’s sinking economy belongs to the Islamists now

The political turmoil that has gripped Egypt for much of the past eleven months has distracted from the most critical question facing Egypt today: Can the Muslim Brotherhood, which is poised to lead Egypt’s emerging civilian government, fix an economy that is in far worse condition than when the uprising began last January?

High unemployment, plummeting tourism and foreign investment and a crippling budget problem, among a myriad of other issues, all threaten to place additional economic hardships on an already struggling Egyptian working class, sowing the seeds of unrest for years to come.

Economic grievances were central to the protests that overthrew President Hosni Mubarak last February. While the country’s macroeconomic indicators improved in the final years of the Mubarak regime, the majority of Egyptians still struggled to get by. GDP per capita was a paltry $6,200 in 2010; labor laws were barely enforced; and basic government services - like healthcare and education - were substandard.

Since the overthrow of Mubarak, however, Egypt’s economic crisis has deepened, threatening to foment further unrest unless Egypt’s incoming civilian government takes decisive action to correct course in a way that has a tangible impact on the lives of ordinary Egyptians.

Egypt’s Muslim Brotherhood and the ultraconservative Salafis won a collective 61 percent of the vote in the first round of parliamentary elections and will be chiefly responsible for solving the country’s economic challenges. Of the two groups, the Muslim Brotherhood, which won a plurality of the vote, will have the greatest ability to affect Egypt’s economy and there should be grave concern over its ability to do so meaningfully.

The Muslim Brotherhood has made efforts to reassure the Egyptian public and the international community that it will embrace capitalism and not use Islam as a pretext for implementing policy that might further derail the economy. The threat to the economy, though, is that a Muslim Brotherhood-led government - because of the widespread mistrust Islamists engender around the world - will inherently deter the international community from engaging Egypt on a business level.

Tourism and foreign direct investment, for example, are cornerstones of the Egyptian economy, and they are likely to be affected negatively by the election of an Islamist government viewed as unfriendly by the West. These two sectors provided important sources of income for the government and significant employment opportunities for the population before the uprising. But tourism, which accounted for 12.5 percent of GDP in 2010, has fallen by about a third since the uprising began, and foreign direct investment has fallen 92 percent this year because of the continuing political unrest.

For these two sectors to recover, foreign investors and tourists alike must regain confidence in Egypt’s political and economic stability, but the international community will be wary of getting involved with a government that is more than 60 percent controlled by Islamists. The Muslim Brotherhood has to take decisive steps to reassure the international community of its ability to restore political order and bring about an economic recovery. Even then, restoring trust is likely to take years.

The principal reason that the Muslim Brotherhood proved so successful in the first round of parliamentary voting was the support it garnered through decades of public welfare programs. From education to healthcare, the Muslim Brotherhood filled the social services vacuum created by the negligent Mubarak government and earned a massive and loyal following as a result.

Because welfare programs were so central to the Muslim Brotherhood’s rise, the group is unlikely to meaningfully reform food and gas subsidies, which offer an important lifeline to the poor. These subsidies, however, also create a crippling budget challenge for the government. Subsidies account for a third of government spending and are an increasing burden for a country suffering a loss of revenue because of political upheaval. Leaving subsidies unchanged will put an increasingly untenable budgetary burden on the state, but efforts to reform them would likely be met with outrage from a large swath of the public that lives on the economic brink.

The Muslim Brotherhood lacks governing experience. Long marginalized by the Mubarak regime, the Muslim Brotherhood is assuming the levers of power, having never controlled any meaningful positions in government. This inexperience poses a challenge that the group can overcome, but it will probably have to sacrifice filling key economic positions with officials who share its ideology and instead appoint technocrats who have the experience necessary to manage a badly damaged economy during a time of crisis.

While the Muslim Brotherhood is hurrying to prove that it is up to the challenge of running Egypt’s economy, the ultraconservative Salafis hope to implement policies that would overturn much of Egypt’s economy.

Ideologically, these hard-line Islamists, who won roughly a quarter of the vote in the first round of elections, support a ban on alcohol, stricter rules on women’s dress, and a shutdown of any financing that is not compliant with Islam. These measures would cripple industries like tourism, foreign investment, and banking.
Fortunately, the most hard line Salafi policies are not likely to soon be enacted. Because of an ideological rift among Islamists, the Muslim Brotherhood is unlikely to form a governing coalition that includes the Salafis.

The economic challenges facing Egypt are immense, and a failure to address them could lead to years of turmoil. Economic issues propelled Egyptians to occupy Tahrir Square this past January and could easily compel them to return in the coming months and years. When the Muslim Brotherhood takes control of the economy, it will enjoy very little international credibility and even less governing experience. It must address its credibility deficit quickly and decisively or risk a backlash similar in ferocity to the one that ejected Mubarak from office.