Beyond Good Politics, Egypt Needs Economic Remodeling

Six months after the fall of the Mubarak regime, Egypt remains in disarray. Protesters continue to take to the streets demanding change, while dozens of secular and Islamist parties jockey for power with the all-powerful military in anticipation of elections in November.

Whether Egypt will then get a stable government and develop into a genuine democracy will depend not only on how it manages its raucous politics but also on whether it can fix its sclerotic economy, and soon.

Political upheaval has plunged Egypt’s economy into crisis. Since January, unemployment has climbed to 12 percent, and investment has shrunk by 26 percent. In a country in which tourism accounts for 11 percent of GDP, international arrivals have fallen a precipitous 46 percent. Given that 40 percent of the population lives on less than $2 a day, the impact of such jolts has been profound.

It gets worse: Half of Egypt’s 80 million people are under the age of 24. Among the country’s unemployed, as many as 90 percent are young, and two-thirds have never worked.

Egypt faces a vortex of poverty and instability unless it finds jobs for its rapidly growing population. To keep up with the youth bulge, the economy has to grow faster (in the range of 10 percent to 11 percent) and for much longer than perhaps has been seen anywhere in the world.

Radical Change:
That would require radical change. Egypt would have to open its economy, shrink its bloated and corrupt public sector, reform its laws and financial regulations, invest more in education and infrastructure, and promote privatization, trade and direct foreign investment. Unfortunately, the country has been reluctant to do any of this.

This is a shame because such changes have a record of working. Economic reform was integral to democratization in Eastern Europe and Latin America in the 1990s. In those cases, the U.S. and Western Europe insisted on economic restructuring early on, tapping the International Monetary Fund and the World Bank to help with the process. Reform was not easy. It was marked with setbacks, social hardships and political resistance. But in the end, economies were transformed, and Eastern Europe and Latin America are better off for it.