Mar 10, 2011

Reform as wrenching as upheaval

http://www.ft.com/cms/s/0/dbb1f24a-49be-11e0-acf0-00144feab49a.html#axzz1GA66ILhY

By David Gardner in London
Published: March 8 2011 20:18 | Last updated: March 8 2011 20:18

The young revolutionaries of Egypt and Tunisia, after toppling Hosni Mubarak and Zein al-Abidine Ben Ali, have managed to cleanse government of their henchmen and are now starting on their police state enforcers. Yet, while their thirst for political reform is unquenchable, little has emerged about their attitude towards the economic reforms their countries desperately need.

That debate, when it comes, could be as wrenching as the political upheaval. That is because the Mubarak and Ben Ali regimes, which ran their economies as rackets for a tight circle of kleptocrats and concessionaires, may have discredited the very idea of reform.

That discredit is the greater insofar as Egypt and Tunisia were held up by bodies such as the International Monetary Fund and World Bank as pioneers of economic reform in the region, while what Egyptians and Tunisians saw was cronyism and regime maintenance. The alibi peddled by western governments and their Arab clients that “structural reform” could unlock political reform – “give us some liberals to liberalise with” as one US ambassador to Cairo put it – was laughable.

Egypt did at times engage technocrats in a theoretically credible attempt to chart a transition from a command economy dominated by the public sector to an investment-powered, export-led, high growth model. Measures such as limited privatisation did, indeed, seed a perceptible rise in investment. But a closer examination of policy would have revealed a picture of mutation rather than change.

Privatisation, for example, invariably favoured regime loyalists such as steel baron Ahmed Ezz, who became a leader of Mr Mubarak’s ruling party and ally of his banker son, Gamal Mubarak. Mr Ezz is facing charges relating to his business and political activities, while the Mubarak family’s assets are frozen. By parcelling out concessions to loyalist businessmen, a regime based on the military and security services expanded its base. Genuine reforms – including changes to corporate law ordered by Mr Mubarak – were vetoed by the security apparatchiks as curbs on their discretionary powers. So, instead of confronting an insiders’ economy, the regime widened the circle of insiders.

In this cat’s cradle of mutual enrichment, scores of businessmen went into parliament – a seat of patronage rather than power – while retired officers remuneratively graced their company boards. In this “sinister cohabitation between power and capital”, as Nader Fergany, the Egyptian lead author of the UN’s 2002 Arab Human Development Report, called it, a particularly indolent form of crony capitalism thrived, but the bulk of Egyptians did not.

The number of Egyptians living on or below $2 a day grew from 39 to 43 per cent on Mr Mubarak’s watch. From 2005, after reform resumed, his government had to triple spending on food and fuel subsidies from 8.1 per cent to 26.1 per cent of current government expenditures. Spending on schools and infrastructure shrivelled. Now, by IMF reckoning, Egypt’s economy needs to grow by 10 per cent each year for the next decade just to absorb the   currently unemployed and new entrants to the workforce.

The crisis has led to strikes releasing bottled-up demands for better pay and conditions. Much of the economy is at a standstill.

Egypt has until now managed to stumble on as a skewed rentier economy of a different kind to the oil-rich Gulf model, earning between two-thirds and three-quarters of its foreign exchange from foreign aid, gas sales, Suez Canal fees, remittances and tourism. The military, furthermore, is insulated by its own business empire, with most of its weaponry provided for by a $1.3bn annual US stipend.

What Egypt needs is a modern education system to unlock the reservoir of talent of its 85m people. It needs law-based institutions. It needs a competitive environment to attract the right investment. There is so much upheaval still to come.

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