Is Egypt Ready For Reforms?

As the months drag on and the prospect of a recovery for Egypt’s economy seem to slip further away, the key question on most investors’ minds is whether the government can push through reforms.

But while it is clear that successive governments have failed to ease hardship, it’s worth addressing whether Egyptians are ready for reforms.

The loudest opposition to the International Monetary Fund loan, energy subsidy reforms and higher taxes was from Egyptian citizens. That’s not surprising considering Egypt’s rocky history with the IMF and the (inaccurate) perception that reforms will make life worse for the poorest.

But perhaps its time for an attitude change. Indeed, it is the very real fear of a popular backlash to reforms that has so far stopped any government imposing anything too harsh.

But as Rebel Economy argued earlier this week, a dose of austerity with some stimulus is better than no austerity at all.

Take Latvia, which has provided “a rare boost to champions of the proposition that pain pays”, where it is perceived as shameful for people who earn any salary, no matter how small, to go on strike, New York Times reporter Andrew Higgins writes:

When a credit-fueled economic boom turned to bust in this tiny Baltic nation in 2008, Didzis Krumins, who ran a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia’s misery deepened under a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.

Then there was light:

But instead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.

Does Egypt need to change its mentality? Rather than protest dislikes (which is all too easy) what about focusing energy into lobbying organisations to work harder for job creation and inclusive growth?

It worked for Latvia.

The Baltic tiger’s economy grew by 50% during 2004 and 2007, but the global financial crisis of 2008-09 hit the country hard and it endured one of the worst recessions of the European Union. Deep public spending cuts introduced by the new government led to discontent and protests at home, but impressed international lenders enough to earn Latvia an IMF/European Union $10 billion bailout.

Rather than cause uproar, the cuts (including slashed wages, wide-scale sackings of public sector workers and reduced welfare) calmed fears in the international markets and rather than throw the government out of office, Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected.

Of course it would be short-sighted to suggest that if there were no protests then life would improve for the neediest. Demonstrations have been a key tool for Egyptians to communicate their grievances. However, persistent political instability, labour strikes and violent street confrontations are only delaying a recovery.

To be sure, economists have estimated that the military’s overthrow of Islamist president Mohammed Morsi led to losses of around $3 billion to $5 billion.  That mostly reflects a sharp fall in foreign investment, declining production as factories and production facilities stopped working and a major reduction in tourism revenue as security concerns mount.

But is it naive to consider Latvia’s recovery, dubbed a “neo-liberal success story”, a model for Egypt, a country that recoils at the mere mention of “neo-liberal”?

Not necessarily. The reason why the military was so welcomed in its power-grab last month was partly because Egyptians want a return to normality. Few people want Mubarak to return but they are viewing his regime a little softer and moaning that life has gotten worse since the 2011 revolution.

At one point, Egyptians will have to recognise that there must be hardship to reach the desired result. Not everyone will get what they want, but protesting every time you don’t get it won’t make any difference either.

Of course, Latvia and Egypt are hardly comparable. While Latvia was reeling from the global recession, Egypt experienced one of the fastest growth rates in the Middle East under reforms that began in 2004 to increase trade, promote growth and facilitate doing business. But as wealth accumulated, this did not trickle down to the poorest and soon stirred the discontent that ultimately led to the 2011 uprising.

Though the January 25 revolution was the harbinger of growth for Egypt, that day cannot be replicated as we have seen with Morsi’s rule and now the military’s caretaker government.

Egyptians must accept reforms and approach these with the mentality that the country won’t recover unless people are willing to try to fulfil their ambitions for a better future, rather than undermine their opponents or protect their own interests at whatever cost.

CORRECTION: This article originally linked to a story by Middle East Monitor that suggested Egypt was hit by losses of $17.1 billion after the military overthrew the former Islamist President Mohammed Morsi. The article has been corrected to reflect losses of around $3 to $5 billion, according to economists Rebel Economy consulted.



One Comment


  • Posted August 1, 2013 at 2:51 pm | Permalink

    Farah,

    First of all thank you for an extremely good blog, which I truly enjoy following (despite the news mostly is bad).

    However, as somebody who have followed both the Latvian and Egyptian economies closely both prior to 2008 and have to make some corrections to the description of the situation in Latvia.

    First, the Latvia success is not nearly as much a success as some want to make it out to be. Five years after the collapse unemployment is still very high and the economy has hardly recovered from the crisis. After all real GDP dropped by 30% so it takes many years of above trend growth to close the output gap. Hence, looking at growth rate in the Latvian economy is very misleading. Judging from the LEVEL of real GDP the crisis in the Latvian economy is still far from over.

    Second, Prime Minister Dombrovskis was NOT reelected because he is a reformer – he indeed is – but because the only alternative to his governing coalition Ethic Russian parties. Hence, the elections that got Dombrovskis was not primarily about economics, but rather about the fear of Russia. A factor that is always tremendously important in all three Baltic states.

    That is not to say that Egypt do not need reforms. Egypt obviously needs reforms and Egypt more than anything needs brave reformers. Subsidies needs to be cut dramatically, all trade restrictions have to be removed. The Egyptian pound should be made fully freely floating. Public expenditures in general should be cut dramatically (start with defence spending!).

    The problem as I see it is that the so-called “reformers” have very little credibility. The Muslim Brotherhood before they came to power had tremendous credibility. They where well-known and man MB members likely are sincere social reformers. The problem of course that MB had no economic agenda and few if any policy makers with any economic skills and insights.

    I am not sure I understand you term “austerity with some stimulus”. I am sorry to say it, but from an economic perspective that is nonsense. However, you might mean that Egypt needs supply sider reforms to spur trend growth and at the same time needs to consolidate public finances. I would fully agree with that.

    The best way to achieve would be to have the central bank target nominal GDP growth, while fiscal policy should be focused on reducing the deficit. At the same time the government’s role in the Egyptian economy should be dramatically reduced through cuts in subsidies, an opening up of the economy, large scale privatisation.

    The best way to get the people to support reformer is to first of all have the Egyptian people take over public sector enterprises. Every Egyptian should become a owner of PSEs. Furthermore, a mandatory private pension system should introduced. Government natural resource revenues should go directly into these private pension fund to benefit ordinary Egyptians. I have spelled out a similar suggestion for Venezuela here: http://marketmonetarist.com/2013/03/09/a-modest-proposal-for-post-chavez-monetary-reform-in-venezuela/

    Once again thanks for a great blog!



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