Treasury Secretary Lew was in Egypt today, meeting with Egyptian finance minister Hany Dimian and central bank governor Hisham Ramez to discuss, among other things, Egypt’s renewed focus on economic reform. Pro-poor policies, support for small and medium enterprises, and meeting the demands of Egypt’s youth for political and economic freedom should be central to the Secretary’s message.
Economists took heart last summer when President Abdel Fattah al-Sisi cut fuel and natural gas subsidies, took a hard line on Egypt’s budget deficit, and vowed further administrative and investment law reforms. A closer look, however, reveals a worrisome revival of crony capitalism that threatens to enrich Egyptian elites in government, the military, and the private sector while failing to address the dire needs of ordinary citizens.
For example, while Sisi’s subsidy cuts address a longstanding need to reduce public spending, he did not diminish large energy subsidies to Egypt’s quasi-private corporations. Instead, Sisi raised prices on commonly used gasoline and compressed natural gas, by 41 percent and 175 percent respectively. It’s a price hike that will hit poor Egyptians—and taxi drivers—hard, with no social safety net to mitigate the impact. Public works projects like the redevelopment of the Suez Canal may provide temporary employment for the poorest Egyptians, but they crowd out capital and won’t meet the needs of Egypt’s large youth population, far more educated than previous generations but still out of work. What it will do is further line the pockets of Egypt’s military, about which it has long been said that “the business of the Egyptian military is business.”
Other plans continue the practices of Mubarak-era “reforms,” with the potential to drive capital to subsidized and protected conglomerates linked to ruling elites. These firms failed to create the jobs necessary to share the gains from Egypt’s growth in the 2000s, and today still employ just 13.5 percent of the labor force. Ultimately, economic and political disenfranchisement proved a toxic mix. The economic disruptions of the post-revolutionary period have only worsened the situation, with a million more Egyptians below the poverty line, a further loss of jobs in the formal economy, and more Egyptians pushed into low-quality, unstable jobs in the informal economy.
More than 95 percent of businesses in Egypt employ 10 or fewer people, with an estimated 85 percent of these operating informally. Egypt’s informal small enterprises employ 40 percent of the labor force, as much as the public and formal private sector combined. Creating incentives and appropriate assistance to formalize these firms holds promise for shared prosperity and greater economic security for all Egyptians. At present, though, the dominant characteristic of these firms is that they don’t grow, constrained by an economy that serves a privileged few.
Small business owners and employees toiling away in Egypt’s informal economy, an ascendant youth population with high expectations for access to economic opportunity, and Egypt’s poor find themselves on familiar ground, locked out of high-quality jobs, growth opportunities, and hope for a better future. For now, a combination of Egyptians’ great desire for stability, the violent and near-total demobilization of the opposition, and a crackdown on dissent provide a false hope that Egypt is back in business. But we’ve seen this movie before, and we know how it ends.
Secretary Lew is right to encourage Egyptian leadership to implement reforms that will benefit all Egyptians. Egyptian leadership has assured the international community that improving the lives of the Egyptian people is central to their approach. As Egypt’s reform agenda unfolds, the US and the international community must keep leadership accountable to its commitment. Egypt’s stability is critical to US interests in the region, and relies on heeding the lessons of the Mubarak era and focusing on policies geared toward economic inclusion, a level playing field for the private sector, and the transparency and civil liberties that allow citizens to be partners in Egypt’s reform and a driving force for its growth.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise.
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