Egypt's Way Forward

Egypt's Way Forward

After endless bloodshed, the Egyptian government's only route back to popular legitimacy is through serious economic reform.

The stakes in Egypt keep rising. The latest clashes between the government and supporters of the Muslim Brotherhood threaten to send Egypt into chaotic conditions.

The U.S. should encourage the new government—which, like it or not, call its rise a coup or not, is one Washington must work with—to achieve popular legitimacy while avoiding extreme actions that could create a civil war. With unemployment soaring, the economy sputtering and social tensions rising, economic improvements are a natural target for Egypt’s new leaders. The cold, hard truth is that Egyptians, and Egyptians alone, can save their country from toppling into a political and economic abyss. But Washington must help Egyptians to help themselves.

Here are the key steps Washington can take to push Egypt in the right direction:

First, use our economic leverage through aid and the World Bank to persuade Egypt to, in the words of Egypt expert and former State Department official King Mallory, "execute a clean privatization" of the two state-owned banks. As Mallory observes, small and medium-sized businesses account for 80 percent of new jobs there. Creating jobs requires capital. Egypt needs to clean up its act and stop making loans to deadbeat state-owned enterprises run by political hacks. That approach supported exactly the regime of "force and favors" which provoked Hosni Mubarak's overthrow.

The best way to do that is to privatize the two remaining state-owned banks and require them to make loans that are repaid. They need to insist, as Mallory argues, on a 20 percent cash recovery on the bad loans and then move into prudent approach to lending money to the job creators on the basis of merit. That alone offers a reasonable assurance that loans will be rapid and that capital infused into the market is used productively to create jobs and prosperity.

This requires el-Sissi and the new government to knock heads and cut through red tape, but they have the power to make it happen. That approach offers a key path to putting the economy on the right track.

Second, reform Egypt's electrical network and turn it into investor-owned utilities. USAID sank billions into Egyptian utilities that made cheap energy available to people while sinking the utilities into a deep financial hole. It was a losing game from the start. Mallory reports that "there are vast pools of capital in the region that would invest in Egyptian electricity," but only with a capital rate structure that's realistic. Establish utilities run by the private sector instead of socialist bureaucrats, and in place of subsidized electric rates, provide poor Egyptians cash-transfer payments that can be used to pay electric bills. That will remove another brake on creating jobs. USAID will hate the idea because it loves bureaucratic solutions, but the markets and Egyptians will like having access to economic growth while helping the less affluent in a realistic way.

Third, clean up Egypt's customs service to cut red tape and tap the Suez Canal zone as an engine of growth. This zone is a potential gold mine for growth. Inexpensive Egyptian labor can process raw materials and semifinished goods that arrive from the south into the zone and reexport them to Europe and the region. The current debacle? Egypt's customs services. The country's trade is about equal to that of Baltimore, Maryland's. But the customs staff employs more folks than the U.S. Customs Service.

No Egyptian politician is going to sack most of its bureaucrats. But we can use our aid to reduce the logjam, supporting packages for early retirement, merit-pay, and above all, a computerized auditing system that expedites the passage of goods. USAID tried that once, an effort which ran aground. But a smarter team, pushed hard by el-Sissi, interim President Adly Mansour, and the new government, could make it work. Easy? No. Doable? Yes.

Fourth, the U.S. political interest is to avoid seeing the current leadership plunge Egypt into a civil war. The Muslim Brotherhood cannot be trusted. But it may be plausible to splinter off elements to support a fresh, open process that supports free elections and democratic institutions without risking the Brotherhood's interest in creating an Islamic Republic. That will require finesse—especially with the ongoing bloodshed—but Egyptians have played politics with sophistication and finesse for three thousand years. They can do it again.

As Mallory puts it, "in most countries, the military's main interest is itself. But Egyptians are patriotic and our interest lies in fostering economic revival." He's right. Egyptians have to work out their own politics. But the alternative to hard-nosed action that produces concrete results is chaos, instability and perhaps civil war. Egypt wants U.S. support. We should provide it if Egypt's willing to take the right steps to help itself.

James P. Farwell is a national security expert who has advised the U.S. Special Operations Command and is the author of Persuasion & Power (Georgetown U. Press, 2012). Darby Arakelian is a former CIA Officer and a national security expert. The opinions expressed are their own and not those of the U.S. Government, its departments, agencies or COCOM.

Image: Flickr/Charlie Phillips. CC BY 2.0.