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Structural crises that have become pressing

Continuous political turmoil since January 2011, and the resulting decline in the annual growth rate to a near-recession level, have turned many of the Egyptian economy’s chronic structural defects into urgent and pressing crises.

Egypt is currently dependent on foreign aid and loans to cover basic expenditures. This arrangement addresses the short term only, a concern made all the more urgent by the energy crisis, especially in the peak demand of the summer period.

The revolutionary camp remains weak and possibly even weaker today with the rise of security oppression and the lockdown of the political sphere over the past year. Since the Brotherhood has been excluded from the political sphere following the demise of their political project within a year, the ruling state alliance is almost the only power standing today in a new attempt to rebuild political authority in the aftermath of former President Hosni Mubarak’s ouster.

There are two broad camps when it comes to the direction of the economy. One seeks restructuring and to take seriously the demand of social justice associated with January 25. The other seeks to reproduce a similar economic model to that which existed during Mubarak’s rule, but without reproducing the same legitimacy crisis that precipitated his fall.

The state of the economy

The political turmoil that followed the January 25 revolution revealed several structural defects in the Egyptian economy. These include financial imbalances represented in increasing budget deficit, constant increase in public debt (primarily domestic), constant reliance on revenue earned from selling cheap energy despite its scarcity, as evidenced by a severe energy crisis, as well as excessive reliance on financially volatile sectors. These sectors, highly vulnerable to local and regional political circumstances, include tourism, foreign investment in non-energy related sectors and remittances from Egyptians abroad.

In the context of political turmoil and economic decline, these structural defects have become a crisis, on two fronts in particular. The first front is the country’s general financial state and increase in budget deficit to around 12-13 percent of the GDP, according to the estimates of the current finance minister. These rates are close to those of the late 1980s, before Egypt adopted an IMF-sponsored stabilization package. According to the most conservative estimates, public debt has grown to exceed 90 percent of GDP, in a way that puts severe pressure on the banking sector to acquire bonds and treasury bills.

The second front of the crisis is represented in foreign reserves that declined from US$35 billion in February 2011 to US$15 billion in December 2012. They then increased slightly to US$16-17 billion, despite the influx of tens of billions of dollars from Gulf countries, including Qatar during the Muslim Brotherhood’s short rule, and Saudi Arabia and the United Arab Emirates following the ouster of former President Mohamed Morsi in July 2013.

Foreign reserves have been in constant decline due to the decrease in tourism revenues and the outflow of foreign capital, accompanied by relative stability in Suez Canal revenues and a slight fall in exports. The result is the government’s failure since December 2012 to provide dollar resources to fulfill the country’s basic needs in terms of oil imports, essential because Egypt as a net importer of oil in 2006 and of energy — including natural gas — in 2012.  

Due to the reliance on foreign funding to cover current expenditures, the country is dependent on loans, grants and in-kind aid estimated at LE2 billion per month. As industries generating foreign currency decline, along with an absence of signs of economic recovery or improved growth rates, there are many questions surrounding the sustainability of Gulf aid over the medium term. Additionally, there are questions around alternatives should this aid decline to a level where it no longer covers essential energy imports. The concern is a pertinent one given that signs of electricity generation and fuel distribution crises emerged even before the summer.

Restructuring the economic system, or tinkering with it

It is possible to detail two main camps in the debate regarding the economy, general policies and currently available alternatives. The first makes economic recovery in the short term a priority on the political agenda by means of raising growth and employment rates and breaking the cycle of recession. This argument revolves around restoring local and foreign investors’ trust in the medium term, while depending on stimulus packages injected by the government from funds provided by Gulf partners, in particular the Emirates, to stir public demand and generate growth and jobs.

This camp also targets the reduction of budget deficit, primarily by decreasing energy subsidies, which currently take up around 20 percent of current expenditures.

Economists across the political spectrum agree that the current energy subsidies formula is not financially sustainable, does not embody the spirit of social justice, and does not contribute to the competitiveness of the Egyptian economy. There is disagreement, however, over how to lift subsidies in light of the social and political repercussions.

There is no room to further discuss the details of this controversy, but suffice it to say there is broad understanding that in light of the global financial and energy crises, and the worsening trade balance, the liberalization of fuel prices is the best way to reduce the deficit. This would consequently bring unrestrained increase in public debt under control and alleviate the immense pressure on the banking system, thus reducing the crowding-out effect on the private sector.

In this context, restoring economic growth is viewed as central to breaking the vicious circle plaguing the Egyptian economy since 2011. Increasing growth rates can both create job opportunities and provide a suitable atmosphere to solve fiscal imbalances, whether by lifting subsidies or increasing the state’s tax revenues. In this view, restoring growth rates would also send signals that would be sufficient to push the economy into a virtuous circle by attracting local and possibly foreign investment in the medium term, thus rebuilding foreign currency reserves, reducing the deficit in the balance of payments and moving away from an excessive reliance on Gulf aid.

This camp remains primarily focused on macroeconomic issues, both in the immediate and medium term, while ignoring questions surrounding the restructuring of the economy itself. It does not consider redefining Egypt’s economic model to give it more political and social legitimacy, by making it more expressive of the social justice that a number of sectors of Egyptian society demanded. The younger population, in particular, never viewed Mubarak’s model as successful or fair, despite increasing foreign investments and exports, and the relatively high growth rate it recorded — an average of 6 percent annually between 2004 and 2011.

It is possible to say, therefore, that the political, economic and media circles that regard economic recovery as the ultimate goal reflect a very conservative agenda that is perhaps hostile towards the January 25 revolution, or at least dismiss social justice demands. They also believe that reproducing Mubarak’s model, including its social and economic biases, will save the country from the current financial and economic crisis.

The second camp, which includes political sectors that are revolutionary or reformist, takes an entirely contradictory position, arguing that returning to Mubarak’s regime will only reproduce the same crisis that destroyed him.

The second camp considers its economic strategy over the upcoming few years as a matter of life or death to ensure the continuity of the Egyptian state, severely shaken during the last decade of Mubarak’s rule. They also consider these changes necessary to support the legitimacy of the regime formed by the military following the toppling of the Muslim Brotherhood.

The second camp in the debate points to the necessity of redefining the economic developmental model in Egypt following the January 2011 revolution, a task that is not only incredibly difficult at the level of implementation but also conception and planning.

The January 25 revolution never went beyond the protest phase, once against the ruling military council, then against the Brotherhood. It is impossible to speak of an organized body that represents the revolution, or to specify its politico-economic program. Although terms such as social justice, freedom, bread and dignity point in one way or another toward leftist affiliations, or even to a social democratic presence, the last three years have not resulted in the formulation of any political rhetoric representative of the revolution, let alone a program to gain access to power. This has repeatedly allowed conservative and even reactionary forces to hide behind a revolutionary cloak and speak in its name, whether it be the Muslim Brotherhood or the military.

The military, the economy and legitimacy

As the military was called onto the scene to represent the “people’s will” against the Brotherhood, it became clear that revolutionary change that alters the political and economic systems was not going to happen.

This does not simply mean, however, that there is no possibility of altering the economic model inherited from Mubarak’s regime, or that newly elected President Abdel Fattah al-Sisi’s rise to power will necessarily mean reproducing Mubarak’s regime. Such predictions are uncertain at best, since Sisi would face tremendous obstacles, at the top of which the way the military took over power from the Brotherhood backed by an unprecedented wave of popular support.

This brings us directly to one area of debate, which is the desire and ability of the military institution as the backbone of the system to modify the economic model inherited from Mubarak’s time. This cannot be grasped without taking into consideration Sisi’s repeatedly articulated concern to rebuild the state’s legitimacy and maintain social cohesion and national unity, which was the rationale for military intervention in the first place.

It is easy to say that the military institution has conservative tendencies, in the sense that their political project so far aims at preserving the state and consequently the economic and social relations of the status quo. This does not simply make the military a representative of interests tied to the economic model used during Mubarak’s rule, however. On the contrary, it creates spaces for contradiction among the constituents of the political alliance that was formed to confront the Brotherhood in June 2013.

These contradictions will gradually appear now that power has officially fallen into the hands of the military’s candidate, especially the tension between the interests of crony networks of heads of families and businessmen on one hand, and the need to broaden the social alliance on which the future regime will rely on the other. Other struggles will appear within the security apparatuses regarding their perception of the public sphere and the freedoms allowed amid a political system that will clearly be subjected to military-security-judicial guardianship in one way or another.      

It is too early to say that the dominating military elite has a general vision, let alone a program, when it comes to restructuring the economic model in Egypt. It is likely that their vision of the economy is tied to two factors. The first is about restoring growth rates and steering the country away from the risk of bankruptcy, while the second concerns building or restoring the legitimacy of the old authoritarian state.

Away from the direct plans related to injection of public investments to immediately raise employment and growth rates, the only thing that could vaguely indicate the military’s position towards the issue of social justice is its invocation of the national Nasserist heritage. The Nasserist period that directly followed independence was based on trading political freedoms for economic rights, resulting in the establishment of a wide social alliance based on public sector workers, state employees and students in what was later called the union of toiling people’s forces. It was an authoritarian populist formula that was quickly eroded as the country’s financial crisis intensified in the 1970s, bringing with it liberalized economic procedures, an increased role for the private sector and a loosening of the state’s direct grip over production and distribution.            

Revitalizing the Nasserist economic program is not seriously on the table, however, for many local and international reasons. Moreover, establishing a social alliance based on the state’s distributional role towards the middle and working classes is not possible in the current context. Sisi does not claim the ability to change that reality, nor does he offer promises in that regard, since the state does not have sufficient financial resources to fulfill the task. Moreover, broadening the state’s role over the private sector may also endanger the injections of foreign capital on which Egypt has been relying.

Consequently, it is safe to say that reversing the capitalist transformation achieved under Mubarak’s rule is not at the top of the military’s priorities, due to the severe shortage in state resources and the dependency on foreign linkages, especially international financial institutions. This is in addition to the dominance of neoliberalism over most of the decision-makers in the fiscal, monetary and trade sectors within the state’s bureaucratic apparatus.

The issue is not so much inducing a shift against capitalism in Egypt, though, as much as it is the introduction of changes to the capitalist model to make it more developmental, and thus fairer in the distribution of its revenues and less exclusionary than it was during Mubarak’s era. It is difficult, in other words, to reproduce the crony capitalism that prevailed during Mubarak’s rule without expecting the same legitimacy crisis that destroyed his regime in January 2011.

This brings us to a central concern: Taming, pruning and possibly eliminating some of the crony networks that emerged during Mubarak’s era. These networks controlled most of the productive assets including lands, energy resources, and bank loans, and also monopolized the market. If they are dealt with, the regime could support more medium and small-sized producers, raising their productivity and their ability to compete.

Such potential reforms would require a complete change in the dynamics between the state bureaucracy and the broader base of the private sector. It would also require reassigning the relations between the state and property and big capital holders to increase tax revenues. These revenues could fund long-term expansion in government investment directed toward education and healthcare, which are the core of any strategy aiming at raising the productivity of the Egyptian economy in the fields of labor-intensive industries, as the average wages can be raised and job opportunities can be created to accommodate newcomers into the market annually.

A variation of this strategy seems to be the most likely, as it supposedly ends with expanding the capitalist alliance by accommodating a more conservative basis to support the new regime, consequently forming a center-right alliance instead of the center-left one that involves workers.

Two questions remain at this point, both without clear answers. The first question concerns the military’s position toward its own shares of the very cronyism that emerged during the Mubarak era. They emerged primarily through access to land and enjoying monopoly over specific sectors that fall under the supervision of different national security apparatuses, such as the power, telecommunication, construction and public works sectors.

The second question concerns the ability of the military and the newly elected president to modify the behaviors of heads of capitalist families in Egypt, and to impose changes in the rules of the game in terms of access to productive assets. The military needs these families in the medium term to pump investment into Egypt and to access foreign capital through them. However, in the immediate term, the military is relying not on them, but rather Gulf States’ funding, who are motivated by a frantic political desire to accomplish a certain extent of stability in Egypt. This funding goes directly into the economic bodies of the military, which allows the new leadership some space for movement to change the rules of the game, if it sought to.         

In his classic, “Egypt’s Military Society,” (1968), Anouar Abdel Malek provided a structural analysis of the July 1952 revolution/coup, as well as the formation of the Nasserist regime that followed. Abdel Malek’s theory was clear — he believed that Egypt was on the verge of widespread social collapse following World War II. This was compounded by the fact that the old regime was unable to understand the intensity of the social struggle or solve the issue of independence from Britain, and as such was threatened with the outbreak of a social revolution opposing both colonialism and the old regime.

Abdel Malek portrayed the military’s takeover as a conservative authority’s attempt to preserve social coherence and national security. As such, they ousted the king, dissolved political parties, evacuated the British, then adopted some of the most important social demands made by workers. The new regime undertook agricultural reform, redistribution of land, the Egyptianization and then the nationalization of large companies, and the crushing of both the right and left wings. Thus, the military succeeded where both the monarchy and nationalist Al-Wafd party failed — it broadened the social alliance that benefited from state policies.

Abdel Malek’s main observation was that a conservative body such as the military adopted reforms that he described as “revolutionary” to maintain the prevalent power relations, i.e. the state, and prevent them from collapsing.

We face a similar situation today, where the outbreak of social crisis overwhelms the political field and the military returns to dominate the scene. So how far is 1954 from 2014, really?

The possibilities of reform may be related to the extent to which the military and security elites perceive the threats to their long-term attempts to restore state legitimacy. This remains unclear, for it seems that at least some of them believe that what happened on June 30 reflects a popular will to return to the pre-January 2011 era, and that frustration over a failed political transformation is sufficient for establishing the legitimacy of the old order. Others seem to better understand that June 30 represents their final chance, rather than a blank check for the old Egyptian state to come back.

This “reformist” wing holds that some changes to make the development model more inclusionary and just are necessary for the restoration of state legitimacy.

An earlier version of this article was published by the Heinrich Boll Stiftung.

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