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Egypt: Europe’s Economic Cousin
The unstable nation suffers from the same problems, and lacks leadership.

Mohammed Morsi and Ahmed Shafiq

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Michael Tanner

Further, one of the world’s most oppressive regulatory environments stifles entrepreneurship, business growth, and the development of civil society. The most recent Economic Freedom of the World Report ranked Egypt 80th out of 141 countries.

Unfortunately, neither candidate coming out of the first round of voting seems to fully appreciate the need for economic reform.

Shafiq clearly represents the crony capitalism and welfare statism of the old regime. He calls Egypt’s current economic situation “stable” and opposes any drastic changes. He has pledged to maintain government and military ownership of businesses. He has pledged to reduce the budget deficit to no more than 6 percent of GDP, though he has provided no details of how he would do so. He talks of subsidy reform, but again without details.

As on so many issues, the Muslim Brotherhood candidate, Morsi, has spoken about economic policy in wildly contradictory ways. On one hand he has proposed a more market-oriented agenda, promising to “limit the state’s role to basic services.” He would reduce and redirect many subsidies, and says he supports free trade. He too would cut deficits to roughly 6 percent of GDP. He would establish an independent central bank, with price stability the major goal. On the other hand, he has called for expanding the number of Egyptians eligible for social assistance, seeks to cancel debts for small farmers, and wants to create a system of Islamic finance parallel to traditional banking and finance systems.

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Both candidates also pose potential threats to the type of open society necessary to promote real growth and opportunity. Either a turn to sharia law or a continuation of the Mubarak security state would dim Egypt’s prospects for prosperity.

The need for economic reform is not unique to Egypt, of course. Countries across the Arab world desperately need to open their economies. Every non-oil-exporting Arab country is running a significant budget deficit, and if unfunded pension liabilities are included, their debts run to several hundred percent of GDP. Typically, government expenditures consume much if not most of the economy, subsidies are omnipresent, and the regulatory burden is massive. With the exception of Oman and the United Arab Emirates, not a single Arab country cracks the top 50 nations in terms of economic freedom.

Whatever the outcome of the June 15–17 runoff, it is apparent that Egypt needs a healthy dose of economic liberalism. Egypt must begin to cut the size and cost of government, reduce its tax and regulatory burden, end subsidies, and privatize its state- and military-run enterprises. Pension reforms should be resumed. And economic liberalization should go hand in hand with personal liberty. Without such reforms, the economy will continue to stagnate, poverty and unemployment will grow worse, and the door to extremism will open wider.

— Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.



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