Egypt on the brink

A half-century ago, economists were abuzz about the need for "balanced development" in poor societies.

Wealthy economies enjoyed development over a broad and complementary range of activities, while poor countries were characterized by imbalance, as some sectors were relatively advanced while others were practically medieval.
Then along came an economist named Harvey Leibenstein, who argued that poor countries suffered from too much equilibrium rather than too little.

Competing forces were so well balanced, nothing happened. In such an environment, equilibrium was not liberating, it was sclerotic. It had the effect of quashing initiative, burying new ideas in bureaucracy and obstruction, and preserving the status quo. The casualties were innovation, entrepreneurship and progress.

After a half-decade of serious and sustained Islamist challenges, Egypt regained its equilibrium in the late 1990s. But welcome as that equilibrium was to many Egyptians after the uncertainty of the early part of the decade, it was also unsettling.

Among many Egyptians, there has been a growing sense that the status quo cannot hold, combined with deep uncertainty over how it might change. After so many years of staving off change for fear it would be disruptive, those both inside and outside the Egyptian government are increasingly united on the need for change, but increasingly unsure how it might be best pursued.

Adding to the uncertainty is a growing consensus that the longest-serving leader in Egypt's modern history, President Hosni Mubarak, is nearing the end of his rule. Thrust into office after the assassination of President Anwar Sadat in 1981, Mubarak has proven a far more skillful player in Egyptian politics than his many doubters predicted. But Mubarak is aging, and equally importantly, so is his entourage.

Virtually the entire senior Egyptian leadership would likely leave if Mubarak left office, making room for a fresh and energetic, but in many ways untested, new generation. Growing uncertainty over the political ambitions of Mubarak's son, Gamal, have had a chilling effect on the political ambitions of potential challengers.

Still, the succession issue is far from resolved, and whether the president, his key supporters or the military will swing strongly behind Gamal's putative candidacy remains an open question. At this point, they have not.

That a new generation will come to the fore is accepted wisdom in Egypt. When they will do so, who they will be and what they will do, remain open questions. Egypt remains in a state of equilibrium, but one that Egyptians are increasingly convinced will not hold for much longer.

It was not always so. As the world approached the Gulf War of 1990-91, there were signs that Egypt was stirring. President Mubarak was a prominent and vital supporter of the allied response to Iraq's invasion of Kuwait, and at the same time a strong voice counseling patience and consultation. In so doing, Mubarak enhanced his position as a leader of the Arab world, since Egypt's participation was a key signal that Arab support for allied action extended beyond the Gulf states.

Mubarak's actions also reaped significant rewards for Egypt, not least among them the cancellation of more than $6 billion in military debt. In the immediate aftermath of the war, the debt relief gave the Egyptian economy a shot in the arm, as did significant but conditional aid from the International Monetary Fund (IMF) and the World Bank.

The external prodding led to broad proclamations about the impending privatization of the Egyptian econonomy, including more than 312 government-owned firms. Mubarak suggested he would go where Sadat had feared to tread, dismantling the Nasser-era infrastructure of public sector behemoths and widespread subsidies of consumer goods. Indeed, privatization was so much on the lips of Egyptians in those days, it even generated its own neologism in Arabic - "khas-khasa," from the Arabic word "khas" meaning "private."

In the years following the Gulf War, Egypt's stock market reopened and went on a tear, currency exchange was radically liberalized, tariffs were reduced and new economic ventures took off throughout the country. It appeared as if the rules of the game were changing.

Other rules began changing as well. Sectarian violence in Upper Egypt morphed into anti-regime violence in Cairo. Bombs exploded in the heart of downtown. The government cracked down hard on Islamist groups, and moved tanks and troops into the Cairo neighborhood of Imbaba in order to retake it from Islamist militants. Frequent attacks on tourists, police, government buildings and even banks became daily fodder in the newspapers. It seemed to some that the system might fall.

A decade ago, then, the only thing that seemed certain was that change would come. That certainty now seems misplaced. It is impossible to pinpoint a specific time in which those forces for change stalled, but the mood shifted perceptibly in June 1995, after an assassination attempt on Mubarak in Addis Ababa by Muslim militants.

Egyptians seem to have peered over the abyss, taken a collective breath and decided that a sudden change in government would mean a descent into chaos, and they didn't want it. The edge was off the insurgency. But the edge was off economic reform as well.

Privatization stalled once the easily privatized companies were sold to investors, while the economic behemoths remained without suitors. Innovation declined. Enthusiasm for change evaporated. A few energetic ministers joined the government, such as IMF veteran Youssef Boutros Ghali, and elicited excitement. But after a few years, their wings were clipped, their portfolios trimmed and their ambitions diminished.

Egypt had experienced enough excitement for one decade, and was going to take it slow for a while.
The status quo. In truth, economic reform in Egypt had never developed much of a constituency. The public remained supportive of subsidies on necessities, ranging from sugar to rice to gasoline.

The business community had long adjusted to the status quo and saw reform primarily as a way to enrich itself rather than create more competition. In point of fact, there were virtually no voices in Egypt to the right of the government, and the government wasn't very far to the right at all.

A declining sense of the urgency of reform did little to obviate the necessity for it, however. The decline in investment and tourism after September 11, 2001, made it all the more necessary. Steps taken so far, however, appear insufficient to shake Egypt out of its economic and political funk.

Per capita GDP growth in Egypt is less than two percent annually, down 50 percent from the average of the last decade. Meanwhile, 600,000 young people enter the labor market every year - far in excess of the number of new jobs.

Unemployment among those under 26 is estimated at more than 28 percent, and it can take years for new graduates to find gainful work.

Just as serious, but much less commented on, are fears of a looming banking crisis. Loans financed the construction of huge new resorts on the Red Sea, housing complexes on the Mediterranean, apartments in Cairo and land reclamation schemes all over the country. But as has happened many times before in Egyptian history, land speculation bubbles burst.

By one estimate, land values in downtown Cairo plunged by two thirds in the last five years, leaving investors exposed and undercapitalized. Partly because of plunging land values, and partly because of lax oversight, banks have huge numbers of non-performing loans on their books.

The Financial Times recently estimated such loans at 18-22 percent of the portfolios of the four major public-sector banks, not only threatening the overall economic health of the country, but also dampening the prospects that such banks could be privatized in the foreseeable future.

In the meantime, opposition parties in Egypt are increasingly moribund. Originally established by President Anwar Sadat in the 1970s as a gesture toward political liberalization, parties other than the National Democratic Party (NDP) are filled with aging leaders resigned to bit parts in Egypt's ongoing political drama. There is one game in town, and that game is the NDP.

That being said, there are intriguing signs that the NDP may seek to become an agent of change in the country. Gamal Mubarak has been leading the party's policy secretariat toward being a sort of internal think tank, vetting creative ideas and pushing an agenda for reform.

Longtime party veterans have been purged from leadership positions, and the party has sought to enlist creative thinkers for study groups and discussions. Although much of the work is in the preliminary stages, at least some Egyptian reformers see Mubarak as the best available vehicle for pursuing change.

A former investment banker with a dozen years of experience in Cairo and London, Gamal has an agile mind and a sure grasp of the Western logic behind reform. He speaks passionately and convincingly about the need for change. But as the son of the president and leader in his party, he is vested in the status quo.

Gamal Mubarak's political ambitions have been rumored in Cairo for years, and some see his stepped-up party role as a sort of grooming process. But his accession to power is by no means assured. On the one hand, some close observers consider the current period as one of testing rather than grooming.

Should he fail to win his interlocutors' confidence - either on the domestic or international scene - the whole idea of his candidacy could be rolled back.

Others point out that the real power in Egypt continues to lie with the military and the security services, and that they have not yet decided to cast their lot with Gamal. Just as some in the business community view Gamal as their best hope for a transition to civilian leadership, some in the military and the security services may see him leading toward an unacceptable loss of control.

But as it appears to an increasing number of observers that Gamal Mubarak fancies a political future for himself, talk about alternatives becomes increasingly rare. For many years, talk about succession to Hosni Mubarak was a taboo subject; now, talk about a successor other than Gamal is similarly hushed.

The key question facing Egypt now is the extent to which fundamental change can come without either a dramatic change in government or some sort of powerful opposition party or movement challenging the status quo. Passive discontent appears to be rising, but such discontent has no leader or clear agenda.

The NDP is seeking to co-opt the forces of change, driving reform from above in much the way that Egyptian governments have done since the 1952 revolution. It is slowly gathering energy, and remains the only game in town.

Some reformists are choosing to sit out the current period, waiting for a more auspicious time to mount a challenge. They are resigned to protecting their own interests. Others have enlisted with the NDP conditionally, arguing that they retain the prerogative of walking away if reform turns out to be a charade. Still others believe that Gamal is truly committed to change, and is waiting patiently to advance his agenda.

Party-led change is unlikely to be dramatic, as it will be constrained by all of the constituencies that currently support it. Whether such change will be sufficient to address Egypt's challenges remains to be seen.

Egypt does face daunting challenges, but it has considerable assets at its disposal. The economy remains a key weak point, as it was for much of the last century. Although overall population growth has slowed, the continued flow of new entrants to the job market will test Egypt's ability to create jobs for some time to come. Because of their history, Egyptians have often been ambivalent about foreign Edirect investment, but the general mood in the country seems more welcoming to such investment than it has been for some time.

Another challenge is the management of one of Egypt's key exports: trained Egyptians. Amidst efforts in the Gulf to hire more nationals to alleviate their own unemployment problems, and Western security concerns after September 11th, Egypt will be hard pressed to turn toward more overseas employment as a safety valve for the domestic workforce.

At issue is not just remittances, which bring more than $3 billion annually to the Egyptian economy, but also providing work for hundreds of thousands of Egyptian workers, both skilled and unskilled.

A third challenge is managing a transition in the US aid relationship, which has continued relatively unchanged for a quarter century. Spurred in part by Israel's decision to phase out economic assistance, and in part by a sense that the US-Egyptian aid relationship is serving neither side very well, Washington has been studying revisions for more than a year. The current absence of warmth between Washington and Cairo suggests that the overall level is likely to be cut, but it remains unclear to where remaining funds will flow.

In the face of these challenges, Egypt has many advantages. Chief among them is that it is Egypt, the diplomatic, artistic, intellectual and population capital of the Arab world. Although its preeminence is no longer what it once was, Egypt has long used its position to attract significant assistance from a wide range of outside powers.

Egypt remains sought after - by parties inside and outside the Arab world. There are also some promising economic experiments, from the information technology sector to agriculture to light manufacturing. While far from an entrepreneurial society, there are the beginnings of an entrepreneurial class, and the country is well placed to exploit them.

Egypt has often managed to muddle through. But it has also set the tone for the Arab world, leading it into war and peace, into socialism and into capitalism. On the brink of change, Egypt may again lead the region in a new direction.
But in order to lead, Egyptians themselves must have a better idea where they are going. A bold leader could do much to set an agenda for progress and necessary change. Whether that leader will come, who that leader will be and where that leader will lead - all remain open questions.