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Egypt’s economy is in a serious post-revolutionary slump; economic growth only emerged from negative territory in the past few months and many Egyptians are beginning to feel the pain of the sustained weakness. GDP fell four percent in the first three months of 2011, a far cry from the five percent growth that had been predicted for the fiscal year. Key sectors of the economy ground to a halt, with manufacturing plants hobbled by continuing strikes and tourism revenues down a remarkable 46 percent in the first quarter, leading to a spike in unemployment from nine percent to 12 percent. Foreign exchange reserves have been depleted by one third and the government is now struggling to come up with the funds to plug a hole of 10.6 percent in its annual budget. The turmoil has provoked many who supported the January 25 revolution to wonder why the military-led transitional government has done so little to stabilize the economy and begin a process of genuine reform.
Yet, taking into account other post-revolutionary transitions, one might be inclined to cut the new government some slack. In fact, post-revolutionary governments throughout history have a rather abysmal record of generating economic growth or fundamentally altering the structure of the national economy. Some regimes, like the Soviet Union and China, created selective bursts of growth in certain state-supported industries, but could not effectively generate sustainable or broad-based economic development. More recently, regimes that emerged in Iran, Nicaragua, South Africa, Russia, Central Asia, and some of Eastern Europe were either too rigid or too disorganized to create flourishing economies. As political scientist Jack Goldstone wrote in a review of the academic literature on revolutions: “One might expect revolutions to unleash great energy for rebuilding economic systems, just as they lead to rebuilding of political institutions. Yet in fact this rarely if ever takes place.”
How can Egypt avoid the fate of other post-revolutionary regimes? Political scientists and sociologists have examined some of the reasons that economies tend to founder after revolutions, and their findings yield some valuable lessons for Egypt’s current and future leaders.
Lesson One: Minimize Uncertainty
Revolutions, almost by definition, breed uncertainty. The period after a revolution seems to hold infinite possibilities; it is a time of hope but also of ambiguity. For businesses, this open-endedness can be crippling, as they cannot effectively plan for the future and must put off necessary investments.
New governments can shorten this period of uncertainty by stating early on the direction of their planned changes, even if the details of these reforms have yet to be worked out. After the 1989 wave of post-Soviet revolutions, states like Poland and the Czech Republic made clear early on that they planned to liberalize their economies, with entrance into the European Union as the ultimate end goal. This not only provided a broad roadmap for future leaders, but also sent a signal to businesses and investors about the kind of economic policies that were to come.
In contrast, Egypt’s current regime has been largely ambivalent on the topic of the economy, an attitude that has generated frustration among both local and domestic businesses. Net foreign direct investment flows turned negative after the revolution and local businessmen are worried that the new regime may develop a deeply populist character. However it proceeds, the new government must clearly express its intentions and lay out some broad parameters for how it plans to manage the economy. To its credit, Egypt has made some moves in this direction, with statements promising cuts in subsidies, a new minimum wage, and a commitment to free-market principles. But there has yet to emerge a more specific reform plan, with a clearly expressed guiding economic philosophy. Until the government takes this step, investors are likely to remain skittish.
Lesson Two: Reduce Division among Ruling Elites
Revolutions tend to be led by broad coalitions, with diverse groups momentarily banding together to confront a common enemy. However, in a post-revolutionary period, unity often frays as latent rivals become hostile enemies vying for control of the new regime. Whichever group emerges as the most powerful new player is often so concerned with holding onto power that it de-prioritizes economic reform.
Sociologist Ekkart Zimmermann suggests that post-revolutionary regimes face the immediate task of choosing whether to invest in guns or butter—with the vast majority opting for the former (he cites Iran, Bolivia, Mexico, and Cuba as classic examples). New regimes are often unstable, so they spend their limited resources and energy consolidating political control and marginalizing those who also seek a stake in the new order. Patronage, repression, and cooptation become their modus operandi, while the goal of genuine transformative change is lost.
Egypt at its current juncture risks falling into this trap. Although its revolutionary coalition included an array of actors, the military is the one now holding the reins of power. At the time of writing, it is unclear how much power the officers of the Supreme Council of the Armed Forces will be willing to share with members of the former opposition. If the military decides to revert to authoritarianism and push the revolutionaries back into the political margins, it will have to resort to repression and short-term consolidation. This, in turn, could breed an economic philosophy focused on shoring up its material bases of support (it is thought that the military already controls 10 percent to 20 percent of Egypt’s economy) and preserving as much of the status quo as possible.
Lesson Three: Break Old Habits
Deeply embedded economic structures tend to be difficult, if not impossible, to change. Domestically, new governments must often make do with the resources and capabilities bequeathed them by old regimes—including weak institutional capacity, limited resource bases, and dependence on the capital and skills of certain elites. Too often new governments default into the same economic patterns of the regimes they replaced, disappointing their supporters along the way. This process is clearly playing itself out in Egypt, where the underlying economic institutions of the new regime (the ministries, trade unions, businesses, and financial institutions) remain virtually unchanged from the Mubarak era.
A country’s structural position in the international economy can also hinder reform. Iran, for example, was largely a rentier, oil-dependent state both before and after the Islamic revolution in 1979. Moreover, dominant economic powers like the United States often exert tremendous pressure on post-revolutionary regimes to avoid changes that might be detrimental to trade relationships. In Iran, Cuba, and Nicaragua, for example, the United States worked furiously to forestall the institutionalization of economic policies that were detrimental to its interests. And when it was clear that prevention and mitigation efforts had failed, it resorted to policies aimed at isolating and undermining these regimes. As Egypt’s new government considers reforms outside the orthodoxy of standard neo-liberalism (such as raising the minimum wage or re-nationalizing select firms), the United States and other international economic powers may once again try to intercede.
Looking Ahead
Political revolutions may occur over days, but economic revolutions do not happen so quickly. The kinds of changes demanded by Egypt’s revolutionaries are deep and broad enough that they could require years to enact, even under ideal political conditions. Egypt’s economy is already predicted to grow too slowly to keep unemployment at its current level; economists generally believe that seven percent growth is required to provide sufficient jobs and even the rosiest projections have Egypt growing at no more than half that rate next year. Moreover, Egypt’s new leaders must figure out how to deliver not only growth but the kind of more equitable growth that the people demanded in January. This will require steps like lowering fuel subsidies (currently eight percent of GDP), raising the minimum wage from its current rate of 700 Egyptian pounds (currently equal to the poverty line), restructuring dysfunctional social welfare programs, and allocating a higher proportion of the budget to investment spending. And it must do all this while sustaining high rates of growth and without adding to the country’s sovereign debt load. Getting this formula right will be difficult, and will undoubtedly take time.
Yet, here history also provides a valuable lesson. For all their maximalist demands, revolutionaries tend to be realistic. They know that fundamental economic restructuring takes time; as long as there is evidence of small changes in the right direction, they are generally willing to be patient and remain optimistic. Egypt’s new leaders will not be able to overhaul the economy overnight. But if they begin the process soon, the Egyptian people are likely to give them the time and space needed to bring about real reform.
