U.S. News & World Report
October 5, 2012
by Andrew Natsios
Much of the news out of Egypt since the "Arab Spring" uprising has focused on the Muslim Brotherhood and its role in the collapse of the Mubarak government; and later its victory in the parliamentary elections in 2011 and slender win in the presidential election in 2012. That Egyptian narrative is gradually changing to one much more complicated and less visible focused on Egypt's economic crisis which will unfold slowly, but may then engulf the country like a title wave over the next few years. That title wave could drive Egypt to a much more violent second revolution.
Compared to the carnage in Libya, Yemen, and Syria, the first Egyptian revolution was relatively restrained. By the end of it, a thousand people rather than tens of thousands had died, the creaky physical and industrial infrastructure of the country remained intact, and the organs of state authority appear to continue to function however corrupt and inefficient. But appearances can be misleading as the country's coming economic crisis could lead to an unraveling of the state.
Egypt faces four economic crises: rapidly rising food prices and budget deficits, a precipitous economic slowdown driving high unemployment even higher, and a long-term crisis over the water resources of the Nile River.
The political chaos in the country has damaged Egypt's tourism industry, which represents nearly 7 percent of the country's GDP and represents its largest source of foreign currency needed to import wheat—the staple grain nearly half the population survives on. Official sources report tourism declined by 30 percent in 2011, but unofficial sources report much more precipitous declines of between 40-80 percent in 2012.
Prior to the revolution the economy was growing at an impressive 5 percent, while last year the economy grew an anemic 1 percent. Under 25-year-old unemployment may be more than 50 percent and rising. Studies of developing countries suggest that countries with a high relative proportion of unemployed young men—often hungry and angry—have higher the risk of internal conflict.
According to the Wall Street Journal, Egypt is the largest per capita importer and consumer of wheat in the world and is thus particularly sensitive to world food prices. This past summer because of drought conditions in major grain producing countries, wheat and corn prices on world markets rose 25 percent, on top of the increases in 2010 which helped ignite the Arab revolutions. Egypt subsidies bread to maintain political stability, but those subsidies are now economically and fiscally unsustainable. Surveys in 2011 by the U.S. Embassy in Cairo showed at least 50 percent of the population felt economically insecure, a proxy for the fears of the poorest half of the country that they may not be able to feed themselves particularly if the bread subsidies end or are altered. Any reforms of the Egyptian food system—however badly needed—could destabilize a fragile political system in a precarious transition. And yet bread and energy subsidies are bankrupting the national treasury.
Energy (electricity and propane gas for cooking) and food (wheat) subsidies amount to almost 30 percent of the national budget and are on the rise. They promote widespread corruption and reduce the productivity of the economy, but they keep the streets from exploding. The Morsi government is out trying to get billions of dollars in loans from the World Bank, the U.S. government, and Gulf states to shore up the budget and economy. But they will only increase the national debt and limit future growth.
Perhaps the most serious challenge facing Egypt over the long term is the water flows of the Nile River. Without the Nile there is no Egypt: Eighty million people (soon to be 98 million) will live in a desert without life-supporting water. Nile waters have been declining for decades, but may reach a crisis level over the next five years. The Ethiopian government is now building what may be the largest dam in Africa—the Grand Millennium Dam—which will produce more than 5,000 megawatts of power using the waters of the Blue Nile. The evaporation alone from the 65 million cubic meter lake created by the dam will reduce Nile River flows, as will future irrigation for Ethiopian agriculture (though the Ethiopians deny it will be used for irrigation). The Egyptian government is so concerned by the dam that it reportedly signed a secret agreement with the Sudanese government to build an air force base on the border of Sudan and Ethiopia in order to potentially bomb the dam (which the Ethiopians began constructing a year ago), an agreement both countries has since denied. In addition Sudan is constructing four new dams on the Nile River north of Khartoum.
The new government Morsi has put in place, not unsurprisingly, is dominated by the Brotherhood's own inexperienced loyalists. The policymakers and managers needed to guide Egypt out of this economic morass are slowly and quietly being forced out of the government and universities. Coptic Christians—in government, business, and the professions—themselves are weighing plans to leave as they see the writing on the Brotherhood's militant Islamist wall. Morsi's cabinet is described by many as second tier, and incapable of dealing with these complex set of issues. They may not fully understand the implications of what is about to happen. A weak government of inexperienced administrators may not be willing to make the tough choices on the water issues or the budget subsidies for food and energy needed to get the economy back on track. Or calm the fears of potential tourists frightened enough by the instability to cancel their vacations in Egypt. The Muslim Brotherhood has a deep and broad grassroots organization in Egypt, but it has no experience governing a country at the national level facing a crisis as daunting as this one.
The economic crisis facing Egypt would challenge even the most skilled policymakers and political leaders, but the potential exodus of skilled Egyptian technocrats increases the risk that the Brotherhood will fail, and may fail miserably to address the economic crisis. In which case its popular base of support will erode as food prices rise and the poor cannot feed themselves. Then out of desperation the Brotherhood will most likely turn to the Salafist party, which represents the most extreme Islamists, for help to shore up their diminishing ranks. That will increase pressure for the Brotherhood's government to embrace even more extreme and untenable positions, thus accelerate the flight of the educated elite putting Egypt's future at risk. Western countries and the Gulf States have a strategic interest in ensuring the new Egyptian government does not fall into this economic abyss because of the instability that would ensue, the humanitarian crisis it would produce, and its political fallout.
Andrew Natsios is a Senior Fellow at Hudson Institute. From 2001 to 2005, he served as Administrator of the U.S. Agency for International Development, and was appointed as Special Coordinator for International Disaster Assistance and Special Humanitarian Coordinator for Sudan.
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