Sustaining Egypt's Revolution: Too Big to Fail

07/11/2011 04:19 pm ET | Updated Sep 10, 2011

During an interview with CNN's Fareed Zakaria, Egyptian presidential hopeful Amr Moussa quipped that, while people speak optimistically of the Arab Spring, "our spring is full of sandstorms." This summer's weather is, it would seem, no calmer. Nearly five months have passed since massive protests at Cairo's Tahrir Square achieved the impossible in finally toppling hated president Hosni Mubarak. However, the objectives of that revolution have remained distressingly difficult to realize. Mubarak may have taken his well-deserved place in custody, but for the time being, at least, Egypt still suffers under the remnants of his military regime. Demonstrations are messily suppressed, honest media coverage is censored, and an estimated 7,000 Egyptians have been arbitrarily detained and hauled before secret, and largely unaccountable, military courts for trial. But another, perhaps greater, summer storm lurks low over the horizon: that of Egypt's sickly and fast-deteriorating economy.

Where rosy estimates once predicted growth at 7 percent, Egypt's GDP looks set to rise by only 1 percent this year. Gaudily decorated feluccas (flat-bottomed pleasure boats) sit idle on the banks of the Nile, camel drivers find few riders eager for a tour around Giza's pyramids, and the merchants of Cairo's Khan al-Khalili (a market popular with foreign visitors) sell their tchotchke souvenirs at desperately deflated prices. Tourists -- previously responsible for anywhere from 5 to 11 percent of Egyptian GDP -- have fled the country in droves, and they show little desire to return anytime soon. Similarly, foreign direct investment has fallen dramatically as ongoing demonstrations, labor strikes and lawlessness plague the country. With industry operating at 50-percent capacity, exports driven down by 40 percent, tourism suffering $13.5 billion in lost revenue, and budget deficits set to hit 8.6 percent of GDP in 2012, the outlook is grim. Egyptian finance minister Samir Radwan reckoned in May that Egypt would need an infusion of some $10 to $12 billion in foreign aid if it is to plug the gap in its finances, noting that even this sum would provide only short-term succor if foreign investment does not soon follow.

Responding to this need, leaders at a meeting of the G8 called for $40 billion in aid to be provided for "emerging democracies" in Tunisia and Egypt. However, on June 25, Mr. Radwan pulled an abrupt about-face. Stating Egypt's intent to seek out "local sources" to finance its deficit, Mr. Radwan announced the rejection of a $3-billion standby loan from the IMF and cast doubt upon the country's willingness to accept the conditions of further foreign loans, an especially surprising decision given the relatively lenient interest rate of 1.5 percent offered on the loan. This sudden turnaround is primarily a product of the longstanding popular mistrust of Western economic policy within Egyptian society, whose experience with financial reform has been less than positive. In 1977 President Sadat's attempts to meet the harsh preconditions attached to IMF loans resulted in deep cuts to vital food subsidies for Egypt's poorest and led to violent bread riots, and more recently, the liberalizing economic reforms enacted by the Mubarak regime in 2003 and 2004 are seen to have produced no measurable benefit for the average Egyptian. To the contrary, those reforms are widely believed to have enriched a wealthy minority at the expense of the poorer classes, whose already-low wages are thought to have been further devalued by the inflation accompanying economic growth.

These assertions are not entirely incorrect, but they make the mistake of blaming the ends on the means. The fault for Egypt's poor economic state lies with the way in which new revenues were funneled through the corrupt client-patronage systems of Mubarak's regime, not with the streamlined policies that attracted those revenues. Blind association of liberalizing economic reform with the evils of the old regime will only serve to stall recovery, while the rejection of short-term financial aid could seriously jeopardize the pace of political reform. Already, plans to shirk foreign loans have forced the finance ministry to cut nearly $6 billion of crucial subsidies and wage increases for the poor. With unemployment skyrocketing, especially in the large informal industries typically reliant on tourism, such spending is sorely needed. Its lack could help plunge the country into a state of further instability, from which the security offered by a military regime might seem more attractive than democracy's uncertainty.

This cannot be allowed to happen. In 2008 the Obama administration justified a bailout of the financial system on the concept that some banks were simply "too big to fail." The same can be said of Egypt's revolution. Egypt is the most populous state in the Arab world and a font of cultural, religious and political innovation. Its transition to a functioning democracy has the potential to replicate that dream across the Middle East; its failure could well spawn the opposite effect. Egyptians would do well to distinguish between Mubarak's corruption and the value of his economic policies, but international donors and lenders must work harder to provide proof of their sincerity if they are to help Egypt seize this singular opportunity. The United States should take the lead in this effort by forgiving the $3.6 billion it holds in Egyptian debt (worth only 14 cents on the dollar anyhow, given Egypt's weak economic condition) and clarifying the terms of proposed "enterprise schemes" that would provide government guarantees to U.S. businesses investing in the region. Such a gesture would not solve Egypt's financial woes on its own, but it might convince others in the Group of 20 to follow suit. In combination with more concrete offers of supportive aid packages, unladen with interest or harsh preconditions, these measures could help give Egypt's revolutionaries the time they need to build a truly post-Mubarak society. Their absence, however, could well hasten the resurrection of his legacy.