Offer Free Trade, Not Foreign Aid to Egypt

Egypt is racing toward dictatorship.  But Washington always has been more interested in maintaining influence than encouraging democracy or promoting development in Egypt.  That’s why the U.S. provided more than $75 billion in “aid” over the years. 

In fact, the cash bought little leverage.  Hosni Mubarak spent decades oppressing Egyptian citizens and persecuting Coptic Christians despite Washington’s contrary advice.  Israel’s military superiority, not America’s money, bought peace. 

Unfortunately, as elsewhere in the Third World, foreign “assistance” hindered economic development by effectively subsidizing Cairo’s inefficient dirigiste policies.  A decade ago the government finally decided to open the economy. 

Reforms including lower tariffs, enterprise privatizations, and regulation reductions.  Meredith Broadbent of the Center for Strategic and International Studies also cited corporate tax reductions and insurance regulation modernization. 

However, Egypt soon began to fall behind other reformers.  For instance, Broadbent pointed to the survival of “significant elements of a heavy-handed statist bureaucracy.”  The banking system was opaque, monopolistic, and inaccessible.  A joint report by the Carnegie Endowment and Legatum Institute cited the need to give poor Egyptians clear title to their property, reform the bankruptcy law, and reduce costs of opening, operating, and closing businesses.

Corruption was pervasive, with commerce dominated by cronyism and privilege.  The military controlled anywhere between 15 percent and 40 percent of the economy. 

The most serious economic hindrance was expensive consumer subsidies, particularly for food and fuel.  Most of the benefits did not go to those in most need.  Moreover, the cost today accounts for roughly a third of the government’s budget and 14 percent of Egypt’s GDP. 

Thus, even after the Mubarak reforms unemployment and inflation remained high while Cairo ran large deficits.  The situation worsened after the 2011 revolution.  Uncertainty and insecurity discouraged investment and the public deficit increased to 11 percent of GDP. 

The coup was another step backwards.  The government is focused on suppressing the Muslim Brotherhood and reconstituting old political and economic relationships.  Reported the Washington Post:  “now some businessmen and officials implicated in post-uprising corruption probes are again in positions of power and influence, including in the cabinet appointed last summer by the military.” 

The prime minister said the government plans to “rationalize” the subsidy, but economic reform appears to be a low priority.  In September the regime launched a “$4.2 billion program for “economic development and social justice,” the sort of big spending initiative which has not worked elsewhere.   

As I point out in my new National Interest article:

Military rule could offer a form of stability.  However, Gen. al-Sisi’s brutality, including the slaughter of Brotherhood protesters in Cairo in August, has encouraged increasingly violent opposition.  Policemen are regularly being killed, and both auto and suicide bombings are on the rise.

Such violence could frighten off investors and tourists. 

In this environment American financial assistance would be even more harmful than before.  The massive aid coming from Saudi Arabia and other Gulf states—given purely for the political purpose of combating the Brotherhood—reduces any financial pressure on the regime to streamline economic policy. 

In contrast, freer trade would be a positive good.  Meredith Broadbent proposed negotiating a free trade agreement—previous talks left off in 2005—and updating the bilateral investment treaty.  The Institute for International Economics once projected that an FTA would increase Egypt’s GDP by three percent annually.

A new accord also would benefit U.S. firms which have been left at a disadvantage by the EU-Egyptian FTA.  Such agreements, Broadbent argued, “can serve as systemic tools to help pry open closed government regulatory processes.”

Absent an inclusive political process, Egypt likely faces an unstable and violent future.  However, economic reform also is necessary.  That is unlikely to come from lectures and money from foreign governments.  But the prospect of increased participation in international commerce would offer a far more powerful and direct incentive for action.  Washington should propose that the two governments free up investment and trade.