The ongoing events in Egypt are an unspeakable human tragedy. With yesterday’s death toll of 525 and rising violence in major Egyptian cities, the chances of a return towards anything resembling normalcy are very slim. The Muslim Brotherhood deserves a significant portion of the blame-–mostly for its complete failure in governing the country prior to the coup and also because their willful effort to be seen as martyrs in the aftermath of the military takeover. However, it is the military junta running the country that is now the single biggest factor driving the country towards a catastrophe.
The fact that the military has shut down the normal political process and proceeded with an extensive crackdown both against the leadership of the Brotherhood and its supporters, has created incentives for the rise in politically motivated violence and, potentially, terrorism. Princeton University economist Alan Krueger--author of What Makes A Terrorist, a book investigating the factors fostering political violence and terrorism--argued that
[t]errorists and their organisations seek to make a political statement; terrorists arise when there are severe political grievances with no alternatives for pursing those grievances.
This account describes perfectly the escalation of violence in Egypt after the military coup. Unfortunately, it is not clear that there is an easy way back. Ideally, one would hope that the Egyptian secular liberals engage with the Brotherhood, that the military relinquish its hold to power, lift the curfew, and renounce further repression, and that the Brotherhood and its various factions steer away from violence. Yet the probability of the simultaneous occurrence of all these events is rather small.
It is important to stress that the West has been complicit in the build-up of the current situation. Without a continual inflow of US military assistance (roughly $70 billion since the country’s independence), the Egyptian military would have hardly grown to be the unaccountable and opaque organization it is, controlling a large part of the Egyptian economy and effectively calling the shots in Egypt’s politics.
Alas, the behavior of Western policymakers in the aftermath of the coup has been equally embarrassing – notwithstanding the cancellation of joint military exercises with Egypt that President Obama announced today. Douglas Carswell, a member of the UK’s House of Commons, wrote an excellent blog post on the subject yesterday. He concludes by saying that
[b]y equivocating about the overthrow of Morsi (the US State Department won’t even call it a coup), Western governments seem to be doing all they can to validate the Brotherhood's script. The more that we buddy up to the generals in Cairo, the further we legitimise the world view of people like Morsi.
Where is the principled opposition to military takeovers in London and Washington? Where is the condemnation of the treatment of Egypt’s democratically elected leader? Where is the loud, and uncompromising condemnation of this morning's killings?
Perhaps this is what happens when we leave it to career diplomats to determine foreign policy. Equivocation and drift. It does not do us – or Egypt – any favours.
President Obama's statement regarding Egypt was decent, as such things go, but reveals the very limited influence that the United States has, and can have, over what transpires inside of that country--or any other, for that matter. American politicians seem incapable of admitting such things, and Obama went about as far as I've heard recently.
It is too convenient for the president's critics to accuse him of failing to halt the violence, just as they blamed him for not preventing the coup, or, before that, of not (somehow) preventing the election of Mohamed Morsi. President McCain or Romney likely would have heard the same thing. Whenever anything bad happens, anywhere in the world, Uncle Sam gets blamed, including by people who want Uncle Sam to do more. The presumption among that group is that more effort, more speeches, more intervention, would have worked, or will work in the future. I'm generally skeptical that that is true, and I'm especially skeptical in this instance.
The one concrete step that Obama could have taken, and should have taken, is a suspension of U.S. aid to Egypt. I've heard the arguments against an aid cutoff: The aid supposedly gives us leverage because the Egyptian economy is a basketcase and an aid cutoff will harm the most vulnerable in Egyptian society. Another argument says that the money withdrawn will be replaced by the aid of others, including people we don't like--this will supposedly give them great influence. Thus, we can't cede this opportunity to others, so we must persist in pretending that the coup wasn't a coup, because if the Obama administration ever admitted that it was, it would be required by law to cut off aid.
But a counterargument is in order. The Egyptian economy is indeed a basketcase, but arguably because of U.S. aid. More accurately, the economy is a mess because of some really foolish policies adopted by the Egyptian government over the years, policies effectively abetted by U.S. support. Do those who oppose an aid cutoff believe that the Egyptian government will reverse its harmful economic policies if the aid continues, but are less likely to do so if it continues unabated?
Similarly, one could logically argue that we have only limited influence over events on the ground in Egypt, while also claiming that our aid gives us that influence. But does it follow, then, that an aid cutoff will reduce minimal influence to zero influence? So what if it did? The truth is that the United States, as the most powerful country in the world, has some influence over countries that receive no U.S. foreign aid, and, sometimes, little influence over countries that receive a lot.
In the end, the absurdity of the U.S. position in Egypt is revealed by the fact that both sides direct their ire at the United States, a point that Obama made in his statement today. We are, once again, damned, no matter what we do. Which seems like a pretty good argument for doing less.
The military regime in Cairo continues to kill supporters of ousted president Mohamed Morsi with Washington’s financial support. The Obama administration is turning hypocrisy into an art form.
Washington labors with the delusion that it controls the world. The administration insists that it must preserve its influence by giving more money to the generals in Cairo. Yet when has the United States ever exercised influence in Egypt?
For four decades American taxpayers have subsidized dictatorial regimes. The administration tried to save Mubarak from revolution, before supporting his overthrow. Washington’s attempts to convince President Mohamed Morsi to rule more inclusively, and military commander Gen. Abdel Fattah al-Sisi not to stage a coup, failed completely. Now the coup leader is ostentatiously ignoring the administration’s plea that he not force the Muslim Brotherhood underground.
Yet the president refuses to acknowledge the military coup, which would require the cut off of U.S. aid. If that happened, says the administration, Gen. al-Sisi might ignore American advice!
As I point out in my latest Forbes column:
It would have been better years ago had American officials simply shut up and done nothing. No money would have been wasted. Washington’s impotence would not have been demonstrated. The U.S. would not be complicit in decades of military rule.
Alas, Egypt is not the first instance in which the U.S. government has managed to look stupid while spending a lot of money. In fact, that is far more the rule than the exception for Washington.
For decades Washington has given away tens of billions of dollars a year for economic “assistance.” Among the lucky recipients? Crackpot communists such as Nicolae Ceausescu’s Romania and Mengistu Haile Mariam’s Ethiopia.
As in Egypt, local despots quickly learned that U.S. officials hate to admit failure and end assistance. So the money continues to flow no matter what.
Around the world Washington officials cheerfully talk about the importance of democracy while ostentatiously backing autocracy. Today the hypocrisy is most flagrant in Central Asia and the Middle East. Indeed, the administration praised the “Arab Spring” while supporting repression in Bahrain, Saudi Arabia, and now Egypt.
Much ink has been recently spilled on preserving American credibility after President Obama made Syrian use of chemical weapons a “red line” for intervention. In fact, Washington routinely draws meaningless red lines around the globe, which are routinely ignored.
American officials never learn!
In Egypt Washington has combined equal parts hypocrisy and futility. U.S. officials are never content to just shut up and stay home. If President Obama wants to leave a positive foreign policy legacy, he should do and say less abroad.
Despite escalating tensions between Egypt’s new military-backed government and supporters of ousted president Mohammed Morsi, there is at least one positive development coming out of the Land of the Nile. Yes, at long last, some semblance of stability appears to be returning to Egypt’s economy.
After the ouster of President Hosni Mubarak in 2011, the Egyptian economy took a turn for the worse. In particular, the Egyptian pound began to slide shortly after Morsi and his Muslim Brotherhood-backed government took power, sparking the development of a black market for foreign currency. The accompanying chart tells the tale: the official and black-market EGP/USD exchange rates began to diverge sharply in late 2012. In recent weeks, however, they have converged.
Recent currency auctions by the central bank, coupled with improved expectations about the country’s economic prospects, have begun to buoy the struggling pound. Indeed, the black-market exchange rate is now 7.13 EGP/USD, very close to the official rate of 7.00 EGP/USD. So, with Morsi, the black market appeared, and with the military’s re-entry, the black market has all but vanished.
The Egyptian stock market is echoing the confident sentiments displayed by the foreign exchange markets (see the accompanying chart). But, it remains to be seen if this newfound confidence in the Egyptian economy will be sustained.
That said, there is still trouble in "paradise." Egypt’s fiscal priorities are severely misplaced. Subsidies and interest payments eat up 58 percent of government expenditures. Salaries for Egypt’s bloated bureaucracy account for another 25 percent of government expenditures. The central bank, too, is in need of substantial reforms. The ideal solution would be to institute a currency board system, which would tightly link the Egyptian pound to a stable foreign currency, such as the U.S. dollar. This would establish the kind of monetary stability enjoyed by Hong Kong and Bulgaria, for example. A currency board system would also inject much-needed discipline into Egypt’s fiscal affairs.
Alas, hope for such reforms seems dim at the moment. Indeed, the tidal wave of foreign aid that is headed for Cairo will weaken the government’s incentives to pursue a bold plan for Egypt’s economy – and in turn, will keep Egypt from reaching its full potential. For the time being, elevated inflation levels will remain the order of the day (see the accompanying chart).
Some much-needed stability has returned to the Egyptian economy since the military removed Morsi from power. But, it is doubtful that the military possesses the know-how or political will to make a bold move in the economic policy sphere. Morsi and the Muslim Brotherhood did not have a plan for the Egyptian economy. The military now appears to have a plan – a bad one. It centers on an old Egyptian political mantra: let’s pass the begging bowl.
The United States has spent decades attempting to micromanage the Middle East. The result is a long series of disastrous failures. Egypt is the latest example.
Almost everyone in Egypt now blames America—despite almost $75 billion in financial assistance to Cairo over the years. Instead of backing away, President Barack Obama is digging America in deeper. The administration is ignoring U.S. law by continuing financial aid.
The United States turned Egypt into a well-paid client during the Cold War after Egypt switched sides and later made peace with Israel. But the case for continuing subsidies has disappeared.
The law requires halting assistance. If what happened in Cairo was not a coup it’s time for an update to George Orwell’s 1984. In fact, it appears that the military planned its takeover for months.
The Egyptian military is a praetorian institution which has been the foundation of dictatorship for a half century. Egyptian military officers are pampered apparatchiks who control as much as 40 percent of the economy. They always have served power and privilege rather than democracy and liberty.
Moreover, foreign “aid” has subsidized Egypt’s catastrophic economic failure. Like government-to-government assistance elsewhere, American subsidies have discouraged economic reform.
As for political influence, Cairo long ago realized that it could count on receiving Americans’ money irrespective of its behavior. Egyptian governments have never listened to Washington’s advice regarding either economic or political reform. That hasn’t changed since the coup.
Deputy Secretary of State William Burns visited Cairo a couple weeks ago and activists on both sides refused to see him. The top military leader met with him, but ostentatiously ignored Burns’ pleas.
Even if the money theoretically brought influence, the Gulf States have promised Egypt at least four times as much as Washington. Why should Cairo listen to America?
The military already is well-funded domestically, and much of America’s assistance goes for prestige weapons, such F-16s. Nor does Washington need to pay the generals not to break the peace with Israel. They know that conflict with Israel would be suicidal.
Unfortunately, the liberal opposition is living an illusion if it believes that security forces which backed dictatorship for six decades now represent liberal values. As I point out in my new Forbes online column:
[I]t will not be long before those who advocate democracy and liberty find themselves in the army’s cross-hairs. Literally, given the military’s penchant for using live ammunition against protestors. Democracy advocates who subvert democracy should expect nothing less.
Finally, America’s reputation is on the line internationally. The Muslim Brotherhood may be no friend of liberty, but political Islamists are far more dangerous if excluded from the political process. And the coup will resonate beyond Egypt. To work so hard to avoid applying the law in order to support a coup against the man who won the first free presidential election in Egyptian history will make a mockery of any future pronouncements about America’s commitment to democracy.
Washington’s best hope is to disengage, leaving Egyptians to decide their own future. That would respect the rule of law in the United States. It also would restore a degree of leverage, if Egypt’s military actually values Washington’s cash and support. It is time to halt American assistance to Egypt.
The Muslim Brotherhood and President Morsi never had a credible plan for the Egyptian economy. Indeed, I doubt that the Brotherhood's leaders know the meaning of the word "plan". Over the past year, economic conditions in Egypt have gone from bad to worse. And, it seems Morsi's brief tenure as president will likely be remembered largely for its shameful economic record – one marred by a decline in GDP growth, a reduction in foreign reserves, and a sharp increase in unemployment.
Black markets have also been a hallmark of the Muslim Brotherhood's economic legacy. Price and capital controls have caused shortages and a substantial slide in the value of the Egyptian pound. In consequence, Egyptians have watched inflation destroy their standard of living. Additionally, controls have delivered shortages of foreign exchange and many goods, like gasoline. In the face of the Brotherhood's wrongheaded economic policies, official inflation and price statistics took leave of reality, and the black market quickly became a source of material support that the Muslim Brotherhood's government could not provide.
Yes, as the accompanying charts illustrate, the story of a failing Egyptian economy is the story of a troubled Egyptian pound – and of the inflation troubles that accompanied it. Indeed, as of July 1, 2013 (shortly before before Morsi's ouster), Egypt's annual inflation rate was 27.1 percent.
These trends have proven fatal for Morsi and the Brotherhood. While Morsi's final hours were filled by lectures on "constitutional legitimacy", Egyptians weren't listening – they were preoccupied with a plunging pound and an inflation rate that is over three times higher than the official rate. Morsi and the Muslim Brotherhood's policies, of course, contributed mightily to the implosion of the Egyptian economy. In the final analysis, the Egyptian people have taught Morsi and the Muslim Brotherhood a harsh lesson: bread is more important than ideas.
As Egypt descends into violence, it is worth remembering that the origins of its current predicament are largely economic. The events of Arab Spring were as much about access to economic opportunity as they were about democratic governance. After all, Mohamed Bouazizi, the Tunisian fruit vendor whose death triggered the mass protests in the region, self-immolated after being constantly harassed, fined, and mistreated by police and local authorities, unable to find other source of employment than selling produce.
In Egypt, the popular support for last week's military coup is related to the disenchantment with the previous government dominated by the Muslim Brotherhood’s Freedom and Justice Party, which failed to even begin to address the country’s economic problems: unsustainable public finances, rural poverty, and youth unemployment.
In June, the country’s foreign exchange reserves fell by $1.12 billion to $14.92 billion. The outflow is driven by the imports of subsidized commodities, most notably fuels. To avert insolvency, the government will have to put in place a credible reform program that will phase out subsidies – or perhaps replace them with a less wasteful and more targeted social assistance program. Subsidy reforms are tricky, both technically and politically, and the present political environment will make them more, not less, difficult.
The current political uncertainty also adds to a long list of institutional deficiencies that make Egypt a tough place to do business. Many of these can be addressed aggressive reforms expanding economic freedom. Many low- and mid-income countries, including Rwanda, Botswana, Mauritius, or Thailand, have made rapid progress in cutting red tape and scrapping unnecessary regulation, with remarkable economic results. Can Egyptians generals follow their example?
The future of Egypt hinges on whether its new leadership – regardless of whether it is chosen democratically or not – will be able to make rapid and sustainable progress in reducing public debt, restoring the rule of law, and improving the business environment. While one hopes for the best, there are reasons to be wary – not only are the country’s economic problems growing more severe every day, but also the divisive authoritarian politics and the rise of violence are hardly conducive to clear-headed economic reforms.