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What the United States Can Do to Help a Post-Mubarak Egypt

by and Barbara Kotschwar | February 4th, 2011 | 09:53 am
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Whoever emerges on top of the unfolding political crisis in Egypt, there is little doubt that the country is in need of fresh economic policies as well as fresh leadership. One year ago, we argued in Reengaging Egypt: Options for US-Egypt Economic Relations that the United States should pursue programs that help Egypt "create a better environment for expanding economic opportunities and promoting democratic processes in Egypt."  In the event, both sides dithered.  Economic reforms were pursued in half-steps and too slowly to address some of the underlying economic factors that have contributed to the political rebellion now spreading across Egypt.

Once President Hosni Mubarak leaves office, Egypt faces an uncertain political future because of many of the same economic problems that have plagued Egyptian society for decades: widespread poverty and income inequality; high levels of unemployment, particularly among young adults; substandard education and housing; and poor economic infrastructure (factors cited by our colleague Marc Noland and his coauthor Howard Pack as significant throughout the Middle East).  More than ever, Egypt needs American economic partnership to help improve the standard of living of its people; otherwise, nascent democratic forces in Egypt will have difficulty taking root.

What can the United States do once there is greater clarity as to the new governing regime?  Egypt has long been a major recipient of US aid, second only to Israel. As Congress has sharply cut back US AID support, US assistance has shifted to trade and investment treaties, predominantly the Qualified Industrial Zone (QIZ) initiative. There is talk in Washington of economic assistance being cut back further. But if Egypt’s conditions are to improve, more needs to be done, and quickly.  US economic and political interests are best served by broader engagement that helps boost production and employment in Egypt and provides a more secure economic base for the growth of a new democratic regime.

US assistance should be aimed at helping Egypt to boost the productivity of its private sector and build industries that will generate good jobs.  Concrete steps should include building upon the QIZ to include additional industries and approving additional QIZ sites, and targeting technical and financial assistance at improvements in ports and customs administration. Such steps would boost industry growth, spur the development of service providers related to these establishments, and potentially help to diversify the Egyptian economy.  Further technical assistance in strengthening the protection of intellectual property rights could boost US investment and help Egypt develop its nascent information and communications technology (ICT) sector.

Egypt should also be accepted as a recipient of assistance under the Millennium Challenge Corporation (MCC), which was set up in 2004 as an independent arm of the State Department’s aid program, aimed at providing incentives for economic reform. The MCC funds large-scale projects designed to liberalize and bolster various economic sectors, including the housing market, and to address the problems of insufficient infrastructure in electricity, construction, and other areas.  MCC funds are granted to countries that perform above the median in three categories:  "ruling justly," "investing in people," and "encouraging economic freedom." Egypt has met the MCC indicators test and scored above the mean in all but three indicators (political rights, trade and fiscal policy). MCC assistance could help Egypt address economic development challenges if it undertakes political liberalization in the wake of the current crisis. Continued participation in the MCC could also be conditioned on improved performance in the political rights indicator.

Finally, US assistance should be channeled towards enhancing human capital, with a focus on education from grade school to college, and on skill-building and training programs. One important component of human capital development is the position of women in the Egyptian labor force. The female literacy rate is considerably lower than that of men (the difference is greater for older adults than for the younger cohort, a sign of improvement), and female unemployment is three times the male unemployment rate. Helping Egypt to address these economic challenges will build a stronger foundation for a more democratic society.

Through active economic engagement, the United States can demonstrate its desire to work with the Egyptian people in the post-Mubarak era to build a stronger economy and to develop the resources to build their own democratic society.

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