THE BABY IN THE BATHWATER:

Searching for Hayek in Cairo: To make democracy stick, the Arab Spring now needs an economic revolution. (MATTHEW KAMINSKI, 4/21/11, WSJ)

Before 2005, Egypt was a stagnant and state-dominated economy. But after the opening that year—including the introduction of a flat tax that increased revenues four-fold—average annual growth above 6% beat similar Arab countries like Jordan or Syria. Economic activity started to come out of the shadows. The banking system was cleaned up. Red tape, while still notoriously bad, improved enough for Egypt to make a dramatic jump up to the 18th spot on the World Bank's rankings of easiest countries in which to do business.

Four days into the January protests, President Mubarak fired the government of Mr. Nazif, who now sits in prison. Aside from appeasing public anger, he hoped to secure the military's support. The brass didn't like reforms or Gamal Mubarak, a banker who had his eye on daddy's job. The privatization of state companies—often to benefit Mubarak cronies—and pledges of transparency and competition threatened the military's opaque hold on, it is said, up to a third of Egypt's economy. Two weeks later, after protests swelled, the generals pushed the Mubaraks out.

To the public at large, Gamal Mubarak symbolizes obscene wealth for the elites, while roughly half of Egypt lives on less than $2 a day and can't read or write. "Egypt did very well—just for 100 people," says protest organizer Abdullah Helmy. As Russia showed in the 1990s, privatization without proper domestic competition and rule of law enriches insiders, enrages the rest, and yields limited economic benefits.

But however flawed and limited, the reforms have helped Egypt stomach the economic blows of revolution. Tourism plummeted and Cairo's stock market stayed shut for over a month, until late March. Gross domestic product this year is expected to grow 2.5%, less than half the pre-revolutionary forecast. The interim government is looking for funding from the International Monetary Fund and others to cover a budget hole, but there's little sense of desperation or shortages of food or other staples. Egypt built up reserves to $36 billion; the central bank has used at least $6 billion of it to prop up the Egyptian pound since February.

"The economic developments that Egypt saw in the last five years did not filter to the masses," says Yasser El Mallawany, the chief executive of EFG Hermes, the biggest investment bank in the Middle East. "It was not people friendly. But if the growth [in 2005-10] had not been achieved, I don't know from where you'd feed 80 million people today."

Pity the poor Arabs, they would have their revolution at a point where the chattering classes have despaired of free markets. Those lucky Eastern Europeans were liberated when even the Left was having to acknowledge that only capitalism works.

Posted by oj at April 22, 2011 6:27 AM
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