As Egypt began the second of three rounds of elections yesterday and commentators in and outside the country debate the prospects for democracy after large Islamist victories so far, its economic problems loom ever larger. As I wrote at the end of November, Egypt’s economic challenges include: a battered tourism industry, expensive food and fuel subsidies that are driving budget deficits, high yields on government debt, and most urgently, rapidly declining foreign currency reserves. To drive the point home, on Sunday, interim prime minister Kamal el-Ganzouri tearfully stated in a press conference that Egypt’s economy is “worse than anyone imagines.” Current estimates about Egypt’s foreign currency reserves surely factor into his sobering assessment. Today, a report was leaked that the government intends to cut expenditures by $3.3 billion, but indicated that the cuts would not hit health care, education, and pensions. According to the World Bank, Egypt spent 5 percent of its GDP on healthcare in 2009, and 3.8 percent on education in 2008. It seems possible, then, that Egypt may begin to cut its politically sensitive and popular subsidies, which are significant: currently, subsidies are about three times the size of the education budget.
Egypt’s short-term solutions to its economic troubles are limited and include substantial commitments of foreign aid that have yet to materialize. Egypt had hoped to obtain nearly $8 billion in assistance pledged by Saudi Arabia, Qatar, and the UAE, though this now seems unlikely. So far, Egypt has received just $1 billion, a funding lag linked to Saudi Arabia’s displeasure with Mubarak’s ouster and subsequent trial, according to statements made by Western diplomats. In the coming months, Egypt’s funding from the United States (totaling about $1.8 billion in the FY2012 budget request) also stands to suffer as members of Congress are wary of an Egyptian parliament dominated by Islamic political parties. As CFR’s Ed Husain noted, it is easy for U.S. lawmakers to “build up a case against the Muslim Brotherhood,” not to mention that budget constraints at home present a further disincentive.
The bottom line is that without getting the basics of the economy right, Egypt’s budding democracy will have no legs to stand on and no energy to propel it. At the heart of protesters’ demands in January were economic complaints: a lack of opportunity, poor standards of living, inadequate education, and rampant corruption. While this economic dissatisfaction was a major factor in overthrowing the regime, it will also be a major inhibitor to democracy consolidation.
An interesting book from Jan Teorell last year, Determinants of Democratization, argues that poor economic performance under autocracies can set off transitions to democracy, while strong economic performance under democracies helps them avoid reverting to authoritarianism. Based on this assessment, without an economic improvement, Egypt’s prospects for sustainable democracy look slim.