It,’s the Economy, Egypt

Full Text:

Byline: Bruce Stokes

The fate of the Egyptian government remains unclear, but one thing is certain: The country’s economy is the immediate casualty of the turmoil in the streets of Cairo. Commerce has ground to a halt, and tourists, who provide much of Egypt’s revenue, are fleeing en masse.

Reviving economic activity will be one of the first orders of business for any new government. In his televised remarks on February 1, President Obama pledged that the United States stands “ready to provide any assistance that is necessary to help the Egyptian people as they manage the aftermath of these protests.C[yen]

To that end, Washington can boost trade and investment with Egypt by negotiating a free-trade agreement, an idea shelved by George W. Bush’s administration because of the government’s record of human-rights abuses under President Hosni Mubarak.

its-the-economy-egypt-1

Before the onset of the unrest, the $500 billion Egyptian economy had been faring relatively well in recent years. It averaged 7 percent growth from 2006 to 2008, before the global recession, a much stronger showing than the Middle East region’s as a whole.

Nevertheless, one in five of Egypt’s 80 million people live in poverty. Three-fifths of the unemployed are between the ages of 15 and 24, which helps to explain the predominance of young people among the protesters. Inflation rose to 16.2 percent in 2009 but had begun to come down. Now, prices are rising again as food and fuel shortages mount. Before the upheaval, the International Monetary Fund was hopeful that Egypt’s economy would grow by a healthy 5.3 percent this year and 5.5 percent next year, but those expectations have been dashed.

To reverse course and return the economy to its pre-protest trajectory requires new business opportunities that will revive investor confidence.

Restoration of tourism will be the first priority. Two million Egyptians work in jobs related to the industry, and the IMF had expected tourist receipts to total $14.2 billion this year.

Expanding tourism will require investment to develop beach resorts in the north along the Mediterranean Sea and in the Sinai that are still underutilized compared with cultural attractions such as Luxor and Giza. But investment demands stability.

The second priority is to grow merchandise exports. The IMF anticipated a merchandise trade deficit of $30.5 billion this year. To create jobs and fuel growth, Egypt needs to run a surplus.

Washington and Cairo talked about a free-trade agreement a decade ago. The pact was seen by the Bush administration as a complement to existing U.S. deals with Jordan and Israel. The White House hoped that it would boost regional economic integration as well as trade with America–and help deter terrorism in the process.

But in June 2005, then-Secretary of State Condoleezza Rice, in a speech in Cairo, spelled out the democratic price that Egypt would have to pay for a deal with the United States: free elections.

Now, assuming that the impending Egyptian elections are democratic and the political transition is peaceful, it may be time to revive the free-trade proposal. The United States is already Egypt’s largest trading partner. Americans bought $2.4 billion worth of Egyptian merchandise each year from 2006 to 2008. Imports fell to $2.1 billion in 2009, thanks to the recession, but revived to about $2.2 billion last year. The challenge is to grow that trade further.

Because a free-trade agreement between Washington and Cairo has been a nonstarter since 2005, estimates of its potential impact on the Egyptian economy are somewhat dated. But the payoff would almost certainly be positive for the country. Economist Dean DeRosa, in a 2003 paper for the Peterson Institute for International Economics, estimated that a trade deal between the United States and Egypt would increase annual exports to America by about $1 billion. In a 2005 study for the same think tank, Robert Lawrence and Ahmed Galal concluded that a U.S.-Egyptian deal would increase economic output in Egypt by 2.8 percent, raise household income by 1.6 percent, and cause prices to fall by 1.6 percent as the cost of imports declines.

its-the-economy-egypt-2

Those are not overwhelming benefits, but they are significant. Nevertheless, a trade agreement would also create economic challenges. Any accord would be a two-way affair, and a likely influx of agricultural goods from the United States could spell trouble for Egypt’s peasant farmers. So the agreement would need to be politically sensitive.

Moreover, trade will be no panacea for Egypt’s political challenges. Jordan signed a free-trade agreement with the United States in 2000, for example, and over the next decade, exports to America rose a staggering fifteenfold. That hasn’t stopped Jordanians from taking to the streets of Amman to demand democratic reforms.

But even with these caveats, if the chaos gives rise to a new, more representative government, a healthy Egyptian economy would go a long way toward ensuring its stability and success.