GÖKHAN BACIK

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GÖKHAN BACIK
February 17, 2013, Sunday

Who will finance Egypt?

Intense debates about the political preferences of the Muslim Brotherhood impede gaining a correct understanding of Egypt. Those debates give the naive understanding of politics as totally independent of economics. Indeed, it is the economy that determines the course of politics. There is no actor in Egypt, the Muslim Brotherhood not exempted, who can impose pure political predilections without giving regard to economic considerations.

There is an important point here: Egypt is still a heavily West-dependent economy. Since the days of President Anwar Sadat in the early '70s, Egypt has followed a pro-Western economic philosophy. The fact, here is this: That path has not been successful; but even so, ignoring the Western characteristics of the Egyptian economy is to tolerate a false understanding of it.

In many sectors, Egypt remains dependent on Western financial resources. I was privileged to meet Professor Ichiki Tsuchiya of Japan's Institute of Developing Economics (IDE) at a conference on the Middle East organized by the Japanese Institute of International Affairs in Tokyo last week. His recent studies display that the country that President Mohammed Morsi rules is strongly linked to Western markets. For example, the US is still the major donor to Egypt. The US has given almost $15 billion to Egypt since 2002. Western countries like Germany, France and other EU institutions follow the US; Turkey is rising on the donor-countries list, but not sufficiently to dent the Western dominance of it.

Regarding the main trade partners aspect, Western states like the US, Italy and Germany are again the leading ones. The US is Egypt's biggest trade partner. In 2011, the US-Egypt trade volume was 8.9 percent of total Egyptian foreign trade. Turkey and Saudi Arabia are the only Muslim states on the list of Egypt's main trade partners. The picture is no different in foreign direct investment (FDI). Again, Western states like the US, Belgium, France and Italy dominate the list. Even in tourism, a highly critical industry that contributes 5 percent of the gross domestic product (GDP), it is Western countries like Germany, the UK, Italy and France, and also Russia that are bringing in the foreign currency. According to Professor Tsuchiya's findings, the only field in which Muslim countries play a critical role is in remittances. Egyptian remittances come mainly from non-Western states like Saudi Arabia, Jordan, Kuwait and Libya.

The figures are very clear. Egypt is economically bound to the West. Therefore, Morsi has to play on a very nicely balanced path. True, it is obvious that President Morsi, whose comparative success so far is to be acknowledged, does not have many options. While looking for alternate financial resources, Morsi has to accept that Egypt's income comes from Western countries. This economic balance is and will be the key dynamic that determines Egyptian domestic and foreign policy. Morsi knows well that no Muslim state can finance Egypt to a level that would enable it to uncouple itself from the West dramatically. So the Western characteristics of the Egyptian economy will continue to determine Egypt's major parameters.

Many would agree that a key problem of Egyptian politics is presidents without economic nous. All presidents from Gamal Abdel Nasser to Hosni Mubarak were political or security-oriented figures. Mubarak should be credited with his concern for the poor that motivated him to erect a system of subsidies, but that was not an instance of profound economic insight. President Morsi is also not an economist, but he gives strong signals that he is aware of the critical role of the economy. His success depends on the drafting of a gradual strategy, given that the Egyptian economy gets the bulk of its revenue from the West.

In parallel with this, Morsi should find a balance between liberalism and statism. He should continue the open door policy (infitah), but he should also use the state strategically to revitalize the economy. One should remember that in 2011 the United Nations Development Program (UNDP) recommended that Egypt should follow a “developmental state model,” one in which the state is expected to take a leading role in both the solution of social problems and activating the private sector.

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