Egypt Independent

Post Mubarak, US aid to Egypt takes new shape

The new chapter in the history of US aid to Egypt involves a new but untested model that will focus on lending to small Egyptian businesses while encouraging focused investments chosen by the US.

“The goal must be a model in which protectionism gives way to openness, the reigns of commerce pass from the few to the many, and the economy generates jobs for the young,” US President Obama said during a speech in Washington last week.

Egypt has long depended on US military aid designed, at least in part, to keep the Egyptian military one of the strongest in the region.

Following the fall of President Hosni Mubarak in February, Obama and US Secretary of State Hillary Clinton have expanded the relationship by presenting an aid package focused on private investment and job creation.

But it will be difficult to reshape Egypt’s economic landscape. And small businesses were hit hardest by the unrest during the political protests.

“In Egypt, you have large monopolies, which actually hinder new businesses and make it difficult for smaller entities to exist,” said Magda Kandil, executive director of research at the Egyptian Center for Economic Studies.

It remains to be seen how the money will be administered or how the plan will be implemented, but both Clinton and Obama have spoken of a bottom-up kind of economic revival.

An economic principle behind the package is that small and medium-sized local businesses, such as small factories, large shops, and some small chains, make up the largest percentage of a healthy economy and are one of the biggest factors for job growth.

Obama also compared some of the investments to funds that jump-started the economies of Eastern Bloc countries after the fall of communism, an arrangement that was geared toward encouraging both democratic and economic change.

“They are doing this because they need to help the countries that are in a dark place,” said Kandil. “They know that if you are to succeed politically, then you have to be in a comfortable situation economically.”

Leaders at the G-8 conference this week have said that the European Bank for Reconstruction and Development, a bank which was established to help rehabilitate eastern European economies, might lead the way in this initiative.

Obama also promised Egypt a swap of US$1 billion in debt for a guaranteed US$1 billion in investment.

The debt-for-investment trade is what many economists are calling "a swap", an arrangement that gives the United States some say over how and where the money will be invested.

Kandil said the United States has been interested in a public housing project that would help people living in Cairo’s slums, although the chosen project has not yet been named by the US government.

Whether the US arrangement or any other investment is beneficial, some economists say, will ultimately hinge on which sector of the economy receives it.

Investment should be in labor-driven and agricultural markets to maximize job production, said Salwa al-Antary, economist and former research director at the National Bank of Egypt.

"Since 30 percent of the Egyptian economy is linked to agriculture, any new investments in that area would help improve the standard of living in all areas," said Antary.

But for all the talk, it’s not clear what small-to-medium sized business investment will mean. Some organizations define a small-to-medium sized enterprise as having 50 employees or fewer; others define them by a revenue benchmark.

"Even large enterprises by Egyptian standards will be small or medium by international standards," said Antary.

The ruling Supreme Council of the Armed Forces has not given any indication of how the funds would be allocated. The government has, however, welcomed the aid.

Egypt's Finance Ministry said that the American aid "will strengthen the Egyptian economy and its ability to overcome the impact of current events and their negative effects on the state budget."

The same week that Obama announced the aid package, Saudi Arabia announced that it would be giving Egypt a sum of US$4 billion, according to Egyptian state news service MENA. Qatar had also said that it is looking into investing up to US$10 billion in Egyptian projects.

Since Obama’s speech, the World Bank and IMF have announced that together they are drawing up a plan to offer US$4.5 billion to Egypt.

Money coming from either the IMF or the World Bank may have strings attached, and conditions for loans provided by both bodies can mean serious government service cutbacks.

Greece serves as an example. The country is struggling to comply with austerity measures imposed after a bailout loan from the IMF saved it from its own economic crisis.

"If you can evade it, do not enter this area,” said Antary. “If you have 40 percent of your people under the poverty line, austerity measures hurt this category of people."

The Obama speech has also opened up a discussion on American and international conditions for aid, including democratic progress and human rights. Some say the American president did not lay down enough conditions.

“What this suggests is a lack of boldness, a lack of assistance," said Shadi Hamid, research director at the Brookings institute in Doha. He thought the amount of money pledged by the US was too little to support Egypt’s democratic process.

Egypt's interim government has said the country lost about US$1.7 billion during the unrest that deposed Mubarak and closed the country's stock market for weeks.

Last week, Finance Minister Samir Radwan said that the projected budget deficit was US$31 billion for the coming year, about 11 percent of the country’s GDP.

The economic effects of the revolution could be felt for years. Labor protests continue and the country's tourism has slackened off by an estimated 40 percent.

There is also distrust of foreign investment. Collusion between large corporations and the Egyptian government was a hallmark of Mubarak’s regime. Egyptians marveled at the fact that economic growth seemed to benefit only a few monopolies, and left many skeptical about the effectiveness of the so-called aid.

Whether the old system will be able to change quickly enough to effectively distribute money provided from abroad will be a test for the new government.

"You really need institutional reform," said Antary.

Moreover, there is not unanimous support from all the lenders in Europe, where many countries are struggling with their own debt problems.

After Obama announced that the European Bank for Reconstruction and Development would be helping support democracies in Egypt and Tunisia, a coalition of non-governmental organizations, along with the Central and Eastern Europe Bankwatch Network, asked bank shareholders to say “no” to the bank’s altered mission, according to reports in US media.

The opposing groups said that the decision was premature, as it was not clear what type of governments would emerge in Egypt and Tunisia. They also criticized the bank’s work in assisting the development of democracy in Eastern Europe.

But according to Nancy Birdsall, an economist and founding president of the Center for Global Development in Washington DC, lending money to Egypt and Tunisia is a risk that should not be shied away from, though making sure the lending has a positive impact could take work.

“The point would surely be to support the economic reformers inside the new governments that will be working to dismantle insider corruption and introduce competition and other reforms,” she wrote in a blog post.

“Good government does not appear like manna from heaven. It is everywhere a work in progress.”