Note: This article is an abridged version of an in-depth country study produced as part of the Prosperity Index project of the Legatum Institute. Complete versions of all 12 are available on the Institute website.
The Egyptian republic's economic course has been problematic, to say the least. Gamal Abdul Nasser's experiment with nationalization, central planning and Soviet-assisted industrialization left the economy hobbled by regulation and inefficiency. Anwar Sadat's successor regime relaxed the government's grip, but accumulated a mountain of foreign debt that caused stagnation through much of the 1980s.
But fortune favored the economy thereafter. Much of Egypt's external debt was forgiven or restructured in the wake of the Gulf War. And in the decade that followed, per capita GDP calculated in terms of purchasing power rose by one-third simply on the strength of containing both inflation and budget deficits.
Mubarak subsequently introduced major market-based reforms -- steps toward privatization and deregulation -- that permitted growth to accelerate to the 7 percent range. His technocrats also negotiated the global recession without a tumble, responding with a domestic stimulus (mostly infrastructure investment) that largely offset declines in private investment and exports. In the two years prior to the Arab Spring, the economy seemed to be back on the rapid development track.
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However, in the years of high growth, though unemployment in the formal market rarely fell below 9 percent, youth unemployment hovered around 25 percent, and increasing numbers of college graduates never managed to get a first job. Moreover, the stimulus barely touched smaller enterprises, reinforcing the popular impression that the game was rigged in favor of insiders.
The revolution and lingering uncertainty during the transition exacted a huge toll on economic performance. The economy has since been creeping back, but at a pace hopelessly short of the 7 percent pace needed to absorb new entrants to the labor force. And the prospects for acceleration are mixed.
The first economic challenge to the newly elected government is to reduce uncertainty about the viability of Egypt's finances. Before the revolution, the Ministry of Finance had targeted a gradual reduction in the overall fiscal deficit from 8.1 percent of GDP in 2009-10 to 3.5 percent of GDP by 2015 -- and thereby to decrease the public debt from 77 percent of GDP to 60 percent.