The new government will have little choice but to continue this juggling act. With foreign exchange reserves badly depleted, Egypt must secure credit from the IMF and other international lenders that follow in the IMF's wake. A tentative deal providing $4.8 billion contingent on budget reforms was announced on November 20, and another $10 billion in aid from other donors is likely to follow. This will give the CBE the resources to stabilize the exchange rate, and thereby to contain import-price inflation, until Egypt regains the confidence of investors.
While Mubarak's deregulation strategy paid off in terms of growth, it allowed corruption to fester: Egypt, ranked a wretched 112th among 183 countries on Transparency International's Corruption Perception Index in 2011. The most corrosive consequence of corruption -- and more generally, the failure to provide equal protection of economic rights -- is that it reduces social and economic mobility. Small- and medium-sized enterprises, the likely engines of mobility, face daunting barriers when they compete with the incumbent elite.
The list of impediments to free enterprise in Egypt is long. According to the World Bank, a business owner needs 218 days to obtain a construction permit. It takes seven procedures and 72 days to register property. Getting an electricity hookup averages seven procedures and 54 days, and costs four-and-a-half times the annual income of an average Egyptian. Moreover, despite substantial growth that made Egypt's industrial base globally competitive in key areas and raised the economy to what the World Bank calls "lower-middle income" status over the past two decades, the discrimination against small business only heightened.
Market reforms are thus a key to fixing what ails Egypt, increasing the potential rate of growth while opening the door to new entrepreneurs and creating jobs to absorb the burgeoning workforce. But such reform is an immensely difficult process in the face of elites that have little to gain and much to lose from change.
The mainstay of Egypt's efforts to deal with poverty is the array of food and fuel subsidies noted earlier. One problem with this approach is that it distorts consumer prices, creating incentives to waste food and fuel. But the most troubling aspect of the subsidies as now constituted is that most of the benefit goes to households and businesses that aren't really needy. Two-thirds of the cost of the subsidy system is linked to fuel. Yet, according to household surveys, less than 5 percent of the fuel subsidies aid the bottom-fifth of the income distribution.
Much the same can be said for food subsidies. Two-thirds of all households now have ration cards, and the bulk of the benefit is going to the middle class. Dumping the subsidies overnight (and replacing them with cash grants to the poor) would not be politically practical. I favor gradual replacement, focusing on the fuel subsidies, which cost more and matter less to the poor. And this is apparently the direction approved by the IMF. But it will be critical to link the phase-out to cash grants and/or in-kind support to the vulnerable.