The Technocrats and Tahrir

Egypt's new rulers have $12 billion to spend. Can they make enough economic progress to stave off disaster?

As part of my ongoing effort to find something positive to say at a moment when everything in the Middle East is objectively dreadful, I would like to introduce some of the members of the new Egyptian government: Prime Minister Hazem el-Beblawi, former director of Egypt's Export Development bank; Minister of Finance Ahmed Galal, former World Bank official and think tank scholar; deputy prime minister Ziad Bahaa el-Din, former head of Egypt's investment authority. The modern Arab world has probably never seen a governing apparatus as well-educated and professionally competent as this.

So what? No government erected on the ruins of Mohamed Morsy's Islamist regime will be deemed legitimate by the millions of Egyptians who believe that Morsy was toppled by a coup. Absent such legitimacy, no government can make its policies stick, however wise. Neither the military leaders who overthrew Morsy nor the secular forces who have now taken the reins show any recognition that a democratic state must include the millions of people who shared Morsy's Islamist vision. So who cares how many degrees and doctorates the new technocrats have?

I did say I was trying to be optimistic; hear me out. First of all, the new government has something that its predecessor did not have: $12 billion from Saudi Arabia, the UAE and Kuwait, who delivered a mountain of cash (and promises of oil) as a reward to Egypt for getting rid of the Muslim Brotherhood. This lavish gift will sow yet more bitterness among the Brothers, but it also averts a crisis that has been looming ever since Egypt's foreign currency reserves began dwindling towards zero. Egypt will not default on its foreign debt and will not suffer a run on its currency -- either of which would wreak havoc on the economy and make foreign investors head for the hills.

The cash infusion also ends, for the moment, Egypt's exhausting stand-off with the International Monetary Fund. The Morsy government, desperate for cash, had tried, and failed, to carry out the painful fiscal reforms the fund had demanded in exchange for a $4.8 billion loan. This ongoing melodrama had the effect of shrinking a very complicated discussion about economic reform into the very narrow confines of the IMF's terms. Ahmed Galal, the new finance minister, has said that while an IMF loan is "part of the solution" for Egypt -- it would be a powerful signal for foreign investors -- it can be laid aside for now. This seems, on balance, like a good thing.

Whatever ordinary Egyptians think of the new rulers, investors are paying close attention. Angus Blair, the head of Signet LLC, a Cairo-based research and investment firm, says that the mere appointment of the new team has begun to change the prevailing mood among both foreign and domestic investors. Blair points out that Egypt is a "cash-rich society" primed with $18 billion a year in remittances from abroad, and with little private debt. He argues that if the government demonstrates a willingness to take tough measures, Egypt can quickly return to the 6 percent growth it enjoyed from 2006-2009. Blair expects that, by the end of this month, the government will propose new policies -- including, he hopes, paring the bureaucracy, moving against corruption, and reducing the budget deficit.

The problem is that any economic measures which inflict substantial pain require a high degree of social consensus, at least in non-autocratic states. The Islamist government quickly frittered away its store of post-revolutionary goodwill, so that when Morsy tried to comply with IMF demands by imposing a sales tax on consumer goods, furious demonstrations forced him to retreat just eight hours after the policy was announced. Egypt is now running an utterly unsustainable budget deficit equal to about 15 percent of gross domestic product. The el-Beblawi government will have to increase revenues and cut costs. That means raising taxes on the rich -- Egypt's rates top out at 25 percent -- and actually collecting tax revenue, which will be difficult enough. But the much harder part will be reducing subsidies on food and fuel, which now consume $20 billion a year, or one quarter of its budget. And the new interim government almost by definition cannot claim the popular mandate it would need to make those decisions stick.

Hosni Mubarak, for all his dictatorial powers, never had the courage to implement longstanding plans to reduce subsidies. Morsy tried, and balked. There is a plan on the table to provide direct cash payments to the poor to offset the loss of the fuel subsidy (no one is even talking about phasing out food-price supports), and to distribute smart-cards so that recipients can make direct purchases at stores and gas stations, cutting out the middle-men who take their own cut and often steal or divert oil and gas. It's the cutting-edge solution currently under consideration in Jordan, India, and elsewhere. And Egypt now has the money to fund such a program. But it still won't work absent "a major PR campaign," as Mohsin Khan, a former IMF director for Egypt, puts it. And that, he suspects, will be beyond the reach of the interim government, which is operating without a parliament, and so would have to issue rules by decree.

Of course technocratic solutions can't heal the vast breach which has opened up in the heart of Egyptian society. But it's also true that you can't satisfy elemental demands for social and economic justice without sound policy. And formulating policy is one thing the A-Team can do. Ashraf al-Araby, the planning minister -- and a rare holdover from the Morsy government -- has spoken of laying out an economic "roadmap" and making a start on the "structural reform" Egypt needs. Those reforms include changing budgetary priorities to focus on investments that enhance growth, such as infrastructure projects; pruning the vast tangle of regulations which inhibit private investment; targeting monopolistic control of sectors like telecom; and selling some grossly uncompetitive public-sector enterprises. None of the experts I spoke to even mentioned the imperative of reducing the military's giant role in the economy, presumably because they are practical people who do not tilt at windmills.

Even such sweeping changes won't touch the heart of Egypt's problem, which is the persistent failure to invest in its own people. This is no secret: The 2002 Arab Human Development Report identified low literacy rates, mediocre secondary schools and universities, a lack of intellectual creativity and openness, and above all the second-class status of women as the besetting problems of the Middle East. (Since then, Egypt and other states have made real progress on literacy rates, but little on the status of women or the quality of higher education.) With no oil wealth to fall back on, Egypt will remain locked in poverty until it can start producing citizens adapted to life in the 21st century. The current deadlock over identity and political representation only further postpones that day of reckoning. It's yet another reason to wish for a leader that's less chauvinistic, provincial, and intolerant that the ones Egypt now seems to have.

The experts I spoke to were hardly blinded by the dazzling resumes of the new government. "Politics will trump any attempt at reform at least for a while," hazarded Alia Moubayed, senior economist for MENA at Barclay's Bank in London. "But the people who have been called to lead on economic policy management have enough credibility to devise proposals, though not implement solutions, in order to pave the way for the next elected government to drive reforms much faster and in a more coordinated fashion."

That assumes, of course, that there will be another elected government, and that it will be seen as broadly representative. If not, economic stagnation will be the least of Egypt's problems.


Terms of Engagement

Time to Be Bold

Why Obama must seize the opportunity to make a nuclear deal with Iran’s new president.

It's all bad -- the Egyptian coup-by-another-name, the Syrian rebels turning their guns on each other, the ongoing Libyan anarchy. Isn't there any good news in the Middle East these days? Why, yes: Hassan Rouhani will be sworn in as the president of Iran on August 4. I know Rouhani is arm candy for the grim theocrats who run the show over there. But that's not all he is. Iran's next president is a pragmatic figure of moderate temperament who admonished a crowd of clerics in a publicly televised meeting last week that "government's involvement in the social and private lives of people should diminish." And let's remember that Rouhani was the chief nuclear negotiator when Iran agreed in 2004 to temporarily suspend its nuclear enrichment program in exchange for modest economic benefits. Rouhani's accession to power just might be good for Iran, and good for the West.

Iran has, of course, a special gift for disappointing expectations.  Indeed, the leitmotif of The Twilight War, David Crist's history of U.S.-Iranian relations since the revolution, is fresh surprise in Washington each time Tehran chooses hostility and disruption over what would appear to be rational self-interest. So first, let's list the caveats.

As the Iranian press itself has pointed out, Rouhani is a deep member of the establishment, not a "reformist," much less a radical. And on matters which the United States cares about, above all on the nuclear file, it is Supreme Leader Ayatollah Khamenei who makes the supreme decisions. And yes, we've seen this movie before. In 1997, when the reformist Mohammad Khatami, who had publicly expressed regret for the takeover of the U.S. Embassy, was elected president, the Clinton administration engaged in an elaborate, if largely secret, courtship ritual, including secret messages passed to intermediaries offering improved relations and a speech by Secretary of State Madeleine Albright apologizing for past support of the Shah of Iran. The result? Ayatollah Khamenei thundered, "The confessions of American crimes are of no use to the Iranian nation." The relationship just got worse.

So why should it be any different now? First, precisely because Rouhani, unlike Khatami, is an insider and an apparatchik. He knows the red lines, and has shown a penchant for pushing them ever so slightly. Patrick Clawson of the Washington Institute for Near East Policy has done the world the inestimable service of reading Rouhani's 860-page Farsi-language book National Security and Iran's Economic System. Clawson points out the remarkable fact that, while conceding that the Supreme Leader opposed the deal, Rouhani nevertheless credits the pact with advancing Iran's effort to join the World Trade Organization, keeping the issue out of the U.N. Security Council, allowing nuclear technicians to continue upgrading facilities. Clawson argues that Iran could reach a deal today if -- a big if -- it is prepared to adopt a similar approach.

Is it? The fact that Khamenei allowed Rouhani to run (and win) could mean that the supreme leader and other members of the Iranian elite recognize that they are threatened by the deep alienation of ordinary citizens, and must improve an economy beset by rampant inflation and unemployment. And those problems aren't going to get better unless and until Iran can convince the West to lift the sanctions imposed on the country's nuclear program. Suzanne Maloney, an Iran expert at Brookings, compares the sense of domestic crisis to 1988, when the Ayatollah Khomeini installed the pragmatic Ali Akbar Hashemi Rafsanjani as president in order to finally bring the war with Iraq to an end.

This is by no means a unanimous view. Karim Sadjadpour, another Iranian expert, recently testified before Congress that Iran's domestic crisis is less salient than the conviction, shared by the Supreme Leader and other key regime elements, that "resistance against America," along with "rejection of Israel's existence," are "inextricable elements of Iran's revolutionary ideology," and thus that the survival of the revolution -- and their own survival -- depend on perpetual hostility.

So any new bid by Washington to break the logjam would be a gamble -- just as it would be for Rouhani. President Barack Obama has been conspicuously risk-averse on Iran, especially as there is a bipartisan consensus in favor of a policy of confrontation. After seeing his purely emblematic gestures (such as the New Year's greetings he sent in the spring of 2009) batted away, Obama determined to err on the side of resoluteness. His policy has been to try to force Iran to cry uncle through escalating sanctions. Arguably, that policy indirectly lead to Rouhani's election. Now the question is whether the administration is prepared to offer Rouhani's negotiating team -- as yet unappointed -- the kind of concessions which might carry weight with the Supreme Leader.

Right now, Iran and the "P5 + 1" -- the five members of the U.N. Security Council and Germany -- are stalemated, like Dr. Seuss's South-Going Zax and North-Going Zax, each waiting for the other to make the first move. Iran insists on an acknowledgment of its "right to enrich." The P5 + 1 has no intention of conceding that notional right, and has demanded that Iran stop enriching nuclear fuel beyond the point needed for strictly civilian uses. In exchange, it has offered sanctions relief so modest that Iran has had very little inducement to negotiate seriously. The stand-off has to be broken by both sides. In an article in Foreign Policy, Robert Einhorn, the former State Department special advisor for nonproliferation and arms control, proposed that negotiators work out a long-term "road map" clarifying that Iran will be permitted to retain a nuclear-fuel program with international safeguards and offering phased sanctions relief, and then furnish immediate confidence-building measures in exchange for an end to fuel enrichment. 

Is Obama prepared to make such a gamble, even in the face of angry protests from the right and from the Israel lobby? It seems not. A senior administration official told me, plainly: "Our fundamental position is where it is." It's true, this official adds, that with the election of Rouhani, "we are conceivably in a whole new place," but "the onus is on Iran to give us some concrete response" to the current offer. Message from South-Going Zax to North-Going Zax: You go first. So the negotiations, if they ever restart, will go nowhere, but at least the West can continue to blame Iran.

That, however, would be the mother of all Pyrrhic victories. The collapse of the Morsy regime in Egypt, or the ongoing humanitarian catastrophe in Syria, do not threaten American national security, however disastrous they are for the people of the region. But as Iran continues to enrich and stockpile highly enriched uranium, and moves ever closer to Israeli and U.S. red lines, President Obama, who has said that "containment" is not an acceptable policy, may find that he is left with no option save to launch an attack on Iran's nuclear facilities. In the face of such a calamitous possibility, it is not enough to say that one has a defensible negotiating position.

Iran is different from other Middle East crises in one other fundamental respect. Washington has learned how very little it can do to calm the tumult of the Arab Spring. The supreme leader may ensure that American policymakers draw the same conclusion in Iran as well; but the choices Washington makes could have a decisive effect on the negotiations, and thus on the question of peace or war with Iran. Obama has a new chance to test how far Ayatollah Khamenei will move -- or rather, to help Hasan Rouhani conduct that test. It's true that conducting that test could cost precious time; but the cost of not conducting it could be much higher.

The president has husbanded his capital on the Middle East, taking a secondary role in Libya,  steering as clear as he could of the violence in Syria and issuing muted statements on the coup-or-whatever in Egypt. In Iran, where he would have no domestic political cover for a bold initiative, he would have to splurge. That's asking a lot. But that's something we have a right to ask.