It was no surprise that the Economic Freedom of the Arab World Report was launched in Cairo last year.
Egypt has been at the centre of economic liberalisation in the Middle East.
Hosni Mubarak stubbornly resisted political and democratic change, but had much ambition in the economic sphere. The end of the dictator’s grip on the Egyptian presidency comes after a substantial economic reform program.
So the world observes in Egypt not only a people trying to free themselves from dictatorial rule and a police state, but another illustration of the close relationship between economic and political liberty.
Introduce one, and people will demand the other to match.
Reform needs consent. Mubarak isn’t the first dictator to fall because he ignored this requirement, and he won’t be the last.
The Economic Freedom of the Arab World Report rates the 22 members of the Arab League on measures of economic liberty: tax rates, size of government, security of property rights, monetary soundness, regulation, labour market flexibility, and trade barriers.
When the report was launched eight years ago, Egypt was near the bottom of the rankings. For its effort, the country is now dead in the centre. Not as economically free as Kuwait or Bahrain, which occupy the top positions, but doing much better than Algeria and Syria.
Egypt’s government launched an economic reform program in 2004. The tariff burden was reduced from nearly 15 per cent to 5 per cent. Egypt re-engaged forums of trade liberalisation, and facilitating import and export. The company tax rate was reduced from 40 per cent to a 20 per cent flat rate, and their progressive income tax system is now levied at a maximum rate of 20 per cent. The rolling series of privatisations, which had petered out in the late 1990s, were rejuvenated.
As a consequence of these changes, Egypt increased its GDP growth from 3 per cent per year at the turn of the millennium to around 7 per cent. That figure only modestly declined during the financial crisis, to 5 per cent.
And unemployment – commonly cited as a source of Egyptian unrest in the wake of the Mubarak regime’s privatisations – declined during the reform period. At 12 per cent in 2003, unemployment is just over now 9 per cent. Economic reform has been disruptive. It always is. But it has not hollowed out the Egyptian labour market.
Poverty, of course, remains a major problem, as it does across the developing world. Yet while Egypt is very poor, it is not as cripplingly so as those under it on the economic freedom rankings.
Alexis de Tocqueville said the most dangerous moment for a bad government is when it begins to reform itself.
While deregulations, privatisations and other economic liberalisations are rarely popular on their own behalf, the wealth and economic growth they spur usually is. The challenge for would-be reformers is to demonstrate the connection between growing prosperity and those disruptive reforms. And to ensure those benefits can seep through the entire society as quickly as possible.
Any attempt to demonstrate that connection is going to be tough while a country is ruled by a dictatorship.
No amount of positive economic reform will excuse the absence of individual liberties, widespread government harassment, arbitrary arrest, political repression, a justice system divorced from the rule of law, rampant corruption, and restrictions on freedom of expression. And nor should it. An increase in GDP is no comfort for someone who has been tortured in custody just to fill an arrest quota, or someone who is unable to report a sexual assault for fear of being seen as “fair game” by police.
In the same period when Egypt was rapidly up the economic freedom rankings, its ranking by Freedom House, which measures civil and political freedoms, remained stagnant. That stagnation hides hundreds of thousands of individual human traumas at the brutal hands of the state.
Dictators can’t always have it both ways. They can’t reap the benefits of economic growth – with their higher tax revenues and more luxuries to hand to political supporters – and maintain complete political control at the same time. No country can be both a police state and a market paradise.
Sure, the Chinese model seems to suggest otherwise. But China is less economically free, more decentralised, and its constituent parts more unstable than the first country appears. And the Chinese story, like the Egyptian story, isn’t over yet.
Not all economic reform is the same. In developing economies like Egypt, the benefits of privatisations can easily be corrupted by bribery and secrecy.
After all, the idea behind privatisation is not merely to get enterprises off government books as quickly as possible. It is to reintroduce market competition, improve services, and make those enterprises more efficient. Consumers should be the beneficiaries, not politically connected oligarchs.
Unsurprisingly, Egypt’s privatisation program has been dogged by corruption allegations. Whether justified or not (there’s every reason to suspect in many cases they are) those allegations reflect a lack of democratic openness. Egypt ranks poorly on Transparency International’s Corruption Perceptions Index – consistently well below most other Middle Eastern countries.
Corrupt practices, whether on a large or small scale, are the manifestation of a broken, undemocratic, and illiberal political system. A corporate tax rate of 20 per cent sounds wonderful, but is illusory if daily business requires greasing the palms of bureaucrats and police.
Despite a decade of reform, Egypt may no longer have one of the most unfree economies in the Middle East. Yet compared to the rest of the world, it is still terribly over-regulated, corrupt, and dominated by state subsidies and restrictive labour practices. Craig Emerson correctly wrote in The Australian last week that “Political freedom without economic freedom would dash the hopes and aspirations of the region’s youth for a better life.”
The military takeover has underlined how much work there is to be done if Egyptians wish to be both prosperous and free. There are some worrying signs. At this stage the new leaders seem more interested in cracking down on strikes than democratisation. “Stability” is the catchcry of tyrannies everywhere.
The military has, however, promised to continue economic liberalisation.
And if last few weeks have demonstrated anything, it’s that a country cannot reform its economic system and leave a corrupt and oppressive political, judiciary, and administrative system in place.