The promising Arab Spring has left North Africa in limbo. Now the task is to build a new political and economic system that is sustainable. President Barack Obama's speech on the Middle East on May 19 outlines most of the right economic features.
When communism ended two decades ago, the Soviet Union fared much more poorly than Eastern Europe, partially because the West did so much more for Eastern Europe. The lesson from the end of communism is that the international community needs to make a maximum effort early on, as the United States did during the postwar Marshall Plan, to mobilize large financial resources for Egypt to help it get its policy right.
In order to be effective, aid must be timely, that is, it must come early. Even if early aid appears of little use (as was the case in Romania in the early 1990s), it costs little and usually helps the country get on the right track, while sins of omission are expensive. Russians were alienated by the West's failure to help two decades ago.
From the outset, the international community offered Poland large amounts of aid. As a consequence, Polish policymakers could do what was right, and they did. In Russia, the reformers never received sufficient international credits and thus had no chance. Soon, they were ousted and their reforms fell apart.
It is vital to focus on one key country. In Eastern Europe, the West concentrated on the biggest country in need, Poland. In the former Soviet Union, however, warnings against the dangers of a—Russia first policy—resulted in Western slowness in helping Russia, a failure that condemned the whole post-Soviet region. Today, we cannot afford to repeat that mistake. We need to focus on assisting Egypt. Then, Tunisia and the rest will follow.
Most financial assistance consists of credits rather than grants, and the aid is usually conditional on good economic policy imposed by international financial institutions. Conditions are necessary to provide a reform government with the right incentives and promote beneficial causes.
The post-communist lesson is that the most dangerous resistance is not social unrest but the usurpation of wealth by the old elite. The worst parasites are not the old rulers, who have been beaten, but the seemingly benevolent opportunists who switched to the revolutionaries' side. In Eastern Europe, they were state enterprise managers. In Egypt the much admired military are the key suspects.
The old rent-seeking regime in Egypt needs to be broken up, as President Obama so rightly emphasized. Politically, that means full democratization with the introduction of maximum transparency and checks and balances. In the post-communist world, parliamentary systems have proven far more effective, reformist and democratic than presidential systems, and the fewer concessions the new democratic regime makes to the old elite the better.
Now, as then, partial deregulation left monopolies in the hands of modern members of the old regime. These monopolies need be broken up through comprehensive deregulation of prices and markets. In particular, small traders and craftsmen should be given complete economic freedom, as happened in Poland, so that they can form a force for economic and political freedom.
Macroeconomic destabilization usually follows a democratic breakthrough, and in Egypt this looks inevitable. The old regime defended itself by raising wages and pensions before it departed, while controlling retail prices. The new rulers seem unable to enforce budget discipline, while tourist revenues and foreign direct investment plunge in the face of political unrest. Egypt's pegged exchange rate appears untenable and inflation is rising. The International Monetary Fund is rightly setting up a stabilization program.
But Egypt needs more: a full-scale program of political and economic transformation. The World Bank has much to contribute. The European Bank of Reconstruction and Development is sensibly interested in promoting private business in Egypt. A new US-sponsored enterprise fund can do so as well, and the Overseas Private Investment Corporation can support private investment in the region.
The big actor, however, should be the European Union. This great elephant nextdoor has made little of its European Neighborhood Policy of 2003 and its Union for the Mediterranean of July 2008. For the European Union, this is the big opportunity to pursue a deep and broad economic integration with its southern neighborhood. It should launch negotiations of a free trade agreement with Egypt, as it already has with Tunisia. Sensibly, President Obama proposed a comprehensive Trade and Investment Partnership Initiative in the Middle East and North Africa.
But it should also be more generous. From its own experience of enlarging its membership, the European Union has plenty of wisdom about how to reform legislation and promote education, and it should put up substantial funds. The European Union also needs to regulate the large flows of illegal immigrants from North Africa. The best way to do that is to allow more legal migration and improve conditions in countries from which immigrants are escaping to find a better life.
These efforts would cost some money, but not as much as one might suppose. Depending on the ambitions of those in a position to help, it could be $20 billion for a three year period, and most of this sum would come from international financial institutions. The United States is already writing off $1 billion of Egypt's debt, and the Gulf states could contribute substantially. For the European Union, only a few billion euros remain to complete the package.
The United States has stated its strategy. It is time for Europe to follow. For Europe and the world, a successful transformation of Egypt's democratic and economic systems is vital and can show the rest of the Arab world the road forward.