It is true their credentials as democrats are untested and their ability to manage an economy is unproved. But a strong showing by the Muslim Brotherhood’s Freedom and Justice party was no surprise, and the FJP has articulated an apparently coherent economic policy.
Rather, what shocked the nation was that the poorest of the poor – a near majority in Egypt – strongly favoured the ultraconservative Salafists, a group that so far talks less about a better life on this earth than one after death.
Hope that people’s circumstances might improve in this life, not the next, needs to be restored.
This cannot be answered by a new government, of any political stripe, alone. A business community tainted by the crony capitalism of a few has helped create such sentiments; it must now help broker a new social contract. The success of our venture into democracy will be judged by how we prepare our youth for real jobs that pay living wages; how we care for our sick; and how we protect our minorities.
Solutions will not come from abroad. Egypt must take action on many fronts – beginning by grabbing firmly the “third rail” of our politics: the subsidy programme.
This takes courage and real political leadership, especially given the reactions elsewhere in Africa recently when long-established subsidy regimes have been tapped for reform. The violent national protests over the cancellation of Nigeria’s fuel subsidy clearly demonstrate the political risks inherent in re-thinking subsidies. On January 1st 2012, Nigerian President Goodluck Jonathan removed a government subsidy on petrol which resulted in the price at the pump more than doubling from N65 (US$0.40) to N141 (US$0.86). General protests began against the removal of the fuel subsidy under the banner ‘Occupy Nigeria’ shortly after the announcement and were later significantly augmented by the Nigeria Labour Congress and Trade Union Congress, which called for an indefinite general strike starting on January 9th. This nearly compromised Nigeria’s 2 million bpd output when oil workers threatened to join the strike. A week later, on January 16th, a decision was made by President Jonathan to announce a compromise fuel price of N97, which the unions subsequently agreed to.
Although many Nigerians don’t oppose the government’s desire to save the country billions of dollars in annual subsidy costs, many of the country’s poor believe such “savings” will end up in the coffers of the elite as faith in the transparency and accountability of government is negligible.
Similarly in Uganda, the government’s decision to phase out power subsidies has been backed by ruling party legislators. Although many disagree with this proposal, diverting money away from power subsidies which currently benefit only ten per cent of the population and harnessing it for social development purposes will benefit more citizens.
Yet the subsidies are simply not sustainable. Measured by their contributions to the economy, Africa’s main assets – oil and gas, water, electricity, infrastructure and mining – are underperforming, largely since they are yoked to an inefficient, corrupt subsidy programme that indiscriminately benefits everyone on African soil, rich or poor. The more you consume, the higher your subsidy. So, by disproportionately benefiting corporations and the wealthy, subsidies are a major source of inequality in Africa.
For instance, Egypt consumes 380m cylinders of subsidised liquefied petroleum gas a year, but the actual need is closer to 200m for 15m beneficiaries. Savings: $2.2bn. By allowing natural gas imports (or curbing exports while raising export prices), we could make domestic power generation more energy-efficient. Savings: $2bn.
We are a net importer of diesel, which we then subsidise. If we expanded domestic refining capacity; promoted rail and river transport over trucking; and liberalised diesel prices over 10 years, petrol prices over five years and fuel oil over three years, we would save billions – and help the environment.
A bold politician might end energy subsidies at once. Along with more efficient use of state assets, and the end of food subsidies, this would save $58bn annually – freeing $20bn for direct cash payments to qualified welfare beneficiaries and $38bn for health, education, job creation and cutting the budget deficit. Similar programmes have succeeded in Brazil, Mexico and Iran.
These solutions are within reach, but demand decisive action by legislators willing to trust the business community. Whether they will do so is an open question.
Since the revolution, which should have been a joyous, once-in-a-lifetime event, Egypt has lost at least 10 months of economic growth. In the months ahead, inflation and the need to create jobs will increase the subsidy budget. The desire to punish business for its past excesses – coupled with a rising nationalism – will make it popular to install trade barriers, reverse privatisations and impose new taxes and regulations.
The instinct of many in business will be to resist – and complain behind closed doors. If we are to rekindle hope for more than 85m people, business must instead advocate and actively build a new social contract. Reforms to use state assets better and phase out energy subsidies over five years could free up billions of dollars to fund health, education and job creation – and cut the aid deficit.
Wise politicians would accept that involvement. Other African leaders may draw useful lessons for their own drive to build more equitable and vibrant economies.
The writer is chairman of Citadel Capital, Africa’s largest private equity firm. The original version of this article was published in the Financial Times.
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