The right approach to Egypt’s economic problems would be to force it to bite the economic reform bullet now by ending wasteful expenditures, especially fuel subsidies. These cost almost half of government revenue at a time when Egypt’s budget deficit is more than 10 percent of gross domestic product and growing, and they encourage energy consumption, especially among wealthier Egyptians, while doing little to help the most vulnerable. Smart budget rebalancing would cut the subsidies, add more to the social safety net for the poor, and reduce the fiscal deficit.
Reform can be accomplished, even in the midst of a difficult political transition, provided social spending is redirected to those in need and the government clearly communicates its policy decisions. Once the poor are identified, cash transfers or targeted subsidies can flow to them as universal subsidies are removed.
Brazil successfully removed fuel subsidies in the 1990s and early 2000s, replacing them with targeted gas vouchers and cash transfers for low-income households. The key to its success was communication, tackling political interests sequentially (first fuel products used by companies, then gas, next liquefied petroleum gas and, finally, diesel) and protecting the poor. Poland, Chile, Turkey, Philippines and Kenya, among others, have made similar reforms. Nigeria, whose disastrous reforms last year were implemented precipitously with unclear public preparation, is the counter-example.
History offers another lesson: that popular regimes or autocracies are most likely to succeed with economic reform. In Brazil, former President Fernando Henrique Cardoso had earned high marks for reining in hyperinflation, giving his subsidy- reform program credibility. In Poland, economic reforms following its transition were eased by popular support for democratic changes. Turkey, by contrast, first tackled electricity subsidies under a military regime in the 1980s. The term “shock policy” (only later to be dubbed “shock therapy”) was coined by Milton Friedman with reference to former dictator Augusto Pinochet’s economic reforms in Chile.
Caroline Freund is a senior fellow at the Peterson Institute for International Economics and former chief economist for the Middle East and North Africa at the World Bank.