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Obama now has little choice but to back the Egyptian military

By Peter Morici
web posted July 15, 2013

In Egypt, the United States is once again confronted with a tough choice between backing the champions of the status quo ante—a military-endorsed regime that resembles that of deposed President Hosni Mubarak—or accepting an Islamic state. As much as anything else, Egyptian economics dictates that the forces for modernism and a genuinely- inclusive democracy are simply too weak and disorganized to offer a viable third option.

After World War II, Egypt pursued what economists call an import-substitution strategy. It sought to develop domestic industries—through stiff tariffs, mercantilist regulations, subsidies, and state ownership—to push out imports from Europe and America and cultivate exports—for example, it established a state owned automobile company.

As throughout Latin America and significant parts of Asia, this policy resulted in massive government borrowing and collapse in the sovereign debt crisis of the 1980s. The government of Hosni Mubarak instigated notable reforms that engendered a more modern, market-oriented economy—but the Egyptian economy remains hamstrung by considerable state involvement and a bloated, corrupt government sector.

It does boast substantial food processing, textile, metals, petrochemical, tourism, and light manufacturing industries and has managed to university educate large numbers of youth.  However, the legacy of protectionism, as almost everywhere else, is corruption, self-dealing and nepotism in government and business, and not enough economic prosperity and democratic freedoms to satisfy the rising expectations of young, western- looking Egyptians.

The distribution of wealth and income are too uneven and many Egyptians are stuck in near poverty—not too dissimilar to many oil-dependent states in the region. The Mubarak and Morsi governments placated the poor and middle class with food and fuel subsidies, but those require large government deficits and foreign aid to sustain.

Within the middle class are two opposing and important groups. On the one hand, are entrepreneurs and mandarins, who often exhibit remarkable thrift and political acuteness, know how to work the corrupt political system, establish businesses, staff the bureaucracy, and prosper.

On the other hand, are an idealistic and less enfranchised class, who were in the streets during the Arab Spring and brought down Mubarak's government. It has high-minded notions of political freedom and reform, but it lacks the political skills to organize the urban workers and rural poor to accomplish an electoral majority. Nor could it run the country in the way that the more pious entrepreneurial and mandarin class has accomplished.

The Muslim Brotherhood tapped into the disenfranchised poor to elect President Morsi, and its fundamentalist Islam poses a threat to both groups.

The Saudis shrewdly see all this—having similar tensions within their equally undemocratic society—and along with a few other autocrats in the region, they throw their support behind the military coup.

Interim Prime Minister Hazem el-Beblawi holds some promise as a reformer. A 77 year old former Finance Minister he is a liberal economist and committed to a more open Egyptian economy. However, he will likely prove hesitant to quickly move reforms that substantially lessen the privileges of the entrepreneurial class and self-dealing bureaucrats.

To be sure, the military should step aside and encourage him to try, but his biggest obstacle will be the entrenched bureaucracy. Their only wealth is control of a corrupt system of government regulations and largess that must be dismantled, and as they proved during the Morsi presidency, are quite adept at throwing sand, stones and boulders into the gears of government if provoked.

If el-Beblawi or a similar successor fails at initiating substantial reforms, then the choice is really between a strong military that imposes order and limited democracy, or an Islamic Republic.

To the Obama Administration's great discomfort, the advocates of an Islamic state won a majority that elected Mohammed Morsi, but are clearly more hostile to western values and modernism than whatever the military imposes.

That reality crystallizes why President Obama may ultimately have to come down squarely in support of the military, instead of the forces for a genuine democracy. ESR

Peter Morici is professor of international business at the Smith School of Business, University of Maryland, and a widely published columnist.

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