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Hosni Mubarak tried to make hidden cuts, such as reducing the weight of gas cylinders and the quality of bread. Khaled Elfiqi / EPA
Hosni Mubarak tried to make hidden cuts, such as reducing the weight of gas cylinders and the quality of bread. Khaled Elfiqi / EPA

Tough challenges await next leader of Egypt's rentier state

Egypt's next president will have two formidable tasks to stabilise the economy in the short term and devise a new model in the longer term.

Power cuts, driving for hours across Cairo to find fuel, foreign-exchange reserves at critically low levels, rising inflation and unemployment over 13 per cent - the Egyptian economy is in a mess.

Given these failures - quite apart from his religious goals and disdain for consensus - it is no surprise that millions came into the streets to demand the overthrow of Mohammed Morsi after a year as president.

But ineptly as he ruled, any government - Islamist, liberal, socialist or military - would have struggled with the economic legacy left by his predecessor Hosni Mubarak. Appropriately, it was an Egyptian, Hazem Beblawi, finance minister in 2011, who wrote the classic book on the rentier state. Egypt has demonstrated the failure of the rentier and redistributionist model, and the difficulty of transition to a productive economy. A rentier state sustains itself through unearned income, rather than through taxation as in most countries, and its regime stays in power by distributing patronage.

Egypt was unusual in having four sources of rent - its modest but not negligible oil and gas production, the Suez Canal tolls, military aid thanks to its strategic importance, and transfers from the legions of Egyptians working overseas. But by the 1980s, a growing population, falling remittances after the oil price crash and rising domestic energy consumption made this model unworkable.

Mubarak himself acknowledged this in 1989, saying that Egypt's bureaucracy "seeks to make the easy difficult and the possible impossible". His predecessor Anwar Sadat's infitah ("openness") policy was launched in 1975, but after 1977's massive bread riots, wide-ranging food and energy subsidies have been politically untouchable. Instead, Mubarak tried to make hidden cuts, reducing the weight of gas cylinders and the size and quality of loaves.

Economic liberalisation brought industrial development and respectable growth, at 5.1 per cent in 2010. But this brought anger against corruption and crony capitalists, such as Mubarak's son Gamal and associates Ahmed Ezz and Hussain Salem.

The gap between rich and poor widened, exacerbated by terrible failings in education that leave 28 per cent of Egyptians illiterate.

When growth collapsed after the 2011 revolution, the economy's weakness became glaringly apparent. A fifth of state spending goes on energy subsidies, which disproportionately benefit the wealthy. Meanwhile the budget deficit exceeds 11 per cent of GDP, natural gas exports have slumped, and Egypt is unable to afford fuel imports, reduced to begging for special favours from Libya, Iraq and Qatar.

The Egyptian state had, as the Russians say, strong thumbs and weak fingers - capable in repression, inept in governing skilfully.

A representative government might have been able to build the consensus to accept a difficult and prolonged period of economic reform. Mubarak's could not; and neither Mr Morsi nor any of the main opposition parties has presented a coherent economic vision. The failure of Egypt is the failure of the Middle East economies in microcosm.

Real GDP growth per person during 1980-2004 was less than 0.5 per cent per year; in Asia, it was 4.5 per cent. In an era of globalisation, Middle East and North African states have not capitalised on their unique advantages - a bridge between two oceans and three continents, a long coastline, sited ideally between Europe and Asia, oil and gas-rich in a world thirsting for resources, and with a young, fast-growing population.

Like Egypt, state-dominated economies, wasteful energy subsidies, high unemployment and falling oil earnings per person blight Algeria, Yemen, Iran and pre-revolutionary Syria. Only the UAE and perhaps Qatar have really adapted to a globalised world economy - and even here hydrocarbon earnings remain vital.

Egypt's next president will have two formidable tasks - to stabilise the economy in the short term and to devise a new model in the longer term. Without a solution to the region's economic ills, more governments will repeat Mr Morsi's short and inglorious experience.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon

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