TSG IntelBrief: Charity or Growth: Egypt’s Muslim Brotherhood’s Painful Transition
January 4, 2013

As of early January 2013, Egypt is facing an increasingly dire economic outlook, which will have a direct impact on that country’s already tenuous political and social stability. The challenges facing the ruling Muslim Brotherhood — and President Mohamed Morsi, a member of the Brotherhood — are serious by themselves: a dwindling cash reserve, a weakening currency, unsustainable subsidies, plummeting tourism revenues, and insidious inflation. But compounding these economic issues is the nature and mindset of the ruling party, which has always been the invisible social safety net during its decades in the shadows. While there are understandable questions about the ability of a relatively strident Islamist government to effectively run a modern public enterprise with significant social, ethnic, and religious diversity (and conflict), there is perhaps a less examined question that might have more bearing on Egypt’s economic and therefore socio-political stability:

How does an organization — one that for decades functioned day-to-day as a de facto social services provider and charity for the huge numbers of Egypt’s poor and underserved — make the transition to running a stable government that will likely need to cut desperately needed subsidies to avoid nationwide financial collapse?  

That indeed might be the proper question for policymakers — and investors — to ask in these early days of 2013. (A quick tour of the region suggests that this might also be a most relevant and vital question to ask about Jordan, which in some troubling aspects is mirroring the recent Egyptian trends.)

To begin answering this question, we need to look more closely at Egypt’s population and economy, with the former being young and restless while the latter is old and sclerotic. Over 50% of Egypt’s population is under the age of 20, with 32% under the age of 15. (For comparison, 25% of the US population is under 20.) All of these young Egyptians will need jobs, meaning Egypt will need to average an unrealistic 9% annual economic growth just to absorb the numbers joining the job market, quite a leap from the 2% growth expected for 2013.

With an official poverty rate of over 25%, and a per capita income that ranks 137th in the world, one begins to see the difficulties a socio-charitable organization such as the Muslim Brotherhood will face as it struggles to run a national economy. How can this socially-minded political group maintain public support — which was based on delivering needed social services during the ineffective dictatorships of the last 60 years — when they will have to significantly cut back on subsidies for bread, cooking oil, fuel, and other daily necessities? The answer, one with potentially thorny consequences, is that the once charitable organization might have to become a decidedly less charitable government, at least in the uncomfortable short-term, if it seeks to become a stable and socially responsive government.

Key Brotherhood officials — including Khairat al-Shater, the organization’s former deputy chairman who remains a powerful political figure in Egypt — consistently appear to promote a free market economy, and there is little to indicate the new government will default on its international financial commitments or move to nationalize its economy. At present, investors’ fear of losing assets due to government seizure or default are likely unwarranted. But it is the less-dramatic-but-more-influential mindset and ethos of the new government that might cause lingering economic uncertainty.

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Charitable Services or Economic Growth

This leads us back to our central question: Will the new government, if needed, be able to cut the very social subsidies its supporters need most, given its long background as a social provider? Apart from its religious support, the Brotherhood earned its vast following by operating in the contrasting shadow of incompetence cast by successive Egyptian regimes, one that served to highlight the relative competence with which the Brotherhood fulfilled the basic needs of people. (It should be noted that there are limited but meaningful similarities with Hamas, another islamist group that once effectively met basic social needs — at least relative to existing governments — but is now struggling as a governing entity.)

To achieve some degree of economic stability/growth — which is a foundation of sociopolitical stability/growth — the Muslim Brotherhood will need to manage a degree of self-inflicted short-term instability by better aligning its social services with its budget. This will likely be an extremely difficult decision for an organization that not so long ago operated within the Egyptian geopolitical landscape as both a major opposition party and preeminent charitable organization. And as we reflect upon this complex choice, we are reminded that high prices on basic foodstuff played a significant role in the 2010-2011 Arab Spring revolts, one of which overthrew the last Egyptian regime.

The key will be not only in the willingness of the Brotherhood-dominated government to cut subsidies where appropriate, but also in how it communicates these cuts to a population (remember, young and restless…) with little tolerance for macro-financial strategies given their dire micro-economic challenges. Morsi and his government will have to prove to the population that it is not balancing the budget on the backs of the countless poor — who are its biggest and thus far most reliable supporters — while letting corruption and military monopolies continue unabated. It will have to incorporate the cuts into a clearly communicated, equitably executed comprehensive strategy that addresses vital social needs while setting the stage for the future growth necessary to alleviate future needs. This is easier written than accomplished (look no further than the US budget negotiations), but the mindset of the Muslim Brotherhood will play a big factor when (and if) such a program can be attempted in the first place.

Whether a former social charity can become a fiscally conservative government, at least in the short term, is a strategic question that merits serious examination. At this point, the answer remains uncertain.

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