PROMOTING ECONOMIC LIBERALIZATION IN EGYPT: FROM U.S. FOREIGN AID TO TRADE AND INVESTMENT By Bessma Momani* In the early to mid-1980s, the United States became frustrated that its financial assistance was being wasted by Egypt’s inefficient, statist economy and wanted the Egyptian government to pursue economic liberalization. At the same time, the United States, observed that its foreign assistance program was less than optimal at effectively leveraging economic reforms. After the 1990-1991 Persian Gulf War, Congress put pressure on the administration to create a new economic relationship that would lessen Egypt’s aid dependency on the United States, and promote economic liberalization in Egypt. Specifically, Congress advocated ‘trade and not aid’ as the new rationale for the bilateral relationship. The Presidents’ Council, created by the two governments in 1994, along with several recent trade agreements, has become the cornerstone for this U.S. policy of pursuing economic liberalization in Egypt. THE U.S.-EGYPTIAN FOREIGN AID allocation after Israel. (see Table 1 in RELATIONSHIP Appendix) Aid to Egypt was, at its core, “a The 1974 Open Door Policy (also referred to political symbol of evenhanded economic as infitah) and the 1979 Camp David Accord support,” as one U.S. government report put renewed Egyptian-U.S. diplomatic relations, it, especially as the large sums Egypt and the resumption of what has become a received were beyond its capacity to substantial amount of foreign assistance. effectively absorb.(3) In fact, development Historically, Egypt has been a leading experts believe that had Egypt’s economic military and political power in the region; for assistance been based on economic need instance, leading the Arab front in wars rather than on political objectives, Egypt against Israel. Egypt’s incorporation into the would have received $100-$200 million in American domain was therefore perceived to U.S. assistance.(4) This was a far cry from be essential for Middle East peace. Once the approximately $1 billion devoted to accomplished, in addition to the relative solely to economic aid. calm it created, a pro-western Egypt also For the United States, the benefits of removed an important source of Soviet foreign aid to Egypt were strategic, influence in the region. It became apparent diplomatic, and political. Egypt had led every to subsequent American administrations that Arab war with Israel, supplying most of the foreign aid to both Egypt and Israel was a personnel and military power. A pacified and worthy investment in order to maintain this neutral Egypt, it was hoped, would prevent relative Middle East peace.(1) further Arab-Israeli wars, at least on the With the Camp David Accord, Egypt interstate level. While there were no began to reap approximately $2 billion per permanent U.S. military bases in Egypt, in annum in U.S. aid, the second largest exchange for the foreign aid, U.S. forces 88 Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) Promoting Economic Liberalization in Egypt: From U.S. Foreign Aid to Trade and Investment were allowed access and were granted the regional access, and influence in military ability to deploy equipment at strategic affairs are an important part of the American military posts in Egypt.(5) The United States rationale for military aid. Correspondingly, and Egypt also regularly held joint military U.S. foreign aid to Egypt is mostly exercises called Bright Star, which involved comprised of military aid. infantry, airborne, artillery, and armored U.S. foreign aid to Egypt also has ensured forces.(6) Moreover, military cooperation the preservation of a moderate Arab regime with Egypt allowed for a quick military capable of playing a legitimizing, diplomatic reaction, including naval passage through the role in Middle Eastern affairs. In addition to Suez Canal, to developments in the oil-rich its military and political capabilities, Persian Gulf. This proved especially useful historically, Egypt has also been a key during the 1991 Persian Gulf War. In a intellectual center of the Arab and Muslim declassified State Department report, the world.(8) Hence, in addition to its United States asserted that: legitimizing role in U.S. operations against Iraq in 1990-1 (as well as in Somalia and The thrust of our security assistance Bosnia), Egypt was often a meeting point for program is to build a modern force U.S. peacemaking efforts between Arab with interoperable equipment capable states, Israel and the Palestinians. President of maintaining Egypt’s defense and Mubarak was also frequently brought into of working effectively with U.S. these discussions, acting as an Arab forces in coalition warfare. Egypt’s figurehead in diplomatic situations. strong military is a stabilizing force Furthermore, the Egyptian-Israeli peace in the region. Its strength is at an served as an example for other moderate apex when combined with U.S. Arab states to emulate. The United States forces in regional coalition hoped that peace with Egypt would create a operations, as was demonstrated domino effect in the region, turning rogue during the Gulf War. We rely on states into friendly ones.(9) Egyptian cooperation in providing The political advantages of U.S. foreign quick transit of Egyptian airspace and aid to Egypt were significant. Increasing through the Suez Canal. The U.S. Egyptians’ standard of living promised to military routinely conducts 6-8 prevent a further rise of Islamic transits of the Suez Canal and some fundamentalism in that country, and thereby, 500 military overflights of Egypt the region. It was especially hoped that U.S. each month. Egypt has developed economic and food aid would undermine extensive experience in peacekeeping radical political elements. One senior and its military forces are working to administration official commented: enhance these abilities. At our request, Egypt contributed No one is trying to underestimate the significantly to UN peacekeeping [Islamic extremist] threat. But what operations in Somalia. Egypt also you have in Egypt and part of--a participated in peacekeeping large part of our aid effort to Egypt is operations in Bosnia and provided targeted on this is--is economic troops or observers in Georgia, reforms, because it is only through Liberia, Mozambique, Western moving forward on the Sahara and Namibia.(7) economic/social agenda that one is able...to undercut the ability of these To this day, military interoperability, Islamic extremists to undermine the Middle East Review of International Affairs, Vol. 7, No. 3 (September 2003) 89 Bessma Momani political process, and quite frankly, highly visible to both the Egyptian regime come to power.(10) and Egyptian people.(11) These same projects then tended to clash with overall The United States wanted to ensure, above U.S. objectives of advancing economic all, Egyptian regime stability. U.S. foreign liberalization in Egypt. aid, it was believed, would undercut the The United States also found that U.S. aid ability of Islamic extremists to attain power was inefficiently absorbed into the Egyptian while increasing the popularity of the economy because of inadequate economic Egyptian regime. Moreover, U.S. economic reforms. A U.S. Government Accounting and food aid would allow the regime to delay Office (GAO) report noted that “U.S. implementing political liberalization by policymakers believed that Egypt might not quelling the urban masses through have the capacity to absorb increased project government subsidies. In short, foreign aid to aid and that the actual impact on the Egypt fulfilled U.S. strategic, diplomatic, and economy would depend on Egypt’s response political objectives, while it was also to basic economic reforms...”(12) intended to be a conduit for future economic Washington believed that money spent on liberalization. Egypt was being wasted because of the inefficiencies in the statist Egyptian U.S. FOREIGN AID AND EGYPTIAN economy. USAID officials also believed that ECONOMIC LIBERALIZATION Egypt should take advantage of the cushion One of the understated purposes of U.S. that foreign assistance gave the Egyptian foreign aid has been to promote economic government and implement economic liberalization in Egypt. Some of the liberalization, calling this “a window of economic reforms, sought by the U.S. opportunity” that Egypt continued to administration, included fiscal discipline, ignore.(13) reducing government expenditures, The United States wanted Egypt to increasing tax revenues, liberalizing interest implement economic reforms, but recognized rates, liberalizing exchange rates, liberalizing that it would not be able to pressure Cairo trade, promoting foreign direct investment, into pursuing economic liberalization. U.S. deregulating the public sector and government reports indicated that safeguarding property rights. By the mid- “...although State [Department] officials 1980s, however, the U.S. government agree with the need for structural changes in recognized that its foreign assistance the [Egyptian] economy in the long term, program to Egypt was ineffective at pushing they believe that pushing too hard for these these essential economic reforms forward. changes may raise political tensions... and Part of the problem was that the United could adversely affect other important States Agency for International Development aspects of our bilateral relationship.”(14) The (USAID) was reportedly pressured into State Department acknowledged that Egypt implementing projects