Egypt is a prime example of an economy ruined largely by its own self-destructive policies. As alluded to above, back in 1979 with the conclusion of the Israel-Egypt peace treaty, there were predictions and expectations of large scale Middle East trade, multinational infrastructure projects, joint ventures involving Egyptian, Israeli and American or European investors, technology transfers, and a reallocation of resources from the military to civilian pursuits. But the reality was entirely different, an d for various reasons unrelated to Camp David, the Egyptian economy has stagnated.

One New York Times correspondent gives the following dismal description: "Egypt's [economy under Mubarak] remains perpetually in ruins, and a breeding ground for fundamentalism. Its attempts to industrialize are a shambles, its government bureaucr acy legendary for sloth and inefficiency. Its schools spew out . . . poorly educated, into a non-existent job market . . . Its Islamic fundamentalists periodically shoot up tourists, the police, Coptic Christians, or government officials, and are shot up in return." [The New York Times (3 June 1996).] An American economist who has studied the Egyptian economy over many years concluded that since the mid-1980s "the Egyptian economy has essentially stagnated." The growth rate of GDP per capita has been approximately zero. [Alan Richards, "Economic Roots of Instability in the Middle East," Middle East Policy (September 1995), pp.175-187.] Estimates for 1990-95 indicate that the average annual growth rate of the economy was a miserable 1.6%, while population grew by 2.4% per annum. In short, GDP per capita was declining. [Economist Intelligence Unit, Quarterly Economic Review-Egypt First Quarter (1996), p.3.] This implies fewer job openings and even higher rates of unemployment, and lower incomes for the large majority.

The poor performance of the economy, especially in the first half of the 1990s, is particularly disconcerting in view of the massive financial aid which Egypt has received in recent years. Since the 1970s Egypt has been a recipient of large-scale aid fro m the US and from other industrialized countries. Aid rose to higher levels following the conclusion of the peace agreement with Israel in 1979, despite the cutoff of Arab aid, in retribution for Egypt's signing a peace agreement with Israel. However, t he assistance Egypt received following the Persian Gulf war has few, if any, parallels.

President Bush was anxious to obtain Arab support for the war against Saddam Hussein and rewarded Mubarak handsomely for joining the coalition by canceling Egypt's $7 billion debt to the US. Bush also urged other creditors, Arab and European, to follow s uit as well as offer substantial additional aid. US influence was also brought to bear on the World Bank and the IMF to help improve Egypt's economic performance and to offer financial aid and guidance. All in all, a major part of the $50 billion debt o wed by Egypt was canceled. Interest rates were lowered and payments were stretched out on the remaining debt. In addition, "Official Development Assistance" from various industrialized countries was raised from $1.8 billion in 1989 before the Gulf War t o $5.7 billion in 1990 and $10 billion in 1992. These figures exclude the annual $1.3 billion military grant from the US. [Economist Intelligence Unit, Country Profile-Egypt (1993-94).]

Egypt's current economic problems stem largely from the legacy of "Arab Socialism," instituted by President Nasser in the 1960s. The state-owned industries, especially in manufacturing, suffer from gross inefficiency, over-manning and very low productivi ty and profitability. The loss-making state-owned firms are a serious drain on the treasury. Nasser guaranteed jobs to all university graduates, as well as demobilized soldiers, in the civil service or state-owned enterprises—a policy continued by Sadat , and by Mubarak during the 1980s. Subsidies were expanded under Sadat and maintained, for the most part, by Mubarak. Price controls, foreign exchange regulations, including multiple-exchange rates, wage policies, and other measures added more distortio ns to the economy. Egyptian corruption did not begin with Arab socialism, but Nasser's policies multiplied the opportunities and inducements. And, the wide gap between the few rich and the many poor widened to dangerous dimensions, fueled by widespread corruption.

Since 1991, under IMF and World Bank guidance, Egypt has made some important monetary and fiscal changes in addition to alterations in its foreign exchange controls—for example eliminating multiple exchange rates. But the recommendations to embark on a l arge scale privatization program in order to get rid of the unwieldy and very costly public sector enterprises, have been strongly resisted. Well-connected individuals who gain enormously, often illegally, from "milking" the public sector oppose the priv atization plans. The public sector workers and managers are fearful that privatization would be followed by massive dismissals. As a result, about two thirds of industrial production remain in hands of the public sector, as are oil extraction and refini ng. As a result, Egyptian efforts to privatize the economy have been of very minor dimensions.

This was a phenomenon in the Soviet Union as well in other formerly socialist countries. Another problem which seems to be intractable is the massive public payroll, literally millions of employees with little or nothing to do. Egypt has four million p ublic servants, 23% of the labor force according to official estimates. Another 8% of the labor force is employed by public sector enterprises. These figures do not include the armed and other security forces. In the public sector it is "virtually impo ssible to sack anybody" and labor laws also make it very difficult to dismiss private sector employees. [Jerusalem Post (15 July 1996).] Low productivity, financial losses, and depressed incomes are the inevitable result.

In the seventeen years that have passed since the conclusion of the peace agreements between Israel and Egypt, it is hard to discern economic progress. Nor is there any indication of any cutback in Egyptian military expenditures. As one analyst has phra sed it: "It might be assumed that peace treaties will neutralize external threats to security and lead inevitably to a reduction in defense outlays. However, the experience of the peace between Israel and Egypt suggests greater spending on defense rather than less." [Middle East Economic Digest - Special Report:Defense (12 April 1996), pp.6-10.] According to the US Arms Control and Disarmament Agency, Egypt's armed forces numbered about 450 thousand in 1978-79. They number about the same today. An additional 250 thousand serve in the National Guard. Given the job market in Egypt, the government is wary of demobilizing large numbers. Unemployed army veterans could pose a serious danger to the regime which already has enough troubles. Insofa r as military equipment is concerned, the American arms which have replaced inferior Soviet equipment are far more expensive than their Soviet-made predecessors.