Egypt: The Revolution Blows Up

Egypt incurred an estimated $1.7 billion in economic losses when crowds thronged Tahrir Square. Miguel Medina / AFP-Getty Images

I recently sat at the desk where John Maynard Keynes wrote The Economic Consequences of the Peace, his coruscating 1919 polemic against the Versailles Treaty. I asked myself what Keynes would be writing if he were with us today. I think the answer is The Economic Consequences of the Arab Spring.

The point of Keynes's original tract was that the victors of the First World War were bungling the peace. The punitive reparations they were demanding of Germany, he argued, would plunge that country into an economic crisis. After that would come the political backlash.

"If we aim deliberately at the impoverishment of Central Europe," Keynes concluded prophetically, "vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the -horrors of the late German war will fade into nothing."

True, we are not demanding reparations of the people of the Middle East and North Africa. But ask yourself: what are we doing today to help them achieve a successful transition to liberty and prosperity? The answer is, not enough.

It is now nearly six months since the Tunisian street vendor Mohamed Bouazizi made himself the fuse for a regionwide revolutionary explosion. His self-immolation not only toppled Tunisian President Zine al-Abidine Ben Ali, but also his Egyptian counterpart, Hosni Mubarak. A wave of protest swept through Algeria, Bahrain, Jordan, and Syria. Rebellion turned into full-blown civil war in Libya. The same seems close to happening in Yemen.

Photos: Touring Egypt After the Revolution Alan Chin for Newsweek

Western journalists flocked to Cairo's Tahrir Square and wrote euphoric articles echoing William Wordsworth's lines on the French Revolution: "Bliss was it in that dawn to be alive, But to be young was very heaven!" With a blithe disregard for historical accuracy, they dubbed it the Arab Spring, an allusion to the (unsuccessful) 1968 Czech uprising against Soviet communism.

Well, it's not so blissful now, and least of all for the youthful Arabs who began this revolution.

This crisis had economic origins. Young people took to the streets because of rising food prices, high unemployment, and the corruption that pervades economic life in the region. Expensive food has been a global phenomenon in the last two years. So the key to the revolution was the disproportionately high unemployment of young Arabs and their dissatisfaction with a parasitical state. Last year 90 percent of the unemployed in Egypt were young (15 to 24). The unemployment rate among high-school and college graduates in Tunisia was 24 percent, far above the official rate.

For some countries in the region the revolution has brought an economic windfall in the form of sharply higher oil prices. The oil exporters of the Gulf Cooperation Council (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Oman, and Bahrain) have thus far been earning enough from their black gold to buy off or coerce their populations into behaving themselves—though oil alone is no guarantee of stability, as is clear in Libya and Yemen. Elsewhere, however, the economic consequences of the Arab revolutionary wave have been almost entirely negative.

In a report published last month, the Institute of International Finance predicted that growth in Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia will fall from 4.4 percent in 2010 to -0.5 percent this year. Egypt's economy will contract by 2.5 percent, Yemen's by 4 percent.

This is partly because revolutions themselves cause damage and disrupt work. Egypt's Central Agency for Public Mobilization and Statistics estimates that the economic losses incurred when the crowds thronged Tahrir Square were about $1.7 billion. Add to that the subsequent losses in export earnings and revenue from tourism (journalists rush in where holidaymakers fear to tread). Then comes the cost of the ongoing disruption due to strikes and the enforced return of more than a million migrant workers fleeing war-torn Libya.

The big story, however, is capital flight. Egyptian businessmen complain of soaring crime in the cities, the difficulty of carrying out normal transactions, and, above all, nerve--racking political uncertainty. Rich Arabs do not trust this revolution. Since January they have been rushing to get their cash into safe havens, some arriving in London or Zurich with suitcases full of cash. According to Reuters, the country's foreign--exchange reserves fell by as much as a third in the first three months of the year. Al-Hayat newspaper estimates that $30 billion has left Egypt since the onset of the Arab Spring.

To put that figure in perspective, the World Bank has offered to give Egypt up to $1 billion in each of the next two years (if the government meets certain conditions), and to lend a further $2.5 billion. The U.S. government has pledged $2 billion in the form of loan guarantees for American businesses and partial debt forgiveness. But foreign investors continue to shun the region. The Egyptian stock market is currently trading at 23 percent below its pre--crisis peak.

The bottom line is that economic conditions have gotten worse, not better, as a result of the Arab Spring. Inflation is now above 12 percent in Egypt. Unemployment is up, too.

None of this should surprise us. Such is the life cycle of revolutions. What begins with euphoric crowds soon slides into a second phase of economic paralysis. The same happened in France after the initial "bliss" of 1789 and in Russia after 1917. In each case, exuberance at the overthrow of the old regime was swiftly succeeded by exasperation at the decline in living standards. And that was what gave the political extremists their opportunity to peddle their radical ideology of war against internal and external foes. Yesterday, the Jacobins and Bolsheviks. Tomorrow, I fear, the Muslim Brotherhood and Al Qaeda.

As Keynes might have written, nothing can then delay for very long that final civil war between the forces of reaction and revolution, before which the horrors of the late war on terror will fade into nothing.