Egypt and Tunisia’s Divergent Paths

CAMBRIDGE – It has been five years since Egypt and Tunisia underwent regime change, and both countries are still suffering from low economic growth, large fiscal deficits, high unemployment, and rising public debts. Having failed to institute reforms on their own, both have turned to the International Monetary Fund, which entered into an arrangement with Tunisia in 2013 and has just approved a $12 billion loan program for Egypt – the country’s first since 1991, and the largest ever for a Middle Eastern country.

On the face of it, countries moving toward democracy seem as likely to experience poor economic performance as countries moving toward renewed dictatorship, because political instability and uncertainty of any kind naturally hurt investment and growth. But Tunisia has embraced political inclusion, and could soon find itself back on the path toward healthy economic growth, while Egypt’s closing society positions its economy for a downward spiral.Until recently, both countries’ governments showed a surprising lack of interest in economic reform. Instead, they engaged with identity issues and security challenges in ways that reflect their diverging political paths. In Tunisia, electoral contests between the Islamist Ennahda Party and the secular Nidaa Tounes Party have allowed for a productive debate about the role of religion in politics and society; in Egypt, by contrast, President Abdel Fattah el-Sisi’s autocratic government has violently repressed the Muslim Brotherhood.

Meanwhile, governments in both countries could not resist increasing public spending. In Egypt, subsidies were still above 10% of GDP in mid-2016, suggesting a return to the old authoritarian bargain whereby citizens abstain from political participation in exchange for government economic support. Now, to qualify for the IMF’s assistance, Egypt has committed to reducing its subsidies and instituting a value-added tax.

In Tunisia, labor unions have managed to push civil-servant wages – which now equal 15% of GDP, up from 10% of GDP in 2011 – well above IMF targets. And macroeconomic instability has impeded growth in both countries. Egypt’s low credit rating has forced the government to borrow domestically, which has crowded out other borrowers to the point that private investment amounts to just 11% of GDP. Tunisia’s external state borrowing has not crowded out the private sector; nonetheless, private investment has fallen to 18% of GDP.

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