Learning from experience

While there are limits to what Europeans can do to foster the transitions occurring in North Africa, one of the things we can do is to share our experience and insights of our own countries' journeys toward democracy and free markets.

I am on my way to Cairo to discuss with local intellectuals, journalists and activists the lessons from economic transitions in Central and Eastern Europe. The trajectories of different countries were strikingly divergent, from the very successful (Estonia, Slovenia and arguably the V4) to the less successful (Russia, Belarus and Moldova). Although the differences between Egypt and Central Europe are enormous, I am convinced that Egypt can learn a lot from the stories of these countries and avoid some of the dangers along the road.

Twenty-two years after the fall of communism, the Czech Republic is a thoroughly normal, boring European country, with a dynamic market economy, standard political institutions and a thriving civil society. One cannot overlook its oddities - many of which are due to its communist past - but there is little doubt about the fundamental soundness of its institutions.

The Czechoslovak economic transition first involved policy decisions needed to create markets. Those initial economic steps can be described simply as liberalization, privatization and deregulation.

The transition, however, was not over once these policies were in place. A market economy requires myriad institutions, many of which did not exist in the early 1990s, and many of which could not be deliberately designed except perhaps by an omniscient social planner.

The post-communist countries then embarked on a slow process of experimentation to see what the best institutions for encouraging private initiative were. With the benefit of hindsight, it becomes apparent that the most successful countries were those that put in place transparent, easily navigable bureaucracies, low income taxes, while also removing most of their barriers to trade.

Egypt finds itself at a radically different starting point from Czechoslovakia in 1990. Egypt does have a market economy and did not have a 40-year experience with communism. Egypt's challenge is more akin to the one experienced by the post-communist countries in the later stages of the transition, when the goal was to develop institutions for helping already existing markets.

Besides dealing with government debt, inflation, external imbalances and the role of the military in hampering economic development, much of the change that is needed in Egypt has to do with reducing the cost of doing businesses. In 2004, the Peruvian economist Hernando de Soto and his research team found that almost 10 million Egyptians worked extra-legally, while around 7 million worked in the legal private sector. Furthermore, 92 percent of real estate was held without a legal property title. The costs of accessing the legal economy have long been a major hindrance to entrepreneurship.

Since then, the Mubarak regime made noticeable progress, as the World Bank's Doing Business Report notes. Yet much more needs to be done to make Egypt an attractive location for foreign investors and domestic entrepreneurs.

In order for the transition to succeed, Egypt needs a political leader able to talk not just to the urban liberal elite but to the average Egyptian, and who can turn the vision of a market economy and limited, constitutional and democratic government into a simple and widely appealing political platform.

A clear idea of where Czechoslovakia was headed, endorsed by a critical part of the newly formed political elite, was crucial to the success of the transition. In the same vein, the popular momentum in Egypt is an asset that needs to be seized by the right people - and it needs to be seized quickly, as it will not linger forever.

The perceived legitimacy of the transition is critical. Reforms that are simply imposed on people are susceptible to reversal. At the beginning of the transition process, the costs of reforms tend to outweigh their benefits, and unless the general public accepts that short-term pain will yield longer-term benefits, the reforms are fragile.

Later in the process, a related problem might arise. Throughout Central Europe, expectations of the transition's benefits vastly exceeded the reality - and any rational estimates. The divergence between the expected gains and the actual outcomes led to disappointment over "how little had been achieved." Toward the end of the 1990s, a strange nostalgia for the old days emerged, even among those who had no direct experience of the regime or those who were arguably much better off than they were under communism. Fortunately, by then, the new institutions had been solidly entrenched, and reversing the transition process was virtually impossible.

Just as the Czechs were, the Egyptians ought to be cautious in accepting expert advice or aid from international organizations. Experts are an interest group of their own, and their interests might not always align with those of the country they are advising. If one makes their living by selling advice or providing aid to governments of transitional countries, then one has a vested interest in keeping their clients and preserving their "transitional" status.

Aid has the potential to distort incentives in the economy and be an obstacle to development. Transitions in Central and Eastern Europe occurred without much economic aid, and arguably there was little that any form of outside assistance would have achieved. It is difficult to argue that the case of Egypt will be fundamentally different.

Although Egypt's challenges are enormous, these weeks are full of great promise, excitement and hope for all freedom-loving people - very much like the winter months of 1989.

- The author is a research fellow at the Legatum Institute in London. This article is adapted from a speech to be given at the "Societies After Revolution" conference organized by Minbar Al-Hurriyya in Cairo April 7-8.

Dalibor Roháč can be reached at
features@praguepost.com