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Sunday, February 20, 2011

Hayek’s Gloomy Prognosis for Egypt

F.A. Hayek’s most important insight is that we cannot have political freedom without economic freedom. Hayek’s inexorable Road to Serfdom, from which it is difficult if not impossible to return, describes a number of today’s troubled countries, and it likely portends the future of post-Mubarak Egypt. Those caught up in the euphoria of democratic street demonstrations must confront the reality that the long-run outcome is likely to be bad.

Take Russia and Iran as possible role models for Egypt. Despite their huge differences (a KGB state versus an Islamic theocracy), they share a common and sinister pattern: A revolution occurs (the collapse of the Soviet Union, the Iranian revolution); a nominal democracy is established; the democracy is hijacked by the ruling elite; the ruling elite (Kremlin-favored oligarchs, the Revolutionary Guard) gains control of the commanding heights of the economy; the ruling elite viciously blocks democracy and liberalization as mortal threats to their vested interests. Anyone who stands in their way is dealt with harshly as corrupt or traitorous.

Egypt is poised to follow this same path. Its private economy is weak. Some thirty five percent of Egyptians work for the state. Ninety percent of cotton spinning and sixty percent of fabric manufacture is in the hands of the state. The poor Egyptian public receives its food through state ration coupons as it did 3,000 years ago. Only ten percent of property rights are secure.

Egypt is currently a democracy in name only; the goal of its idealistic young “tweeter-generation” demonstrators is to make it a real democracy with real elections. Egypt has thrown out Mubarak and will surely punish the corruption of Mubarak, his family, and associates. The country is ruled by the military, who will oversee the transition to something that will be called “democracy” no matter what the outcome.

Herein lies the rub: Egypt’s commanding heights were under the shared control of Mubarak and associates and the military. His removal places a vast amount of Egyptian wealth up for grabs. Mubarak’s share may go to “society” or it may be gobbled up by the military, giving the military even more incentive to avoid the voter scrutiny and transparency of true democracy.

The truth of Egypt’s military’s economic clout is just coming out: The ruling military council is a strong advocate of state controls and a staunch opponent of economic liberalization. The military owns day care centers and beach resorts, makes television sets, jeeps, washing machines, furniture, olive oil and bottled water. Estimates of the military’s share of economic output range from ten to thirty percent. It enjoys huge advantages over private enterprises. Military enterprises pay no taxes, use conscripted soldiers, buy public land on favorable terms and have no obligation to disclose their activities to the Parliament or the public.

As in Putin’s Russia and the Mullah’s Iran, the Egyptian military can eliminate opponents through charges of corruption, collaboration, or other misdeeds. Threat alone will be enough to silence most advocates of reform and change. As in Russia, liberalization can be discredited by associating marketization and privatization with chaos and corruption.

Real revolutions always redistribute society’s wealth. This is why entrenched elites resist change and protect their vested interests. The Bolshevik revolution redistributed wealth from the nobility and landlords to what Lenin and Stalin called “the worker state.” The Putin revolution redistributed Russian wealth from one group of oligarchs to another. The Iranian revolution redistributed wealth from the Shah and associated businesses to the Mullahs and Revolutionary Guard. In a real Egyptian democratic revolution, the military would lose its wealth – either to a true democracy or to a triumphant Muslim Brotherhood, and it understands this fact clearly.

Among the first moves of the military government was to charge with corruption or force from their jobs businessmen and public officials favoring opening the economy and liberalization. The military is satisfied with the status quo of its monopolies, economic privilege, and insecure private property rights.

The Hayek model points to the incredible obstacles facing the true Egyptian democrats. The military “fox” is “guarding the hen house.” The young democrats must somehow figure a way to persuade the military to sacrifice its own economic interests and to do the “right thing” for the country. Judging from past history, their chances of doing so are remote.


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  2. Real revolutions always redistribute society’s wealth.