Playing by the Book

With an unprecedented number of seats in the People’s Assembly, the Muslim Brotherhood is trying to show new maturity by endorsing the broad framework of the Nazif government’s economic reform program. But while a handful of its leading members have recently remade themselves as advocates of privatization and small enterprises, market watchers will have to wait a bit longer for a full explanation of the group’s policies on everything from Islamic banking principles to new taxes.With 88 seats won in the People’s Assembly last fall by independent candidates it backed, the banned-but-tolerated Muslim Brotherhood is set to command vastly more time in debate for the next five years; with a 20% bloc, its deputies now make up the largest non-NDP representation in constitutional history, and they’re itching to speak out as Parliament takes up a busy legislative agenda packed with reform bills moved by the Nazif government and often written at the top levels of the governing National Democratic Party.

The Brotherhood’s critics, and there are many, can say what they like about the group’s political and social agendas, but the notion of Al-Ikhwan one day writing economic policy sends shivers down the spines of foreign and domestic investors alike. While the secular opposition, formerly led by Al-Wafd, the nation’s oldest opposition party, had articulated relatively clear and reasonably detailed economic and fiscal policies, the business community has no concept of what Al-Ikhwan’s policies might be.

And here’s the problem: Neither does the Brotherhood. Like political opposition groups throughout history, its members are entering a crucial transition phase in which they must transform idealistic rhetoric into concrete plans. As the only opposition of substance now that secular parties hold a mere handful of seats, the Brotherhood is under new pressure to articulate a coherent platform or risk irrelevance.

The Brotherhood recognizes that many of the reforms the Nazif Cabinet has implemented in the past 18 months to improve the investment climate and promote free trade are crucial to Egypt’s development and integration into the global economy. Some members are even toning down social and moral requirements that could discourage tourism.

“By and large, our economic program doesn’t differ drastically from the official government economic program or from any other program submitted by any political party in Egypt,” says Abdel-Hamid El-Ghazali, a professor of economics at Cairo University and one of the Muslim Brotherhood’s economic heavyweights. “The similarity of our program with other programs stems from the fact that all of us are concerned with one economy — the Egyptian economy — and its development.”

The two biggest exceptions to the NDP’s current path that the group has publicized so far are its wish to see increased funding for social welfare programs (including job creation) and a desire to transform the financial sector along Islamic lines.

“We can promote [Islamic banking] and expand it there are many reports from all over the world that the system of Islamic banking is functioning with billions of dollars.”
Besides encouraging larger and more flexible microfinance programs for small- and medium-sized enterprises (SMEs), the Brotherhood would seek specifically to promote the production of ‘essential goods,’ such as foods, textiles and housing, as opposed to the luxury goods and accessories it says are the hallmark of the NDP’s industrial policy. The group has not yet reconciled the necessary increase in government spending with a taxation or deficit spending policy to finance such a program, nor does it have a plan for promoting the rapidly growing services economy.

If anything, the Brotherhood is uncomfortable with the state’s increasing debt and the interest it must pay on it, which violates Shariah; members point to the success of the private Islamic banking system here and abroad as a better model, but haven’t come close to describing how it would work at the level of monetary policy.

El-Ghazali, who holds a BSc from the London School of Economics and a PhD from the University of Glasgow, moves fluently between Western economic theory and specific approaches to Egypt’s economic problems in dissecting the Brotherhood’s views. He has been one of the more outspoken members explaining and forecasting the Brotherhood’s economic policy, although the group’s political committee will ultimately have to draft and release all official policies.

Unlike the struggling command economy and muddled macroeconomic goals of Iran’s Islamic Republic, a free-market economy dominated by the private sector is in fact central to the economic thinking of the Brotherhood. El-Ghazali is quick to criticize the lingering mix of private and public ownership in the Egyptian economy.

El-Ghazali claims that privatization has been high on the Brotherhood’s agenda since the 1980s, although there are few public statements that might back his assertion. The government, however, did not move in this direction until it bowed to pressure from international organizations including the International Monetary Fund at the beginning of the 1990s. Many public sector companies primed for sale to the private sector or foreign investors under Law no. 203 of 1991 sat unsold for over a decade; Minister of Investment Mahmoud Mohieddin invigorated the privatization program in mid-2004.

Part of the Brotherhood’s justification for their stance is the protection of private ownership; according to the Qur’an, God has blessed men and women with inalienable property rights.

“[Your property] belongs to you. This is protection of ownership, not by law, but by God. Private property and ownership must be respected,” says Hazem Farouk, a dentist and Brotherhood-backed MP representing Shubra.

Farouk’s statement might also be interpreted as a defense of the Brotherhood’s own substantial financial foundation, an extremely diverse pool of tangible and intangible assets that have been under tight state surveillance since its foundation (see sidebar, “The Gift that Keeps on Giving”).

But beyond these basic convictions, the Muslim Brotherhood has never had to implement economic legislation or regulations and does not possess a written economic platform, although they are specific in their identification of raising the employment rates as a social and economic imperative.

“[The Muslim Brotherhood considers unemployment] a political issue more than it is an economic issue. They point to the results of this phenomenon in social life and political life,” says Diaa Rashwan, a leading analyst at the Al-Ahram Center for Strategic and Political Studies who specializes studying in Islamist groups. “They say that it creates other negative phenomena in the Egyptian society, but they don’t have a real or serious solution for solving it.”

Ivesa Lübben, a Cairo-based German academic and economist currently writing a PhD dissertation on the group’s founder, Hassan El-Banna, likes to explain the Brotherhood’s current appeal with the concept of ‘moral economy,’ coined by British scholar Edward Thompson, who worked on the emergence of the British worker’s movement in the 19th century. His main thesis is that the general values of a society play a stronger role in the economic framework of a country than generally accepted.

According to Lübben, the Brotherhood is thus following broad moral principles that they have not yet translated into an economic program. Central among these principles are a strong emphasis on work ethic, the conscientious use of public resources, the elimination of monopolies and unfair competition and the amorphous desire for a strong society supported by high employment.

Jobs: a moral and economic cornerstone

Job creation is at the center of what presently passes for the Brotherhood’s economic policy, which remains a top priority for the NDP.

“If an American or a German tourist would like to have fun in the country, why not? [There should be] certain limits: you can’t, for instance, drink alcohol in the street…”
In his election campaign last summer and fall, President Hosni Mubarak promised the creation of no less then 4.5 millions jobs over the next six years through new industrial projects of different sizes. The NDP has tried to create jobs by luring in foreign direct investment (FDI) and by increasing Egypt’s industrial production with a strong focus on exports promoted through trade liberalization, including the Qualifying Industrial Zones (QIZ) program, which provides limited free trade with the United States, and other free trade deals such as the one recently signed with Turkey.

Last fall, Minister of Trade and Industry Rachid Mohamed Rachid launched the National Supplier Development Program (NSDP). The NSDP subsidizes consultants for feeder industries like automotive parts makers to help them improve the quality and reputation of their products for domestic sale and export alike.

Farouk says that his district and the poorer areas north of it were previously a stronghold of the Egyptian textile industry. Today, the area has a high rate of unemployment and a decaying industrial infrastructure. Instead of focusing on upgrading industry, as the NDP does, he emphasizes the need for local, tailored and small-sized solutions to reduce unemployment.

“Our own ideas need to be developed, from our environment, here from our community,” Farouk says.

The group has a history as a grassroots organization with strong ties to local communities as well as an ongoing practice of financing small economic projects in return for political support. They emphasize microfinance, which the public-sector banks that still dominate the market have largely neglected. The group would look to move beyond the support the Social Fund for Development and EU-funded programs such as the Industrial Modernization Program currently offer to SMEs.

A specific aspect of the Brotherhood’s focus on industrial reform is its emphasis on production of goods for domestic consumption and import substitution, such as foods, textiles and housing, as opposed to what Hazem Farouk calls luxury goods and accessories; services in fields such as finance and IT barely rate a mention. In this respect, the group sounds a lot like the old Arab Socialist line advanced by Nasser in the 1960s.

While he maintains the group would not discriminate against manufacturing that caters to the upper classes, the idea of channeling investment into industries producing mass goods using labor-intensive production methods appears to contradict the notion of a decentralized free market economy.

“Of course you have certain limits, but within these limits you have room for such industries,” says El-Ghazali. “You can’t continue depending on the consumption of foreign technologies, which are very high-tech and very capital-intensive techniques. You have to invent your own technology, in particular at the local level. There are immense opportunities for development by using local technology and knowledge — for developing small industries. [The Chinese] are now conquering the world by using labor-intensive techniques.”

CAPMAS, the state-run statistics agency, puts unemployment at around 10%, following the UN definition, according to which someone is employed if he works at least one hour per week; the OECD estimates unemployment in Egypt to be 17%.

“The main objective is that we are aiming at establishing a good way of life for the ordinary Egyptian; this means we need on the ‘macro’ level a serious rate of growth, not 5%, but 8, 9, 10%,” argues El-Ghazali.

Politicians in industrialized countries would be happy with the average growth of 3% that Egypt’s economy saw between 2000 and 2003, to say nothing of the 5% rate clocked last year or the red-hot 5.5% in the first two months of this year. In developing economies, however, the bar is higher, as the basis from which economic development must progress is much lower. The Asian Tiger economies posted low double-digit growth rates in the early 1990s, as did Turkey in 2004.

Analysts say that an annual GDP growth rate of 8% would be necessary to significantly reduce the country’s unemployment, as those 600,000 college graduates who are entering the labor market every year need to be absorbed as well.

El-Ghazali says that many of the millions of state employees who actually don’t work have to be counted as well as hidden unemployment, making clear that an increase in public employment would not be a solution the group supports.

Lübben does not believe that the Brothers would implement a strict employment or industrial program based on a single economic school of thought, nor does she believe there is a clear difference in view between the Brotherhood’s old and new guards on the issue.

“The Brotherhood is able to bring several economic schools of thinking together and to sustain different positions on single questions,” Lübben adds, although she says that the majority of the Brotherhood’s experts on macroeconomics tend to a Keynesian approach of managing the economy, especially regarding the question of whether capital interest rates are effective in regulating investments.

First among new taxes that would redistribute wealth, the Brotherhood has been discussing a system of zakat outside the current tax and subsidies systems. The system would require taxpayers with annual incomes of more than the equivalent of 86.5 grams of gold, which would be between LE 5,000 to LE 6,000, to pay 2.5% of their income as an official zakat outside the existing income tax system, providing funds for new social programs.

Of economic significance in the Brotherhood’s private zakat program are the distribution of funds to the poor and the relief of those who cannot pay their debts. Those working to raise and distribute zakat would also be underwritten by the funds they generate.

The buck stops here

After setting the common man on his feet through the expansion of skilled labor employment, the second economic priority the Brotherhood targets is reducing the number of unjustly wealthy through the elimination of corruption and the misuse of public resources.

“We must fight corruption, all sorts of corruption, by enhancing faith in the heart and thorough application of laws,” says MP Hazem Farouk.

However, Brotherhood members offer even fewer concrete measures beyond calling for new laws and a better implementation of existing ones. The vagueness and political sensitivity of this situation allows the Brotherhood to rhetorically cite the end of rampant corruption in government as a panacea to any and all economic problems, such as the burgeoning state deficit.

MPs affiliated with the Brotherhood say that interrogations by special prosecutors of public figures and state officials would bring results and that current legislation needs to be implemented more thoroughly. They remain unclear, however, on whether this implies relying on the existing infrastructure for fighting corruption, such as the Administrative Control Authority.

Egypt ranks 70 out of 159 countries in Transparency International (TI)’s annual corruption perceptions index, significantly below the regional average. Corruption has a direct impact on the economic development of a country: a University of Passau study suggests that a country attracts 15% more FDI for each point the company improves its score on TI’s ten-point scale. In 2005, Egypt scored 3.4, while Kuwait scored 4.7 and Jordan scored 5.7

In our mutual interest

The Brotherhood’s banking policy could include as radical a change as legislation requiring banks to become Shariah-compliant: that is, banning interest as it is conventionally known.

The group’s representatives are reluctant to paint a picture of their final vision of the Egyptian banking sector, but keep stressing that they would change things gradually and that their priorities lie in improving the social situation in the country.

Islamic banking is not as far out a concept as it seems: since its birth in Pakistan in the 1950s, the fast-growing industry has attracted as much as $500 billion in investments, much of it under management at banks outside Islamic countries. The system is based on deposit and loan contracts in which the bank and its clients essentially become profit-sharing business partners. The ‘fees’ for whichever party provides the capital are variable and depend on the performance of the investment. Islamic bank investments range from real estate to equity in companies that are themselves Shariah-compliant.

“We can promote [Islamic banking] and expand it,” says Essam El-Erian, a senior leader of the group’s dovish camp. “It might face many problems when it becomes bigger, but there are many reports from all over the world that the system of Islamic banking is functioning with billions of dollars.”

Opinions within the group vary widely about what the group would do to change the financial sector. At a very minimum, the Brotherhood would provide clear incentives to expand Islamic banking offerings.

Tewfik Aclimandos, a researcher at the French research center CEDEJ, says he believes the majority of members would oppose a Central Bank interest-based system, although Lübben points out this would contradict the Brotherhood’s stated goal of integration into the world market and could cut the country off from international capital markets.

However, in the past couple of years, central banks in Islamic countries including Malaysia, Pakistan, Bahrain and Qatar are beginning to innovate in this area: They have issued upwards of $4 billion in ‘sovereign Sukuk’ bonds, instead of treasury bills, as a way of financing their governments. The coupon on such bonds is paid based on receivables from a grouping of loans the issuing banks have made for specific Shariah-compliant fees, similar to asset securitization (see “Special Purpose Vehicles,” page 66).

Come and play

International hotel operators and tour companies are another segment of the economy that fears the Brotherhood’s policies would negatively impact their growth, but the group has been trying to make it clear that it would encourage tourism by making exceptions for foreigners.

“If an American or a German tourist would like to have fun in the country, why not?” El-Ghazali says. “[There should be] certain limits: you can’t, for instance, drink alcohol in the street, but things can be kept [away from each other]. This is not a serious problem, we are not dogmatic here.”

El-Ghazali goes as far as criticizing the government for not fully exploiting the country’s potential. Egypt saw 8.6 million visitors during 2005, whereas Turkey had 20 million. He does not believe the group’s social and cultural positions regarding alcohol and dress codes need have an impact on tourists.

“Most of the tourists are really here for cultural reasons,” he says. “With a good hotel infrastructure and transportation capacity, we should double the 8 million [and even] reach 30 million tourists.”

24-hour policy people

The Brotherhood’s victory in the parliamentary elections was a shock not only to the incumbent NDP and shrinking liberal opposition, but to the Brotherhood itself. Whereas before, their expected rhetoric was limited to an alcohol ban proposal each term, “now they can be asked in Parliament at any time: ‘What is your opinion about this and that?’” Rashwan says.

This is the impetus El-Erian says the party needs to create a robust economic policy to flesh out its ideas. Before this term, he says the group could make legislative demands or proposals without considering their practical implementation, “but now we are facing real problems, and this is very good for the Muslim Brotherhood. We are facing problems because our members are not used to discussing [economics] because they are rather interested in other things.”

Aclimandos is more skeptical that the Brotherhood will be able, or want, to publicize a detailed program. He expects the group to keep a low profile during the coming two years in order not to jeopardize their recent gains. He believes the Brothers will avoid critical issues and would certainly not specify an economic program that could leave them open to criticism.

At the very minimum, the debate inside the group on issues in all fields is going to become more intense.

“They are now forming small groups and workshops to discuss things,” Rashwan says. “In theory, absolute obedience to the leadership is a principle of the organization, but in fact there are consultations with members and the leadership watches out for what the base has to say.”

So far, though, there have been few signs that the Brotherhood is taking a more mature approach in Parliament. In the past, the group has proven effective only in attacking public figures, a tactic it employed again during the assembly’s mid-February session, when Minister of Transportation Mohamed Mansour and Chief of Presidential Staff Zakaria Azmi found themselves at the center of strong attacks over the government’s handling of the Al-Salam ferry disaster.

To demonstrate its qualification as a genuine opposition group, it needs to submit to the assembly thoroughly worked-out law drafts itself, and Ahmed Abu Baraka, Brotherhood MP and a member of the assembly’s economic committee, says the group intends to do so.

The Brotherhood has also organized seminars with political analysts to train its members of Parliament, most of whom are new to politics. Lübben sees a rising awareness in the group that a program is needed to be able to make better use of its vote in parliament.

“We are few, that’s true, but we will work hard to study all issues in detail and I’m optimistic we will be able to influence aspects,” says Abu Baraka, who says that his coming goals include the reduction of bureaucracy, decentralization, transparency and freedom of information as well as measures against monopolies.

El-Ghazali is optimistic that Egypt’s governmental and economic stakeholders would be able to cooperate with the Brotherhood on their yet-unknown social and economic agendas.

“This is achievable,” he says, “if you have the example of the decision-makers. You have to convince the Egyptian citizen that you can change things.”

Farouk, whose first concern remains the development of employment opportunities in his own district, embodies the motto ‘all politics is local.’

“Human resources is the core of development in any country,” he says. “If the citizen has the chance to work, this enhances his sense of belonging. He will feel he belongs to this country, he will be proud to be an Egyptian.” bt