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The economic forces behind a revolutionary spring

Cairo on Friday was a tableau of bloodied faces, firebombs and rocks, club-swinging soldiers and turbulent street battles. If this year began with a simple arithmetic of immovable protesters facing down a dictatorship, it is ending with a more complicated geometry involving a power-wielding army, resurgent Islamists and humiliated protesters.

How do we understand the new politics of the Arab world? Here's a suggestion: Don't even try. You'll learn far more if you make an effort to understand the economics. For what happened this year on the southern shore of the Mediterranean was far more an inevitable response to economic change than a spontaneous outburst of resistance. And to understand what happens next, you need to know what, economically, has come before.

The most important voice this year is the Cairo economist Samer Soliman, whose book The Autumn of Dictatorship is not just crucial to explaining the Arab uprisings, but also offers the key to understanding almost all transitions from authoritarianism to democracy, and the troubles that occur along the way.

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In his detailed analysis of 60 years of finances, it becomes evident that at the beginning of 2011, Egypt and Tunisia were at about the same place, economically, where you would have found Eastern Europe and Russia in 1988, or Brazil in the early 1980s, just as their authoritarian regimes were about to collapse.

All those governments had spent years buying public support through the doling out of government jobs, food subsidies, housing benefits and positions at state-owned, protected corporations, with minimal taxes.

This was almost all "free" money. Arab states, like most authoritarian regimes, were generally known as rentier economies: They financed themselves not by creating internal economic growth and taxing it, but by attracting money outside: From Egypt's modest petroleum industry and the Suez Canal rents, and most of all from Cold War foreign-aid payments from Moscow and then Washington, both of whom made Cairo, for a time, their largest aid recipient. This gave the Nasser and Sadat regimes the illusion of generosity – but their spending always exceeded their revenues.

Under Hosni Mubarak, that all faded. The oil and canal revenues were nowhere enough to support Egypt's fast-growing population, and the aid money dwindled with the Cold War's end. But by the end of 2010, the Egyptian state was getting by on only half the revenues that Mr. Mubarak was receiving when he came to power in 1981.

He bought time by creating what appeared to be an open market economy – but one that was essentially a state-protected oligopoly, companies owned by a circle of tycoons and the army, which became a big profit-seeker in exchange for keeping him in power. This narrow elite was suddenly the only beneficiary of the state – and it didn't produce enough revenue to cover costs.

Mr. Soliman then asks the crucial question: "What happens when the rentier state grows poor and when its revenues dwindle and its deficit climbs?" This is also exactly what was happening in Eastern Europe in the late 1980s.

There is only one possible answer: "Government will have little choice but to levy taxes, and at this point society can insist that government listen … and account for how it plans to spend the funds it has collected from the public. In other words, this is when the public can force government to become democratic."

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Indeed. And as Tahrir Square exploded in January, Mr. Mubarak made it worse, promising full-time government jobs and a 15-per-cent raise to half a million temporary contract workers, something Egypt could ill afford.

In the months since the regime fell, the showdown, as it always is in these cases, is between those who would hold their existing client privileges, those who would expand them to include their own group, and those who would try to create a real, non-corrupt, independent economy from the wreckage.

Egypt does not sit on a lake of petroleum like Iran, Saudi Arabia and Libya (or Russia) do. So its options, like its Warsaw Pact forebears, will likely be democratic and difficult – and Mr. Mubarak's cloistered elite turned most Egyptians against the idea of a liberal economy.

So it's not so much a question of whether Islamists or reformers win power, but whether the economically wise branches of both groups are able to win the day. Brazil, Turkey and Poland were all able to break free from the client-state debt spiral and build real economies, but only after many difficult years. That, unfortunately, is the best hope for Egypt.

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