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5 silver linings in Egypt's turmoil

November 27, 2012: 9:20 AM ET

Egypt's political and economic future is challenging, and for understandable reasons. But it is too early to give up on the country.

By Mohamed A. El-Erian

Mohamed Morsi

Egypt president Mohamed Morsi

FORTUNE -- The very last thing a struggling Egyptian economy needed is a domestic political crisis that divides its leading personalities, pits the judicial branch against the executive, and ignites street protests. Yet this is exactly where the country finds itself following Thursday's decree that grants more power to the president.

The result is greater anxiety, both within and outside Egypt – so much so that more people seem to be giving up on the country's ability to complete its bumpy multi-year transition from dictatorship to greater democracy and respect for human rights. Moreover, in the short term, widespread global admiration for President Morsi's crucial role in brokering a ceasefire in Gaza between Israeli and Palestinian officials has given way to concern about an internal grab for power.

These concerns are understandable. They are intrinsically related to the delicate conditions under which Egypt is navigating its historic revolutionary transition. But even this new cloud now hanging over the country's already-difficult multi-year journey could end up having a silver lining.

The conventional summary narrative is well known by now. Egypt's grassroots revolution, led by courageous youth movements, overthrew President Mubarak in a quick and relatively peaceful manner. Thereafter, the country has had a challenging time navigating the trickiest revolutionary pivot of all: from dismantling the past and its deeply-entrenched remnants, to building a better future that commands broad-based popular buy-in.

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Egypt has lacked both the institutions and the leaders for a rapid and orderly transition.

Apart from the armed forces, virtually all public institutions (and several private ones) were coopted over many years to serve narrow interests. Re-orienting them to enable and support the greater good, and to do so with acceptance across Egyptian society, is inherently challenging and time consuming.

The one institution that commanded broad admiration at the outset of revolution in 2011 – Egypt's armed forces – failed to build on its widespread credibility and support.

The armed forces brilliantly avoided the tragic trap of fueling a civil war, as subsequently happened in Libya and is now occurring in Syria with horrid human casualties. But they stumbled when it came to the delicate task of handling well the immediate and complicated aftermath of Mubarak's overthrow.

Egypt was also short of  a Mandela type leader who could credibly and rapidly move the nation forward by "forgiving but not forgetting the past."

The sudden grassroots revolution lacked well-recognized revolutionaries. And those who aspired to this role tripped in positioning themselves properly during the initial political vacuum.

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New secular political parties scrambled desperately to organize in time for what turned out to be relatively fair and free elections for both the presidency and parliament. In the vast majority of cases they started from scratch. And they were competing with Islamic parties – particularly the Muslim Brotherhood – with well-structured local networks and highly-effective messaging.

There were also no external anchors to speak of. Egypt's friends and allies were just as surprised as its citizens by the Mubarak overthrow. And their credibility among some domestic constituencies was undermined by the support that they had provided Mubarak over the nearly 30 years of his uncontested rule.

These initial conditions virtually guaranteed what has proven to be a very messy transition – one dominated by two visible and recurrent characteristics: clumsy decision-making by those in positions of power; and street protests that sometimes succumb to violence.

The internal dynamic is not helped by Egypt's struggling economy. Employment and activity have yet to regain fully pre-revolutionary levels. The budget deficit remains under pressure. Foreign exchange reserves have declined. And both domestic and foreign investors are hesitant to engage fully.

All of this has convinced the government to turn to the International Monetary Fund for help, culminating last week in an initial agreement. In addition to contributing to a framework for an Egyptian-owned reform program, the IMF can provide significant quick-disbursing financial assistance and help mobilize additional funding from other official sources. Yet many in Egypt worry that the IMF's involvement could signal the return to the old days of external financial dependency.

All this speaks to concern among Egyptians eager to harvest the revolution's quest for widespread economic well-being and greater social justice. Concern, mixed with disappointment, also dominates conversations among the country's external friends and allies.

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Yet it is too early to give up yet on Egypt's democratic transition.

Rather than be discouraged by recurrent potholes, stakeholders should recognize the inevitable bumpiness of the journey and work hard to maintain momentum. In this regard, there are five silver linings in the new political cloud that now hangs over Egypt.

  • First, the government's growing realization that Egypt is no longer a society in which controversial steps can be rammed through, nor should they: Checks and balances are now operating at multiple levels; and they could well force the rescindment of part of last week's decree. They certainly are noisy today – but they are also key for a successful democratic transition given the country's initial conditions.
  • Second, renewed attempts at greater collaboration among leading political personalities in Egypt: The recent initiatives in this regard are encouraging and could be usefully deepened.
  •  Third, the potential upside of popular empowerment: From greater civic engagement to visionary aspirations, never underestimate the upside associated with a population that finally feels it owns the country and can influence its destiny.
  • Fourth, the economy's considerable potential: With some sustained political stability and short-term financial assistance, many productive sectors can be unleashed in a meaningful manner.
  • Finally, Egypt's friends and allies are interested in its success and they're ready to contribute: many are keen to align themselves behind a sustained domestic effort to attain the revolution's objectives of real and inclusive economic and social progress.

Egypt's immediate political and economic future is challenging, and for understandable reasons; and the latest internal political controversy adds to the anxiety associated with a tricky revolutionary pivot.

Yet it is too early to give up on the country. Indeed, if properly handled, even this latest controversy – and the internal responses it has already triggered – could end up helping Egypt course correct in a constructive, timely and durable fashion.

Mohamed El-Erian is the CEO and co-chief investment officer of PIMCO.

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