By Nina Easton, senior editor
FORTUNE -- "It's the economy, stupid," Vali Nasr, dean of Johns Hopkins School of Advanced International Studies, tells a Washington dinner party. Nasr isn't applying that familiar bromide to U.S. politics. Egypt is the topic of this gathering, sponsored by Bridges of Understanding, a U.S.-Arab cultural exchange forum. Nasr is forcibly driving home a point largely lost in the conversation about renewed political turmoil: Only a stable private sector can bring lasting peace, stability, and a functioning democracy.
"Let's not think of Egypt as an Arab-Muslim nation," Nasr tells me later. "Let's look at it as a large, bloated, public-sector-dominated state. Democracy only succeeds with a thriving free market and private sector."
The problem is that turning around this bloated state -- one facing plummeting foreign investment alongside rising unemployment and poverty rates -- starts with the political. And the enormous economic costs of Egyptian President Mohamed Morsi's power grab in late November are only beginning to come to light. A $4.8 billion IMF loan that could have eased the country's balance-of-payments crisis and calmed foreign investors is on hold -- as is a $450 million emergency cash infusion, now waylaid in Congress.
But the damage goes much deeper. Just months ago Morsi was wooing foreign investors. Key U.S. lawmakers, including Senators John Kerry and John McCain, traveled to Egypt after the fall of Hosni Mubarak to promote global business investment. Last February a suppliers' conference in Cairo attracted an overflow of U.S. executives eager to partner with local firms.
In the spring the State Department launched a $60 million "enterprise fund" to seed small and medium-size businesses. And by the summer some influential voices were calling for a U.S.-Egypt free-trade agreement to cement the American influence in the region.
Even last fall, after mobs attacked the U.S. embassy in Cairo, Kerry and McCain stood by Morsi's struggling democracy, helping to quash an effort by Senate conservatives to block future military and economic aid (the cutoff would have also applied to Libya and Pakistan).
MORE: Globalism goes backward
By putting his decisions above judicial review, Morsi has effectively blunted that emerging American enthusiasm for commercial engagement with the Arab region's second-largest economy. McCain is among those in Congress warning that Morsi's authoritarian bent is jeopardizing not only its $1.5 billion in U.S. military assistance, but also its future economic aid.
None of this has changed the fact that the Muslim Brotherhood's survival as the ruling party depends on restoring some luster to the country's rusting economy. The prospect of more commercial engagement with the U.S. can still be an enticing carrot -- for both economic and political reform. William Brock, a former senator and U.S. Trade Representative, says that carrot should come in the form of a strings-attached free-trade agreement. "We need to tie his interests to ours, and trade is far and away the best assurance of that goal," he says.
Over the past 20 years, with the U.S. taking the lead in promoting economic and political freedom, countries such as Mexico and Poland have seen free markets and international trade sustain their fledgling democracies. In smaller economies, such as Ghana and Mongolia, the U.S., through the Millennium Challenge Corp., has tied huge development grants to progress made on promoting transparent, rule-based free markets. (Egypt scores poorly on corruption and a host of other MCC standards.)
The U.S. can truly influence the course of events in Cairo and the rest of the region by treating Egypt not as an economic-aid ward of Washington but as a strategically valuable trading partner -- one that needs to follow the rule of law. "Egypt's on a hair trigger not only because Morsi abused power," Nasr says. "It's also because there are too many hungry, angry people without a future." That sounds like an opportunity for leadership from a capitalist world power that has filled that void many times before.
This story is from the January 14, 2013 issue of Fortune.
Despite the economic uncertainty and social unrest in Egypt, tech start-up investors are finding plenty of promising options.
By Christopher M. Schroeder
FORTUNE -- It's been more than a year since Egypt's former president Hosni Mubarak resigned after the Arab Spring uprising began. Many Egyptians had high hopes for major reforms after the dictator's 30-year rule, but so far few of them have been realized. But despite the economic turmoil and MOREApr 25, 2012 12:02 PM ET
Leaders around the world are facing angry voters who want real change. Can they keep getting by on the same old promises, or is it time to clean house?
By Geoff Colvin, senior editor-at-large
FORTUNE -- Rarely -- maybe never -- has global leadership been more up for grabs in a single year than it is now. Seven major nations are holding presidential elections -- in chronological order, Russia, France, Egypt, Mexico, Venezuela, MOREMar 6, 2012 5:00 AM ET
One year after the uprisings in the Arab world, some nations in the region say they're open for business. Foreign investors will need to learn a whole new set of rules.
By Vivienne Walt, contributor
FORTUNE -- If you want to gauge the Arab Spring's economic health one year after revolutions exploded in Tunisia, Egypt, and Libya, meet Abu-Bakr Makhlouf. Last February, Makhlouf, founder of a construction supply company in Cairo, stood MOREMar 5, 2012 5:00 AM ET
The ongoing revolutions across the Middle East would seem to be good news for markets. But so far they've scared most foreign investors away.
By Peter Carbonara, contributor
FORTUNE -- A few investors look at the Arab Spring -- the wave of protest and revolution that began last December when a Tunisian street vendor set himself on fire to protest his harassment by police -- and don't see a particularly big deal. MOREDec 13, 2011 10:15 AM ET
Fannie Mae is nearing another not so magical milestone.
The government-owned mortgage investor posted its latest quarterly loss Friday, blaming the recent house-price double dip for a rise in credit costs. Fannie (FNMA) also said its regulator will ask the government for more money to cover those losses.
The $6.5 billion request from the Federal Housing Finance Agency will bring the company's cumulative draw on Treasury funds since its September 2008 takeover MOREColin Barr - May 6, 2011 5:02 PM ET
One day before Egyptians took to the streets in protest, a Cairo-based venture capital firm called Sawari Ventures formally launched. It is the nation's only privately-funded VC firm, with plans to invest between $2 and $5 million in local technology and telecom startups.
Earlier today I spoke with Leslie Jump, a Sawari Ventures partner who works out of Washington, D.C. (her husband is Edward Walker, U.S. Ambassador to Egypt between 1994 MOREDan Primack - Feb 2, 2011 2:24 PM ET
When prices rise faster than economic growth, the outcome is damaging for any population, but especially for a young one like Egypt's. Unfortunately, there are worrying signs that stagflation is spreading around the world.
By Keith R. McCullough, Hedgeye
Suffocating your citizenry with stagflation is a problem, particularly when that citizenry is young, hungry, and unemployed. By definition this is the Egypt we're seeing today. While this may be a very old MOREFeb 1, 2011 11:08 AM ET
Is there a bull market in brutal Egyptian dictators?
There is Monday. The odds of an imminent departure by Egypt's president, Hosni Mubarak, declined on Intrade, which makes a market in bets on political, sports and entertainment events.
The bulls aren't exactly running wild, mind you. The market is putting the odds at 3 in 5, or 60%, that Mubarak will depart by Feb. 28, Intrade shows. That's down from 3 in MOREColin Barr - Jan 31, 2011 2:19 PM ET
For insight into how developments in Egypt and the broader region will impact oil prices, it's worth remembering the Suez Crisis of 1956.
By James Hamilton, Econbrowser
Change is on the way in the Arab world, with Egypt the latest focal point. Here I review recent events and their implications for world oil markets.
I begin with a timeline, if not to connect the dots, at least to collect the dots in a MOREJan 31, 2011 9:39 AM ET
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