How Washington Justified American Aid to Egypt

While the United States is distracted with Donald Trump, Russia and the Kavanagh hearings, it is business as usual (more or less) at the U.S. Department of State.  As you will see in this posting, when it comes to its allies in the Middle East, Washington is willing to bend its own rules to ensure that its partners retain their military capabilities and that the United States retains its strategic advantage in the region.

Let's start by looking at some background.  Back in August 2017, then Secretary of State Rex Tillerson cancelled $95.7 million in military and economic aid to Egypt and delayed an additional $195 million in Foreign Military Financing (FMF) funds because of Egypt's questionable track record on civil liberties and human rights in general.  Under American law, Egypt receives $1.3 billion in annual FMF funding of which $195 million is held back until the Egyptian government can prove that it is making progress on human rights and democracy issues.  One of the key issues that led to the cancellation and delay is the recent law that restricts NGO activity in Egypt to developmental and social work and introduces jail time for up to five years for non-compliant organizations.  Organizations must receive permission from the Egyptian government to carry out and publish the results of studies and will be subjected to fines of up to $55,000 for violations.

The United States has long backed Egypt.  Between 1946 and 2016, the United States provided Egypt with $78.3 billion in aid (not adjusted for inflation) with all aid being appropriated and authorized by Congress.  All U.S. military aid to Egypt is designated to finance the procurement of weapons systems and services from U.S.-based defense contractors, yet another way that tax dollars flow more-or-less directly from taxpayers' wallets to the Military-Industrial-Congressional complex.    Here is how the flow of military aid from the United States to Egypt works:

Here is a table showing the history of military and economic aid granted to Egypt:

For fiscal 2019, President Trump is requesting a total of $1.381 billion oil foreign assistance, the same amount as in previous years.

Despite the flow of aid, there have long been concerns about human rights in Egypt.  According to the Department of State's own report on Egypt's human rights record from 2017, we find the following:

"The most significant human rights issues included arbitrary or unlawful killings by the government or its agents; major terrorist attacks; disappearances; torture; harsh or potentially life-threatening prison conditions; arbitrary arrest and detention; including the use of military courts to try civilians; political prisoners and detainees; unlawful interference in privacy; limits on freedom of expression, including criminal “defamation of religion” laws; restrictions on the press, internet, and academic freedom; and restrictions on freedoms of assembly and association, including government control over registration and financing of NGOs. LGBTI persons faced arrests, imprisonment, and degrading treatment. The government did not effectively respond to violence against women, and there were reports of child labor.

The government inconsistently punished or prosecuted officials who committed abuses, whether in the security services or elsewhere in government. In most cases the government did not comprehensively investigate human rights abuses, including most incidents of violence by security forces, contributing to an environment of impunity...

The government, at times, used excessive force to disperse both peaceful and nonpeaceful demonstrations. On July 16, security forces killed one protester on Warraq Island, near Cairo, reportedly due to suffocation from tear gas. The Ministry of Interior and press reporting claimed protesters attacked security forces with rocks and birdshot. A local resident claimed police fired birdshot as well as tear gas at protesters....

At year’s end the government had not held accountable any individual or governmental body for state violence after 2013, including the deaths of hundreds of civilians during the 2013 dispersals of the sit-ins at Rabaa al-Adawiya Square in Cairo and Nahda Square in Giza."

With that background and keeping in mind that aid to Egypt must be certified before it is granted, let's look at the most recent developments.  On August 21, 2018, Secretary of State Pompeo signed national security waivers which allowed the spending of the Foreign Military Financing (FMF) designated for Egypt.  This includes $1 billion for the current 2018 budget year and the aforementioned $195 million that was appropriated for 2017 as well as the $195 million from fiscal 2016 that was held back by Rex Tillerson as I noted above.  Here is the signed determination/waiver:

Here is the memorandum of justification for the waiver noting that the memo clearly states that "the overall human rights climate in Egypt continues to deteriorate":

Here are the highlights:

1.) Egypt continues to restrict the right of peaceful assembly and freedom of association

2.) Violence against women remains a serious problem

3.) Increased restrictions on freedom of expression

4.) a public meeting of more than ten people can only take place after notifying the Ministry of the Interior

5.) the Egyptian government restricts peaceful public assemblies by arresting activists in advance of planned protests

6.) there is increased harrassment and arrest of LGBTI individuals

7.) the laws restricting the activities of NGOs remains in place

8.) there are reports of large numbers of political prisoners and detainees

9.) Egypt remains deficient in providing guarantees of fair trials and there is excessive use of detention without bail as well as prolonged periods of detention prior to trial (in some cases exceeding five years)

That said, here's the justification for continuing to use taxpayers' dollars to fund a country that is obviously in breach of human rights:

"The Secretary of State has determined that it is important to the national security interests of the United States to waive the certification requirement....with respect to 15 percent of foreign military financing assistance withheld...for Egypt.  The United States seeks a stable and prosperous Egypt that supports regional peace and efforts to combat terrorism.  As the most populous Arab state and guarantor of Suez Canal security, Egypt contributes to regional security."

It is blatantly obvious that Washington cares little about human rights issues among its allies.  With the most recent examples of military aid going to Saudi Arabia, it is clear that Washington is more concerned about its vision of American hegemony and global security than it is about the misery that the regimes in Egypt and Saudi Arabia inflict on their citizens.  It is apparent that the current Secretary of State has blinders on when it comes to human rights issues.

Egypt, Inflation and an Increasingly Restive Population

A joint Cato Institute - Johns Hopkins project by Professor Steve Hanke, the Troubled Currencies Project, examines the role of conflict, economic sanctions and political mismanagement on five of the world's currencies, that of Argentina, Egypt, North Korea, Syria and Venezuela.  The issues facing these five nations have resulted in higher rates of inflation, often much higher than officially reported inflation rates that are used to placate the local population.  To address this inaccuracy, Professor Hanke collects black market exchange rate data and from that, is able to estimate the implied or real world inflation rate that the local civilian population experiences.  In this posting, I will look at his research on Egypt, a subject that is of particular interest now that Egypt has passed the third anniversary of its 2011 uprising.

Here is a graph showing the fall in the value of the Egyptian pound since December 2011:

As shown on the orange line, in December 2011, the official exchange rate was just over 6 Egyptian pounds to 1 United States dollar.  In late 2012, the value of the pound began to drop, hitting a low of 7 pounds to the dollar by May 2013 the rising slightly to 6.9 pounds to the U.S. dollar and falling back to its current level of 6.96 pounds to the U.S. dollar.

You will notice that the real world exchange rate is substantially different than the black market exchange rate as shown on the blue line.  Egypt's currency black market began to develop in late 2012; by March 2013, the black market exchange rate had fallen to 8.25 pounds to the U.S. dollar.  By mid-2013, the official exchange rate was relatively close to the official exchange rate with a difference of roughly one quarter of a pound.  Since October 2013, the black market exchange rate has dropped to roughly 7.5 pounds to the U.S. dollar and the spread between the official rate and the black market rate has widened to half a pound.

Here is a graph showing Egypt's official inflation rate and its implied inflation rate, calculated by Professor Hanke using the black market exchange rate data:

Over the period from January 2013 to December 2013, the official inflation rate rose from 6 percent to a high of 12.97 percent in November 2013.  In contrast, as shown on the blue line, the implied inflation rate hit a high of 35 percent in March 2013, dropping back to its current level of between 15 and 20 percent, still very high by Western standards.  For most of the year, the inflation rate has been at or above 19 percent.  

The Central Bank of Egypt reports that headline inflation in December 2013 was 11.66 percent with core inflation at 11.91 percent (core inflation strips out subsidized goods and volatile items including fruits and vegetables).   Headline inflation dropped from 12.97 percent in November and core inflation dropped very slightly from 11.95 percent in November.  In contrast to most central banks, despite elevated levels of inflation, since President Mubarak was deposed in July 2013, the Central Bank of Egypt has cut its discount interest rates three times by a total of 150 basis points to its current level of 8.75 percent, stating that it was more concerned about boosting economic growth than it was about battling inflation.   What is of some concern is that the year-over-year price index for fruits and vegetables rose by 28.3 percent in November 2013 and 20.5 percent in December 2013.  This could prove to be problematic for the new military government since there are likely to be social repercussions if inflation for necessities continues to run at these high levels, a scenario that is increasingly likely now that the Central Bank of Egypt has lowered interest rates.  Additionally, the Egyptian economic growth level has fallen to 1.04 percent in 2013/2014 Q1 from an already "feeble growth rate" of 2.1 percent recorded in 2012/2013.  That is also unlikely to make a restive population happy.

From what we can see, it certainly appears that Egypt's new military junta has its work cut out for it when it comes to keeping Egypt's civilian population happy.  Should the Central Bank of Egypt's interest-rate cutting program backfire, it may not just be very uncomfortable levels of inflation that are reignited.  As shown on this graph, a very high percentage of Egyptian households experienced food price shocks after the revolution, a situation that has led to household rationing and dietary changes:

With an average Egyptian family spending 40.6 percent of their income on food and 48.9 percent of the population living below or just slightly above the poverty line, the potential shock of higher food prices could prove critical to a peaceful resolution of the current crisis.

Who's Benefitting from the U.S. Military Relationship with Egypt?

Updated December 2014

When covering the unrest in Egypt over the past three years, it is apparent that the Egyptian Army has a rather substantial inventory of Abrams tanks as you can see here:

  

The vast majority of Egypt's tanks are M1A1 Abrams tanks manufactured in Egypt under a co-operative program with the United States that began in 1988.  Going further back in time, under the 1979 Camp David agreement, Egypt, a former Soviet client state that was heavily armed with Soviet materiel, signed a deal that would replace its Soviet weaponry with American items including its battle tanks.  Under the initial 1988 deal, the Reagan Administration sold 555 M1A1 battle tanks to Egypt for an estimated $2 billion as a means of ensuring the ever elusive "peace and stability" in the Middle East.  In the initial phase of the deal, the tanks were assembled and shipped from the United States but as time passed, the parts for the tanks were manufactured in the U.S. by General Dynamics and shipped to the Egyptian Tank Plant on the outskirts of Cairo for assembly.  By the end of 2007, a total of 880 tanks had been produced under this deal.

In July 2011, the United States announced that Egypt had officially requested an additional 125 M1A1 tanks equipped with .50 calibre machine guns and 120 mm smoothbore main guns and sights.  The estimated cost of the entire deal was up to $1.329 billion.  Again, the prime contractor was General Dynamics who was given a $395 million contract by the U.S. Army, accompanied by Honeywell International and Allison Transmission Motors.  Egypt has stated that its goal is to acquire a total of 1200 tanks under the deal with the latest deal bringing them to a total of 1130 tanks.

It makes one wonder if the main beneficiary of this "largesse" isn't the aforementioned defense contractors, doesn't it and if there is a bit of a conflict of interest in the current administration?  Let's take a closer look at General Dynamics, the main beneficiary of the rolling thunder deals with Egypt.

Here is a look at the amount that General Dynamics has spent on lobbying Washington since 1998:

General Dynamics lobbying spending of $10.904 million in 2012 put it in 27th place out of 4374 lobbyists.  That's a pretty substantial standing in the pecking order!

Here is a chart showing that General Dynamics is, by a relatively wide margin, the largest defense electronics industry lobbyist in Washington:

General Dynamics was also a rather substantial contributor to the election process as shown here:

With this in mind, perhaps we have a little better understanding of why it is that the worse the situation in Egypt becomes, it does not become any more likely it that the United States military establishment will take meaningful action.  After all, a decision like that means that someone will be biting the hand that fed and groomed them. 

Egypt - Inequality of Opportunity

Egypt has experienced the longest period of unrest during the Arab Spring of any nation, save perhaps Syria.  Looking back to January 25th, 2011, the "Day of Anger" was set as a day of protest against abuses by the nation's police force.  The demonstrations and anger spread across the nation until the "March of the Millions" on February 1, 2011 when it is reported that up to 2 million people assembled in central Cairo.  The resulting pushback saw more than 300 people killed in the resulting violence.  Finally, on February 11, 2011, President Mubarak stepped down.  Since that time, with brief respite, anger in the streets of Cairo in particular remains.  Why?

One of the root causes of dissent in Egypt is related to the nation's economy.  Let's look at some background information first.  As shown on this chart, Egypt has had a very high birth rate up until the last 10 years:

With the replacement rate being 2.1 children per woman, the number of young adults in Egypt as a proportion of the population is staggering, resulting in a population pyramid that has a conspicuously large base as shown here:

In 2008, only 60.3 percent of married Egyptian women used any form of contraception and of these, 2.7 percent used traditional methods.  By way of comparison, the fertility rate in the United States in 2011 was 1.89 children per woman and hit the replacement rate of 2.1 way back in 1971.

The massive number of young Egyptians results in one major problem; a lack of economic opportunity.

Here are Egypt's most recent unemployment statistics for the first quarter of 2013:

Total Unemployment Rate: 13.2 percent

Labour Force Participation Rate: 48.2 percent

Number of Unemployed: 3.6 million (up by 1.2 million from Q1 2010)

Unemployment Rate for 20 to 24 year olds: 42.3 percent

Unemployment Rate for 25 to 29 year olds: 24.3 percent

Of the total unemployed Egyptians, 70.7 percent are educated with 30.1 percent having university degrees.  

A World Bank study looked at Egypt's inequality of opportunity.  Despite the fact that Egypt has only moderate income inequality as measured by its Gini Coefficient (30.8 percent in 2008 compared to 0.49 in the United States), the opportunities available to Egyptians vary greatly and are impacted by circumstances that are well beyond their control as shown on this graph:

Keeping in mind that the higher the number, the more inequality in opportunity, you can quickly see that there is a great deal of inequality in the ability of young Egyptian men and women between the ages of 15 and 29 years to transition into the work force. 

The work force opportunities for the least and most advantaged Egyptian youth also vary greatly as shown on these two graphs:

Disadvantaged Egyptian youth are more likely to leave school earlier; by the age of 20, less than 10 percent remain in school.  In contrast, of the more advantaged Egyptian youth, 50 percent are still in school by the age of 20.  Again, when it comes to transitioning between schooling and working, 50 percent of disadvantaged Egyptians find themselves unemployed for an average of 12 years  after schooling whereas the period of joblessness for their more advantaged peers is only 8 years.

The study also shows that over 80 percent of the inequality in opportunity for young Egyptian males can be attributed to family background; parental education level and occupation play a huge role in determining the job opportunities open to their sons.  In the case of young Egyptian females, family background is even more of a determinant in the workforce opportunities available.

With a huge cohort of young Egyptians between the ages of 15 and 24, estimated to be over 21 percent of the population in 2005, the situation is unlikely to improve over the coming decade.  Egypt's economy has been stagnant since the end of the Great Recession when measured in real per capita terms and the recent uprising has done nothing to improve the situation.  In any case, for the foreseeable future, any new Egyptian government is likely to find that their ability to rule is constrained by a very unhappy young, unemployed demographic.