Driving to Cairo from the airport, it is easy to see why the transition from authoritarianism to democracy will be hard in Egypt. Large glass-encased buildings line the manicured, flower-sheathed avenue. Each one of the buildings is a reason why the Egyptian military is keen to manage the transition as carefully as they possibly can. For they are all owned by Egypt's officers, who since the ouster of Hosni Mubarak nearly five months have been running the country.
But the buildings along the airport road are only a small part of the military's holdings. The Egyptian military controls anything between 5 and 30 percent of the country's economy - nobody knows the real figure. Military-owned companies sell everything from fire extinguishers and medical equipment to laptops, televisions, sewing machines, refrigerators, pots and pans, butane gas bottles, bottled water and olive oil. The military also built Cairo University's new annex and control most of the Red Sea resorts. As a cable signed by the U.S. Ambassador to Egypt Margaret Scobey said, the military was "becoming a 'quasi-commercial' enterprise.
The creation of this Military Inc dates back to the military factories that sprang up in the 1820s to produce uniforms and small arms. Their role expanded with the state-led economy from the early 1950s. But it really began to grow after the 1967 war between Israel and Egypt, when Egypt's camouflage-clad leadership worried that demobilisation would create a large number of unemployed, weapons-trained youths. So they transformed the military into a peacetime employment-generator while giving real estate developers, often retired officers or people connected to the military, the right to exploit land owned by the military - for example along the Red Sea. The choice must have come natural to a generation of officers who were trained in the former Soviet Union, and learnt first-hand about of what the economist Murray Newton Rothbard called the "welfare-warfare" state.
Dealing with the military's economic role is difficult and at the same time critical if Egypt is to develop into a fully-fledged democracy and create the kind of rules-based, free-market economy that can help the country grow by some 5% annually - the figure needed to keep unemployment stable. Under a baseline scenario of no economic growth, the Egyptian unemployment rate will more than triple during the period 2011-2030 implying an increase of 10 million jobless people.
Military reforms are necessary for several reasons. The first is financial. The country's budget gap will widen to the highest level in more than a decade next year, as tourists have fled or cancelled long-planned trips for fear of further violence. Economic growth may slow to 1 percent this year, the International Monetary Fund has predicted. And the nation had its credit rating lowered to Ba3 at Moody's Investors Service and to BB at Standard & Poor's, the third- and second-highest non-investment grades. To service its billion dollar debts, the Egyptian state needs all the revenue it can raise. But with billions - nobody knows how much - diverted to the defence budget and up to forty percent of the economy controlled by military-run companies that do not pay taxes and use conscripted labour, the Egyptian state will struggle to service its debts in the medium-term.
So the military stands in the way of creating jobs in the private sector and reforming the public sector. But the real reason why military reform cannot be avoided is political. Given the extent of Military Inc, thousands of civilians are bound in predatory partnerships with the military, in turn strengthening it institutionally and increasing its appetite for power and profit while creating an undemocratic over-class. Upon retirement, senior officers are given considerable retirement packages and appointed as provincial governors or head of municipalities.
