Kim Badawi

Editorial Assignments: WSJ: Cairo Revolution Finds New Target: Free Market

Cairo Revolution Finds New Target: Free Market - the Wall Street Journal.

Reportage by YAROSLAV TROFIMOV And MATT BRADLEY

CAIRO—The millions of Egyptians who demanded President Hosni Mubarak's downfall last month were drawn not only by opposition to his authoritarian rule; many were also furious about his free-market reforms.

During a strike at Ceramica Cleopatra, military officials told some workers, above, 'We are on your side.'

Now, as Egypt prepares for elections this year, many of the country's diverse power groups—including the military now running the country, the Muslim Brotherhood, and the young and mostly secular leaders of the Tahrir Square protests—are united by a desire to roll back the economic liberalization and hold its beneficiaries accountable.

"The problem is that the Egyptian people did not benefit from all that growth," says Ashraf Badreldin, head of the Muslim Brotherhood's economic department. "It was only to the advantage of the small elite of the rich."

Telecommunications magnate Naguib Sawiris, the country's wealthiest man who, unlike most businessmen, openly sided with the revolution's political goal of ousting Mr. Mubarak and his autocratic regime, now warns about an escalating "witch hunt" against Egypt's business community. "Being rich is a crime now," says Mr. Sawiris.

Egypt, with its young population producing 700,000 new job seekers every year, started moving toward greater economic freedoms after Mr. Mubarak named a slate of reformist ministers in 2004.

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* Egypt Military Sets Date for Vote

That government scrapped antiquated tax codes and closed loopholes, instituting a flat 20% income tax, down from as much as 42%. Tax evasion declined, the currency was stabilized, and the black market wiped out. Revamped labor laws made it easier to hire and fire.

In the World Bank's ease of doing business rankings, Egypt—once near the bottom of the 183-nation list—leapt ahead of countries such as Brazil, Greece and India to No. 94 in the 2011 survey.

Yet Egypt's central bank struggled to contain rising prices, particularly for volatile food items. Inflation hit the country's poor the hardest, and fed public anger at the businessmen—many of whom doubled as politicians in the ruling party and profited from a pervasive system of kickbacks and sweetheart deals.

"There was extreme corruption. If you had big business and big deals, I cannot imagine how you could not be corrupt," says Mohamed Metwalli, the CEO of Arabiyya lel Istithmaraat, a Cairo private-equity firm, who supported the protests and still has three shotgun pellets lodged in his head from when police fired on the crowds.

Since the Egyptian military took over from Mr. Mubarak on Feb. 11, Egyptian prosecutors have opened investigations into hundreds of prominent businessmen, freezing the assets of some and putting several on trial. Deposed tycoons have appeared in court sitting in a metal cage and wearing white prison overalls.

Egyptian newspapers compete with splashing exposés detailing the alleged crimes of yesterday's rich and powerful.

"We will not leave anyone who is corrupt. Their turn will come and the change will reach them. Just give us time," Maj, Gen. Mohammed al Assar, one of the senior members of the ruling Supreme Council of the Armed Forces, said last month on a popular television talk show.

As Egyptians clamor for justice, most of the groups vying for power in the new Egypt say they want to raise taxes, boost social spending and increase wages.

The Brotherhood, as the country's most organized political group, is poised to secure a strong role in the new parliament.

"The free markets will continue," says retired Maj. Gen. Ahmad Wahdan, the army's former chief of operations, who teaches seminars at the country's top military academy. "But we must serve social justice."

Uncertainty about where Egypt's is now headed is likely to punish foreign direct investment. Two weeks ago, Moody's Investors Service Inc. lowered the country's sovereign bond rating to Ba3 from Ba2.

Egypt's military rulers, trying to stem labor unrest, are pressuring private companies to raise salaries—following the introduction of a 15% increase in public-sector wages.

One such intervention occurred in the port city of Suez, where commanders summoned labor activists and owners of some 30 companies to the local military base late last month.

The army began by telling labor activists, " 'We are on your side,' " says Ahmed Salah al Din Ibrahim, a labor organizer at one of the companies, bathroom-tile maker Ceramica Cleopatra.

Over the following seven hours, senior army officers shuttled between executives and worker representatives to negotiate separate agreements for every company, with Maj. Gen. Tareq al Mahdi, who has since been appointed to run Egypt's state radio and television, overseeing the talks.

Ceramica Cleopatra's general manager Ezzat Essawy recalls that Gen. Mahdi told him that day: "You have to agree with 100% of the employee demands." The Egyptian military didn't respond to requests to comment.

Under such pressure, Cleopatra, which employs 20,000 Egyptians, agreed to a 35% rise in payroll costs, effective from April—just as the Egyptian construction industry, its main market, ground to a halt after the revolution shook investor confidence in the property market.

"The owners are no longer able to rule over their factories, and the workers are asking for more, more and more," complains the company's owner, Mohamed Abu Elenein, a former ruling-party stalwart in parliament.

Mr. Essawy, the general manager, says of the military's pro-worker policy, "It's a socialist decision."

During a strike at Ceramica Cleopatra, military officials told some workers, above, 'We are on your side.'

Now, as Egypt prepares for elections this year, many of the country's diverse power groups—including the military now running the country, the Muslim Brotherhood, and the young and mostly secular leaders of the Tahrir Square protests—are united by a desire to roll back the economic liberalization and hold its beneficiaries accountable.

"The problem is that the Egyptian people did not benefit from all that growth," says Ashraf Badreldin, head of the Muslim Brotherhood's economic department. "It was only to the advantage of the small elite of the rich."

Telecommunications magnate Naguib Sawiris, the country's wealthiest man who, unlike most businessmen, openly sided with the revolution's political goal of ousting Mr. Mubarak and his autocratic regime, now warns about an escalating "witch hunt" against Egypt's business community. "Being rich is a crime now," says Mr. Sawiris.

Egypt, with its young population producing 700,000 new job seekers every year, started moving toward greater economic freedoms after Mr. Mubarak named a slate of reformist ministers in 2004.

More

That government scrapped antiquated tax codes and closed loopholes, instituting a flat 20% income tax, down from as much as 42%. Tax evasion declined, the currency was stabilized, and the black market wiped out. Revamped labor laws made it easier to hire and fire.

In the World Bank's ease of doing business rankings, Egypt—once near the bottom of the 183-nation list—leapt ahead of countries such as Brazil, Greece and India to No. 94 in the 2011 survey.

Yet Egypt's central bank struggled to contain rising prices, particularly for volatile food items. Inflation hit the country's poor the hardest, and fed public anger at the businessmen—many of whom doubled as politicians in the ruling party and profited from a pervasive system of kickbacks and sweetheart deals.

"There was extreme corruption. If you had big business and big deals, I cannot imagine how you could not be corrupt," says Mohamed Metwalli, the CEO of Arabiyya lel Istithmaraat, a Cairo private-equity firm, who supported the protests and still has three shotgun pellets lodged in his head from when police fired on the crowds.

Since the Egyptian military took over from Mr. Mubarak on Feb. 11, Egyptian prosecutors have opened investigations into hundreds of prominent businessmen, freezing the assets of some and putting several on trial. Deposed tycoons have appeared in court sitting in a metal cage and wearing white prison overalls.

Egyptian newspapers compete with splashing exposés detailing the alleged crimes of yesterday's rich and powerful.

"We will not leave anyone who is corrupt. Their turn will come and the change will reach them. Just give us time," Maj, Gen. Mohammed al Assar, one of the senior members of the ruling Supreme Council of the Armed Forces, said last month on a popular television talk show.

As Egyptians clamor for justice, most of the groups vying for power in the new Egypt say they want to raise taxes, boost social spending and increase wages.

The Brotherhood, as the country's most organized political group, is poised to secure a strong role in the new parliament.

"The free markets will continue," says retired Maj. Gen. Ahmad Wahdan, the army's former chief of operations, who teaches seminars at the country's top military academy. "But we must serve social justice."

Uncertainty about where Egypt's is now headed is likely to punish foreign direct investment. Two weeks ago, Moody's Investors Service Inc. lowered the country's sovereign bond rating to Ba3 from Ba2.

Egypt's military rulers, trying to stem labor unrest, are pressuring private companies to raise salaries—following the introduction of a 15% increase in public-sector wages.

One such intervention occurred in the port city of Suez, where commanders summoned labor activists and owners of some 30 companies to the local military base late last month.

The army began by telling labor activists, " 'We are on your side,' " says Ahmed Salah al Din Ibrahim, a labor organizer at one of the companies, bathroom-tile maker Ceramica Cleopatra.

Over the following seven hours, senior army officers shuttled between executives and worker representatives to negotiate separate agreements for every company, with Maj. Gen. Tareq al Mahdi, who has since been appointed to run Egypt's state radio and television, overseeing the talks.

Ceramica Cleopatra's general manager Ezzat Essawy recalls that Gen. Mahdi told him that day: "You have to agree with 100% of the employee demands." The Egyptian military didn't respond to requests to comment.

Under such pressure, Cleopatra, which employs 20,000 Egyptians, agreed to a 35% rise in payroll costs, effective from April—just as the Egyptian construction industry, its main market, ground to a halt after the revolution shook investor confidence in the property market.

"The owners are no longer able to rule over their factories, and the workers are asking for more, more and more," complains the company's owner, Mohamed Abu Elenein, a former ruling-party stalwart in parliament.

Mr. Essawy, the general manager, says of the military's pro-worker policy, "It's a socialist decision."