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After the euphoria in Tahrir Square, Egypt's population – most of whom did not participate directly in the protests that led to President Hosni Mubarak's departure – face a bleak economic outlook, and the custodians of the country's process of change face a daunting task to construct a new political order without themselves being swept away by a renewed tide of popular discontent.

On 20 April, the Egyptian finance ministry revealed that the country's economy had shrunk by 7% between January and March. During the same period, exports fell 40%, inflation accelerated to 11.5%, and investors pulled some $8.5bn out of the country. Tourism, which accounts for a fifth of the economy, also took a severe battering during the months of turmoil, and remittances – usually totalling 9% of GDP – have been affected by unrest across the region as a whole.

All of this matters a great deal to Egypt's elites because economic factors played a large role in the country's uprising, as they did in the region's turmoil as a whole. Analysts have long wondered at the Middle East's seeming imperviousness to the "revolution of rising expectations" which has gripped other parts of the underdeveloped world in successive waves, driving social and political change. Now the phenomenon appears to have arrived in Egypt, and history teaches us that once it has arrived, it tends to remain.

Despite experiencing steady growth in recent years, Egypt has suffered from persistently high inflation and unemployment, phenomena made all the more socially damaging due to widening income inequalities brought about by the economic success of the minority benefiting from the country's growth. This uneven distribution of the fruits of growth had an obvious parallel in the country's distribution of political power, and ordinary Egyptians expect that changes in the latter will lead to changes in the former.

A survey by Pew recently reported an increase in economic optimism among Egyptians when compared to the figures for a year ago. In 2010, only a quarter of Egyptians thought the economic situation would improve over the next 12 months, whereas now 56% do. The number of those with a positive view of the current situation has risen from 20 to 34% of the population. Such figures clearly do not reflect changes in the country's macroeconomic fundamentals, which have got worse, but rather the rising expectations of Egyptians that their situation will improve as a result of political change.

Given such expectations, the stakes could not be higher for the country's political elites. But not all of the economic problems that the country is experiencing – particularly food price inflation – were a direct result of the old regime, but rather reflect global conditions which the new regime cannot alter. Almost half of the state's expenditure goes on subsidies and wages, both of which will have to be increased to simply stop the erosion of living standards through inflation. The government is likely to be forced to borrow money externally to finance its deficits, providing a possible flashpoint for nationalist resentment at the repayment rates and terms attached.

The possibility of renewed political chaos is also likely to weigh heavily on the country's economy. Protests scare investors, which is no doubt one of the reasons that the Egyptian armed forces have being taking an increasingly dim view of those who continue to engage in them, and this also accounts for the interim government's moves against Mubarak's family, which were designed to appease popular discontent. But the country's new rulers must beware, as too strong of a legal assault on the old regime and its business dealings risks encouraging further capital flight.

The extent to which Egypt's new rulers, especially after elections, are able to create durable political institutions will determine how quickly economic stability can be restored. While the country will still be battered by global economic headwinds, Egypt's favourable geographic location and large internal market should make it as able to cope with these problems as any other country in the region so long as it is able to restore a degree of political stability.

For now, the armed forces seem to have kept a lid on popular pressures through a mixture of coercion and concessions, but if a prolonged political crisis leads to a dramatic worsening of the economic situation then Egyptians are likely to respond to having their aspirations dashed through renewed protest, which could further harm the economy. Egypt's political elites hence face the difficult challenge of providing a pace of political change which is rapid enough to satisfy popular demands without causing a degree of economic instability which will cause them to forfeit legitimacy.

It is almost always the misfortune of those who lead revolutions to be left to resolve the challenges and contradictions left over from the previous regime. This helps to explain in part why, as Henry Kissinger remarked recently, those who first make a revolution rarely survive its maturation. Western analysts often misunderstand the extent to which democracy is a social and economic concept in much of the underdeveloped world, and hence the challenges facing a democratizing regime extend beyond the mere holding of elections and directly into meeting the material aspirations of the people. In a volatile global economic environment and a region beset by unrest, Egypt's current and future rulers face a daunting challenge indeed.

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