For better or worse, it’s belt-tightening time in Washington. And unfortunately for U.S. policymakers, the budget crunch did not have the courtesy to wait for a world-changing foreign policy crisis to settle down.

More than a year after the outbreak of civil unrest in nations across the Arab world, there’s still not even a consensus on how to describe the unrest — the proverbial Arab Spring has been interspersed with Arab Awakening, Arab Winter, etc.

However it goes down in the history books, the future of the Arab world is being rewritten through revolution. In Syria, the Assad regime clings to power through increasingly violent attacks against opposition forces. In Egypt, despite the removal and pending prosecution of Hosni Mubarak, Tahrir Square remains a locus of protest, as Egyptians press the military to stop dallying and hand the reins of power to a new civilian government. Libya and Yemen are trying to envision a future without entrenched authoritarian rule, while Tunisia, the spark that lit the Arab flame, is working to see if Islam is compatible with democracy.

Many experts view this as the kind of transformative moment that took place after the Cold War when Eastern Europe rid itself of communism, with Western financial help. After all, stagnant economies marked by cronyism, corruption and unemployment were one of the main reasons that drove Arab protesters to challenge their ossifying political systems.

Yet in Washington, foreign aid borders on a dirty word these days, even though it’s never taken up much of the U.S. budget — contrary to popular opinion, foreign assistance amounts to roughly 1 percent of total federal expenditures. Still, the proposed 2013 budget for the State Department and USAID saw a modest bump from the year before, with a plan to allocate more funds toward “transitioning” Arab governments. Any sizeable increase in American tax dollars being sent abroad, however, is out of the question.

Money can also be a double-edged sword, as evidenced by the recent spat over Egypt’s decision to prosecute 19 Americans — including a Cabinet member’s son — for trying to influence the country’s political system through democracy-building civil society groups.

The flare-up has jeopardized $1.3 billion in annual U.S. military assistance to Egypt, with Congress threatening to withhold the money until the Americans are released and Egypt’s military leaders take tangible steps toward democracy.

On the one hand, the incident reveals the enduring power of money to induce change — with the $1.3 billion in military aid one of the few forms of leverage the U.S. retains over the cash-strapped Egyptian government. On the other hand, Egypt’s military has rebuffed demands to release the Americans and insisted that foreign meddling would not be tolerated — a sign of how sensitive the perception of outside interference, especially from Washington, remains in the Arab world. A recent Gallup poll also showed that more than 70 percent of Egyptians don’t even want U.S. funding anyway (although the survey notes that opposition could stem from conditions attached to the aid, including obligations under the 1979 Israel-Egypt peace treaty).

So, given the dearth of resources to support fledgling governments and democratization movements, how can the U.S. government ensure that countries in the midst of historic transition lay the groundwork for political and economic reforms, without sparking a backlash? Is there even a role for the United States to play, financial or otherwise, or should the people of the Arab world sort out their own destiny?

No Mideast Marshall Plan

America’s current fiscal straitjacket differs enormously from its position during two comparable regional transformations. Under the Marshall Plan in the late 1940s and early 1950s, the United States pumped $13 billion — more than $250 billion in today’s dollars — into Western Europe to aid its reconstruction from World War II and counter the Soviet Union. In the early 1990s, as the Cold War receded and Eastern Europe lurched to capitalism, the U.S. government again, despite a sharp recession, was able to drum up significant amounts of money for the burgeoning democracies.

Today, the coffers are empty and the mood is skeptical. Take the case of Egypt. Aside from being a linchpin nation that’s the most populous in the Arab world, it’s also enjoyed a decades-long security partnership with the United States under Mubarak. Yet the scope of post-Arab Spring non-military assistance has been relatively paltry given Egypt’s regional and bilateral importance. Obama initially called for $1 billion in debt forgiveness for Egypt, with some additional economic aid. “It was not a very big package — not very impressive to the Egyptians,” Thomas Carothers, vice president for studies at the Carnegie Endowment for International Peace, told The Diplomat.

Despite that, the outlays were drastically curtailed by the Senate Appropriations Committee and never even made it through the House of Representatives. What was proposed for other Arab nations was even more limited.

President Obama managed to eventually cobble together a $1 billion debt relief package for Egypt, though he still ran into congressional opposition for an even more modest proposal: a $60 million economic “enterprise” fund to assist small businesses, akin to what was given to Eastern Europe after the fall of the Berlin Wall.

Last year, the administration also offered up to $2 billion in financing through the Overseas Private Investment Corporation (OPIC) and reallocated about $500 million in existing funds toward the region.

And that’s the key — old money versus new money. While Egypt, Tunisia and other nations have been offered loan guarantees, debt swaps and other inventive types of financing, most of the direct assistance has been reshuffled from existing aid accounts without any massive new influx of funds.

Photo: USAID / Africom Public Affairs

USAID humanitarian supplies are unloaded at an airport in Tunisia, on their way to help people fleeing the violence in Libya.

Nonetheless, the Obama administration has recognized the scale of the challenge posed by the upheaval, Carothers says, even if the spending hasn’t yet matched it. “If you look at Obama’s May 19 speech,” he said, in reference to the president’s first response to the Arab Spring last year, “he had some very skinny chicken bones trying to hold together what was an ambitious policy framework for the region.”

The administration is trying to put a little more meat on those bones this upcoming fiscal year. Obama recently announced a new $770 million Middle East and North Africa Incentive Fund in his 2013 budget to “provide incentives for long-term economic, political and trade reforms to countries in transition — and to countries prepared to make reforms proactively,” according to his budget plan, which notes that this new fund builds on other recently announced programs in the region.

And U.S. government officials insist the fund is just that — new. “Seven hundred million is, I would say, quote, new money. It’s money that we have, through the various tradeoffs in the budget, have identified to allow us to help with the democratic transitions in the Middle East,” a senior administration official recently told reporters on background.

“We came to the Middle East change without any resources dedicated to this in the budget. So over the last year, since last January, we have reprogrammed, carved out, almost $800 million for the response,” the official said.

The plan doesn’t offer any details as to how the money would be divided, although the administration says having a pot of money will allow it to better respond to rapidly unfolding events, without having to siphon funds away from other projects.

“The idea is to have some flexibility to support everything from Tunisia [to] Egypt, and in areas where things are changing every day like in Syria,” Thomas Nides, deputy secretary for management and resources, told reporters at a press briefing. “The world is evolving as we see it, and we felt it was important to have a pool of money.”

Alternatives to Cash

Money may talk, but that doesn’t mean Capitol Hill is listening. For one thing, there’s no guarantee the Middle East and North Africa Incentive Fund or any of Obama’s budget proposals will survive the congressional chopping block. And as impressive as nearly $800 million sounds, it’s a drop in the bucket compared to what’s needed to revive sclerotic Arab economies after decades of dictatorship (Iraq and Afghanistan alone receive nearly $5 billion apiece in the foreign affairs budget, compared to $770 million for the entire Arab world).

At a recent salon hosted by the Institute for Education, Robert Hormats, the undersecretary of state for economic, energy and agricultural affairs, readily admitted that the days of blank checks are over.

“Back then, during a crisis, you’d go to appropriations in Congress and get money,” he said of the post-Cold War era. “In the current environment … it’s a lot harder to get those kinds of resources because budgets are tight and attitudes among Americans and Congress are less [inclined] to give out foreign aid.”

However, he emphasized that even without loosening the purse strings, the U.S. can wield a significant amount of influence through a number of innovative, hands-on initiatives. “The people will be looking for these new governments to deliver — and the U.S. can help here,” Hormats said at the Institute for Education roundtable, which was held at the Indonesian Embassy.

One of the most urgent imperatives for all Arab Spring nations is righting their economies, which have been teetering because of the sluggish world economy and as a byproduct of the unrest itself. Hormats, a longtime Goldman Sachs executive, says the United States can provide targeted technical assistance to nascent governments and encourage American companies to set up shop in Arab nations.

“Some do need financial assistance and the U.S. is trying to provide help even with our limited resources,” he said, noting that some non-urgent aid slated for other countries might be redirected to Egypt, for example, while funding in the pipeline for long-term programs may get shifted to quick-impact projects.

“Addressing the unemployment issue will be critical, but it’s not just about money. We must encourage the political conditions to make the economies grow,” Hormats argued.

“Economic stability and economic progress creates the right environment for political stability and political progress,” he added. “So we’re trying to move in parallel [to] encourage countries to undertake reforms and also encourage American companies to go to Egypt, Tunisia, etc.”

He cited programs targeting political reform, the rule of law and the role of women while also strengthening small- and mid-size businesses and alleviating youth unemployment. Hormats suggested other ideas like swapping U.S. loans currently denominated in dollars into Egyptian pounds, saving Cairo some money without hugely impacting Washington’s bottom line.

“We don’t have the luxury for going to Congress and just getting more money. We have to be creative.”

Even small-scale exchange programs that offer basic education and business advice could benefit Egypt’s masses of unemployed youth. “We’re very good at networking, for instance, at enabling young entrepreneurs to have opportunities and the ability to innovate and to connect with one another,” Hormats said, adding that many of the protesters simply want “an opportunity to live like American kids.”

Other analysts agree with Hormats that there is plenty the United States can do without inflating aid budgets. Michele Dunne, a former State Department official now with the Washington-based Atlantic Council, points out that even an endless supply of money would not eliminate all the problems confronting American or Arab policymakers.

“I don’t think that showering [Arab nations] with cash is necessarily the wisest thing to do,” she told The Diplomat, noting that U.S. lawmakers “want to see real sensible economic policies in place, so that they don’t give hundreds of millions or billions that is then wasted.”

However, she says the United States can play a valuable role as an organizer of funds from other sources, even if not acting as the primary generator. “There’s the leadership role the U.S. can take in working with other donors. We can have a multiplier effect,” she said.

Such a tactic would also mimic U.S. strategy during the Cold War’s end. For instance, it was West Germany that, with U.S. support, financed the ongoing deployment of Soviet troops in East Germany because the Soviets were essentially bankrupt, and no one was eager to see several divisions of unpaid, well-armed troops operating on behalf of a collapsing regime at the bottom of an uncertain chain of command.

Hormats too pointed out that the United States can coordinate economic and political advice through partnerships such as the G8, especially on issues such as corruption, a “corrosive” force in the Arab world. “Turkey is playing a constructive role, as is Poland and other countries who can serve as role models and advisors,” he noted.

Dunne and Hormats also both cited the potential of international trade to buttress the region’s economies. And as the largest economy on the planet, budgetary constraints notwithstanding, the United States has a unique carrot with which to entice the emerging Arab governments.

“The one change I would say would be coming up with a policy that will offer them much freer trade with the U.S. as a way to drive their economy going forward,” Dunne suggested. “Try to find a way to offer them negotiations on free trade agreements starting in the next couple of years.”

“Most Arab Spring countries only represent a small portion of international trade outside of energy and they’re not really part of the world economy — this must change,” said Hormats, noting that he’d just met with the Egyptian trade minister in Washington to discuss ways to enhance Cairo’s exports and trade with the world.

New Leaders, Uncertain Landscape

Hormats spoke at the Institute for Education public policy roundtable after having just returned from a trip to Egypt, where he joined a U.S. delegation that held unprecedented talks with the Muslim Brotherhood, which won a parliamentary majority in the country’s first democratic elections in decades.

“A year ago, this would have been unimaginable,” Hormats said of the talks, describing them as “constructive.” He said the Brotherhood knows it needs to deliver to an impatient Egyptian public and is looking for pragmatic governance models “that respect Islam but have a free democracy,” such as Turkey, Malaysia and Indonesia. “They’re in a learning curve.”

Indeed, U.S. engagement in and of itself sends a strong message — and that includes tentatively reaching out to Islamist groups that often have the strongest grassroots appeal and manpower.

Despite apprehension about working with such groups, Hormats argues that the West needs to recognize reality — and respect the winners of Egypt’s democratic vote.

“It’s incumbent of us to sit down and have a dialogue because they did the best in the election,” he said, even if “we can’t predict how it will turn out.”

Carothers agrees that U.S. policymakers should not automatically fear the arrival of the Islamist parties. He adds that a genuine American outreach would carry enormous symbolic value for Arab citizens, who’ve long been suspicious of U.S. intentions in the region, especially with regard to the Israeli-Palestinian conflict, which remains a potent source of anti-American sentiment.

Despite mutual distrust that sometimes boils over into hostility — as seen in Egypt’s criminal prosecution of the 19 Americans — Hormats counsels patience and says that none of the Arab Spring nations are going to emerge as pillars of Jeffersonian democracy overnight. “We have to have this sense of engagement. We’re learning and they’re learning,” he said. “And we can’t get too rattled if they do things we don’t like. This is a transition…. It will take a lot of time.”

Indonesian Ambassador Dino Patti Djalal, who hosted Hormats at his embassy, echoed that sentiment, saying the United States and other nations “must let these new democracies make their own mistakes. They must strike a balance of when to intervene and when to give them space.”

Hormats seized on the example of Indonesia, a Muslim-majority nation that overcame authoritarianism and today has a booming economy, to make his final point about America’s role in the Arab Spring: Change must ultimately come from within.

“The bottom line is you can’t tell them what to do. What you can do is help them look at things that have worked. But an excessive amount of foreign pressure will be counterproductive,” Hormats said.

“These revolutions are really about people willing to take on change by themselves,” he added. “We can’t do for them what they can’t do or are unwilling to do for themselves.”

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About the Author

Patrick Corcoran is a contributing writer for The Washington Diplomat.
Anna Gawel is managing editor of The Washington Diplomat.