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Sunday, February 20, 2011

Dominoes: Tunisia --> Egypt --> Libya (?)

Yours, with thoughts in North Africa, Analyst,


Libya lies to the south of the Mediterranean and in sandwiched between Algeria in the West and Tunisia in the North West and, and Egypt in the East.  Muammar al-Gaddafi has ruled the country since 1969.  Hosni Mubarak ruled Egypt and Zine El Abidine Ben Ali ruled Tunisia in presidential capacity since Oct 1981 and Nov 1987 respectively.  They have now departed.  Will  Muammar al-Gaddafi be next?  Let us begin with a very brief background:

Protests in Libya began on Feb 15.  Human Rights Watch has reported over a 100 deaths.  What started in Benghazi has spread to Albayda and Derna.  The rage continues (which makes twitter a more appropriate medium than a blog).

So then, is it spring or is it a false spring for democracy in Libya?

The situation in Libya is developing at the time of this writing.  What I engage in below is predictive analysis.  Back to the Q, I place my bets on the latter.  We will find out in a few weeks whether I am right.  Time tips it all!  Before we discuss further I must mention one critical assumption I make - foreign powers will not act decisively enough to tip the balance in Libya.

1. Harbingers Gaddafi has had the advantage of Tunisia and Egypt serving as harbingers of a surge in youth power.  This has given him adequate time to (re)identify those he can rely on, the sops he can throw at those with genuine grievances but without a thirst for political power, prep up counter-protesters and, find lines that he can hold should the situation escalate (which has already happened).

2. Internet Penetration Social networking sites were critical to sustaining the momentum in the recent protests.  The internet penetration in Egypt is 16%.  In Libya, it is a meagre 5% [1].  The unrest in Libya has thus far remained concentrated in regions that are geographically distant from the seat of 'real' power (see more on this below).  The dependence of momentum on internet communication is far greater in Libya than in Egypt where protests began in Cairo itself.

3. Power Structure in Libya

3A. The Current Structure There are two power centers - the Revolutionary Leadership, led by Gaddafi, and the People's Congresses.  However, the Revolutionary Leadership can neither be voted out nor dismissed.  The executives of the People's Congresses are elected every four years.  The candidate list that the electorates choose from is approved by the Revolutionary Leadership which also enjoys veto power over any decision made by the Congresses.  The armed forces in Libya, unlike those of Egypt, neither have their own independent power structure nor do they derive their strength from foreign links.  It is true though that the lower rungs have dissatisfied elements.  Indeed, they appear to be involved in the protests.  However, as mentioned before, they do not have surprise on their side.  In all  past uprisings around the globe that I know of where lower-ranked officers have succeeded, the surprise factor has been essential.

3B. Comparisons with Pre-revolutionary Iran Hydrocarbon-related industries accounted for about 50% of the GDP and oil income accounted for about 80% of government revenues in pre-revolutionary Iran.  In Libya hydrocarbon and mineral extraction related industries account for even higher - at a staggering 95% of the GDP.  As a result, the state's tax extraction capability is weak and therefore and therefore information channels are not organized to identify productive sectors or regions of the economy.  Therefore economic dynamism in  Libya  relies critically on patronage structures.

Pre-revolutionary Iran had an urbanization rate of over 50%.  Libya is even more urbanized - nearly 90% of its population lives in urban areas.  The urban unemployment rate in Libya is much higher.  Youth frustration would therefore appear worse in Libya.  However, unlike pre-revolutionary Iran, Libya lacks autonomous Persian bazaars [2].  Also, unlike pre-revolutionary Iran, it lacks religious authorities who could provide a rallying point for moral authority.  Thus while urban frustration may indeed be higher in Libya 2011 than it was in Iran 1979 (it appears so, but I really do not know), it is without avenues for organized expression. [added Feb 25, 2011, 2355 Hrs GMT: After the Soviets were sent packing from Afghanistan in early 1989, the battle-hardened surplus fanned out across the globe; some of them ended up in new foreign lands (e.g., in Jammu & Kashmir, India) and some returned back to their home countries to replicate their Afghan triumph.  LIFG was formed by an assortment of such  returnees who mainly hailed from the same eastern towns where Libya-2011 protests took seed.  Between the mid to late 1990s LIFG carried out assassination attempts on Gaddafi and his regime members.  In the late 1990s however Gaddafi succeeded in fisting this group into submission.  At least that is what appears if you consider ground-action by LIFG as a measure of its existence.  Could this measure however be incorrect?  If yes then, that would falsify my conclusion that "urban frustration ... in Libya 2001 ... is without avenues for organized expression".  I am humbled by the fact that the Shah of Iran having crushed opposition from the religious authorities in the 1960s and early 70s continually scoffed at the idea that they are anything but a spent force.  History however took a different trajectory - the Islamists attracted both the religiously motivated and the secular modernists.  By the time the Shah smelt his coffee it was too late.]

4. Geographic Location of the Protests The protests started in Benghazi which is the industrial and commercial center of Libya.  Then they spread eastwards to the towns of Alquba, Albayda and Derna (see the map) and have thus far remained centered in the eastern part of the country.  Tripoli, the seat of power of Gadaffi, however lies in the far western end of Libya [3]

Map 1: Geography of Libyan protests: Protests in the East (B, C, D).  Political power in the West (A).

It appears that the protesters have chosen to gain strength in parts of Libya where oil wealth is not the only source of economic activity.  That this region is geographically far from Tripoli affords them protection from immediate reprisal and insulates their movement from confusion  or dilution that strong counter-protests can induce.  It also suggests, contrary to reports in the international media, that the unrest is directed at the local government and not at Gaddafi himself [4].

Now, even if the protesters manage to hold on to their gains in the East (I doubt it as they are without an effective leadership or an ideological anchor), how would they carry their movement into Tripoli where counter-protesters and a ruler who has had the time to prepare in advance awaits with forces, who on several occasions in the past have demonstrated staunch loyalty to Muammar al-Gaddafi?      
[1] 2008 est. source: World Bank, self-estimates
[2] The Persian bazaars acted as a magnet for those disaffected with the Shah's system.  It is where such people found camaraderie, employment and developed social networks.  Even though the bazaars enjoyed substantial autonomy from the Shah's governance apparatus, oil wealth would flow there in the form of contracts for pieces of work outsourced to SMEs by those belonging to the thin layer of the Shah's patronage structure. 
[3] By road, Tripoli is over 1000 km from Benghazi and over 1300 from Derna.
[4] Gadaffi proclaimed a few days back that he would join the people in their protests against the government!

Tuesday, February 15, 2011

Impact of a US Slowdown on Thailand’s Export and GDP Growth Rates

Bhot jolokia is perhaps the hottest naturally occurring edible substance.  It rates about a million on the Scoville scale  (Tabasco sauce is rated at 5,000).  This is about it for interesting diversions.  The analysis in this post rests on several assumptions and there are plenty of references to numbers.  We do not want to be lost in diversions ...

Yours, looking forward to spring Analyst,


Disclaimer: The figures here are approximate.  While the general argument stands, I do not recommend using these figures for your professional work.

We engage in what-if analysis, to isolate the vulnerability of Thailand’s export and GDP growth rates to an (hypothesized) slowdown in the US [1] that begins in 4Q2011.

Our problem is ill-defined though simple to state.  How would a slowdown in the US from its baseline level of economic activity impact Thailand?

Let us first look at transmission mechanisms of a US slowdown.  The US weighs heavy in world affairs.  Therefore the channels of direct impact are many.  For example, one set of channel is the choices the US makes with regards to deficit spending, monetary policy, trade policy and defense policy [2].  Its position on RMB appreciation would constitute another channel.  The non-governmental channels are decisions its consumers make on discretionary spending and the choices its corporations make with regards to capacity expansion plans and inventory levels.  Then we have secondary channels impact such as anticipatory cut-backs in other major economies, changes in risk appetite of international investors, and so on.

In our analysis, we assume that all other economies continue to (magically) chug along unperturbed.  Unrealistic I admit, but so are most isolated impact studies.  Besides, the results still shed useful light on the linkages between the US and the Thai economy and give a lower bound on the impact of a US slowdown on Thailand.

We focus on the trade channel alone.  We think that the short-run economic impact on Thailand of a potential adoption of trade-distortive measures by the US will be marginal.  Therefore we assume that trade levels will continue to be determined by supply-demand forces and relative total factor productivity.

Impact of Contraction in US Imports
Reducing dependence on exports to the US Thailand’s bilateral exports to the US stood at 22.5% of its total exports in 1998 [3] (Chart 1).  Over the past decade however Thailand has reduced its exports dependence on mature markets, including the US.  Last year, the US accounted for only 10.5% of its total exports (Chart 2).

Chart 1: Declining trend in Thailand’s direct exports to mature markets

Chart 2: Composition of US imports from Thailand

Sharp fall in machinery exports Thailand’s machinery export comprised 44% (USD10bn) of its bilateral exports to the US in 2010 and these remain vulnerable to a US slowdown.  In 2009 Thailand’s machinery export contracted by 25%.  The contraction in machinery export to the US was sharper at 36%.  In the event of a slowdown in the US we expect machinery exports to fall by 20% (USD2.0bn) - the downside risk mitigated by the fact that the consumer and business sentiments in the US have remained cautious throughout 2010 and is expected to continue to remains so through 2011.

No effect on agricultural exports We do not expect a material impact on the demand for Thai agricultural exports to the US for the following reasons:
  • Thai agricultural products are competitively priced and the basket comprises mainly of food products; the demand for which is sticky in the short-run.
  • While material in absolute terms [4], USD22.3bn (2010), Thailand’s agricultural exports are a small fraction of the global international trade in agricultural products.  This slack can be easily picked up by other markets.
  • The price of agricultural commodities have maintained a general upward trend throughout 2010 despite prospects of uncertain recovery in the US, deflation concerns in Japan and sovereign debt and banking sector problems in the Eurozone.  The two main reasons underpinning the performance of commodities are strong demand from China and India and the channelization of funds from the second round of quantitative easing in the US into the commodity markets.  We expect these trends to continue through 2011.
No effect on fuel/chemical exports Thailand’s chemical and fuel exports were 13.3% of its total global exports in 2010.  The main destination of these exports is however regional and their price dynamics will be impacted more by domestic demand in China, India, Indonesia and Malaysia, investor preference for the commodity asset class and inflationary expectations in the emerging markets [5] than by a slowdown in the US.

Effect on ‘Other’ exports Under the assumption that direct imports by the US for products classified as ‘other’ contracts by the same fraction as import of machinery, we expect Thailand’s direct exports to the US to further contract by USD1.6bn.

Thus the direct impact on Thailand’s bilateral exports to the US due to a US slowdown will be –USD3.6bn.

Impact of contraction in re-exports to the US
Hong Kong and Singapore are the two largest re-export centers for Thailand’s exports.  In 2010, 69.8% of Thailand’s exports (USD7.5bn) to Hong Kong and 44.3% of its exports to Singapore (USD4bn) were re-exported [6].  Exports to the US from Hong Kong fell by 44.9% in 2009 and that to the US from Singapore fell by 13.6% in 2008.  Assuming that percentage contraction in re-exports from these countries remains the same as contraction in exports from these countries under a US slowdown scenario, Thailand’s exports will fall by USD3.3bn due to reduction in re-exports from Hong Kong and by USD0.6bn due to reduction in re-exports from Singapore.  The total contraction due to contraction in re-exports will be USD3.9bn.  The composition of the tri-lateral trade suggests that the major brunt will be borne by the machinery sector.

Tourism Impact
Tourism represents 6.5% of Thailand’s GDP.  However spending by tourists from the US represents just about 5% of all tourism revenues and therefore, the impact of US slowdown on tourism earnings will be insignificant - a 50% fall in revenues from tourists from the US will contribute to a contraction in foreign exchange earning of USD470M.  In fact over the past five years perception of risk of political violence in Bangkok has been the single most important and dominant risk factor for the tourism industry; the impact of economic slowdown has thus been much smaller in comparison.

How much do Thailand’s earnings contract?
Total fall in earnings directly attributed due to contraction in US imports alone of goods or services from Thailand in the event of a slowdown in the US will be USD8bn (2.8%) of Thailand’s 2010 GDP.

How much does Thailand’s GDP contract?
The value-addition in machinery products is small as the items are either low-tech or the technology royalty is accumulated elsewhere.  Besides, raw material such as steel and rare earth metals are mostly imported and Thailand imports over 78.0% [7] of its fuel requirements.  Assuming a 25% value-addition in machinery products, this translates to GDP impact of US$1.5bn.  Assuming a 20% value-addition in export products classified as ‘Other’, the GDP impact is –USD320M.  A tourism value-addition of 60% would translate into a further GDP impact of –USD282M.  Thus, the GDP impact of a US slowdown on Thailand through the channel we have mentioned is –USD2.1bn, or –0.73% of Thailand’s 2010 GDP.

[1] of a magnitude similar to the one experienced in 2009 in terms of Y-o-Y GDP growth rate
[2] The US spends more on defense than the rest of the world combined.  A reduction in defense budget may lead to flare-ups in the Persian Gulf or facilitate the (re)emergence of competitive domestic politics in non-democratic Middle Eastern societies and trigger a spike in oil prices.  In the context of the current economic environment, this will send a stagflationary shock-wave across the globe.
[3] the year following the Asian Financial Crisis (AFC)
[4] 13.4% of Thailand’s exports in 2010
[5] which are high and are likely to continue to remain so throughout 2011
[7] 70% of the total energy generation in Thailand is from gas-fired plants and 8.2% by high quality coal – the overwhelming fractions of both of which are imported.

Saturday, February 5, 2011

Egypt 2011: A Repeat of the Iranian revolution?

Do you like monologues?  We will attempt one.  We think it will go well.

Yours, twin-analysts,

AA & AA'

AA’: Did you see it coming?

AA: You mean the events in Egypt?

AA’: Yes.

AA: No. A bolt from the blue.

AA’: Indeed.  Just like the Iranian revolution.

AA: Insofar as the element of surprise is concerned, yes.

AA’: And more.  You yourself argued that true democracy in Egypt would allow Islamists to gain a significant share of power.

AA: And your point is?

AA': Just look at the Iranian revolution.  The desire for economic freedom brought pro-democracy protesters and the Islamists together against the Shah of Iran and his power apparatus.  The same has happened in Egypt now.  The world was taken by surprise then just as it has been now. 

And if I may get a tad ahead of myself here, why would Egypt not end up walking the same journey that Iran did?  An uprising is a terrible waste if it cannot survive its own victory.

AA: Indeed.

AA’: So well, in Iran once the Shah was deposed the next phase was the rapid pursuit of Islamist democracy - liberal democrats and the Islamists joined hands to build a new system, ground up.  A theocratic constitution was voted in through a national referendum.  It was not something the democrats could protest as it merely reflected the will of an overwhelming majority of the Iranian peoples.  For reasons I wouldn't want to go into now, many amongst those who willingly risked their own lives in the cause of liberty (from the Shah's repressive apparatus) appeared willing to sacrifice their newly earned freedom at the altar of another repressive system that was in the works.  Within just two years the last vestiges of democratic pretences were discarded -Abulhassan Banisadr, a prominent face of the pro-democracy faction in anti-Shah movement who was later elected the President of Iran was impeached as he fell out with the Grand Ayatollah.

The Islamists co-opted the democratic voices early on.  It was necessary.  Without that there was not a chance that the West would have stood down while an unfamiliar group with an unclear agenda and lethal methods got busy dismantling the entire power structure built by ,and around, the unequivocally pro-Western, Shah of Iran.

AA: Democracy has a high mortality rate at birth, doesn’t it?

AA’: Yes indeed. In light of your earlier post then I am sure you would agree that as Egypt 2011 unfolds it will increasingly look like an Iran 1979 repeat.

AA: Perhaps.  However, you overlook the dissimilarities, of which there are many.  I will be surprised, very surprised, if the Egyptian Muslim Brotherhood (EMB) ends up walking the Iran 1979-path.  The Adalet ve Kalkınma Partisi-path appears more likely.

AA’: Why?

AA: Well, let us examine the differences between the Iran then and the Egypt today.

Power Structure The government’s power in both countries rested not on pillars of internal acceptability but on the fact that both governments (prior to the uprising) were eminently acceptable to the Western political and business elites.
In Iran the Shah was an absolute monarch.  Not only was he the face of the government but also he was the regime itself.  He ensured that in no arm of the government would independent chains on command develop or sustain over sufficiently long periods of time so as to acquire their own independent dynamics.

In Egypt Mubarak was the public face of the government.  However ever since 1952 when Nasser (who was then, just a lieutenant-colonel) overthrew the Monarch of Egypt in a coup d'état, the armed forces have been the final guarantors of the stability of the regime’s structure, and thus constitute a formidable second pillar of the regime.

KEY POINT: Iran 1979 uprooted an entire regime.  Egypt 2011 has shaken one pillar of governance but the other pillar remains strong as ever.

Fulcrum of Revolution The fulcrum of the Iranian revolution, particularly, that of violent demonstrations that began in October 1977, was the clerics.

The EMB, despite its status as a banned organization enjoys widespread popularity in Egypt.  The initial group of protesters however appear to have spontaneously taken to the streets - taking cue from the successful deposition of Zine ElAbidine Ben Ali in neighbouring Tunisia following (largely) bloodless protests.  The EMB has so far maintained a low profile and it appears that while the armed forces did not plan for the its tussle with Mubarak on the issue of the latter's succession to pay out in the manner it did, they are likely to have had channelized (and calibrated) the spontaneous outpouring of anger against Mubarak to defeat his plans for dynastic succession.

KEY POINT: Islamists played a crucial role throughout various stages of the Iranian revolution.  In Egypt 2011 the Islamists have never been at the center stage.  Instead, the armed forces appear to have been successful in calibrating the protests.    

Opposition to the Islamist Agenda In Iran the only force that opposed the Islamists was the widely disliked Shah.  The masses, including those that were secular, saw in the Ayatollah a moral authority that stood in sharp contrast with what they considered was the decadent authority of the Shah.
In Egypt the armed forces are the ultimate guardians of regime stability and are held in high esteem by a broad cross-section of the protesters.  The top echelons of the armed forces are sharply critical of EMB’s agenda and have been in sync with Mubarak and the Egyptian General Intelligence Directorate’s views and methods to suppress its activities.  EMB thus not only faces a formidable and yet, untarnished force, any attempt to strike at this pillar of regime stability would split the protest movement - pitting those who protested only in the cause of democracy or merely out of a dislike for Mubarak (of which, there appear to be plenty) against those whose goal is to establish a theocracy and, confusing those who want both.  In the process what EMB runs high risk of losing is the closure of an opportunity [1] that has opened up for the first time in 30 years. These facts, the high probability of failure and the high cost of failure impose a natural limit on how much EMB can co-opt the protests to its own agenda.

KEY POINT: Islamists not only faced no opposition during the Iranian Revolution [2], but also had even the secularists mesmerized with their moral authority.  In Egypt 2011 the armed forces who continue to command the respect of a wide cross-section of Egyptians remain firmly opposed to EMB’s agenda.    

Economic Conditions The economic conditions in the Egypt of today are very different from those in the Iran of 1979.  Now that is hardly a useful statement.  Let us elaborate - with numbers.  

Table 1: Economic Comparison: Egypt 2011 and Iran 1979

The differences in economic conditions result in differences in international economic linkages and domestic patronage structures.  These in turn mean that unrest in Egypt cannot pave way for an Iran 1979-style revolution.  Let us see why.

A.   External Dependence

In the year following the Yom-Kippur war energy exports reached 88% of the total foreign exchange earnings, the sale of oil and natural gas accounted for 84% of government revenues and its production accounted for 51% of Iran's GDP.  Energy in its most fungible form - oil and natural gas - is perhaps the third most ideology neutral of any export [3] for which even the most isolated regimes in the world can get ready buyers.  The second fact that stands out about Iran is the near complete absence of the need for foreign financial capital throughout the 1970s.
Egypt in contrast is a net energy importer.  Tourism earnings, its largest single source of foreign exchange, will plummet (and stay down) should the world fear a repeat of Iran 1979.  (In comparative terms) Egypt has a significant and growing reliance on foreign sources of financial capital.  External economic dependence will have a moderating affect on EMB's agenda.  Moreover, given that frustration with economic hardships has been a significant force behind the Egyptian protests, if EMB does attain power, it will not be without the population having already defined the relationship between the ruler and ruled - this will include a significant economic component as well.  The Iranian revolutionaries could leave the economy on auto-pilot and focus on consolidating their relationship with the ruled on purely theological and moral grounds.  EMB cannot do that;  the different economic conditions in Egypt guarantee that.

KEY POINT: The economic structure in Iran allowed the revolutionaries to ignore the economic impact of potential diplomatic isolation.  Egypt is not a rentier state, its principal sources of foreign exchange will not weather diplomatic isolation, action by the credit ratings agencies will cause economic contraction, rise in cost of capital and significant food and fuel price inflation.  Economic hardship and not morality grounded in religious thought was the primary trigger of Egyptian protests.  Thus EMB cannot afford the economic consequences of full expression of its ideology.

B.   Patronage Structure
Oil allowed the Shah to rule without having to deal with his subjects.  Having been hardly taxed, people could not complain about the Shah's economic policies.  This removed the possibility of emergence of class-based groups opposed to the Shah.  It however had the unintended effect of the state losing its tax extraction capabilities.  Tax extraction mechanisms shed light on the relative productiveness of various sectors and regions.  Without such information connections and patronage earned through visible demonstration of loyalty and respect of the pecking order become the driving force of the economic system.  The Shah however, perhaps on account of his personal proclivity to micromanage kept the formal patronage system small.  The energy sector at its peak accounted for over 50% of Iran's GDP but involved only 0.6% of the labor force.  The white revolution in the 1960s disrupted the rural economy and de-emphasized the role of agriculture.  This, along with the Shah's economic vision caused rapid urbanization.  However these people could not find place in the formal system.  Instead, SMEs [4] rapidly grew in number (not in size).  Those that enjoyed the Shah's patronage preferred the opacity of this system as it allowed them to maximally extract the only capital they controlled - human labor.  All in all, Iran enjoyed spectacular economic growth for over a decade.  However the Shah's power base remained thin as ever.  If I might exaggerate a bit here - no one other than foreign firms had a stake in the Shah's success.  When matters came head-on, there were no counter-protests against the revolutionaries.  No one felt (s)he had anything to defend.
Egyptian economy is diverse - tourism, manufacturing, agriculture, mining, logistics, textile, telecommunications are all important sectors of the economy.  While nepotism has caused economic inefficiency and given rise to public frustration, those that have benefited from such a system form a large constituency - they belong to the many tens of millions of Egyptians who have not joined the protests.  I would not be surprised if this group that remains silent today rise in defense of the regime (not necessarily, Mubarak) if push comes to the shove.

KEY POINT: The Iranian revolutionaries did not have to face counter-protests as the Shah's thin patronage structure guaranteed the removal of ordinary Iranians from amongst those that had stake in the system.  In Egypt tens of millions of people have benefited from the system that Mubarak presided over.  EMB is well aware that an attempt at radical pursuit of its agenda will end up conveying the impression that it seeks to not only remove the now-despised public faces of the regime but seeks to overturn the regime itself.  In that event, it would have to face the ire of counter-protesters.

[1] the opportunity to translate widespread though latent support amongst the populace into a legitimate political force
[2] except from the Shah who they sought to depose
[3] the first two being WMDs and yellow cake
[4] small to medium enterprises that employ 5 - 50 people

Tuesday, February 1, 2011

A Short Note on Egypt and Democracy

The World Bank says India' population in 2009 touched 1.16bn.  A question for Dr. Manmohan Singh - what does it feel to lead a billion people?

Yours, learning about Egypt analyst,


First some numbers: these were sampled from a survey by Pew Research Center released on December 2, 2010.  Pakistan or Turkey? - which country does Egypt appear closer to in its proclivity for a liberal democracy?

Source: Pew Research Center (click the picture for a larger image)

My thoughts on this matter were triggered by an  article by Hamid Shadi for FP which ends with:

"Of course, a major question remains: does the United States, in fact, want real democracy in Egypt? Or would it prefer that the current regime -- perhaps after agreeing to reforms -- somehow stay in power?"

I do not think Shadi has got it right.

First, the protests in Egypt are not against the regime but the public face of the regime - Hosni Mubarak.  The regime comprises senior armed forces personnel and the armed forces remain a widely respected institution.  From the patterns of the protests and of the reaction of the protagonists to those protests it appears that the regime has used the events in Tunisia to ensure clear success in their plan for a change of guards. Scheduled to be played out during the Presidential elections in September this year, the tussle between the armed forces and Hosni Mubarak on the latter's succession is now being played out in the streets of major cities in Egypt.  Genuine grievances are a powerful force. They are being channelized to put to rest Mubarak's succession plans [1].

As for Shadi's question that I have italicized for emphasis, I think the US has answered it.  This is how I see it:

In the state of general equilibrium, a 'true democracy' would reflect the will of the people. Political power in Egypt today rests with two groups - the West-supported elites and Islamists [2].  At another time in the past the Arab nationalists and the Arab socialists were a powerful force in the Egyptian society. However due to  natural societal proclivities in Egypt, the success of the American policy in the region and the fact that boundaries in the region were drawn by extra-regional powers not with historical legitimacy in mind but with the goal to re-anchor the European balance of power in the wake of precipitous decline of the Ottoman empire, legitimate opposition was gradually pushed towards the Islamists.

People such as Dr. Mohamed ElBaradei receive generous coverage in the English press.  However they are considered by Egyptians as a paratrooper [3] who will get sidelined or perhaps, given time and a chance at the helm, will develop no different from the tight-fisted rulers that four generations of Egyptians have become accustomed to.  The chance of the former occurring is far higher as they lacks the street-survival skills that Mubarak had finessed or the Islamists possesses [4].

Thus the only natural equilibrium conditioned on 'true democracy' is a rule wherein Islamists gain a significant share of power.  It will be a democracy in the sense that it expresses the desire of the average citizen but will not carry any of the hallmarks of liberal democracies [5].  

Over the medium-term, an Islamist democracy in Egypt will give fillip to calls for its emulation in the broader Arab world.  This will unhinge the current anchors of stability of sovereign boundaries and energy flows from the region and cause a redirection of people's anger in Egypt from local rulers to those that lead in the US, the UK and France.  Russia will be presented a smörgåsbord of geopolitical choices.  While Russia is unlikely to have an appetite for grand strategies in the region [6], it will act on opportunities for re-establishing a strong naval presence in the Mediterranean sea. 

Thus, I do not think the US has an appetite for real democracy in Egypt (or, in other key Arab states - Morocco, Jordan or Saudi Arabia).  It will however continue to push for what Shadi refers to as 'real democracy' in Lebanon, Libya, Syria and Yemen.

[1] passing the mantle to his son - Gamal Mubarak
[2] An Islamist is a believer in Islamism which I define as the political philosophy based on the axioms that a shared Muslim identity transcends all other forms of societal divisions, that the problems in Muslim societies are caused by an incomplete adherence to Islamic tenets and that such problems can only be resolved through a committed projection of religion into the political sphere.
[3] they lack grassroot support
[4] paradrop is easy, mission accomplished is not 
[5] No, I am not thinking that liberal democracies can spring overnight in the region.  However, if a reasonably democratic state is established once the dust settles, I think over time it will be forced increasingly frequently into choices where the only alternative to the use of force will be to watch a creeping takeover of the state by those who believe in democracy only insofar as it enables a takeover of the system.
[6] Building closer ties with Germany, the Caucasus and tightening its grip over energy routes that go to Europe from the former Soviet states will keep Russia occupied for the next decade.