When Hosni Mubarak stepped down as President of Egypt on February 11^th, the markets that were still open in the Western Hemisphere celebrated with at least a bit of the enthusiasm shown by the people in Tahrir square. The Egypt Index ETF rebounded by almost 8% erasing three quarters of its previous decline. Although I dislike discouraging any celebration, the markets should perhaps remember the words of Alexis de Tocqueville, “In a revolution, as in a novel, the most difficult part to invent is the end.”

 This is not the first revolution in Egypt, far from it. The first uprisings in Cairo and Alexandria date from 1882. Then as now the Egyptian army helped to foment revolution, which only failed after a defeat by the British. The Egyptians tried again in 1919 and again failed. It was not until 1952 the Egyptians succeeded in installing their own government.

 Revolutions and regime changes are never as smooth or is beautiful as the idealistic youth who helped create them like to believe. The Communist takeovers in Russia and China ultimately resulted in millions of deaths. The transitions to democracy in the former Soviet Union and in Eastern Europe have certainly been uneven. The theocracy created in Iran after its revolution intends to ensure that the popular uprising, which placed it in power, will not be repeated.

 De Tocqueville pointed out another truth about revolutions. Contrary to popular belief revolutions are not the result of dire poverty, but rather they are the result of rising prosperity. This is certainly true of Egypt where reforms begun in 2004 have helped drive growth above 5% for the past few years. Although Egypt is still one of the poorest countries in the world, its per capita gross domestic product recently hit a new high of $3,295.

 Still the promise of growth has not reached very far. According to the World Bank, roughly 20% of Egyptians live below the poverty line and another 20% over just above it. A government survey in 2008 showed that four fifths of Egyptian families earned less than the mean.

 A democratic system of government, if it is successful in taking hold in Egypt, will have to deal with many problems created by the old regime. Two of the most difficult will be reducing subsidies and creating jobs.

 The subsidies in Egypt have to end. Food and energy subsidies eat up to 7% of the gross domestic product and prevent other spending on needed social and infrastructure projects. They also prevent the government from reducing its 8.1% budget deficit, half of which is accounted for by energy subsidies. Egyptians presently pay for fuel at prices that are 30 to 75% below international prices. This has distorted market signals for energy and lead to the purchase of over 1 million air-conditioners by an emerging middle class. It also acts as an impediment to further development of potential natural gas supplies.

 The other problem will be to create jobs. Egypt, like other Arab countries, has a very young population with a median age of only 24. While a 10% unemployment rate in the United States is considered a major disaster, it has been the norm in Egypt for much of the past 20 years. Youth unemployment is much higher.

 The Mubarak regime used jobs as well as subsidies to hang onto power. It created a huge civil service that employs 7 million people, over a third of the work force, three times the number in OECD countries. Yet unemployment among college graduates still tops 30%.

 To transform this system will require Egypt adopt major reforms to improve its business environment including a bankruptcy law, land registration, bureaucratic procedures, a reformed foreclosure framework, cleaning up conflicting regulations and a financial system that makes loans to small businesses easier and profitable. Making these modifications will be difficult in a country where business is viewed with distrust.

 Some feel that a democracy is not sufficient to solve these problems. Ding Gang, a senior editor of the Chinese government’s official news outlet, the People’s Daily, wrote that the “problem in Egypt in fact is the problem of competitiveness.” He felt that a country’s competitiveness was the result of “history, traditions, culture and education, closely related to its competitive advantage in the global economy. It can only be internal and cannot be freely chosen, nor could it be reformed through revolution or solved through a change of systems.” In other words, the Chinese are competitive. The Egyptians are not. The form of government does not matter.

 Still despite the messiness of democracy, it does have one redeeming feature that Ding Gang fails to recognize and Mubarak could not accomplish: change. As De Tocqueville points out, "The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.”