Читать книгу The Political Economy of Reforms in Egypt - Khalid Ikram - Страница 12
ОглавлениеThe Political Economy of Reform: A Survey with Special Reference to Egypt
Central to the political economy of reform is the conflict of interests between economic actors in a society.1 Changes in economic policies can drastically alter the distribution of winners and losers. A group that is in the winners’ column has every incentive to resist being relegated to that of the losers. What makes policy reform particularly difficult in developing countries, including Egypt, is that the pre-reform group of economic winners has more often than not become such by virtue of its political strength, generally obtained through wealth or close association with centers of power, such as the monarchy, the military, or the religious establishment. It would be demanding too much of human nature to expect this group to willingly cede its economic privileges—turkeys do not readily vote for Christmas. For policies to be reformed, the built-in resistance of such interest groups has to be overcome. Various political-economy models and case studies of individual countries attempt an explanation. This chapter surveys and develops approaches that are most relevant to the political-economy experience of Egypt.
Following Haggard (2000, 22–39), these approaches can be roughly divided into two groups: one that focuses primarily on the role of interest groups, and the other that emphasizes the importance of institutional arrangements. In practice the distinction is not nearly so clear-cut and the conduct of economic reform, and especially the sustainability of reform policies, often requires a melding of these elements. Indeed, Williamson (1994a, 20–21) notes that “from a political standpoint, the most difficult part of a reform program is not introducing the reforms but sustaining them until they have a chance to bear fruit and thus generate political support from the potential beneficiaries.”
The foregoing classification is not the only way of grouping different approaches. Roháč (2014), for instance, stresses two broad constraints on policymaking that could be used to classify the approaches: (a) the differences in incentives that voters, politicians, and bureaucrats face; and (b) the differences in the beliefs and mental models used by the public and the politicians. The discussion in this book largely follows the grouping proposed by Haggard.
Interest-group models emphasize the role of coalitions—how they can come together and how they can become influential enough to change the status quo. In order to do the latter, a pro-reform coalition has to be formed that can defeat the groups opposed to reform, or at least induce their acquiescence in the reforms. Such models have an impressive lineage, with Mancur Olson (1965, 1982) the best-known progenitor. Institution-focused models, on the other hand, emphasize the institutional and administrative restructuring to ensure that the economic reforms are efficient and have a better chance of surviving in the long run.
As Haggard points out, interest-group models face an important problem. These models can explain how a policy regime has come about after a struggle between different coalitions. If that policy regime has been in place for a substantial time, one might say that an equilibrium has been reached in that the coalitions have managed to optimize their political and economic strategies. Reform, however, is about policy changes. What would it take to upset the existing equilibrium and to change the dynamics between coalitions? If stakeholders are strong to begin with, how will their power be overturned? The best explanations in Egypt’s experience emphasize the part played by crises and by the design of reform packages, especially their comprehensiveness, and the extent and speed of compensation. These issues have been of particular relevance to Egypt.
Interest Groups, Crises, and Economic Reforms
In Egypt’s case, crises—military, political, and economic—have been crucial to empowering coalitions and triggering economic reforms that had a major effect on the economy. A few examples will illustrate the point.
On July 23, 1952 the Free Officers led a revolution and overthrew the monarchy. The principal motives behind the revolution were resentment against the corruption of the monarchy (also perceived as a major reason for the defeat in the 1948 war against Israel) and frustration with the failure of the politicians to rid the country of British occupation. The Free Officers did not have any well-defined economic philosophy or even a common political ideology (Nasser 1954; Vatikiotis 1961). They did, however, have a clear idea of who would be their foremost opponents—these would be the large landowners who formed the backbone of the former regime. The political and economic power of this coalition had to be broken, and new constituencies had to be created to support the revolutionary group. It was crucial to create these constituencies, because as Vatikiotis (1961, 218) notes, the Free Officers were an exclusively military group and “acceded to power without the active support of a single civilian group in Egyptian society.”
The power of the landowning coalition was evident. In the parliament elected in 1950—the last before the Free Officers’ revolution—landowners formed the mainstay of the regime, holding 63 percent of the seats (compared with only 14 percent by capitalists).2 Before the 1952 land reform, a tiny elite of about eleven thousand landlords (0.4 percent of the total)3 owned almost two million feddans (34 percent of the cultivated land);4 in fact, the two thousand largest landowners possessed nearly 20 percent of the agricultural land. At the other end of the spectrum, 2.6 million owners (94.3 percent) possessed 2.1 million feddans (35 percent) (Mabro 1974, 61, 73). However, once the army seized control of the country, the balance of power between the two competing coalitions—the Free Officers and the landowners—tilted decisively toward the former, and thus the existing equilibrium between the winners and losers could be altered.
The determination of the landowning faction in parliament to defend their privileges was made evident by their relentless opposition to any measure that tried to improve the distribution of land. For example, in 1945 a bill had been introduced that prohibited future acquisition of more than one hundred feddans of land. In 1950 another bill proposed breaking up, with adequate compensation, all holdings over fifty feddans. Another bill in 1950 provided that newly reclaimed agricultural land owned by the government should be sold only to peasants who owned less than two feddans. All these measures were decisively rejected by the parliament. “The most that could be wrung out of the landlord-dominated Parliament,” notes Issawi (1954, 135) “was a law requiring owners of large estates to provide better housing and health and social services for their tenants.” And what constituted better housing and other services lay in the eye of the landowner.
Similarly, a bill abolishing waqf (land and property gifted to an ecclesiastical or other corporation) had been introduced in 1937, but this also had been rejected by the parliament. (Family waqf amounted to nearly 600,000 feddans—about 11 percent of the cultivated area—and vested the use and enjoyment of the land in the heirs in perpetuity.)
The Free Officers recognized that the immediate order of business was to break the power of the landowning coalition. This led to the promulgation on September 9, 1952—barely a month and a half after the seizure of power—of a law on agrarian reform that limited individual ownership to two hundred feddans. The reforms had had a mixture of political, social, and economic objectives. First, it was to eliminate the power of the large landowners. Second, it aimed to improve the living conditions of the rural population. The reform measures did succeed in improving the condition of the tenants, whose disposable incomes increased as a result of the reduction in rents and by the greater security offered to their tenancy by the Agrarian Law.5 Third, it was to stimulate the movement of capital from the agricultural to the industrial sector by discouraging further land purchases and by permitting landlords to invest the government bonds (with which they had been compensated) in approved industrial enterprises. Fourth, it was to raise agricultural output, in the belief that an owner would put more resources into improving the land than would a tenant.
Of the stated objectives, the first was crucial. The reform measures stripped the rich landowners and contributed to ending the power that the class formerly possessed, and stopped it from obstructing other policies that the revolutionaries might want to implement. Writes Mabro (1974, 56), “The political implications did not escape the civilian Prime Minister, Ali Maher, a man of the past, who objected to the [agrarian reform] project and was asked to resign.”
This early move by the revolutionary government found support not only in Egypt, but also abroad. The United States moved quickly to establish relations with the Free Officers. Roussillon (1998, 2:354) states that the Americans were the first to be notified that the coup was imminent and “taking into account the discreet contacts made with the officers through their representatives, in July 1952 they had many reasons to think that ‘their men’ had seized power on the banks of the Nile.” He notes that United States aid to Egypt within the framework of Point Four (the forerunner of today’s USAID) “shot up from less than $6 million before 1952 to $40 million only a few weeks after the coup, and Dean Acheson, the U.S. Secretary of State, asserted that Egypt could henceforth count on the United States’ ‘active friendship.’” The honeymoon hit turbulence in 1955 after Egypt’s purchase of weapons from Czechoslovakia.
The British moved more cautiously. However, based on the messages from their ambassadors (Jefferson Caffery of the United States and Sir Ralph Stevenson of Britain), both countries were in favor of the land reform. Indeed, Gordon (1996, 166) reports that Winston Churchill scribbled “Down with the Pashas, Up with the Fellahin” on a note to Anthony Eden and dispatched experts to advise the Egyptians.
Another crisis, another major set of reforms. In 1956, Britain, France, and Israel attacked Egypt following President Gamal Abd al-Nasser’s nationalization of the Suez Canal. Because of these hostilities, the coalition of British and French interests in Egypt could be defined as enemies of the country and thus easily be overcome; British and French assets in the country consequently were sequestrated.6 Joan Nelson (1990, 3–32, 321–362) analyzed the politics of reforms between 1979 and 1988 in a sample of nineteen countries in Latin America, Asia, and Africa and found that it had been easier to introduce reforms in countries and periods in which the opposition was discredited, disorganized, or repressed. The changes in Egypt’s economic framework in 1956 conformed to this finding.
The Suez crisis of 1956 also triggered a fundamental change in Egypt’s political-economy environment. Egypt’s external policies tilted toward the Soviet bloc, with collateral effects on the economy. The principal impact of the crisis was a drastic increase in the role of the government in economic matters and a vigorous move to “Egyptianize” the main arteries of the national economy.
These matters are discussed further in chapter 4. For our immediate purpose, it is sufficient to note that these changes included the sequestration of British and French assets; the extension of nationalization to other sectors of the economy; and the introduction of comprehensive economic planning. Egypt’s politics began to shift from the West toward the Communist Bloc; economic management started to move away from relying on the private sector; and state intervention and influence set about reshaping the economic landscape. The power of the British/French coalition as well as that of the Egyptian private sector was thus progressively overcome, and the country’s economic structure came to be dominated by domestic public-sector organizations.
Yet another instance of a crisis strengthening the hands of one group and enabling it to effect substantive economic reforms occurred after the Egypt–Israel war of October 1973. Egypt’s economic situation in the months leading up to the war and after had become dire. GDP growth had dropped to about 3 percent in 1973. Oil prices had fallen, and with the resulting fall in revenues, the deficits in both the budget and the balance of payments increased sharply. The external situation was made even worse by the requirements of servicing the foreign debt, especially as the country had resorted to financing earlier deficits through bank credit facilities that had an average maturity of only 180 days. The overall budgetary deficit in 1974 was estimated at 17 percent of GNP (Gross National Product), with much of the financing borrowed either from abroad or from the domestic banking system. This inevitably had a major impact on the money supply and domestic liquidity, and fueled inflation. A detailed description of the economic situation in 1973 and 1974 is provided in chapter 5.
These developments made it clear that Egypt could not continue with a “business as usual” approach to economic policy. In April 1974, President Sadat outlined a new direction in the October Paper that was presented to the People’s Assembly. This document laid out the basis for a new strategy, in which the public sector would be responsible for implementing projects that other sectors would not or could not undertake, and for providing essential services, while the production of most goods and services would be the responsibility of the private sector. The new strategy has come to be known as the infitah or “open-door strategy.” While the full effects of, and indeed the motivation behind, the strategy have been much debated (see chapter 5), the new direction clearly challenged the prevailing orthodoxy of Arab socialism.
Of course a crisis is not essential to enable one coalition to distort economic policies in its favor to the detriment of even a much larger group. Such outcomes can also be created by differences in the organizing ability of the coalitions and the vigor with which they pursue their aims.
A standard example is provided by international trade theory. Egyptian producers would benefit from tariffs on imports because they would be able to sell their products domestically at higher than international prices; however, Egyptian consumers would benefit from lower prices if such tariffs were not imposed. The grounds for a clash between the rival interest groups were clearly demarcated. Whether the pro-tariff or the anti-tariff prevails depends on the political weight of the respective groups and the strength with which they are able to press their demands in the political process. Crucial ingredients in this strength are the ability and incentive to organize and to raise the finance necessary for effective lobbying. However, “consumers” are a very large and ill-defined group scattered all over the country, and thus difficult to organize into a coherent coalition. Moreover, as Frey (1985, 146) points out, “Protection constitutes a public good affecting all the members of a particular economic sector or occupation. There is an incentive not to join the interest group or to contribute financially, because one may profit from the outcome by free-riding [that is, benefiting from an activity without paying for it].” As against this, compared with the number of consumers, industries or importers that benefit from the higher prices constitute a minuscule group; they would thus be much easier to organize and also have a strong incentive to contribute financially to a lobbying effort because the benefits from import restriction would be concentrated in a very small number.
The tariff example is but one instance of a wider issue. Pareto put it in more general terms.
In order to explain how those who champion protection make themselves heard so easily, it is necessary to add a consideration that applies to social movements generally. . . . If a certain measure A is the case of a loss of one franc to each of a thousand persons, and of a thousand franc gain to one individual, the latter will expend a great deal of energy, whereas the former will resist weakly; and it is likely that, in the end, the person who is attempting to secure the thousand francs via A will be successful.
A protectionist measure provides large benefits to a small number of people, and causes a very great number of consumers a slight loss. This circumstance makes it easier to put a protectionist measure into practice. (Pareto 1927, 379–80)7
Although in Egypt revolutionary and military crises have paved the way to drastic restructurings of the economy, a crisis does not necessarily require bloodletting. On many occasions economic crises have changed the dynamic between coalitions and compelled the acceptance of major policy changes.
Why would it take a crisis to induce reform? An early, and still perhaps the most influential, answer was provided by Olson (1965, and especially 1982). He argued that economic performance created powerful groups who would resist reform policies that might impair their interests. Their strength would enable them to block socially desirable reforms. This would freeze the status quo, making society, in Olson’s term, “sclerotic.” If reform required overturning the power of such groups, something drastic would have to occur to break their hold. This could be a political disaster for which the group could be held culpable—such as the Egyptian monarchy being held responsible for the country’s defeat in Palestine. Or it could be economic deterioration of such a magnitude that a sufficient number of groups decided that the country could not continue with “business as usual” and that a different set of economic policies had to be tried. This section of the book concentrates on the role of economic crises in inducing reform; other explanations have also been suggested, and Drazen (2000, 44–54) elaborates a discussion of a number of them.
Different economic situations have been proposed as crises that triggered reform—for example, Krueger (1992, 81–2) notes that “the majority of policy reforms are initiated in what are perceived as crisis situations,” and identifies them as taking two forms. The first, and which she judges to be the more frequent, is when a country finds it difficult to meet its foreign exchange obligations. The second occurs when the rate of inflation reaches unacceptable levels. Other writers add different crisis situations, but foreign exchange dearth and raging inflation figure in all the lists; see, for example, Bruno and Easterly (1996), Lora (1998), Drazen and Easterly (1999), and the several studies of individual countries edited by Bhagwati and Krueger in the National Bureau of Economic Research’s project on “Foreign Trade Regimes and Economic Development;” the volume on Egypt is Hansen and Nashashibi (1975).
But the literature cautions us that an economic crisis is defined not simply by the fact that an economic variable is present, but critically by the degree to which it is present. “A first problem is to determine what is, and what is not, [an economic] crisis,” writes Krueger (1993, 124), and goes on to say, “No satisfactory answer has yet been given: rates of inflation that in one country provoke immediate policy responses are not even criticized in other countries, and the absence of critical goods such as medicines and petroleum has been withstood for years in some countries, while inducing an immediate response in others.” This book is not the place to delve into the complexities of the issue, but we must note two critical factors that have emerged from the debate and are most relevant to the Egyptian case.
First, Krueger (1993, 126) concludes that successful reform in the face of deteriorating economic conditions requires a government that “has the political resources to undertake action and the technocratic support to take appropriate actions.”8 Second, after examining a host of studies, Drazen (2000, 445) concludes there needs to be an extreme deterioration of the status quo before a reform is adopted that is, “things need to get very bad, and not just bad, to induce reform.”
In the political-economy literature, “crisis” is generally measured by the value of some macroeconomic indicators matched against a comparator; for example, real per capita income or inflation in year t + y compared with that in year t. “Reform” is gauged by a change either in the selected macroeconomic indicators or in policy variables.
Thus, Bruno and Easterly (1996) defined a crisis rate of inflation as that above 40 percent annually for two or more years (that is, a severe deterioration), and examined the effects on growth and inflation in a large number of countries in subsequent years. Their study found that growth dropped sharply during a crisis caused by high inflation and rose above the pre-crisis level after inflation had been brought down. They also found that high-inflation countries were motivated to undertake reforms and they subsequently kept inflation below the 40 percent threshold. Drazen and Easterly (1999) widened the foregoing study by examining the inflation experience of 123 countries between 1953 and 1996, considering more variables, and using alternative levels of inflation to define a crisis. Their results echoed those of Bruno and Easterly and supported the view that sustained high inflation was likely to beget reform.
The importance of crises in stimulating policy reforms is not confined to Egypt. An exercise by Lora (1998) for the Inter-American Development Bank is succinctly described in Drazen (2000, 453–54), and further elaborated in Lora and Olivera (2004). Lora developed policy indices for trade reform; financial system reform; tax reform; privatization; and labor market reform for nineteen Latin American and Caribbean countries over the period 1985–95. He then examined a number of political and economic factors that might lead to a reform, such as the time in office of a government; compensation mechanisms for losers in the reforms; capital flows; and economic crisis. The last was measured by macroeconomic indicators, such as the gap between real per capita income and its previous highest level, negative growth, high or variable inflation, and government budget deficits. The study considered the reforms taken individually as well as overall structural reform, the last being measured as an average of the five individual reform indices.
Lora found that of all the factors he examined, the most important factor for reform was a crisis. For the total index, the best crisis indicator was how far per capita income had fallen from its peak. The individual reform indicators reacted to different metrics; for example, trade and labor market reforms were especially sensitive to negative GDP growth, while financial sector reform was most responsive to the level and variability of inflation. Conversely, Lora found that privatization and tax reform were only weakly related to a crisis, even a fiscal crisis. The purely political variables that Lora used did not much affect the reform indicators.
The foregoing studies are useful in tracing connections between economic reforms and variables that are largely economic in nature. However, each country has its own institutions and particular historical experience. I suspect that for Egypt the purely political factors might carry more weight than they did in Lora’s study.
Thus, the Egyptian agrarian reform followed a military coup (that is, a political crisis) and the necessity for the coup’s members to break the power of the opposition and to build up a constituency for the revolutionaries. The nationalizations and sequestrations of British and French assets in 1956 followed the invasion of Egypt (a political crisis) by the United Kingdom and France and strengthened the government’s role in the economy, which, down the road, led to large-scale nationalizations and the move toward “Arab socialism.” Conversely, the deteriorating economic and mounting external debt situation in the 1980s did not compel the government to introduce major reforms; these were introduced in the 1990s following Egypt’s political decision to participate in the war with Iraq. The participation responded to a political decision by the United States and other Western donors to offer a compensation package of generous debt write-offs and economic assistance to induce countries to join the anti-Saddam Hussein campaign.
After surveying a number of studies, Drazen (2000, 454) concludes that “empirically, crisis is important in inducing or facilitating reform.” This conclusion, however, should be read in conjunction with his caveat that “much work remains to be done on matching of theory and actual experience.”
Political Institutions and Policy Reform
The second broad approach to the political economy of reform looks at the incentives that policymakers face within the political framework in which they operate. This family of models examines questions such as whether reforms are more likely under authoritarian governments or democracies. They also investigate the characteristics of electoral rules, the structure of political parties, the number of “veto gates” in the system, whether the ruling party in a parliamentary system has a dominant majority or is part of a coalition, the extent of power accorded to the president or the prime minister, and so on.
For a number of reasons, this approach may be more useful for discussing the sustainability rather than the initiation of economic reforms in Egypt. First, theoretical or a priori arguments can be produced in favor of both democracy and authoritarianism as an engine of reform. Second, the large number of empirical case studies has thrown up no convincing or definitive relation one way or the other; for a survey see Maraval (1997). Several reviews have argued that authoritarian regimes are more likely to be successful reformers, because they can override the power of interest groups that had held back reforms in the past—instances adduced include China, South Korea, Taiwan, Hong Kong, and Singapore. But an equally large number of reviews point to instances where authoritarianism has only created crony capitalism or sclerotic bureaucracies—instances cited include Russia, Haiti, Zaire, North Korea, and Romania.
The advocates of democracy rely on the argument that this system of government increases competition and increases the number of voices to which policymakers must listen and to whose interests they must cater (Haggard 2000, 39). However, after setting aside the a priori arguments and examining the data, Alesina et al. (1996) show that, on average, the economic growth performance under dictatorships and democracies is indistinguishable. The worst economic outcomes, compared with both established democracies and dictatorships, occur in countries that are transiting to democracy (Haggard and Kaufman 1992), because they show the greatest amount of instability and consequently discourage investment and growth.
Third, for Egypt in the period from 1952 to 2011 this approach is of limited relevance, because for the entire period the country was under only three regimes, all of them authoritarian. The more interesting questions, therefore, concern the attitudes of the incumbent president and his principal advisers to economic reforms and the capability of the ministers and bureaucrats to implement them. Three broad issues are crucial to shaping these attitudes: (a) the pace of reform; (b) the content of reform (especially which groups will benefit and which will be disadvantaged); and (c) the design of the compensation package (especially its size, its distribution among different groups, and its speed of delivery).
The Pace of Reform: “Big Bang” versus Gradualism
An issue that frequently comes up in the discussions of policymakers as well as in the literature on the political economy of policy reforms is the pace of reform. Would it be better to institute reforms simultaneously in several sectors of the economy (the “Big Bang” approach), or would it be better to introduce reforms gradually and test their acceptability before moving on to further reforms? Theoretical arguments have been advanced for each of these approaches. Both sides can claim successes and concede failures in practice, and the empirical studies do not confer a decisive victory on either strategy.
Four principal ideas underlie the “Big Bang” approach. First, an economy functions as an interaction of different sectors; therefore acting on several of them simultaneously will make a policy package more efficient because the reforms will reinforce each other.
Second, the most common danger with implementing reforms is that the government will lose heart before the policies begin to take effect. Advocates of the “Big Bang” approach argue that simultaneously undertaking a wide range of policies is more likely to bind the government to the strategy, because it will have committed itself to too many areas to back down without seriously damaging its credibility. Thus the “Big Bang” approach is more likely to entrench the reform process and to make it sustainable.
Third, proponents of the “Big Bang” strategy believe that it avoids another weakness of the gradualist approach. The latter, by introducing reforms in a piecemeal manner, potentially creates several stages with different distributions of winners and losers, and thus offers incentives to the winners at each stage to resist further reform. Hellman (1998) uses the experience of reforms in the previously communist countries to point out that further reform can then be blocked not by those who lost from changes in the initial situation, but from those who gained from the partial reform and the inefficiencies in the economy that were left uncorrected (and were presumably to be corrected in subsequent stages of the reform). This group would be concerned that the subsequent corrections would eliminate the opportunities of capturing economic rents (unearned profits).9 A step-by-step introduction of reforms would create multiple stages at which different interest groups could mobilize opposition. Milton and Rose Friedman in Tyranny of the Status Quo similarly urged political leaders favoring reform to act quickly after election to counter the inevitable closing of ranks of people threatened by change (Friedman and Friedman 1984). This line of thought thus also supports the idea of doing as complete a set of reforms as quickly as possible.
Fourth, champions of the “do all reforms as soon as possible” approach argue that partial reforms often fail to provide sufficient clarity to economic agents. Employers can be deterred from creating permanent jobs because they are left uncertain whether they will be able to shed labor if they have to and what this would cost. Investors hold back because they are uncertain about what will be even the medium-term shape of the regulatory environment. “We don’t know when the other shoe will drop and on whom it will land,” is how an Egyptian businessmen responded to a World Bank questionnaire on the investment climate. Thus, for the proponents of the “Big Bang” approach, the foregoing difficulties taken together provide compelling reasons for getting the reform process over and done with as soon as possible.
So much for the essence of the theory; it is worth looking at arguments that have held special appeal to practitioners. The case for a swift and comprehensive reform is cogently argued by, among others, a former minister of finance of New Zealand, Roger Douglas, drawing on the experience of the very successful reforms carried out by New Zealand after 1984. Krueger (1992, 115) notes that the program was so successful that it came to be known as “Rogernomics.”
Douglas (1990, 2–6) argues that the authorities should not try to advance one step at a time; otherwise interest groups that oppose the reform will have time to mobilize and drag down the government. He asserts that “speed is essential; it is impossible to go too fast. Even at maximum speed, the total program will take some years to implement, and the short-term trade-off costs start from Day One.”
Douglas reiterates that the basic reason for urging speed is that the economy is an interlinked mechanism, and acting simultaneously on a wide range of structural reforms will improve the quality of the interactions within the whole. This will help win wider public acceptance of the reform. He argues that in order to win public acceptance, the policymaker has to demonstrate that opportunities for people as a whole are being improved, while the most vulnerable groups in the community are protected. The important point is that the public will accept short-term pain if the costs and benefits are seen to be shared “with visible fairness across the community as a whole.”
Douglas makes an important argument about mobilizing support, even from coalitions that initially oppose the reform. Before the privileges of a protected sector have been removed, it will tend to see structural change as a threat that has to be opposed. However, after the government has removed the group’s privileges and demonstrated credibly that they will not be restored, that group will resent the privileges that still accrue to other groups and which boost its own costs, because “wherever a group manages to hold onto a privilege, an avoidable cost is imposed on those who are facing up to an adjustment process.” The de-privileged group will then lobby to remove the privileges of groups that still possess them, and thus become an ally of the government in the reform process. The crucial ingredients, in Douglas’s view, are speed and the government’s credibility, procured by “an unwavering consistency in serving medium-term objectives.”
The gradualist approach, on the other hand, rests on the idea that the reform process can only be sustained if there is a “buy-in” by the major stakeholders. “Sustainability” is the exception rather than the rule. Krueger (1993, 132) notes that “more countries have experienced a reversion to their earlier economic difficulties within two or three years after the beginning of a reform program than have successfully entered a period of long-term improvement in economic performance.” Moving slowly, at least in the earlier stages of policy reform, gives the authorities the opportunity both to persuade stakeholders by pointing to the successes obtained in the area of reform and to reassure them by being able to pull back on tactics that have not worked. It would be difficult to do this if the government were acting simultaneously all across the economy. A World Bank minute reported an Egyptian minister defending his country’s gradualist approach with the words, “You do not test the depth of the Nile with both feet.”
Generalizations have proved difficult because the viability of either of these approaches depends on too many factors, in particular: the initial situation, that is, how much economic pressure the country is under; which groups most affect the economic decision-making process; the technical strength of, and the political backing received by the economic team; whether the incentive system has created groups that would give continuity to economic policy; the resources that can be conjured up to cushion the almost inevitable austerity at the start of the reform program; and how long the economy can withstand shocks to its interdependence with other economies.
Moreover, a government is not a monolithic unit.10 Even when different cabinet members agree on a common objective, for example, accelerating the GDP growth rate, they may hold substantially different opinions regarding the means of attaining the objective. One faction is usually not sufficiently dominant in cabinet to determine policy outcomes in all areas; if it were, policies would be much more consistent and coherent than is actually the case. Chapter 5 describes in some detail the differences between the approaches of Egypt’s Ministry of Economy and Ministry of Finance to the policy reforms proposed by the International Monetary Fund in 1976, and the tactics that they employed in the cabinet to ensure the triumph of their views. The gap between the methods supported by the two ministries turned out to be unbridgeable, even though they both agreed on the ends.
A complicating factor is that policymakers can and do change their policy preferences depending upon their shifting views of the country’s circumstances or their assessments of what would be best for the survival of the regime. Such “time inconsistency,” as it is known in the literature, can be perfectly logical. As Keynes is famously reported to have said, “When the facts change, I change my mind. What do you do, sir?” Let me offer an example from Egypt’s experience to illustrate the point.
A key issue in Egypt’s approach to economic development concerns the respective roles of the public and private sectors. Ever since the nationalizations after 1956 (and especially from 1961), the public sector’s role had metamorphosed from supporting the private sector to dominating the economy. However, in a far-reaching program of reforms starting in 1991, Egypt began to tilt the balance back toward the private sector.
Some leading policymakers viewed the change in the relative roles of the public and private sectors as a logical response to the stage of Egypt’s development and the state of the international economy. Kamal al-Ganzoury (minister of planning 1982–85, deputy prime minister 1985–96, prime minister 1996–99 and 2013) regarded the change as a pragmatic response to evolving conditions; it was important not to be blinkered by ideology, but to respond in a pragmatic manner to what was best for the economy in a given situation. From 1956 and especially immediately after the 1973 war, the main task facing the Egyptian economy was the building or rebuilding of a large amount of infrastructure. The domestic private sector did not have the financial or human resources to undertake this task (could the Egyptian private sector have run and maintained the Suez Canal after its nationalization, or built the High Dam?). Moreover, in view of the uncertain Middle East situation, foreign investors were chary of committing the required resources. The challenges, therefore, had to be met by the Egyptian public sector.
Three major changes had occurred since the 1990s. First, much of the infrastructure had been built and the more urgent challenge for the country was to create productive jobs for the rapidly expanding labor force. This private enterprise could do more efficiently than the public sector. Second, the private sector was now also much bigger and able to mobilize sizable amounts of capital; given the proper economic incentives and legal safeguards, it could now undertake large projects both in the infrastructure and in the directly productive sectors. Third, the more stable situation in the Middle East had reassured foreign investors. In order to take advantage of these changes, Egypt had to create an environment that would be more friendly for the private sector, both domestic and international. In Ganzoury’s view, therefore, the redirection of strategy was necessary to making the Egyptian economy viable for the twenty-first century.
Dr. Ganzoury emphasized that the government was not going to disappear from the economy—the strategy called for a recalibration of the government’s role, not its extinction. The revised emphases in its functions in fact made its role much more important. In addition to the crucial functions of providing internal and external security and managing the administration of the country, the government had the responsibilities of funding education and health, providing infrastructure (by itself or in public–private partnerships), dispensing justice, managing externalities, regulating monopolies and ensuring a level playing field for private enterprises, developing the lagging regions of the country, protecting the most vulnerable elements in society, and ensuring that the distribution of incomes did not exceed bounds that would create dangerous social tensions. The government was also best placed to take a holistic view of the economy, and thus to judge whether regulations were light or onerous; taxes competitive or punitive; incentives insufficient, excessive, or just.
Ganzoury’s view was that decisions in many sectors could be taken only by the government, because those taken by a profit-maximizing private entity might not be optimal for society. For example, in the vital electricity sector, it was important to maintain a certain amount of excess capacity, because disruptions caused by electricity shortages cost the economy much more than maintaining the excess capacity. But a profit-driven private sector would have no incentive to create excess capacity. Similarly, even when the financial sector was privatized, major decisions concerning the size of banks and the activities that they could engage in would have to be taken by the government. This would help avoid the “too big to fail” syndrome, in which very large financial institutions could not be allowed to fail because of the immense collateral damage that their failure might inflict on the rest of the economy, and consequently these institutions would have to be bailed out using taxpayer money. Moreover, in order to avoid financial crises, the government would have to set banks’ capital requirements far above what these profit-seeking institutions might aim at if they were left unregulated. In the transport sector, the government was best placed to consider the needs of the country’s security and its economy to strike the balance between air, road, river, and rail transport. The government also had the crucial responsibility of perfecting the “software” of development: strengthening institutions, monitoring incentives, maintaining equity, and reinforcing governance to ensure that the private-sector economy performed in a manner that was both efficient and socially responsible. The issue was thus not of the government’s withering away, but of ensuring that it made good decisions.
Returning to the choice between a “Big Bang” and a gradualist approach, the strategy adopted (especially in an authoritarian regime) might simply reflect the personality and preferences of the political leader. Having described Douglas’s advocacy of a “Big Bang” approach, it would only be fair to put the case for the gradualist side, especially as for several decades this has been the preferred route for Egypt. Here I will provide only a very brief outline of President Mubarak’s explanation of his views; the reader is referred to chapter 6 for a fuller exposition extracted from my minutes of his meeting with James Wolfensohn, the president of the World Bank.
President Mubarak said that he favored a “step-by-step” approach. He offered two reasons in support of the strategy. First, he said that people had to be carefully prepared to accept the reforms, and this required time. One could not simply ram reforms down the throats of people who were living close to the margin of subsistence, especially as reforms often initially require a significant amount of belt-tightening. The government had to persuade people that the alternatives were inevitable and worse. The government also had the responsibility of creating a safety net for the most vulnerable members of society who would be impacted by the reforms—even the most efficiency-obsessed government had to recognize the political wisdom and the humanity of tempering the wind to the shorn lamb.
The president credited the gradualist approach for his success in pushing through reforms that were much more stringent than those attempted in 1977 by President Sadat. Moreover, the blowback against President Sadat’s reforms had caused the entire package to be annulled, and the public had absorbed the unfortunate lesson that if it resisted, the government would back down. This had not only set back reforms in 1977; it had also made it virtually impossible to undertake them for several years thereafter.
The president’s second reason for favoring a gradualist approach was that it did not require an all-or-nothing package. The government could introduce a set of policies, and if they “stuck,” then the government could add another policy or two. If the public resisted, it was much easier with the step-by-step approach to identify which policies the public had found the most unpalatable, and to modify only them. With a “Big Bang” strategy, that is, when a host of reforms were introduced simultaneously, the set of reforms tended to be viewed as a unit, and so if it were resisted, the entire parcel would have to be scrapped. This is what had happened with President Sadat in 1977.
Mubarak’s cautious attitude conditioned his officials’ approach to policy reform. More than one Egyptian minister confided that Egyptian policymakers follow a precautionary principle: if you cannot be confident of the results, do not experiment. And since it is in the nature of economics that one cannot offer precise and infallible assurances of the outcomes of reform policies, the evidential burden on the advocates of change becomes too great and thus the bias of Egyptian policymakers tends to favor the status quo. Egyptian policymakers gamble on economic transformations only if there is little alternative. This might help to explain why policymakers generally accepted reforms only in response to a crisis.
Moreover, knowing that the United States would be reluctant to risk threats to Egypt’s stability enabled ministers to ward off pressures for policy change by cloaking their defense of the status quo in the mantle of national security. The resistance became particularly strong after the 1977 riots (described later). Ali Lotfi (a former prime minister) said that whenever a discussion on rationalizing the subsidy system came up in cabinet, “Up would go the Minister of Interior’s hand and he would insist that he could not be responsible for the security situation in such circumstances.” This sufficed to snuff out any debate.11
While one might feel that Egyptian policymakers could have acted with greater urgency, one must remember an important asymmetry between their fate and the results for the counselors from abroad. If the program imposed excessive austerity on the country, Egypt’s policymakers would have to face the music; this could take the form of sacking by the president or perhaps stoning by an incensed populace. The counselors, on the other hand, would simply go off to ply their trade in Tunisia, Turkey, or Timbuktu.
That Egyptian officials had had the same thoughts is not mere speculation. During the 1977 bread riots, Wagih Shindy, at the time a deputy minister in the Ministry of Economy, and I drove through the parts of Cairo that had been the worst affected. While viewing the burnt buses, the demolished government buildings, the shattered glass that was everywhere, and inhaling the stench of teargas that still hung in the air, Shindy kept repeating, “See what those boys have done!” It is almost impossible to convey the anger and loathing that was expressed in the word “boys.” He described a meeting of undersecretaries of the economic ministries that had taken place a day earlier at which everyone present had lamented that Egypt’s fate had come to rest in the hands of a group of inexperienced youths from the IMF who could unwittingly destabilize the country, but who would neither individually nor collectively pay any price for their mistakes.
Shindy and his colleagues complained that the Fund’s policy prescriptions were merely lifted from elementary textbooks that assumed an ideal economic world, and that its staff members on the mission to Egypt were entirely innocent of any real-world political-economy experience. “Have these 30-something year-olds ever functioned in roles that acquaint a policymaker with the full range of governmental work and the political constraints within which economic policies must be devised?” was in effect the rhetorical question they asked. Heikal (1983, 90) and Sadowski (1991, 155, 353n45) describe the “Dickie memorandum” outlining the IMF’s conditions, the acceptance of which led to the riots.12 (See also Tignor 2016, 138.)
In fairness to Egyptian ministers, I must point out that it was not unknown for the president to possess a hotchpotch of irreconcilable instincts on economic issues, and in the country’s extremely centralized regimes since 1952, inconsistent aims or policies could be decreed or suggested (and the “suggestion” would have the force of a command) by the president, who would in effect be asking for a square circle. The ministers and the bureaucracy were then left with no choice but to construct the squarest circles that their ingenuity was able to devise in the circumstances.
President Mubarak was not alone in emphasizing the importance of convincing the public that the government would carry out its announced policies. President Chung-Hee Park, the initiator of South Korea’s economic miracle, also made sure that announced policies were carried out. Policies were implemented through a rigorous structure of rewards and punishments that included compulsion and administrative discretion. The result was a sharp increase in the public’s perception that the government meant what it said. A major study of how South Korean businessmen perceived the firmness of the government’s resolution found that only 20.4 percent of the respondents considered that under Syngman Rhee (the previous president) decisions were “always implemented” or “almost always implemented.” In the Park period the comparable figure was 94.8 percent (Jones and SaKong 1980, 136–37 and table 22). This shift in perception made it much easier for the Park government to execute its policies without having to apply extreme measures.
The foregoing comments underline the importance of a government’s rigorously carrying through its announced policies. They do not, however, demonstrate that these policies must necessarily be carried out slowly or in a piecemeal fashion. President Park’s regime was distinguished not only for the firmness with which it adhered to its declared policies, but also for the speed with which they were implemented.
The overriding lesson from the foregoing discussion is that there is no unique approach to implementing a successful program of structural economic reform. The literature, however, emphasizes that indispensable constituents of a program’s success are a strong and visible government commitment and a general perception that the pains and gains under the program are shared in a fair manner. It is also very helpful to provide a cushion to protect the basic needs of the most vulnerable elements of society, and to ensure that the public believes that the compensation package is adequate and will indeed be delivered quickly.
“Tragedy of the Commons” and the Impact on the Environment
The political economy of Egypt highlights other outcomes that reflect the power politics of self-interest versus the collective (social) interest. Public resources are vulnerable to the familiar “tragedy of the commons” problem. Where there are no property rights over a resource, individual users have an inducement to independently maximize their use of that resource. There is therefore an incentive for individuals to use the resource beyond limits that are justified by the sustainability of the system. This overuse can lead to a deterioration or destruction of the resource, making its benefits unavailable to all users—the unregulated pursuit of private profit can and often does lead to a substantial social loss.
A classic case is the discharge of chemical waste into the Nile by the numerous factories situated along the river. This behavior on the part of powerful industrial groups renders Nile water impotable without being treated (so consumers have to bear the costs associated with the treatment), reduces the catch and increases the cost of production of downstream fisheries (so fishermen have to spend much more time on the water to catch a given amount of fish), and increases the possibility of spreading gastrointestinal and other illnesses.
Such outcomes are not limited to the Nile. A study for USAID (PRIDE 1994, 1:III–7) estimated that industry and hospitals in Cairo alone produced up to 65,000 tons annually of hazardous and infection wastes that received no special management but were simply dumped. The study (1994, 2:D–28) also estimated that because of exposure to lead from smelters in Cairo, an average of 4.25 IQ points was lost per child, and that more than eleven thousand heart attacks and premature deaths could be prevented annually in older adults if the blood lead levels in Cairo were reduced to those in the United States.
A report by the World Bank (2002) estimated the damage cost of environmental degradation in 1999 at up to 6.4 percent of GDP. Sarraf (2004) found that as a share of GDP this was about two times higher than in high-income countries and, indeed, substantially higher than in other developing countries in the region.13
Policies for dealing with the tragedy of the commons are well known. If the situation is one in which property rights can be assigned, they should be clarified and enforced. The owner of those rights will take steps to limit the usage of the resource at a sustainable level by imposing a suitable charge. In cases in which private ownership is not feasible, such as the Nile waters or the streets in which garbage is dumped or the air that is polluted by the emission of lead particles, an agent (such as the state) with the power to coerce users of the resource to pay an appropriate tax or fee would prevent the overutilization of the resource. The proceeds of the tax or fee would also provide finance for investing in maintaining or expanding the resource, which the private user of a public resource has no incentive to do. No such policy has been enforced. It is a measure of the political strength of groups engaged in the degradation of the Egyptian environment that they are permitted to inflict major health and economic damage with impunity.
The Costs and Benefits of Policy Reforms
Attempts have been made to estimate the costs and benefits of policy reform. In view of the difficulty of controlling for all factors that are involved, conclusions cannot be definitive. Moreover, the estimates relate only to economic, and not to political, costs. Even where economic costs are concerned, estimates of the costs and benefits of reform policies undertaken simultaneously in several parts of the economy are more difficult to compute and will be less secure than measures for particular sectors. It might, therefore, be useful to examine some results for more restricted areas of the economy.
The sector that has received the greatest amount of attention regarding the costs and benefits of reform policies is that of external trade—in particular, the benefits and the adjustment costs likely to result from trade liberalization.14 These investigations looked at this problem from a number of angles—the trade sector as a whole, economy-wide levels of employment, the percentage of the labor force that might have to change occupations as a result of the reforms, the impact on particular industries,15 the costs of capital equipment becoming idle during the adjustment period, and so on.
Since the methodologies used differ from study to study, the estimates span a very wide range. Depending upon the assumptions—concerning, inter alia, the number of jobs lost compared with the normal amount of job turnover in the economy, the length of unemployment, the cost of capital idled by the reforms during the period of adjustment, the discount rate used to compute present values of costs and benefits—the benefit–cost ratios range from 1.3 for iron and steel (Mutti 1978) to 153 for footwear (Takacs and Winters 1991). Matusz and Tarr sum up their review of the studies as follows:
In studies where such comparisons are possible, it seems to be the case that each dollar of adjustment cost is associated with several dollars’ worth of efficiency gains. . . . [A]djustment costs are the largest in the period immediately after the implementation of reforms, disappearing after a period of one to five years. By contrast, the efficiency gains of liberalization grow over time and continue indefinitely. (Matusz and Tarr 2000, 381–82)
However, given that with only a minor tweaking of the assumptions, Matusz and Tarr (2000, 381n21) can raise the Takacs and Winters benefit–cost ratio to 2193 (!) suggests that some estimates can be far from robust, and that their acceptance should be garnished with the proverbial pinch of salt.
If the effects of policy reforms are generally positive, why have so many countries, including Egypt, been reluctant to embrace them wholeheartedly? Banerjee (2000, 58) provides the best response: “Reforms necessarily involve cobbling together a package that is only part economics. . . . The rest of it is part institutional design, part public relations, part rhetoric. A successful reform involves coming up with the right combination of all these things in the context of the particular country.”
Given the diversity of political, social, economic, and institutional conditions between countries, it would be futile to search for an unequivocal, universal answer. The empirical literature does, however, suggest some recurring issues that impact on policymakers’ decisions.
Four issues appear to be the most critical.
1. Disjunction between the timing of the costs and the benefits from reform. Most of the cost of adjustment will have to be borne immediately, while the benefits could take perhaps two years or even more to make their full appearance. As Rodrik (1996, 10) reminds us, “Good economics does often turn out to be good politics, but only eventually.” Rodrik later argues that the data do not consistently show a significant lag between the adoption of the reform and the benefits flowing from it. However, his use of the word “eventually” would suggest that there is in fact a sort of J-curve effect—that is, that conditions first deteriorate and travel down the bowl of the J, before improving and moving up along the stem of the letter.
This pattern is confirmed by other studies. Masera (1974), in a detailed analysis of the 1967 devaluation of the pound sterling, estimated that it took eighteen to twenty-four months for the current account to move into balance. Williamson (1983, 154) reports that the evidence shows that while trade may respond within months to changes in income, reasonably complete adjustment to price changes may take three years or so. The study by Matusz and Tarr quoted earlier (2000) also pointed out that adjustment costs would be largest immediately following the reforms and could take one to five years to disappear. Some calculations by the World Bank on Egypt’s experience with exchange-rate depreciation indicated that it took at least eighteen months for a significant response by non-oil manufactured exports. However, the cost of imports would increase as soon as the currency was devalued and could have a serious impact on prices and consumer subsidies (the latter in Egypt have at times amounted to more than 20 percent of budgetary expenditures).
The inevitable time gap between suffering the costs and enjoying the benefits of the reforms can play havoc with ministerial futures. The rapid turnover of economic ministers, particularly evident during the days of President Sadat, reinforced the tendency for caution. One can hardly blame ministers for not wanting to submit themselves to immediate criticism for the sake of some uncertain felicity in the future when the evidence pointed to a rather short ministerial shelf life. Between 1973 and 1980 there were seven changes of finance ministers, seven of planning ministers, five of ministers of economy, and four of ministers of international trade.16
Wagih Shindy (deputy minister of economy and subsequently minister of tourism) summed up the quandary. He said that ministers knew what they had to do; what they did not know was how to be retained as ministers once they had done it. They would have to carry the burden for the immediate consequences of reform policies, even if the short-term consequences had been foreseen to be inevitable and all the evidence indicated that the reforms would bring substantial benefits down the road.
This is more likely to be the case in an authoritarian presidential system, under which the ministers are generally technicians and do not bring a political “dowry” for the regime. Hamed al-Sayeh, a minister of economy, said that ministers under President Sadat knew that they were, politically speaking, cannon fodder and easily disposable if policies turned out to be unpopular even if only in the short run. Weiss (1993, 66) noted that “a series of ministers was replaced every six months on average, and prime ministers changed almost annually.” The matter was somewhat better, but perhaps not by very much, under Nasser. Thus, McDermott (1988, 103–104) remarked that Nasser in eighteen years formed eighteen cabinets with 131 different individuals, but under Sadat the ministerial merry-go-round became dizzying—in seven years he had eleven cabinets with a turnover of 127 members. “Ministers tended to last half as long under Sadat as they did in Nasser’s time, and in the economic portfolios, the changes verged on the hysterical.” With the cabinet merry-go-round spinning at this speed, ministers could barely begin to grasp the details of their portfolios before they were ejected from office, and while occupying it could at best do little more than execute variations on existing policies rather than prepare well-considered ones to initiate.
This created an environment in which the cabinet might want the ends, but was reluctant to supply the patience that would be required for the policy measures to attain the ends. This is unfortunate. After reviewing reforms in several Asian, African, and Latin American countries, Krueger (1992, 69) notes that a successful reform normally spans several years, and that “time is one of its ingredients.”
And therein lay the rub. Ministers were reluctant to support austerity measures unless they felt that they stood a good chance of being in office to see the benefits. But given the political mortality rate, the odds of this happening were distinctly unfavorable. The costs of policy reform were immediate and certain; the payoff was deferred in timing and unpredictable in amount. In their calculations, ministers heavily discounted the future. Consequently, the balance between risk and reward did little to encourage ministers (and even the president) to take the long view.
Dr. Abdel Aziz Higazi17 described a meeting in February 1975 at which President Sadat had been urged to slow down the consumption boom following the infitah. The argument was that policy measures taken up front to restrain excessive consumption would lead to increased investment and incomes, and thus permit high and more sustainable consumption a little later. The president had dismissed this view out of hand, responding sarcastically, “Ya‘ni bukra fi-l-mishmish?” (“In your dreams!”). The tendency of the government to concentrate almost exclusively on immediate benefits was much discussed among donors. At one of the monthly donor meetings in Cairo, the British representative remarked that the preoccupation with the short term made it appear that the government’s main strategic principle came from FitzGerald’s Rubaiyat of Omar Khayyam: “Ah, take the cash, and let the credit go,/Nor heed the rumble of a distant drum.” Or as Hamed al-Sayeh (minister of economy) confided more prosaically, “Ministers do not necessarily support reforms; they just want the results of reform.”
The focus on the short term was not limited to a particular cabinet. In early 1981 the deputy prime minister for economic affairs, Abdel Meguid, tabled at a cabinet meeting a range of proposals dealing with the exchange rate, consumer and fuel subsidies, the restructuring of loss-making public enterprises, and the injection of competition into the financial sector. Detailed papers, coordinated by the Ministry of Planning, had been circulated concerning the likely effect on the price level, the budget, and employment in the public enterprise sector. Abdel Meguid had discussed his ideas with the ministers concerned, and he was confident that they were all on board. At the meeting he asked for their formal assent to begin drafting appropriate legislation. The response took him by surprise.
He said that ministers had “hopped from one ‘however’ to another” and that the cabinet had not been able to reach any decisions. As Abdel Meguid put it, “Everyone was ready to go to heaven, but no one was prepared to die.” He added, “I suppose the most sobering thought for any politician is that he should politically die [because of authoring reform policies], while his successor should benefit from the outcome of those policies and go to political heaven.” The clear political-economy lesson is that if ministers perceive the benefits of reform to lie beyond the electoral horizon or (especially under an authoritarian regime) the president’s forbearance, reform policies will have few champions.
It is thus impossible to predict for how long a government is likely to persist with stabilization efforts or structural reform in the face of continuing austerity. Too many variables—such as the nature of the immediate economic crises, the economic trends of the previous decades, the political structure of the government (democratic, authoritarian, or dictatorship) and its strength, the state’s capacity for efficiently implementing the program, the role of external agencies, and many others—all are in play. After reviewing the experience of nineteen countries in Latin America, Africa, and East Asia, Nelson (1990, 339) tentatively concluded that “some relief from economic hardship within, perhaps, a year usually is necessary to sustain confidence” to carry on with the program even where economic crisis may have convinced much of the public that drastic measures were required. The only stabilization program in Egypt that may be said to have attained many of its goals covered 1991–93. Much of the government’s ability to stay the course resulted from the relief from economic hardship provided by the substantial write-offs and reschedulings of external debt, and the donor financing of support programs such as the Social Fund for Development (See chapter 6).
A further problem arose from Egyptian ministers’ insecurity about their tenures. Kassem (2004, 27–28) points out that the constitutional power to appoint the prime minister and the other ministers (and to relieve them of their posts) gave the president absolute power over the political future of cabinet members; moreover, the economic ministers were almost exclusively technicians who were not backed by a political constituency. This situation is very likely to inculcate in them a strong feeling of loyalty to the ruler; indeed, “the issue of loyalty accommodates subservience to the ruler’s policies. Consequently, [the president’s] personal decision-making is less likely to be questioned, let alone challenged.” Ministers could too often be unwilling to tell the president that some of his pet initiatives might not be workable.
McDermott (1988, 139–40) describes a meeting at which President Sadat was enthusiastically told by a minister of agriculture that he could carry out the president’s directive to “turn the entire Sinai green within one year.” This undertaking was given despite USAID’s providing the minister with evidence that (a) there was virtually no water to irrigate the Sinai; (b) if water were diverted from other uses and pumped across the Suez Canal into the Sinai, the per-gallon cost would be about five to eight times that of delivering it to existing sites in the Nile Delta; and (c) improving the quality of soil in the Sinai to support even simple grass cover could take five years or more. Such instances could occasion some irony by international observers. McDermott recounts that at that meeting the World Bank representative asked if the minister intended to fulfill his promise by plastering the Sinai with Astroturf, since growing natural vegetation appeared to be out of the question. Of course the Sinai has not become any greener in the forty or so years since that meeting. “Never commit to a date and a number,” would be sage advice to Egyptian policymakers, observed the USAID representative at the meeting.
These ministerial attitudes did nothing to encourage donors’ belief in the government’s seriousness. Moreover, such pronouncements debased public discussion by pretending that simple solutions existed for complex, and perhaps insoluble, problems, and corroded people’s trust in the government when it became apparent that there were in fact no easy answers.
Perhaps the ministers’ fears of their political ephemerality if they acted on sensitive subjects were not irrational. In a well-known paper, Cooper (1971, 28–29) analyzed the political effects of twenty-four devaluations between 1953 and 1966. He found that in about 30 percent of the cases the government lost office within one year, compared with only 14 percent in a random control group of similar countries that did not devalue. Ministers of finance suffered even worse fates: nearly 60 percent of them were dismissed in the year following devaluation, compared with 18 percent in the group that did not devalue.
2. Disjunction between private and social profitability. The cost–benefit ratios discussed above have all referred to social benefits or profitabilities, that is, the gains from policy reforms that accrue to society as a whole. However, the calculation that interest groups typically make does not refer to this wider concept of benefits, but rather focuses on private profitability—the gains or losses that would impact their own coalition. And there frequently is a wide disjunction between social and private profitability. Therefore, what happens to the structure of the country’s policy framework can depend crucially on whether the group seeking to advance social profitability can outwit, persuade, or overpower the group seeking to preserve private profitability that is created by inefficiencies in the economy. This is seldom easy. As long ago as 1513, in his classic study on the exercise of political power, Nikolai Machiavelli warned that “the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new” (The Prince, chapter 6).
Instances of the ascendancy of private over social profitability in the Egyptian experience and the effects this has had on policies are not hard to find. Let me describe some examples from different sectors.
For long periods Egypt’s exchange rate was overvalued. A devaluation would provide an incentive to stimulate exports, increase tourism, and redirect workers’ remittances from unofficial to official channels. All these would add foreign exchange, which has remained a key bottleneck to the country’s development. The higher exports would also increase domestic savings while the greater availability of foreign exchange would require less foreign borrowing, which has compromised Egypt’s sovereignty several times during the last 150 years. The social benefits therefore were evident. However, the overvalued exchange rate benefited importers, while the subsidies effectively increased the disposable incomes of consumers. The private benefits therefore were also obvious. The fact that Egypt maintained an overvalued exchange rate for long periods showed that the interest groups favoring imports and consumption retained a dominance over those that favored exports, savings, and investment, even though the benefits to the country would have been more aligned with the interests of the latter group.
The resistance by particular factions to protect their interests can make governments go through various contortions to make a policy package look like a reform, even when it does not alter the underlying reality. Krueger (1992, 80) describes the Egyptian reform program of 1962, in which the country sought emergency support from the IMF. As a condition of obtaining the funds, Egypt had to devalue its exchange rate by about 25 percent. However, “the authorities managed to remove a sufficient number of surcharges on imports and subsidies for exports so that almost no exporters or importers were receiving or paying more than 3 percent more local currency per unit of foreign exchange than they had earlier.” The status quo was effectively protected. Indeed, Hansen and Nashashibi (1975, 90), whose data provide the basis for Krueger’s calculations, say quite bluntly, “There is little doubt that the government, despite its commitments to the IMF, had no intention whatever to cut down domestic demand”; which continued to expand vigorously.
A further example is provided by policies that discriminate between Egypt’s small and large enterprises. The small, and usually informal, firms account for 95 percent of the country’s enterprises, but they lack the political access and the privileged entrée to policymakers that is accorded to the large firms. It is thus not surprising that trade, labor, locational, energy, competition, and other policies are devised primarily with an eye to benefiting the large firms. The effect of these policies is to artificially reduce the cost of, and thus to encourage the use of, capital- and energy-intensive methods of production, even though these are not aligned with the country’s resource endowment or its comparative advantage. Concern for the private profitability of the politically influential 5 percent of the total number of firms trumps the social profitability of increasing labor-intensive production and creating jobs by facilitating the activities of the other 95 percent. The discussion in chapter 6 of crony capitalism illustrates the effects of this differential treatment on the country’s employment and potential GDP growth.
Another long-standing example of private profitability outweighing social profitability is shown by the country’s cropping pattern. The United Nations Food and Agriculture Organization (1999, 32–34) concluded that the cultivation of sugarcane was profitable for private farmers because they did not have to pay for water, but the resulting distortion of incentives encouraged the planting of sugarcane and imposed a substantial economic loss on the country. This occurred because, first, Egypt was not an efficient producer of sugar, and thus could not export it at international prices, but in many areas sugarcane competed for land with other crops, such as cotton, in which the country was internationally competitive. Second, water was the most binding constraint on Egyptian agriculture, and sugarcane is a very water-intensive crop; thus, the encouragement of sugarcane production led to a less than optimal use of the country’s most valuable agricultural resource. Third, sugarcane is a year-round crop and the land is thus not available for double-cropping, so the country has to forgo the benefits of the displaced crop.
However, the government remained wary of upsetting the agricultural coalition. In discussions on agricultural strategy with the United Nations Food and Agriculture Organization (FAO), the government stonewalled any attempt to discuss water pricing. The FAO reported that the government’s position remained that the kingdoms of Upper and Lower Egypt had been united under King Narmer (circa 3000 bce) in order to better manage the waters of the Nile. Since that time, the farmer had not paid directly for the use of water. Any attempt to change the situation could be seen as striking at the basis of the country’s foundation with unpredictable, and possibly dire, political consequences. The incentive system therefore remained tilted in favor of growing a water-intensive crop, such as sugarcane, that was profitable for the private farmer even though it entailed a loss for society as a whole. The origins of some political-economy issues in Egypt can go back quite far!
The agricultural lobby also resisted paying for drainage. A cardinal fact of economics is that “there is no free lunch.” The costs of constructing and maintaining the vast irrigation and drainage infrastructure were thus pushed onto groups that were less powerful than the agricultural coalition. The foregoing examples reiterate a general political-economy truth: some powerful political forces will fight to preserve their private benefits (in the shape of economic rents) that arise from an inefficient allocation of resources, regardless of the cost to society.
3. Differential impact of reforms between sectors and between individuals. The empirical investigations show very wide differences in the benefit–cost ratios for different sectors. Many of these studies found that even if the countrywide benefit–cost ratio was impressive, the costs (especially declines in unemployment) tended to be concentrated among a few industries. If the worst-affected sectors are politically important (for example, if they are large employers of labor or have strategic value), policymakers will not pay too much attention to overall benefit–cost estimates but seek to protect these sectors by abstaining from or slowing down reforms.
Private adjustment costs, such as the dislocation of workers, also differ between groups of workers. The private losses borne by workers depend on individual characteristics, such as their skills and experience. Workers with the training or experience required by the market are likely to find another job relatively quickly. However, workers not so endowed may continue to swell the ranks of the unemployed for long periods. Thus, even if the social benefit–cost ratio is very favorable, the private costs borne by a dislocated worker may amount to a significant fraction of his or her lifetime earnings.
Studies that focus on countrywide estimates of benefits and costs tend to ignore or downplay the distributional impact of reform policies on individuals. Academics in ivory towers (and their international advisors) can make an intellectually rigorous case for reform measures on the basis of the benefits that would accrue to the country as a whole; political representatives who will bear the wrath of their unemployed constituents will feel the pressure to tread more circumspectly. This can be seen, for example, in the manner that the Egyptian government handled the privatization program of the 1990s.
Studies had repeatedly shown that public enterprises suffered from massive overstaffing. The Public Enterprise Office estimated employment in public enterprises in 1993 at just over one million. Khattab (1999, 12–13) reported that before the main restructuring began in 1996, public enterprises employed 932,404 workers, and that the Ministry of the Public Enterprise Sector estimated that about 300,000 of them were redundant. It was unlikely that private investors would rush to purchase public enterprises in which one-third of the workers were unnecessary. The excess labor would have to be shed. Mindful of the political danger of antagonizing labor, the government undertook reforms in the public enterprise sector only after donor governments and international institutions put together a substantial financial package to cushion the impact of the job losses. The government’s measures (such as early retirement, not replacing workers lost through normal attrition, and so on) succeeded in reducing employment in public enterprise to less than 600,000 by the middle of 2000, and to about 400,000 by 2009, when the privatization program was frozen.
The crucial ingredient making the reduction politically possible was that donors offered substantial resources to support compensatory measures that would mitigate the dislocation. Distributional issues—who will benefit and who will lose—are at the core of groups’ resistance to reform. The political-economy lesson is that the size and design of the compensation package, the speed with which it can be delivered, and, most importantly, credibility that the government will actually implement the package are crucial to passing a successful reform over the resistance of opposing coalitions.
4. The perception that the burden of reform policies is shared equitably. The literature points out that austerity is almost invariably an initial outcome of major reform policies. It also emphasizes that austerity is likely to be accepted by the population and reform policies supported if there is a clear perception that this burden is equitably shared (see, for example, the earlier discussion of “Rogernomics” (see page 31).
A necessary implication of this finding is that reform policy must be rigorously evidence-based. Facts have a way of getting their revenge. Overall growth may look robust and average (per capita) incomes apparently growing, but the averages may conceal substantial pockets of people and regions that have been left behind. The Gini index and other measures of income distribution have to be scrutinized carefully in order to ensure that they are not systematically affected by influences that cause the indices to show spuriously equitable outcomes. Such an effect may have been a factor in Egypt, as pointed out by the World Bank (2015b). The report argued that the Gini index might have been truncated at both ends—with high-income groups underreporting their consumption and income in order to avoid attracting the attention of tax authorities, and low-income groups underreported because survey enumerators found it difficult to access poor neighborhoods (for reasons mentioned in chapter 8 of this book). It is also clear that Upper Egypt, especially its rural areas, has benefited much less than the rest of the country from the development process (World Bank 2009). Thus, although aggregate growth and average incomes in Egypt were rising much faster from 2005 until 2008 (when the international financial crisis occurred) than in the decade before, a widespread perception that the fruits of growth were largely captured by the richer classes connected with the political regime (see the discussion of crony capitalism in chapter 8) proved toxic to reform efforts and, indeed, fatal to the political regime.
The “Insider–Outsider” Conundrum
For much of the period after the nationalizations of 1961, almost one-third of Egypt’s labor force was employed by the public sector (excluding the armed forces). In 2015 the compensation paid to government employees consumed 35 percent of budgetary revenues and accounted for 8 percent of GDP. The aggregate burden on revenues of salaries, pensions, and bonuses is thus very heavy. Moreover, numerous studies have shown that virtually every public-sector organization suffers from overstaffing and that many of their employees are simply involved in “make-work” activities.
A few examples might help convey a flavor of this problem. I have already quoted the Ministry of the Public Enterprise Sector’s estimate that in 1996 (before the Egyptian authorities had agreed to a restructuring of the public enterprise labor force under an IMF/World Bank program), almost one-third of the more than 900,000 workers employed in public-sector enterprises were redundant. Earlier, Waterbury (1983, 246) quoted an official report on overstaffing which noted that in 1975 the Ministry of Human Resources asked the Ministry of Agriculture for the number of graduates that it would need in the following year. The answer was 261 university graduates and 495 with secondary agricultural diplomas. Facing this demand was a supply of eight thousand graduates of agriculture faculties and higher institutes, and eleven thousand holders of agricultural secondary school diplomas. One can only guess at the frustration suffered by graduates who were unsuccessful in getting one of the advertised jobs, and also by those who were forced by circumstances to accept jobs the requirements of which fell well below the graduate’s qualifications.
The problem is durable. Nearly a quarter of a century after the incident described by Waterbury, a headline in the Egyptian Mail (December 5, 1998, p. 2) blared that “3 Million Employees Get Paid for Doing Nothing.” The report quoted the state minister of administrative development complaining that “there are 5 million [public] employees in Egypt, but there are only 2 million jobs. It means that 3 million employees are doing nothing, not to mention that they can slow down the progress of the work.” He urged the country to stop appointing ten persons where there was work only for one. As yet another instance, Galal (2002) reported a government announcement of the availability of 170,000 jobs being confronted by a tsunami of more than 5 million applications.
The Egyptian bureaucracy has shown itself to be a powerful group that will strongly resist attempts at reform. In part, the strength derives from its sheer size—the civil service expanded from 350,000 in 1952 to 6.37 million employees in 2014 (excluding military personnel); this works out at one civil servant for every thirteen Egyptians (World Bank 2015, 16n28).
The size, growth, and structure of the bureaucracy has attracted a good deal of unfavorable comment. Thus, for example, McDermott (1988, 122–24) described the bureaucracy and its growth as “a deadly combination of Ottoman complexities, Eastern European inflexible committee rule, a touch here and there of British and French secretive intrigue, and Egyptian indiscipline. . . . Nasser may have purged the state apparatus, but he basically did not restructure it. It could be said that the revolution… bypassed the civil servants almost as much as it did the fellah.”
The crux of the problem was that governments tended to make the bureaucracy and the public enterprise sector perform a social welfare function, namely, to act as repositories for the rapidly growing labor force. Budgetary constraints meant that the numbers involved could only be accommodated at appallingly low salaries, made even worse by price inflation. Handoussa and El Oraby (2004, tables 3 and 4) reported, for example, that the top of the salary for the highest grade (First Undersecretary) increased by only 30 percent in nominal terms between 1964 and 1999, a period of 35 years.18 Similarly, in 1964 prices, the salary range for Grade 6 (the lowest grade after 1978) dropped to LE11.86–21.01 in 1999 from LE330–600 in 1964.
The low salaries sap morale and encourage civil servants to work (illegally) at two or more jobs. The numbers involved can be daunting. Palmer et al. (1988, 61–2) reported that 89 percent of the respondents in their survey admitted to holding such second jobs and defended it as an economic necessity. Moreover, 84 percent of those respondents holding second jobs said that they spent between three to five hours a day (that is, half a normal working day) on this supplemental job. Ayubi (1980, 507) points out that government officials were not technically ignorant of how to do a job; they were simply not socially motivated as to why they should do it. Matters change when the pay increases. “The same ministry employees who sit idly most of the days,” writes Weinbaum (1986, 115), “are examples of industriousness in hustling to make extra cash once off the [government] job.”
The employment issue poses a delicate political-economy conundrum—the creation of large numbers of essentially artificial jobs at low salaries works against the government’s aim of mobilizing sufficient savings to invest in accelerating GDP growth that would create sufficient numbers of more meaningful jobs. However, there are time lags between mobilizing the savings and investment and achieving the output and sustainable job growth, and the political-economy of successive regimes gave priority to the short-term.19
Government attempts to increase flexibility and to improve efficiency have not gained much traction. Thus, for example, in 2005 the government attempted to make it easier to hire temporary contract employees and to discipline poor performers. However, the vehement opposition of civil servants and public employee unions compelled the government to withdraw the proposed amendments to the civil service legislation.
The question of labor in the public sector has attracted particular attention. Measures to shed the excess labor in public enterprises form part of the conditions attached to virtually every IMF program or World Bank policy loan, while measures to make labor markets more flexible are the subject of numerous discussions between donors and the Egyptian authorities. Simulations are run and spreadsheets flourished, all purporting to show large benefits to the economy of “resizing” or “rightsizing” (other euphemisms for firing workers are not unknown) the labor force in the public sector. The argument that the econometric exercises make is straightforward: If the public sector were to reduce its excess labor, the savings could be invested, which in turn would raise the GDP growth rate and create productive employment of numbers that would substantially exceed those that the public sector had eliminated. The country as a whole would benefit.
Why, then, is the government loath to take this seemingly straightforward and socially beneficial measure?
The political-economy answer lies to a considerable extent in the “insider–outsider” problem. The point is that although the number of jobs created would outweigh those abolished, those fired and those hired would be different persons. Those who stood to be fired would be “insiders,” those already employed and whose positions were protected by laws and by the costs of labor turnover (such as advertising the jobs, screening applicants, training the new hires, and so on). The “outsiders” would be those who were working in the informal sector of the economy or were unemployed; in either case they would not enjoy the protection that the insiders did.
Public enterprises would be discouraged from firing workers because of the legal costs involved in separation and because of the costs involved in training their replacements. Lindbeck and Snower (2002) discuss some other reasons that might also discourage this replacement of workers. They point out that, for example, insiders who have been working together for some time are known to form groups or factions and cooperate with each other in the production process and thereby raise each other’s productivity, but could threaten not to cooperate with newcomers and thereby reduce overall productivity and increase costs. Moreover, Egypt’s stringent legal protection against dismissals (and a drawn-out legal process in case it occurs) makes the costs of firing an insider significantly higher. Furthermore, insiders are generally unionized and thus able to exert a degree of political power; outsiders of course would be unable to do the same.
Finally, uncertainty about the shape of the post-reform environment plays an important role in the resistance of the insiders to economic reform, including those who are in no danger of immediate dismissal. Once a long-lasting, not to say sclerotic, structure of public-sector employment is threatened by the possibility of a reform policy being introduced, a great deal of uncertainty is created as to whether the initial reform is only the thin edge of a process that will keep on being repeated in the future. The IFIs’ studies underpinning the 1991 reforms contain references to workers asking whether the tradition of stable public-sector employment was to be abandoned. There was much concern about the terms of the employment of the retained workers and of the size of the compensation package of those deemed redundant, because workers wanted to be compensated for the loss of the value of their (sure) position in the pre-reform situation, for the loss of what the literature calls their situation rents.
For all the foregoing reasons, the Egyptian government proceeds cautiously in dealing with questions of labor in the public sector. Its most successful episode of reducing jobs in public enterprises (it did not touch the general bureaucracy) occurred in the second half of the 1990s and for about five years in the early 2000s under an agreement with the IMF and the World Bank. An important part of the arrangements was the provision of a “golden handshake” equivalent to three years’ compensation to workers taking early retirement, and the creation of the Social Fund for Development that paid for retraining workers and provided funds for micro- and small-business startups to which the exiting workers (and others) had access. The IMF (1998, 53) pointed out that the elimination of these jobs in public enterprises was possible because the low wages and benefits paid in the public sector made the retirement packages affordable.
Apart from the overstaffing issue with public enterprises, there are substantial labor problems even with private enterprises. The legal protection against dismissals is, in practice, quite rigid not only for the public sector but also for the private. Background papers for the World Bank’s studies on private-sector development described repeated complaints by businessmen of how difficult it was to dismiss unproductive and even dishonest workers. They also described some ingenious methods that businesses had developed in order to circumvent these rules. The most popular techniques were hiring on temporary contracts, or obtaining signed but undated letters of resignation from workers at the time of hiring; these were then dated and presented to the authorities should the worker have to be dismissed.
However, such methods impose costs on the worker, on society, and on the employer. The temporary worker does not get all the benefits (such as a pension) that a permanent one would. These and other handicaps push an increasing number of workers into the informal labor market, in which wages are lower and benefits nonexistent. The informalization of employment imposes a cost on society; for example, the exchequer loses the revenue that it would have collected from formal enterprises. Costs are also imposed on employers. Businessmen who made use of the undated resignation letters reported in World Bank questionnaires that they had to bribe local authorities or representatives of the Ministry of Labor to accept the letter without delving too deeply into its background. Getting around the rigidity of the market thus creates transactions costs that hurt the interests of all the parties involved.
Political Economy and Dictatorships
The question whether a democratic or an authoritarian regime is more conducive for economic growth has been widely debated but has received no clear answer. The difficulty is that a priori arguments can go both ways. Thus, for example, a democratic regime may be said to be better for growth because it is buttressed by institutions that provide greater security for property rights, and hence better incentives for investment and innovation, that are the engines of growth. On the other hand, as Przeworski and Limongi (1993) show, it has also been argued that universal voting rights bestow power on groups that have little or no property. The acquisition of the franchise by such groups could shift the balance of political power toward them and enable them to overturn property rights in order to extract resources from the economically more successful. Thus, the enlargement of the franchise to a universal or very wide one would wither the latter group’s incentive to commit to long-term investment.
Similarly, it has been argued that an authoritarian regime is better able to disregard immediate pressures for redistribution and focus on investment and growth. However, as Olson (1991) and Drazen (2000) point out, dictators’ commitment to future policies must be viewed with skepticism—if there are no limits on the ruler’s power, there is no way of holding him to any commitments he makes. And North and Weingast (1989) stress that the risk that the autocrat will subvert property rights for the benefit of himself or his allies will lower the expected returns from investment and reduce the incentive to invest. Investment entails long-term risks, and the incentive to invest thus requires the investor to be confident of the regime’s long-term commitment to rights. More elaborate discussion of this subject will be found in Przeworski and Limongi (1993), Sirowy and Inkeles (1990), and Drazen (2000, 488–501).
Economic policymaking under authoritarian governments or dictatorships is an important subject for Egypt, because the country has been under such regimes almost continuously since 1952. However, the political-economy literature on dictatorships is limited and is generally concerned with discussions of whether dictatorship or democracy is better for economic growth.
Dictatorships are a very mixed group, and this heterogeneity makes it difficult to generalize. Moreover, being overthrown in a dictatorship is likely to involve much more severe consequences than in a democracy; it cannot be shrugged off as just a bad day at the office. Regime change would not only eliminate the dictator’s office, but also jeopardize his liberty and possibly his life and limbs. Similar risks to his family and associates are not negligible. Regime survival in a dictatorship, therefore, is a much more compelling instinct and will suffuse the government’s assessment of any reform proposal.
Alesina (1992) reports that, empirically, one cannot distinguish between the average growth performance of democratic and authoritarian regimes. He makes a distinction between “strong” and “weak” dictators. The former are those whose survival is not seriously threatened. However, this group itself is heterogeneous. Some “strong” dictators or authoritarians—such as Chung-Hee Park of South Korea—put economic development at the forefront of their agenda; others (for example, the Duvaliers in Haiti, Mobutu in Zaire, Ceaucescu in Romania)—indeed, probably the great majority—have been predatory and despoiled their countries.
“Weak” dictators are those in danger of being overthrown. Alesina argues that when such a dictator is in danger, his incentives are likely to be similar to those of an incumbent political leader in a democracy who faces an uncertain election. In such a situation, therefore, one would expect to see fiscal policies that are generally “loose,” in the sense of increasing budgetary expenditures, especially on items such as consumer subsidies, and “opportunistic,” targeting budgetary expenditures toward constituencies (such as the armed forces and the security services) that would shore up the ruler’s support.
Egypt’s history provides examples of such political-economy decisions. Chapter 5 describes how, when confronted with unrest following an attempt to rationalize some consumer subsidies, President Sadat chose to jettison the prime minister who had argued for reform in favor of the minister of interior, who was in charge of the security services. Again in 1977, following the riots over the cut in the bread subsidy, Sadat rapidly rescinded the price increases and asked the prime minister to personally take charge of the Ministry of Interior.
Egypt’s leaders are not alone in the opportunistic use of fiscal and military policies. Several Latin American dictators followed opportunistic policies, especially by using public expenditure to benefit key constituencies, particularly the military, when the ruler felt he might be overthrown (Alesina 1992).
An allied question is whether authoritarian/dictatorial governments are able to push through reforms more quickly than more participatory regimes. Mau offers an interesting example that would not be entirely foreign to the thinking of many policymakers working under authoritarian regimes.
Count Sergei Witte, a prominent reformer under the Czars,20 used to say that there were two essential elements for radical reforms in Russia: absolute monarchy, because you need not pay attention to your critics if His Majesty supported you, and speed, because somebody might persuade the Czar to change his mind before the reform could be made irreversible. (Mau 1994, 6)
There has been a fair amount of discussion in the literature on the subject. A useful distinction is made by Haggard (1994, 467–71) between the initiation of reform and its consolidation. He argues that initiating reform is facilitated by an independent or autonomous executive, while consolidating reform requires the support of institutions, such as legislatures and even interest groups. The application of such criteria in Egypt’s case is a little problematical. Although the country was ruled almost continuously by authoritarian regimes since 1952, reform proceeded only slowly, and generally only when the economy was in extremis. A fruitful focus of research in Egypt’s case, therefore, would be what circumstances made the ruling autocrat risk the change that a significant economic reform would inevitably bring. Some answers are attempted in this book, but the matter requires more exhaustive examination.
The Role of the Foreign Patron
A factor that complicates the political-economy response, and one that probably occurs more frequently in developing-country dictatorships, is the role played by a foreign patron. In Egypt’s case, the latter was the Soviet Union in President Nasser’s era and is the United States at the present time. The interests of the foreign patron and its attitude toward the client country’s political economy can be quite complex, and the interplay of their interests and powers can be a major determinant of political-economy outcomes. The general experience is that if the patron has to decide between pressing the client to adopt reform policies or to support him in resisting reform because of a fear that otherwise the client will lose office, the patron will opt for support even if the client is undeserving. The attitude of the patron is epitomized most colorfully in the remark attributed to President Franklin D. Roosevelt in Time magazine (November 15, 1948) concerning the Nicaraguan dictator Anastasio Somoza: “Somoza may be a sonofabitch, but he is our sonofabitch.”
The client dictator wants the patron’s unconditional support. The patron may be willing to support the client, but may want the client to adopt certain reforms. However, sensing that these might not be welcome and would therefore damage the bilateral relationship, the patron may seek indirect ways of influencing the outcome.
Let me give two examples from Egypt’s experience of this complex relationship and the political-economy outcomes to which they led.
At the height of the January 1977 bread riots in Cairo, I had a discussion with Hermann Eilts, the U.S. ambassador to Egypt, who was the best-informed diplomat I have met in Egypt.21 He urged the World Bank to press Egypt on subsidy and other reforms, because Egypt desperately needed such reforms. He suggested that the World Bank make the disbursement of the Bank’s loans conditional on actions on subsidies and the budget. I answered that the World Bank was disbursing only $60 million while the United States was disbursing about $600 million. Would the United States hold back even a penny of this amount if Egypt did not go in for the recommended reforms?
The ambassador responded that the United States believed President Sadat to be a force for moderation in the Middle East, and that so long as he continued to be such a force he merited the United States’ support. Translation: So long as Egypt adhered to its peace treaty with Israel and refrained from creating any nuisance that would interfere with the West’s access to Middle East oil, it would get the money no matter what it did or failed to do in the way of economic reform.
I replied that the laws of physics did not permit the tail to wag the dog, and neither did the laws of arithmetic suggest that a hint to hold back some part of $60 million would terrify the Egyptians into taking the recommended actions, especially as they knew that at least $600 million would be available and that the United States was pressing the G-7 and other countries to join the aid program for Egypt in order to increase the total amount. (The first Consultative Group for Egypt, consisting of about twenty-five aid donors, in fact met later that year and pledged $3.4 billion in aid for the coming year.) I could not therefore in good conscience recommend to the World Bank’s management to join the IMF with any hints to withhold disbursements, particularly as Egypt had been fulfilling its contractual commitments on the World Bank’s projects. After some further discussion, Ambassador Eilts accepted my position.22
Thus, on the one hand the United States agreed that the policies proposed by the international financial institutions (IFIs) were necessary to deal with Egypt’s economic predicament. On the other hand, publicly agreeing with these institutions might harm the United States’ bilateral relationship with Egypt. The solution seemed to be to urge the IFIs from behind the scenes to press Egypt on reform while publicly remaining “understanding” of the country’s difficulties.
The Egyptians sensed the Americans’ dilemma, and were quite prepared to take advantage of it. Ministers said that the cabinet would trumpet the “understanding” statements in order to glue the United States to its public posture. The Americans understood that abandoning a position that Egyptians applauded as being sympathetic would drain much of the popularity that the United States had garnered because of its (well-publicized) helpful stance. The political costs of a retreat would be too great.
The presence of the patron also enabled Egypt to play the “American card” in its dealings with the IFIs, in which the United States was the principal shareholder. Several examples of Egypt’s co-opting the United States to pressure the IMF are documented by Richards (1991) and in various issues of the Middle East Economic Digest.23 Some instances are also described in later chapters of this book.
A telling example is provided by the experience of the Consultative Group of aid donors for 1979. In September of that year it appeared that the World Bank was reluctant to hold a meeting of the Consultative Group for Egypt. I was invited to join a discussion between Hamed al-Sayeh (the minister of economy) and the United States ambassador (Alfred Atherton) at which the minister asked the ambassador to have Robert Strauss (at the time President Carter’s special envoy to the Middle East) call on the World Bank’s president, Robert McNamara, and prevail on him to hold a meeting of the Consultative Group within that calendar year. The minister drew attention to the fact that meetings of the Group had been held in 1977 and 1978. Not holding one in 1979, after the Camp David Accords between Egypt and Israel,24 and in response to which the Arab countries had cut off their aid to Egypt, would send an unacceptable political signal, namely, that the West also had abandoned Egypt. In these circumstances, how could the public accept a continuation of Sadat’s pro-West policy? As matters turned out, Robert Strauss’s intervention was not required. That evening Ambassador Atherton telephoned to let me know that Assistant Secretary of State Richard Cooper had called McNamara, who had assured him that a meeting of the Consultative Group would take place before the end of the year. The meeting was held in Aswan on December 20.
The result of this interplay of interests between donor and patron was that the signals from the United States could often appear ambiguous. This sometimes led to confusion on the Egyptian side as to what was really wanted, but more frequently to Egyptian policymakers dissecting the United States’ messages and highlighting elements that conformed to their own views and would buttress their own position.
Egyptian officials had also become more adept at getting the United States to put political pressure on the IFIs to moderate their conditions. Hamed al-Sayeh said that the cabinet had realized it should not jump to accept IFI prescriptions. If direct discussions failed to convince the IFIs of Egypt’s concerns, then it was the “absolute duty” of Egyptian policymakers to use the route through the U.S. State or Treasury Department to make the IFIs understand what the feasible boundaries of reform were. He added that after the experience of the 1977 bread riots, Egypt’s policymakers were adamant that it would be “insane” on the part of donors to insist on, or for Egypt to agree to, major subsidy cuts. He had little doubt on whose side the United States would come down if it had to choose between maintaining its Middle East policy or subscribing to the purism of the IMF’s economic ideology.
A picture of the ambiguous situation between client and patron was brought out by Abdel Meguid, deputy prime minister for economic affairs. He said Egypt’s policymakers were quite aware that in the relationship between Egypt and the United States the economic dialogue would be eclipsed by the political narrative. In any such relationship, the key decisions are always determined by political leaders, not economic technicians.
He maintained that Egyptian policymakers would argue that for political reasons they could not implement a number of the IMF’s conditions without risking the government’s fall. They would therefore indicate that they would have to withdraw from discussions with the IMF or to ignore some parts of an agreement with it. The United States had built up a solid relationship with Egypt in order to secure two of its principal policy goals in the Middle East—peace between Israel and the largest Arab country, and unhindered access to oil. The United States would be reluctant to risk the possibility of an unknown regime’s coming into power in Egypt and perhaps placing the foreign-policy gains in jeopardy. The Americans would therefore use their leverage as the largest shareholders to encourage the Fund to water down the conditions that Egypt found most unpalatable or to find a fudge around them—there were many ways of making the IMF’s precepts more accommodating. Egypt would not find it too difficult to slip the IMF’s fiscal leash.
Abdel Meguid highlighted the irony in the situation: if domestic politics pointed Egypt toward the exit from an IMF program, geopolitics would work to keep the country in a watered-down agreement. The United States would have to weigh the strategic cost of risking an Egyptian government collapse against the diplomatic cost of leaning on the IMF. According to Abdel Meguid, these issues had frequently been discussed in cabinet, which had concluded that the “dilemma” was a non-issue. The threat of political turmoil in Egypt would compel the Americans to find ways of getting the IMF to adjust its conditions. “Never underestimate the power of weakness,” said Abdel Meguid, adding that seven thousand years of survival had left the Egyptians well instructed in the art of turning weakness into an element of strength. Egypt was too big to be allowed to fail.
This situation highlights another political-economy conundrum, namely, the difference in objectives that can crop up between principal and agent, even though they may be working for a common goal. The tactics described by Abdel Meguid were so transparent that it would be astonishing if U.S. representatives did not see through them. Indeed, I asked a U.S. ambassador if he really believed that the apocalypse was around the corner and that the Middle East would hurtle toward it should an Egyptian government fall.
He replied that of course the United States was aware of the Egyptian strategy, but there was a danger, even if very small, that if an unfamiliar regime replaced a government with which the United States had built up a solid relationship, it just might cause the United States to lose the foreign-policy gains that it had so painstakingly assembled. No U.S. official was willing to jeopardize his career by being stigmatized for Egypt being “lost” on his watch. Officials were thus willing to go very far to avoid this possibility; if it required pressuring an IFI or putting the best face on policy lapses by Egypt (in the economic as well as the political field), then so be it.
An example of the extent to which the American card could be made to work was demonstrated by events relating to Egypt’s 1987 agreement for debt relief with the Paris club of creditors. Pressure on the IMF by the United States gave birth to an agreement that was described as “probably the feeblest in recent memory.” Moreover, the easy terms, said by Cairo diplomats to be “unprecedented” in their leniency, drove a senior IMF executive to resign in protest.25
Over the years, I have discussed aid issues relating to Egypt with a number of ambassadors from donor countries. The discussions naturally concentrated on assistance from the United States, because of the importance of the country in the total aid picture and its weight in the IFIs. Let me summarize some of the key points from the discussions.
In the ambassadors’ view, the basic problem was that the IMF and some countries were happy to propose drastic change, but shirked the burden of showing that it was safe for Egypt. Unless Egypt could be reassured on this point, it would fight very hard to maintain the status quo. Egyptian policymakers regarded the status quo as a lot better than many plausible alternatives—better the devil you know than one you don’t know.
However, the ambassadors were concerned that the foreign-policy stances of both Egypt and the United States concealed a substantial amount of impermanence that could lead to problems down the road. They described two major weaknesses in Egypt’s strategy to obtain external assistance. Let me summarize the substance of our discussions.
First, they said that the Egyptian negotiating strategy in dealing with the IMF was to concentrate on the center of gravity, the United States, and to let that country use its weight in the IMF Board to bring the other members around to its point of view, which was to “go a little bit easier” on the policy conditions applied to loans for Egypt. This was a very short-term view, and likely to be counterproductive:
(a) It encouraged Egypt to avoid adopting the policies that would enable it to stand on its own feet. It would not correct the distortions in the borrower’s economy, and was thus likely to set up a continued cycle of its recourse to the Fund’s resources.
(b) While the United States might for a while be able to prevail upon the IMF to soften its policy conditions, it could not do this unilaterally for the long term; it would have to shepherd other IMF board members along the same path. This would not be simple. The 1987 experience should not be seen as a precedent that could be repeated indefinitely. The conditionality for Egypt set down markers which would be used as precedents by other borrowers from the Fund. Repeatedly easing conditions for Egypt might require the Fund to offer similar dispensations to all borrowers. These concessions could make the whole point of IMF lending futile, because the watered-down conditions would not attain the objectives of restoring external and internal balance in the borrowing country.
Second, Egyptian politicians acted as if the narrative of apocalyptic peril had been hardwired into the United States’ DNA and that the United States would never rebut this storyline. This premise was wrong. A country’s foreign policy could not be taken as a constant. A foreign policy was only an instrument to further a country’s interests. These interests not only altered over time, but the methods by which they could be attained could also change. Unless Egypt took measures to strengthen its economy, its requirements for foreign assistance would keep increasing and a time would be reached when democracies that supported Egypt would find it impossible to persuade their taxpayers to continue to foot the bill. “Donor fatigue” was very real. Egypt could not act as if there were an unlimited treasury of donor grace. The United States’ strategy toward Egypt was not calcified, but could change with changing circumstances. Egypt’s long-term political-economy strategy thus might be built on sand, because it mistook political expediency for permanent truth. A review by donors of their aid budgets and their overall foreign-policy goals might well show that they could attain their objectives more efficiently by measures other than shoveling money into Egypt.
The ambassador highlighted another important reason why patience with foreign aid was running low in donor countries. Foreign aid was the transfer of incomes of taxpayers in donor countries to a recipient country. In the donor countries, citizens at most income levels had to pay taxes. On the other hand, in the recipient countries, including Egypt, the taxation systems contained huge loopholes, inefficiencies, and corruption whereby the higher-income groups avoided paying their fair share of taxes. However, they benefited fully from the assets and other advantages created by the foreign aid their country received. The decline in the ratio of taxes to Egypt’s GDP had not gone unnoticed in donor capitals. Taxpayers in the donor countries were getting increasingly weary of a situation in which their middle- and even lower-income citizens were having to transfer a part of their incomes to subsidize the lifestyles of the rich in recipient countries.
They warned that the day of reckoning may be not be too far off. Egypt was a big country, its resource requirements were correspondingly large, and thus the burden on donors was substantial. Political circles in the United States were already grumbling that with around two-thirds of the aid budget preempted by Israel and Egypt, it left little scope to use aid as an instrument of U.S. foreign policy in the many other countries with which it had dealings. The United States had already seen glimmers of this issue and had sought to widen the circle of support, and thus lighten the load on individual donors, by appealing to the G-7 and encouraging the World Bank to set up a consultative group of donors. However, the results of these exertions could not be guaranteed, because they depended on whether other countries considered that their commercial and strategic interests justified providing support to Egypt. Thus Egypt should not regard foreign assistance as an eternally available or a continually expanding resource.
From the viewpoint of 2016, the ambassadors’ analysis was prescient. It would be useful to briefly review the course of U.S. assistance to Egypt, and to bring out some of the political implications of its trajectory.26
After the Camp David Accords that cemented the peace between Egypt and Israel, the United States agreed to give Egypt $1.3 billion in military assistance and $815 million as economic aid, a total of $2.15 billion, annually. This contrasted with over $3 billion in total assistance provided to Israel. Commentators in Egypt were unhappy that on a per capita basis, Israel was getting ten times the assistance that Egypt was getting. However, $2.15 billion was still a substantial amount, and Egypt could not afford to reject it.
This state of affairs continued for two decades. Then in January 1998, Israel, mindful that a country with per capita income approaching $20,000 should not be a supplicant for economic assistance, negotiated with the United States to change the mix between economic and military aid. The former was to be reduced over a ten-year period and the latter increased. The United States applied a 3 to 2 ratio, similar to total U.S. aid to Israel and Egypt, to the reduction in economic aid. This reduced Israel’s share annually by $60 million and Egypt’s by $40 million, but military assistance to Egypt was not increased. As a result of these measures, economic aid from the United States to Egypt steadily dropped from $815 million in the fiscal year 1998 to $250 million from fiscal year 2009 onward. Military assistance remained at $1.3 billion, so total U.S. assistance to Egypt in 2016 was about $1.55 billion.
At the same time, Egypt’s GDP has been increasing. In 1980 it was about $23 billion; total U.S. aid therefore accounted for somewhat more than 9 percent of GDP. Egypt’s GDP in 2016 had reached about $300 billion; total U.S. aid today accounted for less than one-half of 1 percent. This greatly changed the calculus—9 percent of GDP can buy you a very comfortable armchair at the table; one-half of 1 percent would hardly pay for a two-legged stool (especially as the purchasing power of the $1.55 billion was much less than it was thirty-five years previously). The leverage that the United States can obtain by virtue of its aid program has substantially eroded.
The leverage is further diluted by U.S. procedures that greatly extend the gap between the promise of aid and its fulfillment, a fact recognized by the U.S. secretary of state John Kerry in testimony before the House Appropriations Subcommittee on April 17, 2013. After detailing the aid Egypt had received from Arab countries, Kerry went on to say:
We promised $1 billion and until I took the $190 million that you kindly helped us to be able to provide, we didn’t provide them with a dime, not a dime. We gave them a promise and a year later, we’ve given them zero. . . . I’ll tell you, if you’re not helpful to people in their time of need, if you’re not there, part of the process, it’s very, very difficult to have the kind of leverage to say, a diverse pluralistic politics is critical to us when they say, what’s it matter to you? You don’t really care. You’re not helping us. The other guys are helping us. Thank you, we’ll, you know, do what we want to do.27
Second, there have been suggestions in the U.S. press and from some legislators that more conditions should be added on the assistance. This produces a blowback from Egyptian policymakers. The latters’ narrative goes on the following lines: “The contract with the United States was that Egypt would maintain the peace with Israel, and not do anything to impede the West’s access to Middle East oil. Even in the face of strong public opposition, we have delivered on this understanding. Now the Americans are asking for more conditions—you must free the press, you must expand democracy, you must increase human rights, you must not be beastly to political dissenters, you must permit NGOs to operate without restriction, and so on and so forth. All these have nothing to do with the original agreement.”
The Egyptian response is thus on the lines of “we already gave at the office.” In the officials’ view, if the United States wants Egypt to do extra things, it should be prepared to come up with more money—one-half of 1 percent of GDP doesn’t begin to cover the bill. The pity is that most of the reforms supported by the United States and the international organizations would be to Egypt’s benefit. However, the two countries are looking at these issues through different lenses, and it is not surprising that the outcome is a muddle and satisfies neither party.
In view of the foregoing analysis, it is difficult to resist the conclusion that the United States has given up direct, meaningful support of the Egyptian economy. It appears to have decided that its strategic goals can be most effectively pursued through its relationship with the Egyptian military combined with some pressure on the IFIs. The United States’ approach takes the form of continuing the carrot of the $1.3 billion in military aid, while wielding the unspoken threat of withholding spare parts, specialized paraphernalia, munitions, training, and maintenance for the hardware supplied. This can be a powerful foreign-policy tool, as Egypt has largely switched its dependence for advanced military equipment from Soviet to American sources. For economic support, Egypt may increasingly have to look to other patrons.
This may not be altogether easy. The ambassador with whom I had the discussions on foreign assistance remarked that for historical, political, and cultural reasons Egypt naturally looked toward the Arabian Gulf countries for assistance. It had helped that many of the rulers and senior officials from these countries had had long-standing ties to Egypt by virtue of being educated in the country and having respect for its culture. However, this was not necessarily true of the younger generation, which increasingly looked to Europe and the United States for these matters. There was a limit to how long the Egyptians could act as Greeks to the Gulf Arabs’ Romans, purporting to provide wise, experienced counsel and the benefits of their superior culture to the Middle East’s new powerhouses. Egypt’s stock of ‘soft power’ was rapidly waning.
The Political Economy of External Assistance
Since so much of modern Egypt’s development has been associated with external aid inflows, it is worthwhile to examine some of the key political-economy discussions that Egyptian policymakers and external donors engaged in concerning this issue.
The economic case for seeking external assistance is straightforward. A country requires a certain rate of investment in order to raise its GDP growth to the targeted level. It may also want technical assistance to upgrade its institutions or stock of human capital. The country is unable to finance these requirements from its own savings, and it may be unable to afford or to access international financial markets. It therefore seeks foreign savings on concessional terms to fill the gap between the required investment rate and the domestic savings rate. The foregoing is the general justification for project assistance. In addition, the recipient country may generate insufficient domestic revenues and thus have a deficit in the budget. The country may therefore seek program assistance, which, in the simplest case, consists of receiving commodities from a donor on grant terms and which the recipient sells in its home market at the market price and thereby acquires the required domestic resources for its budget.28 The recipient may also have a shortfall on its balance of payments for which it requires foreign exchange; this may be provided by a bilateral donor (generally the Arab Gulf countries in Egypt’s case) or the International Monetary Fund.
This simple story, however, can mask a variety of political and economic intentions. The recipient may want resources purely in order to develop the country; or its interests may be narrower and may have more to do with securing the longevity of the regime. An associated motive is to obtain these resources without burdening the regime’s constituencies with additional taxes so as to retain the loyalty of these constituents. The bilateral donors’ motives are equally diverse: they may be altruistic in wanting to help countries that are less fortunate than their own; they may be commercial in wanting to capture a market for their exports; but most bilateral aid is likely to be provided for strategic purposes, that is, in order to acquire political influence in the recipient countries. Multilateral institutions may wish to increase their disbursements in order to maintain their relevance in the global order and thus to persuade their shareholders to finance an enlargement of their capital base.
The multitude of aims on both sides can make for a very complex mix of politics and economics. Moreover, while donor and recipient objectives may coincide on many points regarding aid, they may also diverge on several important issues. Thus, as an example, aid may fail to boost the recipient’s GDP growth rate or reduce poverty in that country, and yet be counted a success by the donor if the purpose of the aid was to purchase strategic influence.29
In Egypt’s case, if one takes as given that policymakers regard the offer of more aid as preferable to that of less, five issues recurred with sufficient frequency to warrant serious discussions in cabinet and with international agencies and bilateral donors.
The first was the composition of aid between project and program components. Egypt argued for a larger proportion of program assistance in the mix, for three reasons.
1. It is disbursed much more quickly. The World Bank estimated that typically between 50 and 100 percent of amounts committed as program assistance is disbursed in the twelve months following commitment, compared with only 3–5 percent for project assistance.
2. It called for much less intrusion by donors compared with project aid. The latter required an extensive process of project identification, feasibility studies, reviews, and lengthy contracting procedures, to be followed by supervision missions at least once or twice a year. The process not only consumed a good deal of time, but also grated politically on the Egyptians. The resentment was focused largely on assistance from the United States, which was not only the largest single donor but also, as Weinbaum (1986, 102) noted, because of the “comparison between the supervision of U.S.-sponsored projects in Egypt and U.S. economic assistance to Israel that is delivered without an AID [later known as USAID] mission.”
3. It enabled existing manufacturing and other capacity to be utilized more fully by providing the necessary raw materials. It also increased the Egyptian government’s ability to generate domestic resources by selling to the private sector some of the commodities imported under program aid. This was an important benefit. The Egyptian budget was chronically short of resources, and projects were held up because donors tended to finance only the foreign-exchange component (which on average accounted for about 30 percent of a project’s cost), leaving Egypt to provide the domestic currency portion of about 70 percent. Speaking of Egyptian ministries and agencies, in late 1976 Mahmoud al-Imam, minister of planning, expressed his problem as, “They bring me a button from abroad and expect me to provide a coat to sew it onto.”
The second area that gave rise to concern among policymakers was the costs of aid tying. Studies pioneered by Mahbub ul-Haq (1967) and Bhagwati (1967) had shown that commodities obtained under conditions in which the procurement was tied to the donor country typically tended to be priced higher than international prices. Some of the price differences obviously resulted from the use of what was effectively monopoly power by the donor. A few resulted from what might well be viewed as rather dubious practices. Haq gives an instance of a subsidiary firm in country A obtaining air compressors from its parent company in country B, marking them up by 30 percent, and including the higher-priced item as part of the aid package from country A.
The Egyptian government examined the question of aid tying in detail in 1979, after two meetings of the Consultative Group had greatly increased the number of donors, the offers of assistance, and multiplied the range of terms on which the assistance was offered. Let me paraphrase the findings of a rather discursive study for the cabinet on this subject. The study concentrated on assistance from the United States, since that country was by far the biggest provider of economic assistance to Egypt. The paper found that many items procured from the United States were priced 30–50 percent higher, and at times even more, than if purchased in the international market. However, a closer look at the facts would exonerate the United States from deliberately following a predatory pricing policy for items financed under aid. The price differences resulted chiefly from a mismatch between the items that Egypt wanted and the areas in which the United States was an efficient producer.
The United States was most efficient at producing what one might call the most “modern” items; studies showed that the more technologically advanced the product, the more efficient was the United States in producing it. Thus, the United States was more efficient at producing bicycles than donkey carts, motorcycles than bicycles, motor cars than motorcycles, jet planes than motorcars, and so on all the way to, say, space rockets and satellites compared with jet aircraft. The problem was that most of the commodities that Egypt required lay closer to the donkey-cart than to the space-rocket-and-satellite end of the technological spectrum. It was unfortunate that, to quote Weinbaum (1986, 51), “U.S. aid programs normally stipulate that concessional financing be tied to U.S.-made products, regardless of more competitive prices elsewhere and irrespective of Egypt’s ability to produce the same items.” The effect was that the real value of aid in terms of purchasing power could be substantially less than the nominal value. Moreover, while Egypt might in real terms receive only 50–70 percent of the nominal value, the country had to repay 100 percent of the non-grant element in the aid package.
The government of course wanted to mitigate the effects of aid-tying, and the paper drew on work by UNCTAD to offer some proposals. It recommended that Egypt negotiate with the principal aid donors to accept some or all of the following suggestions.
1. In cases where the tied nature of credits raised the prices of imported commodities and equipment above their international prices by some specified figure, donor countries should write down the credit to the extent of the difference between the international prices and the domestic price, and treat this part as a measure of their domestic export promotion.
2. Where possible, credits could be tied to larger areas, such as the Common Market in the case of European countries, so that Egypt could take advantage of procurement in the region as a whole.
3. Aid-giving countries should accept the principle of tying at least some portion of the payment of tied credits to exports of manufactured commodities from the recipient country. This could lower the financial burden on Egypt, and also help the development of a quality-conscious manufacturing sector.
Nothing came of these proposals, but it shows that Egyptian officials were concerned from an early date with the paying back of foreign aid that was provided as loans.
Third, policymakers were concerned about the conditionality attached to some external inflows. This was a serious matter, because the conditions on the disbursement of aid determined the amount of pain imposed on the economy. The favored response of Egyptian policymakers was to argue for a more gradual implementation of the conditions so as to lessen the pain on the public and thus to give the authorities more time and make it easier to persuade it to accept the conditions.
Concerns with what might happen if the conditions imposed a sudden shock to the economic system could bring down wrath from the highest levels in the land. Sadowski quotes some comments of President Mubarak in 1988 regarding the IMF’s prescriptions. He compared the Fund to a quack doctor, and went on to say:
A patient, for example, needs a treatment for one month. Instead of this doctor telling the patient to take the medicine daily for one month, he tells him to take all the medicine today and tomorrow and that he will recover the day after. Of course, he will take the medicine to go to sleep at night and will not wake up in the morning. He dies. This is the IMF. It writes a prescription for those who require prolonged treatment, just as for those who require short treatment. . . . I tell the IMF that economic reform should proceed according to the social and economic situation in the state and according to the people’s standard of living. One should not come and say increase the price by 40 per cent. Surely, no one will be able to live. This will not be an IMF process: it will be a slaughter. (Sadowski 1991, 252–53)
Another reason for Egyptian policymakers’ antipathy to conditionality was skepticism regarding whether the policy conditions would in fact achieve their aims. Many studies showed that conditionality frequently worked very poorly; see, for example, Spraos 1986; Cornia, Jolly, and Stewart 1987, 1988; Harrigan and Mosley 1991; Mosley, Harrigan, and Toye 1997; Collier 1997; Dollar and Svensson 1998; Easterly 2003, 2006; Easterly et al. 1993; Boone 2006; and some from the World Bank itself, such as World Bank 1990a; Corbo, Fischer, and Webb 1992.
These studies showed that conditionality was liable to fail because of two principal factors. First, it targeted instruments rather than outcomes, and the designated instruments might not be sufficiently effective to produce the desired results. Second, in the case of aid provided for strategic purposes (most frequently by bilateral donors), recipients seldom believed that it would be cut off. Terminating this type of aid would lose the donor all the strategic capital that had been built up; therefore, aid cutoff as an instrument for enforcing conditionality was rarely credible and hence seldom feared.
The aid relationship became more complicated as the Egyptian economy expanded and its financing requirements increased. The net transfer of concessional resources steadily decreased as a percent of Egypt’s GDP, and with it the donors’ leverage to impose conditions also eroded. At the same time, donors’ budgets came under increasing strain, especially when the West was hit by a series of financial crises, and raising aid allocations to Egypt became unlikely. Egypt therefore began looking toward the Arab capital-surplus countries to provide assistance that was significant in amount and burdened with few, if any, conditions. Of course, Egyptian policymakers were aware that there is no free lunch, and that Egypt would have to repay the Arab aid in political, if not economic, currency. Such conditions are more implicit than explicit, but they are no less real for being invisible. Moreover, aid from Arab countries could be very generous, but also could be very volatile—for example, in 2014 Egypt received $20 billion from the Gulf countries as budget and balance-of-payments support, amounting to some 5 percent of GDP; the following year it dropped to 1 percent of GDP (Government of Egypt 2015a, 11). However, given the state of the Egyptian economy in the 2008–2015 period, the country’s policymakers considered this route, despite the volatility, the least bad option.
The fourth issue, which became especially important after Egypt’s debt crises of the late 1980s and early 1990s, concerned the terms of aid. In the early years of the aid relationship with the West, the Egyptian authorities did not define explicit criteria for discriminating between loans in order to decide which to accept and which to reject. The criteria evolved over a number of years and ultimately comprised three elements: (1) the currency in which the loan was denominated; (2) the phasing of the debt service; and (3) the concessionality of the loan.
1. Concern with the currency in which the loan was denominated came to the fore when the Japanese yen appreciated by about 70 percent against the U.S. dollar (which was the currency in which much of Egypt’s foreign-exchange earnings were denominated). Until that time, loans from Japan had appeared attractive because of their low interest rates. However, the appreciation of the yen sharply increased the value of these loans and the cost of servicing them in terms of Egyptian pounds. Resource inflows that had been regarded with much favor began to be looked at askance. The cabinet demanded a more careful analysis of the prospects of the currency in which the loan was issued.
2. Egypt had previously suffered a “bunching” of its debt service payments; a temporary problem of liquidity faced with such a spike in servicing obligations might seriously damage perceptions of the country’s solvency. Zaafer al-Bishry, the minister of planning and of international cooperation, initiated an examination of the time profile of external debt service so that loans that would worsen this profile could be rejected or renegotiated.
3. The next minister of international cooperation, Ahmed al-Dersh, established rules for comparing the concessionality of loans and set a minimum hurdle that the terms of a loan would have to clear before it could be accepted. The bar was set at a grant element of at least 40 percent with the stream of repayments discounted at 10 percent a year.30
Fifth, a Marshall Plan for Egypt? On a number of occasions, Egyptian policymakers raised the argument that what Egypt required from donors was a “Marshall Plan” for the country; indeed, variants of this idea were formally put forward in 1979 and 1986 for consideration to the G-7 (the group of the biggest industrialized countries). The notion continues to resurface from time to time, perhaps because its proponents have not paid due regard to the underlying premise of the Marshall Plan. Let me elaborate.
After the Second World War, the economies of the European countries had been destroyed and it was imperative, for humanitarian and political reasons, to rebuild them as quickly as possible. The United States was the only country that possessed the necessary resources, and it prepared a plan for the rebuilding of Europe.
As assistance under the European Recovery Program (which came to be called the Marshall Plan), the Europeans asked for $22 billion over four years; the U.S. Congress agreed to consider $17 billion over that period. From April 1948, when the Marshall Plan began, until December 31, 1951, when it ended, the United States provided about $11.8 billion in grants and $1.14 billion in loans to the sixteen countries covered by the plan. This amount in late-1940s dollars was estimated to be equivalent to about $108 billion in 2006 dollars31 and to about $125 billion in 2015.
At the start of the Marshall Plan period the combined population of the eligible countries amounted to roughly 280 million. If Egypt’s 90 million were to receive the same per capita amounts in 2015 dollars as disbursed under the Marshall Plan, it would require Western countries (assuming that, unlike the Marshall Plan, the United States would not be the sole donor) to transfer about $40 billion over four years. Given the state of the European and Japanese economies—which have undergone several years of recession and run up mountains of debt—would their taxpayers be willing to support the implied levels of external charity? One might note that the United States’ allocation of economic aid to Egypt in 2015 was $250 million(!), that is, a mere 2.5 percent of the $10 billion that would have to be transferred under the presumed Marshall Plan.
Equally to the point, could Egypt productively absorb the targeted annual amount? The crucial assumption underlying the Marshall Plan does not hold in Egypt. The plan was predicated on the basis that while the capital assets of the Western European countries had been destroyed in the war, their human capital and fundamental institutions remained largely intact. Thus, if the United States replaced the destroyed physical capital, economic growth in these countries would proceed rapidly. This, in fact, is what occurred.
In Egypt, however, the human capital base is much smaller, of generally lower quality than in Western Europe, and a substantial part of it continues to be lost through emigration. Moreover, many key institutions remain weak or dysfunctional (see, for example, the discussion in Ikram, 2006, 287–308, el-Mikawy and Handoussa, 2002). This does not, of course, mean that the shortcomings cannot be remedied, but it does mean that it will require time, effort, and considerable political will. Many aspects of the program for Egypt must therefore be qualitatively different from those applicable to Western Europe; simply throwing money at the problem will not provide a solution.
Apart from Financial Resources, Egypt Requires Strengthening of Governance
Quite apart from the unlikelihood of a resource transfer of this magnitude, it may also largely be unnecessary. Many of the fundamental economic problems of Egypt have resulted not so much from a shortage of financial resources as from failures of governance—unclear property rights, a sluggish bureaucracy, an overburdened judicial system, a weak and unbalanced taxation system, corruption, uneconomic pricing of scarce resources (such as electricity and water), an education system that that does not deliver the skills and especially the quality demanded by an internationally competitive market economy, the prevalence of crony capitalism, oligopolies and reduced competition in many sectors of the economy, significant overstaffing in public enterprises, a perceived lack of accountability at many levels of government, and the list goes on. These impediments raise the cost of doing business and thereby discourage investment, and they also lower its productivity. Fixing these problems does not call for mounds of money, but requires analysis, implementation capacity, and above all, the political will to subdue the factions that benefit from economic rents created by inefficiencies in the economy. Discussions and data on these issues appear in World Bank (1992), el-Mikawy and Handoussa (2002), Ikram (2006), and World Bank (2016).
This survey of political-economy issues impacting the aid relationship would be unbalanced if it did not, even if briefly, refer to some problems raised by donors. The chief complaint of multilateral donors was obviously the slow implementation of the policy conditions in the agreement (the experience of the early 1990s was an exception).
The complaints of bilateral donors, at least on the economic side (one assumes they were getting sufficient strategic returns because they continued their politically oriented aid programs), generally concerned the insufficiency of good projects, slow implementation, and the mismatch between what the donors could do and the expectations of the Egyptians.
Bilateral donors often complained that there was a paucity of “spade-ready” projects that they could quickly incorporate into their aid programs. This led them to raise questions about Egypt’s “absorptive capacity.” Egyptian policymakers did, in fact, attempt to respond to this issue. Even as far back as the first meeting of the Consultative Group in 1977, the Egyptian delegation worked with the World Bank to prepare a list of projects divided by sector and distinguished by state of readiness—that is, whether it was an extension to an existing project, whether it was a new project and a feasibility study was ready, or whether it was as yet only a gleam in a ministerial eye. However, constructing a substantial portfolio of aid-worthy projects, backed by high-quality feasibility studies and with financing assured for the domestic currency component, undoubtedly represented a major challenge for a country unused to such procedures for receiving aid, and progress initially was slow.
There was also the pressure on donors to disburse their aid budgets within their country’s financial year; donor bureaucrats were aware that this was the most certain way of ensuring an adequate replenishment of their department’s budget in the following year. Depending upon the flexibility within a particular country’s regulations relating to external assistance, the pressure for quick disbursement could switch assistance toward non-project ends. Taking the United States as an example, in the period 1974–86, the Commodity Import Program disbursed about 80 percent and the PL-480 program almost 100 percent of the amounts allocated, while the project aid component disbursed barely 40 percent of allocated funds. Weinbaum (1986, 111) reports that even attaining this level of disbursements for projects required the USAID mission to make special efforts and seek approval from Washington for costly, expanded infrastructure projects and to provide support for several peripheral programs.
Dissatisfaction with the pace of the implementation of projects was an issue that caused some unhappiness among donors, especially in the earlier years of the Western aid programs (commencing from about 1974). In part, this should have been expected and was simply the result of the Egyptians’ inexperience of dealing with new procurement and other procedures and of starting work with countries and institutions from which they had largely been isolated for two decades. However, an important factor was the pressure on the Egyptian budget and the insufficiency of domestic resources to complement the foreign-exchange component provided by the donor. Donors felt that Egypt should be making a bigger effort to mobilize domestic resources so that it could fully benefit from the foreign assistance that was on offer.
Some bilateral donors, in particular the United States, felt that their Egyptian counterparts had unrealistic expectations about how much resources could be made available. Don Brown, the first director of USAID after the resumption of the aid program, said on more than one occasion that he had to keep reminding Egyptian officials that he had a large but not bottomless wallet. These remarks were occasioned because the Egyptian counterparts often appeared to think that most objectives could be attained simply by having the donors provide more resources. Commenting on this facet of the relationship between Egypt and USAID, Weinbaum (1986, 121) writes, “This notion of development during much of the [early] history of the program expressed itself in ‘build us this.’”
The third aspect of the relationship was the thorniest. The United States ambassador Hermann Eilts (1985, xv) described the attitude of Egyptian officials “as though there were some kind of an obligation on the part of foreign donors to provide them with economic help.” He noted that there was “usually little sign of appreciation on the part of Egyptian officials and an obvious reluctance to give public credit to the foreign donor for the burden borne by the latter’s taxpayers,” and that “their [the officials’] attitude often brought to mind Pharaonic friezes showing subject peoples bringing tribute to Egyptian rulers.”
Dissatisfaction with Egyptians’ apparent lack of appreciation of foreign aid was not confined to Ambassador Eilts, but also figured prominently in discussions among representatives of donor embassies in Cairo. I recommended that they read George Orwell’s Down and Out in Paris and London, especially the part concerning Orwell’s experiences in London, saying that it might help to disabuse them of any rose-tinted view they might harbor of the donor–recipient relationship. After reading it, one of the ambassadors commented that he had thereby acquired a much greater sensitivity concerning the relationship, but felt that Egypt in turn should be made aware that foreign aid had become increasingly hard to “sell” to donors’ constituents. Ambassadors would thus have to make strenuous efforts to ensure that recipients, regardless of what they actually felt, made appreciative noises that could be relayed back to parliaments in donor countries.
The fundamental question, however, was left unresolved: Did the recipient country accept that the resource transfer was a “gift,” for which it should be grateful, or did it view the transfer as simply part of a transactional exchange, to compensate the recipient for some service that it had provided? Examples of such incongruity of perception are not difficult to find: what the United States considered “aid,” the Egyptians regarded as but a due reward for recognizing Israel and not impeding the West’s access to Middle East oil, and thus did not feel any obligation to tug at their forelocks; during the war in Afghanistan, what the United States considered “aid,” Pakistan tended to view as rent for the use of Karachi port and the country’s road and rail network by U.S. military and support units. The donor and the recipient can be viewing the same transaction through different lenses, and that can create substantial misunderstandings.
Foreign Aid to Egypt: Benefit or Bane?
A question frequently asked in political-economy discussions in Egypt is whether foreign aid has had a beneficial or a baleful effect on the Egyptian economy. The answer might help to clarify whether or not aid should be accepted, and if it is, on what terms, in what amounts, and for what purposes.
The question whether aid supplements or displaces domestic efforts and whether it has succeeded in facilitating economic reform has generated an extensive literature. A settled conclusion, however, has not been reached. This is perhaps unavoidable; as Rodrik (1996, 30) remarks, “external resources reduce the costs both of reform [that is, by providing finance for some sort of cushion] and of doing nothing—that is, avoiding reform [that is, by continuing to provide finance for the status quo].” The studies tend to examine the experience of different countries and different time periods, and can use different criteria for judging success, so it is almost inevitable that they encompass a wide range of conclusions. In fact, as Adam and Dercon (2009, 173–74) point out, since Robert Barro’s (1991) paper on cross-country patterns of growth sparked the surge of research on the empirics of growth, “perhaps only one broad conclusion emerging from the wealth of growth regression results commands universal support. This is that ‘institutions matter.’”32
Proponents arguing for the success of aid (at times with nuanced caveats) can point to, among many others, Papanek (1972, 1973), Cassen (1994), Burnside and Dollar (2000), Sachs (2005), the U.N. Millennium Project (2005), Sen (2006), and Tarp (2010), while critics of aid can find much ammunition in (again among others) Bauer (1971), Boone (2006), and the writings of Easterly (for example, 2003, 2006). The increasing availability of data and the application of more refined models have at times cast doubt on the robustness of earlier findings and led to some to-ing and fro-ing between proponents and critics as they sought to attack others’ positions or to defend their own. Tarp (2010, 43) is not far off the mark when he quotes the singer Bob Dylan to say that with all the uncertainty concerning aid effectiveness, it might appear that “the answer, my friend, is blowin’ in the wind.” However, the conclusion of Tarp’s study is that “a substantial part of the modern aid-growth literature does suggest that aid has a positive impact on per capita growth,” but he cautions that “no excessive claims about parameter sizes and total aid impact should be made.”
In view of the unsettled nature of the general debate, it should surprise no one that examinations of the impact of aid on the performance of the Egyptian economy have been inconclusive. Critics of foreign aid argued that much foreign assistance harmed Egypt’s economy or was wasted, and that large donors imposed their own preferences on Egypt’s development pattern and distorted Egypt’s priorities.
These critics can find support from a variety of sources. Thus, Weinbaum (1986, 52) reports USAID officials in Cairo acknowledging privately that their analyses showed food aid had a negative impact on domestic Egyptian wheat production. Springborg (1989, 275–76) presents an embarrassing litany of failed USAID-associated projects, such as “U.S.-built buses that rapidly and noisily disintegrated on Cairo’s potholed streets;33 a cement factory that required a decade to construct; automated bakeries that did not bake bread; fish farms that produced no fish but did give rise to embezzlement charges against the U.S. project director and some of his Egyptian counterparts; a housing project that consumed more than $100 million without producing a single new dwelling unit; a sewage project in Alexandria that dumped effluent on the city’s beaches; pumping stations along the length of the Nile that remained uncompleted years after the pumps had been delivered; and various other embarrassing debacles that received greater or lesser attention in the Egyptian and U.S. media.” Critics also claimed that inadequate donor funds were committed to industrial investment, that too small a contribution was made to building up Egypt’s productive capacity, and that the deluge of concessional funds enabled policymakers to take the soft option and to abstain from structural reforms that would have improved the efficiency of the Egyptian economy.
Supporters of foreign aid to Egypt retort that some U.S. aid might indeed have been wasted, but the cost of this to Egypt was minimal because much of the assistance was in the form of grants. But the main point of foreign-aid advocates was that their opponents’ principal argument rested on a demonstrably dubious assumption, namely, that the absence of aid resources would have compelled policymakers to restructure the economy. They point out that in the fifty years since 1965, the Egyptian economy had seen periods when the economy was under resource pressure (as for example in 1982–91 and 2000–2004), and in neither episode had policymakers shown any appetite for structural reform. The response to a curtailment of external inflows had been to turn to international capital markets, even if Egypt had to pay on hard commercial terms. For aid advocates, the experience of the last fifty years only nurtures the suspicion that smaller aid inflows would simply have triggered more commercial borrowing, not economic reforms.
The idea that Egypt’s investment pattern was significantly distorted because of the predilections of donors also gets short shrift from aid advocates. They argue that Egyptian policymakers are adults whose vocabulary includes the word “no.” Whether to accept or to reject aid for a particular activity, project, or sector was ultimately an Egyptian decision. Aid was actively pursued by Egypt, not thrust down the country’s resisting throat. At bottom, Egypt had to seek external assistance because the country had opted for a political-economy stance that privileged groups who favored consumption over savings and imports over exports.
Moreover, there is no necessary reason why total investment in the presence of foreign assistance should be less than in its absence, and there was nothing to prevent Egypt from using its own resources to support its priorities. If total investment from Egypt’s own resources plus the very substantial foreign assistance was still inadequate to meet Egypt’s aims, it raised questions about the vigor of the country’s efforts to mobilize domestic savings and the strength of the country’s desire to move toward economic independence. Over the period 1960–2016, the domestic savings rate averaged only about 13.5 percent of GDP, showing that in the preferences of policymakers, consumption counted for more than savings. Exports of goods and services over the period averaged about 21 percent of GDP, compared with 29 percent for imports of goods and services, making it clear that the groups benefiting from imports retained an ascendancy over those championing exports.
The basic issue of Egypt’s receiving foreign aid is not technical, but political-economic. As numerous analyses have reiterated, Egyptian regimes since 1952 have maintained an implicit compact with citizens: the regimes would provide a mixture of subsidies and other benefits (garnished with the threat of coercion), the citizens would remain politically dormant. With the population growing and wants expanding, the GDP had to keep increasing in order to sustain the compact. A shrinkage or severely reduced growth of the GDP could imperil the regime. Therefore, if Egypt could not finance the expansion with its own resources, then these had to be obtained from abroad, be it in the form of concessional assistance or of borrowing from capital markets on commercial terms.
The role of foreign aid in Egypt’s development merits a serious discussion drained, as far as possible, of ideological prejudices. Foreign aid—whether from the West or from the Soviet Union—permitted Egypt a wider range of options. It enabled consumption, investment, and imports to be higher and exports lower than they would have had to be in its absence, and supported a military buildup and an expansive foreign policy. Those who argue that foreign aid has been a toxin coursing through the veins of Egypt’s economy need to be explicit about the political-economy trade-offs. They need to address questions such as: What economic and/or political elements would or should the country have been prepared to give up in exchange for reduced dependence on external resources? Which groups would bear the cost, in terms of reduced consumption and higher taxes, for self-reliance? How far could the living standards of the people have been compressed and/or what elements of its foreign policies should the country have abandoned in order to live within its means?
The cheerleaders for external assistance are under an equal obligation to analyze the effectiveness of that assistance, to consider who were the main winners and losers from the availability of the additional resources, and to explain whether the price that Egypt had to pay in a political coin was adequately compensated by what it received in an economic one. A discussion of such matters could help policymakers and the voting public to pick their way through the thicket of political and economic issues that surrounds the question of economic growth and external dependence, and perhaps to reach some conclusions that could help to guide future policy in this area.
