The Political Economy of Reforms in Egypt

Issues and Policymaking since 1952

Khalid Ikram

• Publisher: The American University in Cairo Press
• Year: 2018
• ISBN:
  9781617978661
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

An indispensable study of the Egyptian economy from 1952 to the present day, new in paperback What are the long-term structural features of the Egyptian economy? What are the factors that have facilitated or inhibited its performance? This crucial and timely work answers these questions and more by examining the most important economic decisions to have impacted the Egyptian economy since 1952 and the political factors behind them. Drawing on Khalid Ikram's extensive knowledge of economic policymaking at the highest levels, The Political Economy of Reforms in Egypt, 1952-2016 lays out the enduring features of the Egyptian economy and its performance since 1952 before presenting an account of policy-making, growth and structural change under the country's successive presidents to the present day. Topics covered include agrarian reforms; the Aswan High Dam; the move towards Arab socialism and a planned economy; the reversal of strategy and the infitah; fiscal, monetary, and exchange-rate policies; consumer subsidies; external debt crises; negotiations between Egypt and international donors and financial institutions; privatization; labor and employment; and poverty and income distribution. The analysis concludes with an examination of institutional reforms and development strategies to tackle the Egyptian economy's structural problems and lay the foundation for sustained and rapid growth. Written from the point of view of a 'participant-observer, ' this book will be indispensable to students of political economy, to scholars of Egypt and the Middle East, and to the general reader who wishes to understand, especially from the wealth of insider information provided, how domestic and international politics and economics can interact to shape decisions that promote, or prevent, economic reforms.

1

The 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

Military and Economic Crises

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...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright
• Dedication
• Contents
• List of Figures and Tables
• Preface
• Acknowledgments
• Abbreviations
• Introduction
• 1   The Political Economy of Reform: A Survey with Special Reference to Egypt
• 2   Challenges and Performance, 1952–
• 3   The Population and Related Issues
• 4    Political Economy in the Nasser Period, 1952–
• 5   Political Economy in the Sadat Period, 1970–
• 6   Political Economy in the Mubarak Period, 1981–
• 7   After Mubarak, 2011–
• 8   The Task Ahead
• Annex
• Notes
• References