The Political Economy of Reforms in Egypt. Khalid Ikram
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