The Political Economy of Reforms in Egypt. Khalid Ikram
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