The Political Economy of Reforms in Egypt. Khalid Ikram
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