The Political Economy of Reforms in Egypt. Khalid Ikram
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