The Political Economy of Reforms in Egypt. Khalid Ikram
region.13
Policies for dealing with the tragedy of the commons are well known. If the situation is one in which property rights can be assigned, they should be clarified and enforced. The owner of those rights will take steps to limit the usage of the resource at a sustainable level by imposing a suitable charge. In cases in which private ownership is not feasible, such as the Nile waters or the streets in which garbage is dumped or the air that is polluted by the emission of lead particles, an agent (such as the state) with the power to coerce users of the resource to pay an appropriate tax or fee would prevent the overutilization of the resource. The proceeds of the tax or fee would also provide finance for investing in maintaining or expanding the resource, which the private user of a public resource has no incentive to do. No such policy has been enforced. It is a measure of the political strength of groups engaged in the degradation of the Egyptian environment that they are permitted to inflict major health and economic damage with impunity.
The Costs and Benefits of Policy Reforms
Attempts have been made to estimate the costs and benefits of policy reform. In view of the difficulty of controlling for all factors that are involved, conclusions cannot be definitive. Moreover, the estimates relate only to economic, and not to political, costs. Even where economic costs are concerned, estimates of the costs and benefits of reform policies undertaken simultaneously in several parts of the economy are more difficult to compute and will be less secure than measures for particular sectors. It might, therefore, be useful to examine some results for more restricted areas of the economy.
The sector that has received the greatest amount of attention regarding the costs and benefits of reform policies is that of external trade—in particular, the benefits and the adjustment costs likely to result from trade liberalization.14 These investigations looked at this problem from a number of angles—the trade sector as a whole, economy-wide levels of employment, the percentage of the labor force that might have to change occupations as a result of the reforms, the impact on particular industries,15 the costs of capital equipment becoming idle during the adjustment period, and so on.
Since the methodologies used differ from study to study, the estimates span a very wide range. Depending upon the assumptions—concerning, inter alia, the number of jobs lost compared with the normal amount of job turnover in the economy, the length of unemployment, the cost of capital idled by the reforms during the period of adjustment, the discount rate used to compute present values of costs and benefits—the benefit–cost ratios range from 1.3 for iron and steel (Mutti 1978) to 153 for footwear (Takacs and Winters 1991). Matusz and Tarr sum up their review of the studies as follows:
In studies where such comparisons are possible, it seems to be the case that each dollar of adjustment cost is associated with several dollars’ worth of efficiency gains. . . . [A]djustment costs are the largest in the period immediately after the implementation of reforms, disappearing after a period of one to five years. By contrast, the efficiency gains of liberalization grow over time and continue indefinitely. (Matusz and Tarr 2000, 381–82)
However, given that with only a minor tweaking of the assumptions, Matusz and Tarr (2000, 381n21) can raise the Takacs and Winters benefit–cost ratio to 2193 (!) suggests that some estimates can be far from robust, and that their acceptance should be garnished with the proverbial pinch of salt.
If the effects of policy reforms are generally positive, why have so many countries, including Egypt, been reluctant to embrace them wholeheartedly? Banerjee (2000, 58) provides the best response: “Reforms necessarily involve cobbling together a package that is only part economics. . . . The rest of it is part institutional design, part public relations, part rhetoric. A successful reform involves coming up with the right combination of all these things in the context of the particular country.”
Given the diversity of political, social, economic, and institutional conditions between countries, it would be futile to search for an unequivocal, universal answer. The empirical literature does, however, suggest some recurring issues that impact on policymakers’ decisions.
Four issues appear to be the most critical.
1. Disjunction between the timing of the costs and the benefits from reform. Most of the cost of adjustment will have to be borne immediately, while the benefits could take perhaps two years or even more to make their full appearance. As Rodrik (1996, 10) reminds us, “Good economics does often turn out to be good politics, but only eventually.” Rodrik later argues that the data do not consistently show a significant lag between the adoption of the reform and the benefits flowing from it. However, his use of the word “eventually” would suggest that there is in fact a sort of J-curve effect—that is, that conditions first deteriorate and travel down the bowl of the J, before improving and moving up along the stem of the letter.
This pattern is confirmed by other studies. Masera (1974), in a detailed analysis of the 1967 devaluation of the pound sterling, estimated that it took eighteen to twenty-four months for the current account to move into balance. Williamson (1983, 154) reports that the evidence shows that while trade may respond within months to changes in income, reasonably complete adjustment to price changes may take three years or so. The study by Matusz and Tarr quoted earlier (2000) also pointed out that adjustment costs would be largest immediately following the reforms and could take one to five years to disappear. Some calculations by the World Bank on Egypt’s experience with exchange-rate depreciation indicated that it took at least eighteen months for a significant response by non-oil manufactured exports. However, the cost of imports would increase as soon as the currency was devalued and could have a serious impact on prices and consumer subsidies (the latter in Egypt have at times amounted to more than 20 percent of budgetary expenditures).
The inevitable time gap between suffering the costs and enjoying the benefits of the reforms can play havoc with ministerial futures. The rapid turnover of economic ministers, particularly evident during the days of President Sadat, reinforced the tendency for caution. One can hardly blame ministers for not wanting to submit themselves to immediate criticism for the sake of some uncertain felicity in the future when the evidence pointed to a rather short ministerial shelf life. Between 1973 and 1980 there were seven changes of finance ministers, seven of planning ministers, five of ministers of economy, and four of ministers of international trade.16
Wagih Shindy (deputy minister of economy and subsequently minister of tourism) summed up the quandary. He said that ministers knew what they had to do; what they did not know was how to be retained as ministers once they had done it. They would have to carry the burden for the immediate consequences of reform policies, even if the short-term consequences had been foreseen to be inevitable and all the evidence indicated that the reforms would bring substantial benefits down the road.
This is more likely to be the case in an authoritarian presidential system, under which the ministers are generally technicians and do not bring a political “dowry” for the regime. Hamed al-Sayeh, a minister of economy, said that ministers under President Sadat knew that they were, politically speaking, cannon fodder and easily disposable if policies turned out to be unpopular even if only in the short run. Weiss (1993, 66) noted that “a series of ministers was replaced every six months on average, and prime ministers changed almost annually.” The matter was somewhat better, but perhaps not by very much, under Nasser. Thus, McDermott (1988, 103–104) remarked that Nasser in eighteen years formed eighteen cabinets with 131 different individuals, but under Sadat the ministerial merry-go-round became dizzying—in seven years he had eleven cabinets with a turnover of 127 members. “Ministers tended to last half as long under Sadat as they did in Nasser’s time, and in the economic portfolios, the changes verged on the hysterical.” With the cabinet merry-go-round spinning at this speed, ministers could barely begin to grasp the details of their portfolios before they were ejected from office, and while occupying it could at best do little more than execute variations on existing policies rather than prepare well-considered ones to initiate.