The Political Economy of Reforms in Egypt. Khalid Ikram
some examples from different sectors.
For long periods Egypt’s exchange rate was overvalued. A devaluation would provide an incentive to stimulate exports, increase tourism, and redirect workers’ remittances from unofficial to official channels. All these would add foreign exchange, which has remained a key bottleneck to the country’s development. The higher exports would also increase domestic savings while the greater availability of foreign exchange would require less foreign borrowing, which has compromised Egypt’s sovereignty several times during the last 150 years. The social benefits therefore were evident. However, the overvalued exchange rate benefited importers, while the subsidies effectively increased the disposable incomes of consumers. The private benefits therefore were also obvious. The fact that Egypt maintained an overvalued exchange rate for long periods showed that the interest groups favoring imports and consumption retained a dominance over those that favored exports, savings, and investment, even though the benefits to the country would have been more aligned with the interests of the latter group.
The resistance by particular factions to protect their interests can make governments go through various contortions to make a policy package look like a reform, even when it does not alter the underlying reality. Krueger (1992, 80) describes the Egyptian reform program of 1962, in which the country sought emergency support from the IMF. As a condition of obtaining the funds, Egypt had to devalue its exchange rate by about 25 percent. However, “the authorities managed to remove a sufficient number of surcharges on imports and subsidies for exports so that almost no exporters or importers were receiving or paying more than 3 percent more local currency per unit of foreign exchange than they had earlier.” The status quo was effectively protected. Indeed, Hansen and Nashashibi (1975, 90), whose data provide the basis for Krueger’s calculations, say quite bluntly, “There is little doubt that the government, despite its commitments to the IMF, had no intention whatever to cut down domestic demand”; which continued to expand vigorously.
A further example is provided by policies that discriminate between Egypt’s small and large enterprises. The small, and usually informal, firms account for 95 percent of the country’s enterprises, but they lack the political access and the privileged entrée to policymakers that is accorded to the large firms. It is thus not surprising that trade, labor, locational, energy, competition, and other policies are devised primarily with an eye to benefiting the large firms. The effect of these policies is to artificially reduce the cost of, and thus to encourage the use of, capital- and energy-intensive methods of production, even though these are not aligned with the country’s resource endowment or its comparative advantage. Concern for the private profitability of the politically influential 5 percent of the total number of firms trumps the social profitability of increasing labor-intensive production and creating jobs by facilitating the activities of the other 95 percent. The discussion in chapter 6 of crony capitalism illustrates the effects of this differential treatment on the country’s employment and potential GDP growth.
Another long-standing example of private profitability outweighing social profitability is shown by the country’s cropping pattern. The United Nations Food and Agriculture Organization (1999, 32–34) concluded that the cultivation of sugarcane was profitable for private farmers because they did not have to pay for water, but the resulting distortion of incentives encouraged the planting of sugarcane and imposed a substantial economic loss on the country. This occurred because, first, Egypt was not an efficient producer of sugar, and thus could not export it at international prices, but in many areas sugarcane competed for land with other crops, such as cotton, in which the country was internationally competitive. Second, water was the most binding constraint on Egyptian agriculture, and sugarcane is a very water-intensive crop; thus, the encouragement of sugarcane production led to a less than optimal use of the country’s most valuable agricultural resource. Third, sugarcane is a year-round crop and the land is thus not available for double-cropping, so the country has to forgo the benefits of the displaced crop.
However, the government remained wary of upsetting the agricultural coalition. In discussions on agricultural strategy with the United Nations Food and Agriculture Organization (FAO), the government stonewalled any attempt to discuss water pricing. The FAO reported that the government’s position remained that the kingdoms of Upper and Lower Egypt had been united under King Narmer (circa 3000 bce) in order to better manage the waters of the Nile. Since that time, the farmer had not paid directly for the use of water. Any attempt to change the situation could be seen as striking at the basis of the country’s foundation with unpredictable, and possibly dire, political consequences. The incentive system therefore remained tilted in favor of growing a water-intensive crop, such as sugarcane, that was profitable for the private farmer even though it entailed a loss for society as a whole. The origins of some political-economy issues in Egypt can go back quite far!
The agricultural lobby also resisted paying for drainage. A cardinal fact of economics is that “there is no free lunch.” The costs of constructing and maintaining the vast irrigation and drainage infrastructure were thus pushed onto groups that were less powerful than the agricultural coalition. The foregoing examples reiterate a general political-economy truth: some powerful political forces will fight to preserve their private benefits (in the shape of economic rents) that arise from an inefficient allocation of resources, regardless of the cost to society.
3. Differential impact of reforms between sectors and between individuals. The empirical investigations show very wide differences in the benefit–cost ratios for different sectors. Many of these studies found that even if the countrywide benefit–cost ratio was impressive, the costs (especially declines in unemployment) tended to be concentrated among a few industries. If the worst-affected sectors are politically important (for example, if they are large employers of labor or have strategic value), policymakers will not pay too much attention to overall benefit–cost estimates but seek to protect these sectors by abstaining from or slowing down reforms.
Private adjustment costs, such as the dislocation of workers, also differ between groups of workers. The private losses borne by workers depend on individual characteristics, such as their skills and experience. Workers with the training or experience required by the market are likely to find another job relatively quickly. However, workers not so endowed may continue to swell the ranks of the unemployed for long periods. Thus, even if the social benefit–cost ratio is very favorable, the private costs borne by a dislocated worker may amount to a significant fraction of his or her lifetime earnings.
Studies that focus on countrywide estimates of benefits and costs tend to ignore or downplay the distributional impact of reform policies on individuals. Academics in ivory towers (and their international advisors) can make an intellectually rigorous case for reform measures on the basis of the benefits that would accrue to the country as a whole; political representatives who will bear the wrath of their unemployed constituents will feel the pressure to tread more circumspectly. This can be seen, for example, in the manner that the Egyptian government handled the privatization program of the 1990s.
Studies had repeatedly shown that public enterprises suffered from massive overstaffing. The Public Enterprise Office estimated employment in public enterprises in 1993 at just over one million. Khattab (1999, 12–13) reported that before the main restructuring began in 1996, public enterprises employed 932,404 workers, and that the Ministry of the Public Enterprise Sector estimated that about 300,000 of them were redundant. It was unlikely that private investors would rush to purchase public enterprises in which one-third of the workers were unnecessary. The excess labor would have to be shed. Mindful of the political danger of antagonizing labor, the government undertook reforms in the public enterprise sector only after donor governments and international institutions put together a substantial financial package to cushion the impact of the job losses. The government’s measures (such as early retirement, not replacing workers lost through normal attrition, and so on) succeeded in reducing employment in public enterprise to less than 600,000 by the middle of 2000, and to about 400,000 by 2009, when the privatization program was frozen.
The crucial ingredient making the reduction politically possible was that donors offered substantial resources to support compensatory measures that would mitigate the dislocation. Distributional issues—who will benefit and who will lose—are at the core of groups’