The Political Economy of Reforms in Egypt. Khalid Ikram
size and design of the compensation package, the speed with which it can be delivered, and, most importantly, credibility that the government will actually implement the package are crucial to passing a successful reform over the resistance of opposing coalitions.
4. The perception that the burden of reform policies is shared equitably. The literature points out that austerity is almost invariably an initial outcome of major reform policies. It also emphasizes that austerity is likely to be accepted by the population and reform policies supported if there is a clear perception that this burden is equitably shared (see, for example, the earlier discussion of “Rogernomics” (see page 31).
A necessary implication of this finding is that reform policy must be rigorously evidence-based. Facts have a way of getting their revenge. Overall growth may look robust and average (per capita) incomes apparently growing, but the averages may conceal substantial pockets of people and regions that have been left behind. The Gini index and other measures of income distribution have to be scrutinized carefully in order to ensure that they are not systematically affected by influences that cause the indices to show spuriously equitable outcomes. Such an effect may have been a factor in Egypt, as pointed out by the World Bank (2015b). The report argued that the Gini index might have been truncated at both ends—with high-income groups underreporting their consumption and income in order to avoid attracting the attention of tax authorities, and low-income groups underreported because survey enumerators found it difficult to access poor neighborhoods (for reasons mentioned in chapter 8 of this book). It is also clear that Upper Egypt, especially its rural areas, has benefited much less than the rest of the country from the development process (World Bank 2009). Thus, although aggregate growth and average incomes in Egypt were rising much faster from 2005 until 2008 (when the international financial crisis occurred) than in the decade before, a widespread perception that the fruits of growth were largely captured by the richer classes connected with the political regime (see the discussion of crony capitalism in chapter 8) proved toxic to reform efforts and, indeed, fatal to the political regime.
The “Insider–Outsider” Conundrum
For much of the period after the nationalizations of 1961, almost one-third of Egypt’s labor force was employed by the public sector (excluding the armed forces). In 2015 the compensation paid to government employees consumed 35 percent of budgetary revenues and accounted for 8 percent of GDP. The aggregate burden on revenues of salaries, pensions, and bonuses is thus very heavy. Moreover, numerous studies have shown that virtually every public-sector organization suffers from overstaffing and that many of their employees are simply involved in “make-work” activities.
A few examples might help convey a flavor of this problem. I have already quoted the Ministry of the Public Enterprise Sector’s estimate that in 1996 (before the Egyptian authorities had agreed to a restructuring of the public enterprise labor force under an IMF/World Bank program), almost one-third of the more than 900,000 workers employed in public-sector enterprises were redundant. Earlier, Waterbury (1983, 246) quoted an official report on overstaffing which noted that in 1975 the Ministry of Human Resources asked the Ministry of Agriculture for the number of graduates that it would need in the following year. The answer was 261 university graduates and 495 with secondary agricultural diplomas. Facing this demand was a supply of eight thousand graduates of agriculture faculties and higher institutes, and eleven thousand holders of agricultural secondary school diplomas. One can only guess at the frustration suffered by graduates who were unsuccessful in getting one of the advertised jobs, and also by those who were forced by circumstances to accept jobs the requirements of which fell well below the graduate’s qualifications.
The problem is durable. Nearly a quarter of a century after the incident described by Waterbury, a headline in the Egyptian Mail (December 5, 1998, p. 2) blared that “3 Million Employees Get Paid for Doing Nothing.” The report quoted the state minister of administrative development complaining that “there are 5 million [public] employees in Egypt, but there are only 2 million jobs. It means that 3 million employees are doing nothing, not to mention that they can slow down the progress of the work.” He urged the country to stop appointing ten persons where there was work only for one. As yet another instance, Galal (2002) reported a government announcement of the availability of 170,000 jobs being confronted by a tsunami of more than 5 million applications.
The Egyptian bureaucracy has shown itself to be a powerful group that will strongly resist attempts at reform. In part, the strength derives from its sheer size—the civil service expanded from 350,000 in 1952 to 6.37 million employees in 2014 (excluding military personnel); this works out at one civil servant for every thirteen Egyptians (World Bank 2015, 16n28).
The size, growth, and structure of the bureaucracy has attracted a good deal of unfavorable comment. Thus, for example, McDermott (1988, 122–24) described the bureaucracy and its growth as “a deadly combination of Ottoman complexities, Eastern European inflexible committee rule, a touch here and there of British and French secretive intrigue, and Egyptian indiscipline. . . . Nasser may have purged the state apparatus, but he basically did not restructure it. It could be said that the revolution… bypassed the civil servants almost as much as it did the fellah.”
The crux of the problem was that governments tended to make the bureaucracy and the public enterprise sector perform a social welfare function, namely, to act as repositories for the rapidly growing labor force. Budgetary constraints meant that the numbers involved could only be accommodated at appallingly low salaries, made even worse by price inflation. Handoussa and El Oraby (2004, tables 3 and 4) reported, for example, that the top of the salary for the highest grade (First Undersecretary) increased by only 30 percent in nominal terms between 1964 and 1999, a period of 35 years.18 Similarly, in 1964 prices, the salary range for Grade 6 (the lowest grade after 1978) dropped to LE11.86–21.01 in 1999 from LE330–600 in 1964.
The low salaries sap morale and encourage civil servants to work (illegally) at two or more jobs. The numbers involved can be daunting. Palmer et al. (1988, 61–2) reported that 89 percent of the respondents in their survey admitted to holding such second jobs and defended it as an economic necessity. Moreover, 84 percent of those respondents holding second jobs said that they spent between three to five hours a day (that is, half a normal working day) on this supplemental job. Ayubi (1980, 507) points out that government officials were not technically ignorant of how to do a job; they were simply not socially motivated as to why they should do it. Matters change when the pay increases. “The same ministry employees who sit idly most of the days,” writes Weinbaum (1986, 115), “are examples of industriousness in hustling to make extra cash once off the [government] job.”
The employment issue poses a delicate political-economy conundrum—the creation of large numbers of essentially artificial jobs at low salaries works against the government’s aim of mobilizing sufficient savings to invest in accelerating GDP growth that would create sufficient numbers of more meaningful jobs. However, there are time lags between mobilizing the savings and investment and achieving the output and sustainable job growth, and the political-economy of successive regimes gave priority to the short-term.19
Government attempts to increase flexibility and to improve efficiency have not gained much traction. Thus, for example, in 2005 the government attempted to make it easier to hire temporary contract employees and to discipline poor performers. However, the vehement opposition of civil servants and public employee unions compelled the government to withdraw the proposed amendments to the civil service legislation.
The question of labor in the public sector has attracted particular attention. Measures to shed the excess labor in public enterprises form part of the conditions attached to virtually every IMF program or World Bank policy loan, while measures to make labor markets more flexible are the subject of numerous discussions between donors and the Egyptian authorities. Simulations are run and spreadsheets flourished, all purporting to show large benefits to the economy of “resizing” or “rightsizing” (other euphemisms for firing