The Political Economy of Reforms in Egypt. Khalid Ikram
The argument that the econometric exercises make is straightforward: If the public sector were to reduce its excess labor, the savings could be invested, which in turn would raise the GDP growth rate and create productive employment of numbers that would substantially exceed those that the public sector had eliminated. The country as a whole would benefit.
Why, then, is the government loath to take this seemingly straightforward and socially beneficial measure?
The political-economy answer lies to a considerable extent in the “insider–outsider” problem. The point is that although the number of jobs created would outweigh those abolished, those fired and those hired would be different persons. Those who stood to be fired would be “insiders,” those already employed and whose positions were protected by laws and by the costs of labor turnover (such as advertising the jobs, screening applicants, training the new hires, and so on). The “outsiders” would be those who were working in the informal sector of the economy or were unemployed; in either case they would not enjoy the protection that the insiders did.
Public enterprises would be discouraged from firing workers because of the legal costs involved in separation and because of the costs involved in training their replacements. Lindbeck and Snower (2002) discuss some other reasons that might also discourage this replacement of workers. They point out that, for example, insiders who have been working together for some time are known to form groups or factions and cooperate with each other in the production process and thereby raise each other’s productivity, but could threaten not to cooperate with newcomers and thereby reduce overall productivity and increase costs. Moreover, Egypt’s stringent legal protection against dismissals (and a drawn-out legal process in case it occurs) makes the costs of firing an insider significantly higher. Furthermore, insiders are generally unionized and thus able to exert a degree of political power; outsiders of course would be unable to do the same.
Finally, uncertainty about the shape of the post-reform environment plays an important role in the resistance of the insiders to economic reform, including those who are in no danger of immediate dismissal. Once a long-lasting, not to say sclerotic, structure of public-sector employment is threatened by the possibility of a reform policy being introduced, a great deal of uncertainty is created as to whether the initial reform is only the thin edge of a process that will keep on being repeated in the future. The IFIs’ studies underpinning the 1991 reforms contain references to workers asking whether the tradition of stable public-sector employment was to be abandoned. There was much concern about the terms of the employment of the retained workers and of the size of the compensation package of those deemed redundant, because workers wanted to be compensated for the loss of the value of their (sure) position in the pre-reform situation, for the loss of what the literature calls their situation rents.
For all the foregoing reasons, the Egyptian government proceeds cautiously in dealing with questions of labor in the public sector. Its most successful episode of reducing jobs in public enterprises (it did not touch the general bureaucracy) occurred in the second half of the 1990s and for about five years in the early 2000s under an agreement with the IMF and the World Bank. An important part of the arrangements was the provision of a “golden handshake” equivalent to three years’ compensation to workers taking early retirement, and the creation of the Social Fund for Development that paid for retraining workers and provided funds for micro- and small-business startups to which the exiting workers (and others) had access. The IMF (1998, 53) pointed out that the elimination of these jobs in public enterprises was possible because the low wages and benefits paid in the public sector made the retirement packages affordable.
Apart from the overstaffing issue with public enterprises, there are substantial labor problems even with private enterprises. The legal protection against dismissals is, in practice, quite rigid not only for the public sector but also for the private. Background papers for the World Bank’s studies on private-sector development described repeated complaints by businessmen of how difficult it was to dismiss unproductive and even dishonest workers. They also described some ingenious methods that businesses had developed in order to circumvent these rules. The most popular techniques were hiring on temporary contracts, or obtaining signed but undated letters of resignation from workers at the time of hiring; these were then dated and presented to the authorities should the worker have to be dismissed.
However, such methods impose costs on the worker, on society, and on the employer. The temporary worker does not get all the benefits (such as a pension) that a permanent one would. These and other handicaps push an increasing number of workers into the informal labor market, in which wages are lower and benefits nonexistent. The informalization of employment imposes a cost on society; for example, the exchequer loses the revenue that it would have collected from formal enterprises. Costs are also imposed on employers. Businessmen who made use of the undated resignation letters reported in World Bank questionnaires that they had to bribe local authorities or representatives of the Ministry of Labor to accept the letter without delving too deeply into its background. Getting around the rigidity of the market thus creates transactions costs that hurt the interests of all the parties involved.
Political Economy and Dictatorships
The question whether a democratic or an authoritarian regime is more conducive for economic growth has been widely debated but has received no clear answer. The difficulty is that a priori arguments can go both ways. Thus, for example, a democratic regime may be said to be better for growth because it is buttressed by institutions that provide greater security for property rights, and hence better incentives for investment and innovation, that are the engines of growth. On the other hand, as Przeworski and Limongi (1993) show, it has also been argued that universal voting rights bestow power on groups that have little or no property. The acquisition of the franchise by such groups could shift the balance of political power toward them and enable them to overturn property rights in order to extract resources from the economically more successful. Thus, the enlargement of the franchise to a universal or very wide one would wither the latter group’s incentive to commit to long-term investment.
Similarly, it has been argued that an authoritarian regime is better able to disregard immediate pressures for redistribution and focus on investment and growth. However, as Olson (1991) and Drazen (2000) point out, dictators’ commitment to future policies must be viewed with skepticism—if there are no limits on the ruler’s power, there is no way of holding him to any commitments he makes. And North and Weingast (1989) stress that the risk that the autocrat will subvert property rights for the benefit of himself or his allies will lower the expected returns from investment and reduce the incentive to invest. Investment entails long-term risks, and the incentive to invest thus requires the investor to be confident of the regime’s long-term commitment to rights. More elaborate discussion of this subject will be found in Przeworski and Limongi (1993), Sirowy and Inkeles (1990), and Drazen (2000, 488–501).
Economic policymaking under authoritarian governments or dictatorships is an important subject for Egypt, because the country has been under such regimes almost continuously since 1952. However, the political-economy literature on dictatorships is limited and is generally concerned with discussions of whether dictatorship or democracy is better for economic growth.
Dictatorships are a very mixed group, and this heterogeneity makes it difficult to generalize. Moreover, being overthrown in a dictatorship is likely to involve much more severe consequences than in a democracy; it cannot be shrugged off as just a bad day at the office. Regime change would not only eliminate the dictator’s office, but also jeopardize his liberty and possibly his life and limbs. Similar risks to his family and associates are not negligible. Regime survival in a dictatorship, therefore, is a much more compelling instinct and will suffuse the government’s assessment of any reform proposal.
Alesina (1992) reports that, empirically, one cannot distinguish between the average growth performance of democratic and authoritarian regimes. He makes a distinction between “strong” and “weak” dictators. The former are those whose survival is not seriously threatened. However, this group itself is heterogeneous. Some “strong” dictators or authoritarians—such as Chung-Hee Park of South Korea—put economic development at the forefront of their agenda; others (for example,