The Political Economy of Reforms in Egypt. Khalid Ikram
and the benefits of their superior culture to the Middle East’s new powerhouses. Egypt’s stock of ‘soft power’ was rapidly waning.
The Political Economy of External Assistance
Since so much of modern Egypt’s development has been associated with external aid inflows, it is worthwhile to examine some of the key political-economy discussions that Egyptian policymakers and external donors engaged in concerning this issue.
The economic case for seeking external assistance is straightforward. A country requires a certain rate of investment in order to raise its GDP growth to the targeted level. It may also want technical assistance to upgrade its institutions or stock of human capital. The country is unable to finance these requirements from its own savings, and it may be unable to afford or to access international financial markets. It therefore seeks foreign savings on concessional terms to fill the gap between the required investment rate and the domestic savings rate. The foregoing is the general justification for project assistance. In addition, the recipient country may generate insufficient domestic revenues and thus have a deficit in the budget. The country may therefore seek program assistance, which, in the simplest case, consists of receiving commodities from a donor on grant terms and which the recipient sells in its home market at the market price and thereby acquires the required domestic resources for its budget.28 The recipient may also have a shortfall on its balance of payments for which it requires foreign exchange; this may be provided by a bilateral donor (generally the Arab Gulf countries in Egypt’s case) or the International Monetary Fund.
This simple story, however, can mask a variety of political and economic intentions. The recipient may want resources purely in order to develop the country; or its interests may be narrower and may have more to do with securing the longevity of the regime. An associated motive is to obtain these resources without burdening the regime’s constituencies with additional taxes so as to retain the loyalty of these constituents. The bilateral donors’ motives are equally diverse: they may be altruistic in wanting to help countries that are less fortunate than their own; they may be commercial in wanting to capture a market for their exports; but most bilateral aid is likely to be provided for strategic purposes, that is, in order to acquire political influence in the recipient countries. Multilateral institutions may wish to increase their disbursements in order to maintain their relevance in the global order and thus to persuade their shareholders to finance an enlargement of their capital base.
The multitude of aims on both sides can make for a very complex mix of politics and economics. Moreover, while donor and recipient objectives may coincide on many points regarding aid, they may also diverge on several important issues. Thus, as an example, aid may fail to boost the recipient’s GDP growth rate or reduce poverty in that country, and yet be counted a success by the donor if the purpose of the aid was to purchase strategic influence.29
In Egypt’s case, if one takes as given that policymakers regard the offer of more aid as preferable to that of less, five issues recurred with sufficient frequency to warrant serious discussions in cabinet and with international agencies and bilateral donors.
The first was the composition of aid between project and program components. Egypt argued for a larger proportion of program assistance in the mix, for three reasons.
1. It is disbursed much more quickly. The World Bank estimated that typically between 50 and 100 percent of amounts committed as program assistance is disbursed in the twelve months following commitment, compared with only 3–5 percent for project assistance.
2. It called for much less intrusion by donors compared with project aid. The latter required an extensive process of project identification, feasibility studies, reviews, and lengthy contracting procedures, to be followed by supervision missions at least once or twice a year. The process not only consumed a good deal of time, but also grated politically on the Egyptians. The resentment was focused largely on assistance from the United States, which was not only the largest single donor but also, as Weinbaum (1986, 102) noted, because of the “comparison between the supervision of U.S.-sponsored projects in Egypt and U.S. economic assistance to Israel that is delivered without an AID [later known as USAID] mission.”
3. It enabled existing manufacturing and other capacity to be utilized more fully by providing the necessary raw materials. It also increased the Egyptian government’s ability to generate domestic resources by selling to the private sector some of the commodities imported under program aid. This was an important benefit. The Egyptian budget was chronically short of resources, and projects were held up because donors tended to finance only the foreign-exchange component (which on average accounted for about 30 percent of a project’s cost), leaving Egypt to provide the domestic currency portion of about 70 percent. Speaking of Egyptian ministries and agencies, in late 1976 Mahmoud al-Imam, minister of planning, expressed his problem as, “They bring me a button from abroad and expect me to provide a coat to sew it onto.”
The second area that gave rise to concern among policymakers was the costs of aid tying. Studies pioneered by Mahbub ul-Haq (1967) and Bhagwati (1967) had shown that commodities obtained under conditions in which the procurement was tied to the donor country typically tended to be priced higher than international prices. Some of the price differences obviously resulted from the use of what was effectively monopoly power by the donor. A few resulted from what might well be viewed as rather dubious practices. Haq gives an instance of a subsidiary firm in country A obtaining air compressors from its parent company in country B, marking them up by 30 percent, and including the higher-priced item as part of the aid package from country A.
The Egyptian government examined the question of aid tying in detail in 1979, after two meetings of the Consultative Group had greatly increased the number of donors, the offers of assistance, and multiplied the range of terms on which the assistance was offered. Let me paraphrase the findings of a rather discursive study for the cabinet on this subject. The study concentrated on assistance from the United States, since that country was by far the biggest provider of economic assistance to Egypt. The paper found that many items procured from the United States were priced 30–50 percent higher, and at times even more, than if purchased in the international market. However, a closer look at the facts would exonerate the United States from deliberately following a predatory pricing policy for items financed under aid. The price differences resulted chiefly from a mismatch between the items that Egypt wanted and the areas in which the United States was an efficient producer.
The United States was most efficient at producing what one might call the most “modern” items; studies showed that the more technologically advanced the product, the more efficient was the United States in producing it. Thus, the United States was more efficient at producing bicycles than donkey carts, motorcycles than bicycles, motor cars than motorcycles, jet planes than motorcars, and so on all the way to, say, space rockets and satellites compared with jet aircraft. The problem was that most of the commodities that Egypt required lay closer to the donkey-cart than to the space-rocket-and-satellite end of the technological spectrum. It was unfortunate that, to quote Weinbaum (1986, 51), “U.S. aid programs normally stipulate that concessional financing be tied to U.S.-made products, regardless of more competitive prices elsewhere and irrespective of Egypt’s ability to produce the same items.” The effect was that the real value of aid in terms of purchasing power could be substantially less than the nominal value. Moreover, while Egypt might in real terms receive only 50–70 percent of the nominal value, the country had to repay 100 percent of the non-grant element in the aid package.
The government of course wanted to mitigate the effects of aid-tying, and the paper drew on work by UNCTAD to offer some proposals. It recommended that Egypt negotiate with the principal aid donors to accept some or all of the following suggestions.
1. In cases where the tied nature of credits raised the prices of imported commodities and equipment above their international prices by some specified figure, donor countries should write down the credit to the extent of the difference between the international prices and the domestic price, and treat this part as