‘A Search for Band-Aids’: Economic Reform in Egypt

In his recent book The Political Economy of Reforms in Egypt: Issues and Policymaking Since 1952, Khalid Ikram has done a rare thing: written a book about economics for the general public that is easy, useful and pleasant to read.

As Ikram briskly explains, Egypt faces a longstanding problem that is a combination of demographics and geography: a huge and growing population that lives on a limited stretch of productive land with a finite amount of water. As Ikram puts it, every two years Egypt adds a New Zealand or an Ireland to its population (around four million people); every five years, a Sweden or Portugal (nearly ten million).

Egypt needs its gross domestic product to grow vigorously, to create jobs for the 700,000 people who enter the work force every year. But its economy is characterized by low productivity—the modest increases in GDP come overwhelmingly from increases in labor and capital, not in efficiency or productivity.

Ikram’s book, published this year by the American University in Cairo Press, is a clear and engaging overview of the economic policies and reforms adopted by successive Egyptian regimes, and the effects they have had. It asks why reforms—which almost everyone agrees are necessary–have been entered upon so slowly, haltingly and unsuccessfully. One of the answers, he argues, is that policies are often also fulfilling social and political goals that are in contradiction with economic objectives.

Ikram is a former director of the World Bank’s Egypt department and has served as a consultant for a number of international development banks and agencies, but he is not a free-market ideologue and his analysis struck me as even-handed. His definition of what economic policy, at its most fundamental, should accomplish is “to provide a better life for the country’s citizens and to make it less vulnerable to outside pressures.”

What has stalled necessary reforms in Egypt? For one thing, the resistance of entrenched interests. “Some powerful political forces,” writes Ikram, “will fight to preserve their private benefits that arise from inefficient allocation of resources, regardless of the cost to society.”

For example, small and often informal companies account for 95 percent of Egypt’s enterprises. Yet policies regulating trade, labor, energy, and competition have been devised to favor large companies. Ikram cites a study showing that politically connected firms have profits 13 times higher than those of similar, non-connected firms—due almost entirely to energy subsidies and to preferential tariff measures. Owners of large businesses who owe their wealth to good relations with an autocratic regime have little incentive to support democracy.

The other defining aspect of the Egyptian economy, according to Ikram (and many others whom he cites), is that Egyptian regimes, lacking the legitimacy of democratic elections, have bought popularity—or at least acquiescence—through a wide array of subsidies and by keeping taxes low. Economic policy has been deployed, first and foremost, to ensure regime survival.

Employment in the state bureaucracy has also been used as a subsidy of sorts. In 2016, after the public sector had been shrinking for some time, there was still one government employee per 13 citizens (and this figure excludes the army). This bureaucracy, whose employees work semi-artificial jobs with low salaries and often have second jobs elsewhere, is also deeply resistant to change.

Since Egyptian governments have rarely wanted to impose painful reforms, they have most often made ends meet by relying on foreign debt, rent and aid—and on sudden windfalls, such as the major debt forgiveness Egypt was granted in 1991 by Western powers and international financial institutions after it supported the U.S.-led anti-Iraq coalition in the First Gulf War.

Yet foreign debt has damaged Egypt’s sovereignty, and foreign aid (and the strings attached to it) has proven contentious. It is also not clear whether it has encouraged reforms or actually created repeated opportunities to put them off.

Economic policy-making in Egypt has consisted largely in “a continual search for Band-Aids,” writes Ikram. And ever since the 1977 bread riots (in response to an International Monetary Fund package that required cuts to subsidies and thus an increase in the price of bread), Egyptian authorities have been extremely wary of igniting popular discontent and have argued for a slow and gradualist approach. Ministers, Ikram notes, are unlikely to contradict a president and are unwilling to be blamed for unpopular reforms whose results may only be seen several years later, by which time they will be out of office.

Often, the policy of the authorities has consisted in little more than stalling, in hope of a positive development—which has actually been successful more than once. Still, writes Ikram, “Egypt cannot construct a secure economic future on the assumption of benefiting indefinitely from serendipity.”

Reading Ikram’s book I couldn’t help noting how many of his observations about the difficulties of introducing reforms might apply to the field of education as well. In the end, one important point he makes is that what matters as much if not more than the “rightness” of the reforms themselves is the overall environment in which they are introduced and expected to take root.

For example, Ikram admits that policies to liberalize the economy—such as former President Anwar Sadat’s “open door” policy toward foreign investment, or the controversial wave of privatizations in the 1990s—often simply created private monopolies in the place of public monopolies, because they were not accompanied by a panoply of measures to create true competitiveness, such as strengthening and making fairer and more transparent the commercial judicial system, the tax regime and the government bureaucracy.

Generally, Ikram notes, reforms are more likely to be successful if the public is persuaded that the burden of a particular reform will be shared equally; if those who suffer the consequences are offered adequate compensation; if the positive results of the reform come sooner rather than later; and if the authorities act in a consistent manner and follow through on their plans.

Unfortunately, given what a valuable reference this book is, its final section, on contemporary matters, is disappointing.

Ikram describes events since the Arab Spring uprising of 2011 superficially and very circumspectly. He does not mention one of the most salient features of the current economic landscape: the substantial encroachment of the military and the intelligence services upon the economy since President Abdel Fattah El-Sisi came to power, which has been widely documented.

This is somewhat understandable. The very connection between economics and politics is what makes economics such a fraught topic in Egypt today.

Yet this reticence takes the steam out of Ikram’s arguments at the end of his book.

In his conclusion, the author considers several prescriptions and models from elsewhere in the world for economic reforms and development. In a discussion of the Asian “tiger” economies, such as those of China, Hong Kong, Singapore, South Korea and Taiwan, he notes that those countries’ economic success was underpinned by deals between the authorities and the population: quite equitable economic development in exchange for a curtailing of political freedoms.

Ikram suggests that Egyptians would be unlikely to accept a trade-off between political participation and economic development. This observation struck me as doubtful, and already out of date. The tragedy is that currently, facing both political repression and economic austerity, they are not even being offered that choice.


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