Khalid Ikram, The Political Economy of Reforms in Egypt: Issues and Policymaking Since 1952 (American University in Cairo Press, 2018; paperback with a detailed new preface 2021).
Jadaliyya (J): What made you write this book?
Khalid Ikram (KI): My previous books dealt with some of the principal issues the Egyptian economy faced, the policies that were implemented to deal with them, and the outcomes that resulted. Several experts on Egypt told me that a crucial factor missing in virtually all discussions on Egypt’s economic performance was an in-depth interrogation of the political economy behind the policies. They felt they were looking into a “black box” and trying to guess how politics and economics intertwined to produce some policies that were adopted and others that were rejected. An examination of the salient factors that motivated Egypt’s and donors’ policymakers was urgently needed.
These experts insisted that I occupied a unique position. In my long experience of working on Egypt for the World Bank and for international consultancies, I had had plentiful access to policymakers, analysts, and policy papers from the Egyptian side, as well as to officials and studies from the principal donors to Egypt. I was also able to draw on numerous discussions, reports, back-to-office accounts, comprehensive sets of data, and assessments of Egypt’s economic policies from former colleagues in the World Bank and the International Monetary Fund. These experts felt that a book informed by this material would be invaluable; in a very real sense, I would be writing from inside the “black box.”
The present book is a response to this urging. It draws on my experience, on the published literature, and documents from and discussions with both sides—Egypt and donors. I have been as unreserved as I could be while maintaining the confidentiality of information that was exceptionally sensitive.
J: What particular topics, issues, and literatures does the book address?
KI: The book provides a survey of the literature on the political economy of reforms, with an emphasis on ideas that are especially relevant to Egypt. The discussion includes the roles of interest groups, crises (military and economic), political institutions and policy reform, the costs and benefits of policy reforms, the role of the foreign patron, the political economy of external assistance, and others. It examines some of the principal challenges the economy faced since 1952 and how it performed.
Major political economy issues confronted by the regimes of presidents Nasser, Sadat, and Mubarak are surveyed, as are some of those to be encountered by policymakers in subsequent periods. Particular emphasis is directed to the “software” of growth, i.e., the system of incentives and the functioning of major institutions, such as the commercial judicial system, the bureaucracy, and the enforcement of property rights, and so on. The effects of the Covid-19 pandemic on the Egyptian economy are also taken up.
J: How does this book connect to and/or depart from your previous work?
KI: My previous work (such as Egypt: Economic Management in a Period of Transition in 1981 and The Egyptian Economy, 1952-2000: Performance, Policies and Issues in 2006) was a more historical and technical examination of major policies that shaped the Egyptian economy during the period 1952 to 2000. Much of the discussion in those books focused on what might be called the “hardware” of growth, such as the physical infrastructure, the performance of major sectors, the role played by fiscal and monetary policies, factors affecting Egypt’s external accounts (such as the anti-export bias in the policy framework) and problems of external indebtedness. The present book looks in more depth at factors behind the policies, particularly those that impinged on the “software” of growth.
J: Who do you hope will read this book, and what sort of impact would you like it to have?
KI: I would like the book to be read by policymakers, academics, economic consultants, journalists, teachers, students, and indeed by anyone who is interested not only in the “whats” of economic policymaking in a major country, but also the “whys.” The book has proved accessible to different types of readers; indeed, one reviewer described it as “easy, useful, and pleasant to read.” I would feel rewarded if the data, analyses, and recommendations in the book not only supported an informed discussion on the economic development and prospects of the Arab world’s largest country, but also provided grist to the wider dialogue on economic policymaking in developing countries.
J: What other projects are you working on now?
KI: I am editing a book on the Egyptian economy in the twenty-first century, and working on policy papers for Pakistani authorities.
J: What, in your view, is the essential reason for Egypt’s not performing to its economic potential?
KI: My view is that Egypt should concentrate much more than it has on “second generation” reforms, even though these may be more time-consuming and difficult. These are policies that impinge on institutions, such as the commercial judicial system, the bureaucracy, the incentive structure (shaped largely by fiscal and monetary policies), and on Egypt’s human resource assets (shaped by the education and health systems). Second generation reforms not only improve the quality of life for Egyptians, but also reduce the cost of doing business and make using the hardware of growth (such as farms, factories, dams, canals, power stations, and so on) more efficient. This, in turn, creates more incentives for businesses and government to invest in increasing the hardware. A virtuous circle is thus created.
The book highlights that the basic reason for Egypt’s economy not performing to its potential is not economic; it lies more in the realm of political economy. It is not that Egypt’s policymakers are unaware of which policies create economic inefficiencies and with what they should be replaced. It is that they have been unwilling to press for reforms that would eliminate inefficiencies in the economy.
Why are they unwilling? Much of the answer is that the politically powerful class benefits from existing inefficiencies. Inefficient policies create economic rents, i.e., unearned incomes, and these are captured largely by the politically connected. Correcting these policies could reduce their incomes. Understanding the urgency of economic reform for Egypt does not require rocket science. But as the American writer and political activist Upton Sinclair said: “It is difficult to get a man to understand something when his income depends upon his not understanding it.”
Excerpt from the book (from the Introduction, pp. 5-7)
The book covers too much ground to allow a simple summary, but some points are worth emphasizing.
First, the overriding issue during the period covered by this study concerns the role of the state in the economy. The state spent the earlier part of the period imposing an extensive set of discretionary controls on the economy, and the latter part in dismantling many of them. Neither experience was entirely satisfactory. The task defined by Ikram still remains: “The government will have to continue trying to strike a balance between the conflicting objectives ofliberalization for the sake of productivity growth and intervention for the sake of an equitable distribution of income.”
Second, accelerating the GDP growth rate is imperative; Egypt’s demographic dynamics do not permit an alternative. Every two years Egypt adds a New Zealand or Ireland to its population; every three, a Denmark or Finland; every four, an Israel or Switzerland; and every five, a Sweden or Portugal. And while it adds the population, it does not add the capital assets, the technical knowledge, the institutions, and the governance of these countries
Moreover, Egypt is not only experiencing a bulge in the population’s working-age cohort, but it also has an even larger ‘echo’ generation below the age of ten that will enter the labor market in the near future. In 2016 there were about 10 million Egyptians aged 25–29, but also more than 13 million below the age of five years. This age structure offers a potential dividend, but also creates a danger.
The dividend is provided by the rapid increase in Egypt’s labor force and productive capacity, while the experience of countries that have passed through a similar demographic transition suggests that it could also raise the country’s savings rate. But if the economy fails to create a sufficient number of meaningful jobs, the demographic dividend could turn into a demographic nightmare as hundreds of thousands of young men and women crowd Egypt’s streets desperately seeking jobs, income, security, housing, and access to health and education for themselves and their families—a mouth-watering prospect for a recruiter for any extremist ideology.
Third, Egypt’s experience since 1952 also shows the influence exerted by external forces in the country’s development. These external forces have been foreign governments, international agencies, and commercial financial institutions. The influence can come from the financial resources they provide, from the technical advice they offer, or more generally from a combination of the two. The experience suggests that Egypt should have been more proactive in deciding which elements of the economic advice to act upon and which parts to decline. But “Who pays the piper calls the tune” remains the most compelling maxim of international politics, and Egypt will only be able to reduce external political pressure if it takes more serious measures to mobilize domestic resources and to correct the anti-export bias in its incentive structure.
Fourth, Egypt is ripe for ‘second generation’ reforms. The distinction between first- and second-generation reforms is to some extent a semantic question and the two forms of reform can overlap. However, Naím provides a useful way of classifying the main differences. First-generation reforms can be undertaken relatively quickly, focus on actions that need to be taken (on ‘inputs,’ so to speak), and face political opposition that is largely diffused. Examples of first-generation reforms would be macroeconomic stabilization, reductions in import tariffs, budget cuts, changes in tax rates and coverage, privatization, and similar policies. These are technically easy to identify and, if the authorities are serious about economic policy, the policies need not take very long to implement.
On the other hand, as Navia and Velasco point out, second-generation reforms are often “merely statements of desired outcomes (for example, civil service reform or improving tax collection), without a clear sense of policy design.” Moreover, second-generation reforms frequently raise a different level of technical difficulty. As Navia and Velasco put it: “Any economist can tell you that curtailing inflation requires lower money growth; fewer are prepared to put forward a proposal for supervising operations in derivatives by banks and other financial institutions, or for solving failures in the market for health insurance.” Thus, for first-generation reforms, identifying the outcome to aim at and the means to attain it are both, in principle at least, fairly straightforward; for second-generation reforms, the desired outcome may be discernible only in a rather general form, and the means of attaining it can be far from clear.
Moreover, second-stage reforms commonly take much longer to implement because they require fundamental changes in the organizing and/or functioning of institutions—their chief aim is to improve governance. And the widespread experience is that faith-, ideology-, and culture-based attachments to institutional structures, or those rooted in a long history, are fiercely resistant, or even immune, to policy. Thus, for example, second-stage reforms generally require a reform of the bureaucracy. This is seldom easy and could be particularly difficult in Egypt. More than one-fourth of the country’s labor force is employed in various parts of the government—in 2016 there was one government employee for every thirteen citizens (even this figure excludes the Armed Forces)—and is set in its attitudes and methods of working. The reforms might also require creating entirely new institutions or politically empowering existing ones, such as regulatory agencies that would actually restrain monopolistic or oligopolistic behavior by firms. They would also require fundamental changes in the functioning of the commercial judicial system in order to speed up judgments and to reduce the case burden on judges. And measures would also have to be put in place to ensure that judicial decisions were implemented promptly.
The two stages of reforms also raise different issues of political economy. Apart from some exceptions—such as businesses that might be compelled to compete against international firms because reforms had cut import tariffs—the groups affected by first-stage reforms are often too fragmented or too poor to carry much political clout and thus their concerns can be set aside more easily. But, as Navia and Velasco put it, “By contrast, the set of interests potentially affected [by changes in governance] in the next stage reads like a Who’s Who of highly organized and vocal groups: teachers’ and judicial unions, the upper echelons of the public bureaucracy, state and local governments, owners and managers of private monopolies, and the medical establishment.” Their resistance can prove lethal to the reform program.
Fifth, most of Egypt’s GDP growth of the last fifty years has come from adding more labor and particularly capital; the contribution of total factor productivity (TFP), that is, the efficiency with which factors of production are used, has been very small. Productivity in this sense results not only from technology change, but also from any other changes that influence the efficiency with which inputs are converted into output. Of particular importance are such factors as changes in regulations and the working of institutions that govern the economy.