private sector. The new strategy has come to be known as the infitah or “open-door strategy.” While the full effects of, and indeed the motivation behind, the strategy have been much debated (see chapter 5), the new direction clearly challenged the prevailing orthodoxy of Arab socialism.
Of course a crisis is not essential to enable one coalition to distort economic policies in its favor to the detriment of even a much larger group. Such outcomes can also be created by differences in the organizing ability of the coalitions and the vigor with which they pursue their aims.
A standard example is provided by international trade theory. Egyptian producers would benefit from tariffs on imports because they would be able to sell their products domestically at higher than international prices; however, Egyptian consumers would benefit from lower prices if such tariffs were not imposed. The grounds for a clash between the rival interest groups were clearly demarcated. Whether the pro-tariff or the anti-tariff prevails depends on the political weight of the respective groups and the strength with which they are able to press their demands in the political process. Crucial ingredients in this strength are the ability and incentive to organize and to raise the finance necessary for effective lobbying. However, “consumers” are a very large and ill-defined group scattered all over the country, and thus difficult to organize into a coherent coalition. Moreover, as Frey (1985, 146) points out, “Protection constitutes a public good affecting all the members of a particular economic sector or occupation. There is an incentive not to join the interest group or to contribute financially, because one may profit from the outcome by free-riding [that is, benefiting from an activity without paying for it].” As against this, compared with the number of consumers, industries or importers that benefit from the higher prices constitute a minuscule group; they would thus be much easier to organize and also have a strong incentive to contribute financially to a lobbying effort because the benefits from import restriction would be concentrated in a very small number.
The tariff example is but one instance of a wider issue. Pareto put it in more general terms.
In order to explain how those who champion protection make themselves heard so easily, it is necessary to add a consideration that applies to social movements generally. . . . If a certain measure A is the case of a loss of one franc to each of a thousand persons, and of a thousand franc gain to one individual, the latter will expend a great deal of energy, whereas the former will resist weakly; and it is likely that, in the end, the person who is attempting to secure the thousand francs via A will be successful.
A protectionist measure provides large benefits to a small number of people, and causes a very great number of consumers a slight loss. This circumstance makes it easier to put a protectionist measure into practice. (Pareto 1927, 379–80)7
Although in Egypt revolutionary and military crises have paved the way to drastic restructurings of the economy, a crisis does not necessarily require bloodletting. On many occasions economic crises have changed the dynamic between coalitions and compelled the acceptance of major policy changes.
Why would it take a crisis to induce reform? An early, and still perhaps the most influential, answer was provided by Olson (1965, and especially 1982). He argued that economic performance created powerful groups who would resist reform policies that might impair their interests. Their strength would enable them to block socially desirable reforms. This would freeze the status quo, making society, in Olson’s term, “sclerotic.” If reform required overturning the power of such groups, something drastic would have to occur to break their hold. This could be a political disaster for which the group could be held culpable—such as the Egyptian monarchy being held responsible for the country’s defeat in Palestine. Or it could be economic deterioration of such a magnitude that a sufficient number of groups decided that the country could not continue with “business as usual” and that a different set of economic policies had to be tried. This section of the book concentrates on the role of economic crises in inducing reform; other explanations have also been suggested, and Drazen (2000, 44–54) elaborates a discussion of a number of them.
Different economic situations have been proposed as crises that triggered reform—for example, Krueger (1992, 81–2) notes that “the majority of policy reforms are initiated in what are perceived as crisis situations,” and identifies them as taking two forms. The first, and which she judges to be the more frequent, is when a country finds it difficult to meet its foreign exchange obligations. The second occurs when the rate of inflation reaches unacceptable levels. Other writers add different crisis situations, but foreign exchange dearth and raging inflation figure in all the lists; see, for example, Bruno and Easterly (1996), Lora (1998), Drazen and Easterly (1999), and the several studies of individual countries edited by Bhagwati and Krueger in the National Bureau of Economic Research’s project on “Foreign Trade Regimes and Economic Development;” the volume on Egypt is Hansen and Nashashibi (1975).
But the literature cautions us that an economic crisis is defined not simply by the fact that an economic variable is present, but critically by the degree to which it is present. “A first problem is to determine what is, and what is not, [an economic] crisis,” writes Krueger (1993, 124), and goes on to say, “No satisfactory answer has yet been given: rates of inflation that in one country provoke immediate policy responses are not even criticized in other countries, and the absence of critical goods such as medicines and petroleum has been withstood for years in some countries, while inducing an immediate response in others.” This book is not the place to delve into the complexities of the issue, but we must note two critical factors that have emerged from the debate and are most relevant to the Egyptian case.
First, Krueger (1993, 126) concludes that successful reform in the face of deteriorating economic conditions requires a government that “has the political resources to undertake action and the technocratic support to take appropriate actions.”8 Second, after examining a host of studies, Drazen (2000, 445) concludes there needs to be an extreme deterioration of the status quo before a reform is adopted that is, “things need to get very bad, and not just bad, to induce reform.”
In the political-economy literature, “crisis” is generally measured by the value of some macroeconomic indicators matched against a comparator; for example, real per capita income or inflation in year t + y compared with that in year t. “Reform” is gauged by a change either in the selected macroeconomic indicators or in policy variables.
Thus, Bruno and Easterly (1996) defined a crisis rate of inflation as that above 40 percent annually for two or more years (that is, a severe deterioration), and examined the effects on growth and inflation in a large number of countries in subsequent years. Their study found that growth dropped sharply during a crisis caused by high inflation and rose above the pre-crisis level after inflation had been brought down. They also found that high-inflation countries were motivated to undertake reforms and they subsequently kept inflation below the 40 percent threshold. Drazen and Easterly (1999) widened the foregoing study by examining the inflation experience of 123 countries between 1953 and 1996, considering more variables, and using alternative levels of inflation to define a crisis. Their results echoed those of Bruno and Easterly and supported the view that sustained high inflation was likely to beget reform.
The importance of crises in stimulating policy reforms is not confined to Egypt. An exercise by Lora (1998) for the Inter-American Development Bank is succinctly described in Drazen (2000, 453–54), and further elaborated in Lora and Olivera (2004). Lora developed policy indices for trade reform; financial system reform; tax reform; privatization; and labor market reform for nineteen Latin American and Caribbean countries over the period 1985–95. He then examined a number of political and economic factors
