of a government; compensation mechanisms for losers in the reforms; capital flows; and economic crisis. The last was measured by macroeconomic indicators, such as the gap between real per capita income and its previous highest level, negative growth, high or variable inflation, and government budget deficits. The study considered the reforms taken individually as well as overall structural reform, the last being measured as an average of the five individual reform indices.
Lora found that of all the factors he examined, the most important factor for reform was a crisis. For the total index, the best crisis indicator was how far per capita income had fallen from its peak. The individual reform indicators reacted to different metrics; for example, trade and labor market reforms were especially sensitive to negative GDP growth, while financial sector reform was most responsive to the level and variability of inflation. Conversely, Lora found that privatization and tax reform were only weakly related to a crisis, even a fiscal crisis. The purely political variables that Lora used did not much affect the reform indicators.
The foregoing studies are useful in tracing connections between economic reforms and variables that are largely economic in nature. However, each country has its own institutions and particular historical experience. I suspect that for Egypt the purely political factors might carry more weight than they did in Lora’s study.
Thus, the Egyptian agrarian reform followed a military coup (that is, a political crisis) and the necessity for the coup’s members to break the power of the opposition and to build up a constituency for the revolutionaries. The nationalizations and sequestrations of British and French assets in 1956 followed the invasion of Egypt (a political crisis) by the United Kingdom and France and strengthened the government’s role in the economy, which, down the road, led to large-scale nationalizations and the move toward “Arab socialism.” Conversely, the deteriorating economic and mounting external debt situation in the 1980s did not compel the government to introduce major reforms; these were introduced in the 1990s following Egypt’s political decision to participate in the war with Iraq. The participation responded to a political decision by the United States and other Western donors to offer a compensation package of generous debt write-offs and economic assistance to induce countries to join the anti-Saddam Hussein campaign.
After surveying a number of studies, Drazen (2000, 454) concludes that “empirically, crisis is important in inducing or facilitating reform.” This conclusion, however, should be read in conjunction with his caveat that “much work remains to be done on matching of theory and actual experience.”
Political Institutions and Policy Reform
The second broad approach to the political economy of reform looks at the incentives that policymakers face within the political framework in which they operate. This family of models examines questions such as whether reforms are more likely under authoritarian governments or democracies. They also investigate the characteristics of electoral rules, the structure of political parties, the number of “veto gates” in the system, whether the ruling party in a parliamentary system has a dominant majority or is part of a coalition, the extent of power accorded to the president or the prime minister, and so on.
For a number of reasons, this approach may be more useful for discussing the sustainability rather than the initiation of economic reforms in Egypt. First, theoretical or a priori arguments can be produced in favor of both democracy and authoritarianism as an engine of reform. Second, the large number of empirical case studies has thrown up no convincing or definitive relation one way or the other; for a survey see Maraval (1997). Several reviews have argued that authoritarian regimes are more likely to be successful reformers, because they can override the power of interest groups that had held back reforms in the past—instances adduced include China, South Korea, Taiwan, Hong Kong, and Singapore. But an equally large number of reviews point to instances where authoritarianism has only created crony capitalism or sclerotic bureaucracies—instances cited include Russia, Haiti, Zaire, North Korea, and Romania.
The advocates of democracy rely on the argument that this system of government increases competition and increases the number of voices to which policymakers must listen and to whose interests they must cater (Haggard 2000, 39). However, after setting aside the a priori arguments and examining the data, Alesina et al. (1996) show that, on average, the economic growth performance under dictatorships and democracies is indistinguishable. The worst economic outcomes, compared with both established democracies and dictatorships, occur in countries that are transiting to democracy (Haggard and Kaufman 1992), because they show the greatest amount of instability and consequently discourage investment and growth.
Third, for Egypt in the period from 1952 to 2011 this approach is of limited relevance, because for the entire period the country was under only three regimes, all of them authoritarian. The more interesting questions, therefore, concern the attitudes of the incumbent president and his principal advisers to economic reforms and the capability of the ministers and bureaucrats to implement them. Three broad issues are crucial to shaping these attitudes: (a) the pace of reform; (b) the content of reform (especially which groups will benefit and which will be disadvantaged); and (c) the design of the compensation package (especially its size, its distribution among different groups, and its speed of delivery).
The Pace of Reform: “Big Bang” versus Gradualism
An issue that frequently comes up in the discussions of policymakers as well as in the literature on the political economy of policy reforms is the pace of reform. Would it be better to institute reforms simultaneously in several sectors of the economy (the “Big Bang” approach), or would it be better to introduce reforms gradually and test their acceptability before moving on to further reforms? Theoretical arguments have been advanced for each of these approaches. Both sides can claim successes and concede failures in practice, and the empirical studies do not confer a decisive victory on either strategy.
Four principal ideas underlie the “Big Bang” approach. First, an economy functions as an interaction of different sectors; therefore acting on several of them simultaneously will make a policy package more efficient because the reforms will reinforce each other.
Second, the most common danger with implementing reforms is that the government will lose heart before the policies begin to take effect. Advocates of the “Big Bang” approach argue that simultaneously undertaking a wide range of policies is more likely to bind the government to the strategy, because it will have committed itself to too many areas to back down without seriously damaging its credibility. Thus the “Big Bang” approach is more likely to entrench the reform process and to make it sustainable.
Third, proponents of the “Big Bang” strategy believe that it avoids another weakness of the gradualist approach. The latter, by introducing reforms in a piecemeal manner, potentially creates several stages with different distributions of winners and losers, and thus offers incentives to the winners at each stage to resist further reform. Hellman (1998) uses the experience of reforms in the previously communist countries to point out that further reform can then be blocked not by those who lost from changes in the initial situation, but from those who gained from the partial reform and the inefficiencies in the economy that were left uncorrected (and were presumably to be corrected in subsequent stages of the reform). This group would be concerned that the subsequent corrections would eliminate the opportunities of capturing economic rents (unearned profits).9 A step-by-step introduction of reforms would create multiple stages at which different interest groups could mobilize opposition. Milton and Rose Friedman in Tyranny of the Status Quo similarly urged political leaders favoring reform to act quickly after election to counter the inevitable closing of ranks of people threatened by change (Friedman and Friedman 1984). This line of thought thus also supports the idea of doing as complete a set of reforms as quickly as possible.
Fourth, champions of the “do all reforms as soon as possible”
