agents. Employers can be deterred from creating permanent jobs because they are left uncertain whether they will be able to shed labor if they have to and what this would cost. Investors hold back because they are uncertain about what will be even the medium-term shape of the regulatory environment. “We don’t know when the other shoe will drop and on whom it will land,” is how an Egyptian businessmen responded to a World Bank questionnaire on the investment climate. Thus, for the proponents of the “Big Bang” approach, the foregoing difficulties taken together provide compelling reasons for getting the reform process over and done with as soon as possible.
So much for the essence of the theory; it is worth looking at arguments that have held special appeal to practitioners. The case for a swift and comprehensive reform is cogently argued by, among others, a former minister of finance of New Zealand, Roger Douglas, drawing on the experience of the very successful reforms carried out by New Zealand after 1984. Krueger (1992, 115) notes that the program was so successful that it came to be known as “Rogernomics.”
Douglas (1990, 2–6) argues that the authorities should not try to advance one step at a time; otherwise interest groups that oppose the reform will have time to mobilize and drag down the government. He asserts that “speed is essential; it is impossible to go too fast. Even at maximum speed, the total program will take some years to implement, and the short-term trade-off costs start from Day One.”
Douglas reiterates that the basic reason for urging speed is that the economy is an interlinked mechanism, and acting simultaneously on a wide range of structural reforms will improve the quality of the interactions within the whole. This will help win wider public acceptance of the reform. He argues that in order to win public acceptance, the policymaker has to demonstrate that opportunities for people as a whole are being improved, while the most vulnerable groups in the community are protected. The important point is that the public will accept short-term pain if the costs and benefits are seen to be shared “with visible fairness across the community as a whole.”
Douglas makes an important argument about mobilizing support, even from coalitions that initially oppose the reform. Before the privileges of a protected sector have been removed, it will tend to see structural change as a threat that has to be opposed. However, after the government has removed the group’s privileges and demonstrated credibly that they will not be restored, that group will resent the privileges that still accrue to other groups and which boost its own costs, because “wherever a group manages to hold onto a privilege, an avoidable cost is imposed on those who are facing up to an adjustment process.” The de-privileged group will then lobby to remove the privileges of groups that still possess them, and thus become an ally of the government in the reform process. The crucial ingredients, in Douglas’s view, are speed and the government’s credibility, procured by “an unwavering consistency in serving medium-term objectives.”
The gradualist approach, on the other hand, rests on the idea that the reform process can only be sustained if there is a “buy-in” by the major stakeholders. “Sustainability” is the exception rather than the rule. Krueger (1993, 132) notes that “more countries have experienced a reversion to their earlier economic difficulties within two or three years after the beginning of a reform program than have successfully entered a period of long-term improvement in economic performance.” Moving slowly, at least in the earlier stages of policy reform, gives the authorities the opportunity both to persuade stakeholders by pointing to the successes obtained in the area of reform and to reassure them by being able to pull back on tactics that have not worked. It would be difficult to do this if the government were acting simultaneously all across the economy. A World Bank minute reported an Egyptian minister defending his country’s gradualist approach with the words, “You do not test the depth of the Nile with both feet.”
Generalizations have proved difficult because the viability of either of these approaches depends on too many factors, in particular: the initial situation, that is, how much economic pressure the country is under; which groups most affect the economic decision-making process; the technical strength of, and the political backing received by the economic team; whether the incentive system has created groups that would give continuity to economic policy; the resources that can be conjured up to cushion the almost inevitable austerity at the start of the reform program; and how long the economy can withstand shocks to its interdependence with other economies.
Moreover, a government is not a monolithic unit.10 Even when different cabinet members agree on a common objective, for example, accelerating the GDP growth rate, they may hold substantially different opinions regarding the means of attaining the objective. One faction is usually not sufficiently dominant in cabinet to determine policy outcomes in all areas; if it were, policies would be much more consistent and coherent than is actually the case. Chapter 5 describes in some detail the differences between the approaches of Egypt’s Ministry of Economy and Ministry of Finance to the policy reforms proposed by the International Monetary Fund in 1976, and the tactics that they employed in the cabinet to ensure the triumph of their views. The gap between the methods supported by the two ministries turned out to be unbridgeable, even though they both agreed on the ends.
A complicating factor is that policymakers can and do change their policy preferences depending upon their shifting views of the country’s circumstances or their assessments of what would be best for the survival of the regime. Such “time inconsistency,” as it is known in the literature, can be perfectly logical. As Keynes is famously reported to have said, “When the facts change, I change my mind. What do you do, sir?” Let me offer an example from Egypt’s experience to illustrate the point.
A key issue in Egypt’s approach to economic development concerns the respective roles of the public and private sectors. Ever since the nationalizations after 1956 (and especially from 1961), the public sector’s role had metamorphosed from supporting the private sector to dominating the economy. However, in a far-reaching program of reforms starting in 1991, Egypt began to tilt the balance back toward the private sector.
Some leading policymakers viewed the change in the relative roles of the public and private sectors as a logical response to the stage of Egypt’s development and the state of the international economy. Kamal al-Ganzoury (minister of planning 1982–85, deputy prime minister 1985–96, prime minister 1996–99 and 2013) regarded the change as a pragmatic response to evolving conditions; it was important not to be blinkered by ideology, but to respond in a pragmatic manner to what was best for the economy in a given situation. From 1956 and especially immediately after the 1973 war, the main task facing the Egyptian economy was the building or rebuilding of a large amount of infrastructure. The domestic private sector did not have the financial or human resources to undertake this task (could the Egyptian private sector have run and maintained the Suez Canal after its nationalization, or built the High Dam?). Moreover, in view of the uncertain Middle East situation, foreign investors were chary of committing the required resources. The challenges, therefore, had to be met by the Egyptian public sector.
Three major changes had occurred since the 1990s. First, much of the infrastructure had been built and the more urgent challenge for the country was to create productive jobs for the rapidly expanding labor force. This private enterprise could do more efficiently than the public sector. Second, the private sector was now also much bigger and able to mobilize sizable amounts of capital; given the proper economic incentives and legal safeguards, it could now undertake large projects both in the infrastructure and in the directly productive sectors. Third, the more stable situation in the Middle East had reassured foreign investors. In order to take advantage of these changes, Egypt had to create an environment that would be more friendly for the private sector, both domestic and international. In Ganzoury’s view, therefore, the redirection of strategy was necessary to making the Egyptian economy viable for the twenty-first century.
Dr. Ganzoury emphasized that the government was not going to disappear from the economy—the strategy called for a recalibration
