functions in fact made its role much more important. In addition to the crucial functions of providing internal and external security and managing the administration of the country, the government had the responsibilities of funding education and health, providing infrastructure (by itself or in public–private partnerships), dispensing justice, managing externalities, regulating monopolies and ensuring a level playing field for private enterprises, developing the lagging regions of the country, protecting the most vulnerable elements in society, and ensuring that the distribution of incomes did not exceed bounds that would create dangerous social tensions. The government was also best placed to take a holistic view of the economy, and thus to judge whether regulations were light or onerous; taxes competitive or punitive; incentives insufficient, excessive, or just.
Ganzoury’s view was that decisions in many sectors could be taken only by the government, because those taken by a profit-maximizing private entity might not be optimal for society. For example, in the vital electricity sector, it was important to maintain a certain amount of excess capacity, because disruptions caused by electricity shortages cost the economy much more than maintaining the excess capacity. But a profit-driven private sector would have no incentive to create excess capacity. Similarly, even when the financial sector was privatized, major decisions concerning the size of banks and the activities that they could engage in would have to be taken by the government. This would help avoid the “too big to fail” syndrome, in which very large financial institutions could not be allowed to fail because of the immense collateral damage that their failure might inflict on the rest of the economy, and consequently these institutions would have to be bailed out using taxpayer money. Moreover, in order to avoid financial crises, the government would have to set banks’ capital requirements far above what these profit-seeking institutions might aim at if they were left unregulated. In the transport sector, the government was best placed to consider the needs of the country’s security and its economy to strike the balance between air, road, river, and rail transport. The government also had the crucial responsibility of perfecting the “software” of development: strengthening institutions, monitoring incentives, maintaining equity, and reinforcing governance to ensure that the private-sector economy performed in a manner that was both efficient and socially responsible. The issue was thus not of the government’s withering away, but of ensuring that it made good decisions.
Returning to the choice between a “Big Bang” and a gradualist approach, the strategy adopted (especially in an authoritarian regime) might simply reflect the personality and preferences of the political leader. Having described Douglas’s advocacy of a “Big Bang” approach, it would only be fair to put the case for the gradualist side, especially as for several decades this has been the preferred route for Egypt. Here I will provide only a very brief outline of President Mubarak’s explanation of his views; the reader is referred to chapter 6 for a fuller exposition extracted from my minutes of his meeting with James Wolfensohn, the president of the World Bank.
President Mubarak said that he favored a “step-by-step” approach. He offered two reasons in support of the strategy. First, he said that people had to be carefully prepared to accept the reforms, and this required time. One could not simply ram reforms down the throats of people who were living close to the margin of subsistence, especially as reforms often initially require a significant amount of belt-tightening. The government had to persuade people that the alternatives were inevitable and worse. The government also had the responsibility of creating a safety net for the most vulnerable members of society who would be impacted by the reforms—even the most efficiency-obsessed government had to recognize the political wisdom and the humanity of tempering the wind to the shorn lamb.
The president credited the gradualist approach for his success in pushing through reforms that were much more stringent than those attempted in 1977 by President Sadat. Moreover, the blowback against President Sadat’s reforms had caused the entire package to be annulled, and the public had absorbed the unfortunate lesson that if it resisted, the government would back down. This had not only set back reforms in 1977; it had also made it virtually impossible to undertake them for several years thereafter.
The president’s second reason for favoring a gradualist approach was that it did not require an all-or-nothing package. The government could introduce a set of policies, and if they “stuck,” then the government could add another policy or two. If the public resisted, it was much easier with the step-by-step approach to identify which policies the public had found the most unpalatable, and to modify only them. With a “Big Bang” strategy, that is, when a host of reforms were introduced simultaneously, the set of reforms tended to be viewed as a unit, and so if it were resisted, the entire parcel would have to be scrapped. This is what had happened with President Sadat in 1977.
Mubarak’s cautious attitude conditioned his officials’ approach to policy reform. More than one Egyptian minister confided that Egyptian policymakers follow a precautionary principle: if you cannot be confident of the results, do not experiment. And since it is in the nature of economics that one cannot offer precise and infallible assurances of the outcomes of reform policies, the evidential burden on the advocates of change becomes too great and thus the bias of Egyptian policymakers tends to favor the status quo. Egyptian policymakers gamble on economic transformations only if there is little alternative. This might help to explain why policymakers generally accepted reforms only in response to a crisis.
Moreover, knowing that the United States would be reluctant to risk threats to Egypt’s stability enabled ministers to ward off pressures for policy change by cloaking their defense of the status quo in the mantle of national security. The resistance became particularly strong after the 1977 riots (described later). Ali Lotfi (a former prime minister) said that whenever a discussion on rationalizing the subsidy system came up in cabinet, “Up would go the Minister of Interior’s hand and he would insist that he could not be responsible for the security situation in such circumstances.” This sufficed to snuff out any debate.11
While one might feel that Egyptian policymakers could have acted with greater urgency, one must remember an important asymmetry between their fate and the results for the counselors from abroad. If the program imposed excessive austerity on the country, Egypt’s policymakers would have to face the music; this could take the form of sacking by the president or perhaps stoning by an incensed populace. The counselors, on the other hand, would simply go off to ply their trade in Tunisia, Turkey, or Timbuktu.
That Egyptian officials had had the same thoughts is not mere speculation. During the 1977 bread riots, Wagih Shindy, at the time a deputy minister in the Ministry of Economy, and I drove through the parts of Cairo that had been the worst affected. While viewing the burnt buses, the demolished government buildings, the shattered glass that was everywhere, and inhaling the stench of teargas that still hung in the air, Shindy kept repeating, “See what those boys have done!” It is almost impossible to convey the anger and loathing that was expressed in the word “boys.” He described a meeting of undersecretaries of the economic ministries that had taken place a day earlier at which everyone present had lamented that Egypt’s fate had come to rest in the hands of a group of inexperienced youths from the IMF who could unwittingly destabilize the country, but who would neither individually nor collectively pay any price for their mistakes.
Shindy and his colleagues complained that the Fund’s policy prescriptions were merely lifted from elementary textbooks that assumed an ideal economic world, and that its staff members on the mission to Egypt were entirely innocent of any real-world political-economy experience. “Have these 30-something year-olds ever functioned in roles that acquaint a policymaker with the full range of governmental work and the political constraints within which economic policies must be devised?” was in effect the rhetorical question they asked. Heikal (1983, 90) and Sadowski (1991, 155, 353n45) describe the “Dickie memorandum” outlining the IMF’s conditions, the acceptance of which led to the riots.12 (See also Tignor 2016, 138.)
In
