pinch of salt.
If the effects of policy reforms are generally positive, why have so many countries, including Egypt, been reluctant to embrace them wholeheartedly? Banerjee (2000, 58) provides the best response: “Reforms necessarily involve cobbling together a package that is only part economics. . . . The rest of it is part institutional design, part public relations, part rhetoric. A successful reform involves coming up with the right combination of all these things in the context of the particular country.”
Given the diversity of political, social, economic, and institutional conditions between countries, it would be futile to search for an unequivocal, universal answer. The empirical literature does, however, suggest some recurring issues that impact on policymakers’ decisions.
Four issues appear to be the most critical.
1. Disjunction between the timing of the costs and the benefits from reform. Most of the cost of adjustment will have to be borne immediately, while the benefits could take perhaps two years or even more to make their full appearance. As Rodrik (1996, 10) reminds us, “Good economics does often turn out to be good politics, but only eventually.” Rodrik later argues that the data do not consistently show a significant lag between the adoption of the reform and the benefits flowing from it. However, his use of the word “eventually” would suggest that there is in fact a sort of J-curve effect—that is, that conditions first deteriorate and travel down the bowl of the J, before improving and moving up along the stem of the letter.
This pattern is confirmed by other studies. Masera (1974), in a detailed analysis of the 1967 devaluation of the pound sterling, estimated that it took eighteen to twenty-four months for the current account to move into balance. Williamson (1983, 154) reports that the evidence shows that while trade may respond within months to changes in income, reasonably complete adjustment to price changes may take three years or so. The study by Matusz and Tarr quoted earlier (2000) also pointed out that adjustment costs would be largest immediately following the reforms and could take one to five years to disappear. Some calculations by the World Bank on Egypt’s experience with exchange-rate depreciation indicated that it took at least eighteen months for a significant response by non-oil manufactured exports. However, the cost of imports would increase as soon as the currency was devalued and could have a serious impact on prices and consumer subsidies (the latter in Egypt have at times amounted to more than 20 percent of budgetary expenditures).
The inevitable time gap between suffering the costs and enjoying the benefits of the reforms can play havoc with ministerial futures. The rapid turnover of economic ministers, particularly evident during the days of President Sadat, reinforced the tendency for caution. One can hardly blame ministers for not wanting to submit themselves to immediate criticism for the sake of some uncertain felicity in the future when the evidence pointed to a rather short ministerial shelf life. Between 1973 and 1980 there were seven changes of finance ministers, seven of planning ministers, five of ministers of economy, and four of ministers of international trade.16
Wagih Shindy (deputy minister of economy and subsequently minister of tourism) summed up the quandary. He said that ministers knew what they had to do; what they did not know was how to be retained as ministers once they had done it. They would have to carry the burden for the immediate consequences of reform policies, even if the short-term consequences had been foreseen to be inevitable and all the evidence indicated that the reforms would bring substantial benefits down the road.
This is more likely to be the case in an authoritarian presidential system, under which the ministers are generally technicians and do not bring a political “dowry” for the regime. Hamed al-Sayeh, a minister of economy, said that ministers under President Sadat knew that they were, politically speaking, cannon fodder and easily disposable if policies turned out to be unpopular even if only in the short run. Weiss (1993, 66) noted that “a series of ministers was replaced every six months on average, and prime ministers changed almost annually.” The matter was somewhat better, but perhaps not by very much, under Nasser. Thus, McDermott (1988, 103–104) remarked that Nasser in eighteen years formed eighteen cabinets with 131 different individuals, but under Sadat the ministerial merry-go-round became dizzying—in seven years he had eleven cabinets with a turnover of 127 members. “Ministers tended to last half as long under Sadat as they did in Nasser’s time, and in the economic portfolios, the changes verged on the hysterical.” With the cabinet merry-go-round spinning at this speed, ministers could barely begin to grasp the details of their portfolios before they were ejected from office, and while occupying it could at best do little more than execute variations on existing policies rather than prepare well-considered ones to initiate.
This created an environment in which the cabinet might want the ends, but was reluctant to supply the patience that would be required for the policy measures to attain the ends. This is unfortunate. After reviewing reforms in several Asian, African, and Latin American countries, Krueger (1992, 69) notes that a successful reform normally spans several years, and that “time is one of its ingredients.”
And therein lay the rub. Ministers were reluctant to support austerity measures unless they felt that they stood a good chance of being in office to see the benefits. But given the political mortality rate, the odds of this happening were distinctly unfavorable. The costs of policy reform were immediate and certain; the payoff was deferred in timing and unpredictable in amount. In their calculations, ministers heavily discounted the future. Consequently, the balance between risk and reward did little to encourage ministers (and even the president) to take the long view.
Dr. Abdel Aziz Higazi17 described a meeting in February 1975 at which President Sadat had been urged to slow down the consumption boom following the infitah. The argument was that policy measures taken up front to restrain excessive consumption would lead to increased investment and incomes, and thus permit high and more sustainable consumption a little later. The president had dismissed this view out of hand, responding sarcastically, “Ya‘ni bukra fi-l-mishmish?” (“In your dreams!”). The tendency of the government to concentrate almost exclusively on immediate benefits was much discussed among donors. At one of the monthly donor meetings in Cairo, the British representative remarked that the preoccupation with the short term made it appear that the government’s main strategic principle came from FitzGerald’s Rubaiyat of Omar Khayyam: “Ah, take the cash, and let the credit go,/Nor heed the rumble of a distant drum.” Or as Hamed al-Sayeh (minister of economy) confided more prosaically, “Ministers do not necessarily support reforms; they just want the results of reform.”
The focus on the short term was not limited to a particular cabinet. In early 1981 the deputy prime minister for economic affairs, Abdel Meguid, tabled at a cabinet meeting a range of proposals dealing with the exchange rate, consumer and fuel subsidies, the restructuring of loss-making public enterprises, and the injection of competition into the financial sector. Detailed papers, coordinated by the Ministry of Planning, had been circulated concerning the likely effect on the price level, the budget, and employment in the public enterprise sector. Abdel Meguid had discussed his ideas with the ministers concerned, and he was confident that they were all on board. At the meeting he asked for their formal assent to begin drafting appropriate legislation. The response took him by surprise.
He said that ministers had “hopped from one ‘however’ to another” and that the cabinet had not been able to reach any decisions. As Abdel Meguid put it, “Everyone was ready to go to heaven, but no one was prepared to die.” He added, “I suppose the most sobering thought for any politician is that he should politically die [because of authoring reform policies], while his successor should benefit from the outcome of those policies and go to political heaven.” The clear political-economy lesson is that if ministers perceive the benefits of reform to lie beyond the electoral horizon or (especially under an authoritarian regime) the president’s forbearance, reform policies will have few champions.
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