is likely to persist with stabilization efforts or structural reform in the face of continuing austerity. Too many variables—such as the nature of the immediate economic crises, the economic trends of the previous decades, the political structure of the government (democratic, authoritarian, or dictatorship) and its strength, the state’s capacity for efficiently implementing the program, the role of external agencies, and many others—all are in play. After reviewing the experience of nineteen countries in Latin America, Africa, and East Asia, Nelson (1990, 339) tentatively concluded that “some relief from economic hardship within, perhaps, a year usually is necessary to sustain confidence” to carry on with the program even where economic crisis may have convinced much of the public that drastic measures were required. The only stabilization program in Egypt that may be said to have attained many of its goals covered 1991–93. Much of the government’s ability to stay the course resulted from the relief from economic hardship provided by the substantial write-offs and reschedulings of external debt, and the donor financing of support programs such as the Social Fund for Development (See chapter 6).
A further problem arose from Egyptian ministers’ insecurity about their tenures. Kassem (2004, 27–28) points out that the constitutional power to appoint the prime minister and the other ministers (and to relieve them of their posts) gave the president absolute power over the political future of cabinet members; moreover, the economic ministers were almost exclusively technicians who were not backed by a political constituency. This situation is very likely to inculcate in them a strong feeling of loyalty to the ruler; indeed, “the issue of loyalty accommodates subservience to the ruler’s policies. Consequently, [the president’s] personal decision-making is less likely to be questioned, let alone challenged.” Ministers could too often be unwilling to tell the president that some of his pet initiatives might not be workable.
McDermott (1988, 139–40) describes a meeting at which President Sadat was enthusiastically told by a minister of agriculture that he could carry out the president’s directive to “turn the entire Sinai green within one year.” This undertaking was given despite USAID’s providing the minister with evidence that (a) there was virtually no water to irrigate the Sinai; (b) if water were diverted from other uses and pumped across the Suez Canal into the Sinai, the per-gallon cost would be about five to eight times that of delivering it to existing sites in the Nile Delta; and (c) improving the quality of soil in the Sinai to support even simple grass cover could take five years or more. Such instances could occasion some irony by international observers. McDermott recounts that at that meeting the World Bank representative asked if the minister intended to fulfill his promise by plastering the Sinai with Astroturf, since growing natural vegetation appeared to be out of the question. Of course the Sinai has not become any greener in the forty or so years since that meeting. “Never commit to a date and a number,” would be sage advice to Egyptian policymakers, observed the USAID representative at the meeting.
These ministerial attitudes did nothing to encourage donors’ belief in the government’s seriousness. Moreover, such pronouncements debased public discussion by pretending that simple solutions existed for complex, and perhaps insoluble, problems, and corroded people’s trust in the government when it became apparent that there were in fact no easy answers.
Perhaps the ministers’ fears of their political ephemerality if they acted on sensitive subjects were not irrational. In a well-known paper, Cooper (1971, 28–29) analyzed the political effects of twenty-four devaluations between 1953 and 1966. He found that in about 30 percent of the cases the government lost office within one year, compared with only 14 percent in a random control group of similar countries that did not devalue. Ministers of finance suffered even worse fates: nearly 60 percent of them were dismissed in the year following devaluation, compared with 18 percent in the group that did not devalue.
2. Disjunction between private and social profitability. The cost–benefit ratios discussed above have all referred to social benefits or profitabilities, that is, the gains from policy reforms that accrue to society as a whole. However, the calculation that interest groups typically make does not refer to this wider concept of benefits, but rather focuses on private profitability—the gains or losses that would impact their own coalition. And there frequently is a wide disjunction between social and private profitability. Therefore, what happens to the structure of the country’s policy framework can depend crucially on whether the group seeking to advance social profitability can outwit, persuade, or overpower the group seeking to preserve private profitability that is created by inefficiencies in the economy. This is seldom easy. As long ago as 1513, in his classic study on the exercise of political power, Nikolai Machiavelli warned that “the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new” (The Prince, chapter 6).
Instances of the ascendancy of private over social profitability in the Egyptian experience and the effects this has had on policies are not hard to find. Let me describe some examples from different sectors.
For long periods Egypt’s exchange rate was overvalued. A devaluation would provide an incentive to stimulate exports, increase tourism, and redirect workers’ remittances from unofficial to official channels. All these would add foreign exchange, which has remained a key bottleneck to the country’s development. The higher exports would also increase domestic savings while the greater availability of foreign exchange would require less foreign borrowing, which has compromised Egypt’s sovereignty several times during the last 150 years. The social benefits therefore were evident. However, the overvalued exchange rate benefited importers, while the subsidies effectively increased the disposable incomes of consumers. The private benefits therefore were also obvious. The fact that Egypt maintained an overvalued exchange rate for long periods showed that the interest groups favoring imports and consumption retained a dominance over those that favored exports, savings, and investment, even though the benefits to the country would have been more aligned with the interests of the latter group.
The resistance by particular factions to protect their interests can make governments go through various contortions to make a policy package look like a reform, even when it does not alter the underlying reality. Krueger (1992, 80) describes the Egyptian reform program of 1962, in which the country sought emergency support from the IMF. As a condition of obtaining the funds, Egypt had to devalue its exchange rate by about 25 percent. However, “the authorities managed to remove a sufficient number of surcharges on imports and subsidies for exports so that almost no exporters or importers were receiving or paying more than 3 percent more local currency per unit of foreign exchange than they had earlier.” The status quo was effectively protected. Indeed, Hansen and Nashashibi (1975, 90), whose data provide the basis for Krueger’s calculations, say quite bluntly, “There is little doubt that the government, despite its commitments to the IMF, had no intention whatever to cut down domestic demand”; which continued to expand vigorously.
A further example is provided by policies that discriminate between Egypt’s small and large enterprises. The small, and usually informal, firms account for 95 percent of the country’s enterprises, but they lack the political access and the privileged entrée to policymakers that is accorded to the large firms. It is thus not surprising that trade, labor, locational, energy, competition, and other policies are devised primarily with an eye to benefiting the large firms. The effect of these policies is to artificially reduce the cost of, and thus to encourage the use of, capital- and energy-intensive methods of production, even though these are not aligned with the country’s resource endowment or its comparative advantage. Concern for the private profitability of the politically influential 5 percent of the total number of firms trumps the social profitability of increasing labor-intensive production and creating jobs by facilitating the activities of the other 95 percent. The discussion in chapter 6 of crony capitalism illustrates the effects of this differential treatment on the country’s employment and potential GDP growth.
Another long-standing example of private
