is shown by the country’s cropping pattern. The United Nations Food and Agriculture Organization (1999, 32–34) concluded that the cultivation of sugarcane was profitable for private farmers because they did not have to pay for water, but the resulting distortion of incentives encouraged the planting of sugarcane and imposed a substantial economic loss on the country. This occurred because, first, Egypt was not an efficient producer of sugar, and thus could not export it at international prices, but in many areas sugarcane competed for land with other crops, such as cotton, in which the country was internationally competitive. Second, water was the most binding constraint on Egyptian agriculture, and sugarcane is a very water-intensive crop; thus, the encouragement of sugarcane production led to a less than optimal use of the country’s most valuable agricultural resource. Third, sugarcane is a year-round crop and the land is thus not available for double-cropping, so the country has to forgo the benefits of the displaced crop.
However, the government remained wary of upsetting the agricultural coalition. In discussions on agricultural strategy with the United Nations Food and Agriculture Organization (FAO), the government stonewalled any attempt to discuss water pricing. The FAO reported that the government’s position remained that the kingdoms of Upper and Lower Egypt had been united under King Narmer (circa 3000 bce) in order to better manage the waters of the Nile. Since that time, the farmer had not paid directly for the use of water. Any attempt to change the situation could be seen as striking at the basis of the country’s foundation with unpredictable, and possibly dire, political consequences. The incentive system therefore remained tilted in favor of growing a water-intensive crop, such as sugarcane, that was profitable for the private farmer even though it entailed a loss for society as a whole. The origins of some political-economy issues in Egypt can go back quite far!
The agricultural lobby also resisted paying for drainage. A cardinal fact of economics is that “there is no free lunch.” The costs of constructing and maintaining the vast irrigation and drainage infrastructure were thus pushed onto groups that were less powerful than the agricultural coalition. The foregoing examples reiterate a general political-economy truth: some powerful political forces will fight to preserve their private benefits (in the shape of economic rents) that arise from an inefficient allocation of resources, regardless of the cost to society.
3. Differential impact of reforms between sectors and between individuals. The empirical investigations show very wide differences in the benefit–cost ratios for different sectors. Many of these studies found that even if the countrywide benefit–cost ratio was impressive, the costs (especially declines in unemployment) tended to be concentrated among a few industries. If the worst-affected sectors are politically important (for example, if they are large employers of labor or have strategic value), policymakers will not pay too much attention to overall benefit–cost estimates but seek to protect these sectors by abstaining from or slowing down reforms.
Private adjustment costs, such as the dislocation of workers, also differ between groups of workers. The private losses borne by workers depend on individual characteristics, such as their skills and experience. Workers with the training or experience required by the market are likely to find another job relatively quickly. However, workers not so endowed may continue to swell the ranks of the unemployed for long periods. Thus, even if the social benefit–cost ratio is very favorable, the private costs borne by a dislocated worker may amount to a significant fraction of his or her lifetime earnings.
Studies that focus on countrywide estimates of benefits and costs tend to ignore or downplay the distributional impact of reform policies on individuals. Academics in ivory towers (and their international advisors) can make an intellectually rigorous case for reform measures on the basis of the benefits that would accrue to the country as a whole; political representatives who will bear the wrath of their unemployed constituents will feel the pressure to tread more circumspectly. This can be seen, for example, in the manner that the Egyptian government handled the privatization program of the 1990s.
Studies had repeatedly shown that public enterprises suffered from massive overstaffing. The Public Enterprise Office estimated employment in public enterprises in 1993 at just over one million. Khattab (1999, 12–13) reported that before the main restructuring began in 1996, public enterprises employed 932,404 workers, and that the Ministry of the Public Enterprise Sector estimated that about 300,000 of them were redundant. It was unlikely that private investors would rush to purchase public enterprises in which one-third of the workers were unnecessary. The excess labor would have to be shed. Mindful of the political danger of antagonizing labor, the government undertook reforms in the public enterprise sector only after donor governments and international institutions put together a substantial financial package to cushion the impact of the job losses. The government’s measures (such as early retirement, not replacing workers lost through normal attrition, and so on) succeeded in reducing employment in public enterprise to less than 600,000 by the middle of 2000, and to about 400,000 by 2009, when the privatization program was frozen.
The crucial ingredient making the reduction politically possible was that donors offered substantial resources to support compensatory measures that would mitigate the dislocation. Distributional issues—who will benefit and who will lose—are at the core of groups’ resistance to reform. The political-economy lesson is that the size and design of the compensation package, the speed with which it can be delivered, and, most importantly, credibility that the government will actually implement the package are crucial to passing a successful reform over the resistance of opposing coalitions.
4. The perception that the burden of reform policies is shared equitably. The literature points out that austerity is almost invariably an initial outcome of major reform policies. It also emphasizes that austerity is likely to be accepted by the population and reform policies supported if there is a clear perception that this burden is equitably shared (see, for example, the earlier discussion of “Rogernomics” (see page 31).
A necessary implication of this finding is that reform policy must be rigorously evidence-based. Facts have a way of getting their revenge. Overall growth may look robust and average (per capita) incomes apparently growing, but the averages may conceal substantial pockets of people and regions that have been left behind. The Gini index and other measures of income distribution have to be scrutinized carefully in order to ensure that they are not systematically affected by influences that cause the indices to show spuriously equitable outcomes. Such an effect may have been a factor in Egypt, as pointed out by the World Bank (2015b). The report argued that the Gini index might have been truncated at both ends—with high-income groups underreporting their consumption and income in order to avoid attracting the attention of tax authorities, and low-income groups underreported because survey enumerators found it difficult to access poor neighborhoods (for reasons mentioned in chapter 8 of this book). It is also clear that Upper Egypt, especially its rural areas, has benefited much less than the rest of the country from the development process (World Bank 2009). Thus, although aggregate growth and average incomes in Egypt were rising much faster from 2005 until 2008 (when the international financial crisis occurred) than in the decade before, a widespread perception that the fruits of growth were largely captured by the richer classes connected with the political regime (see the discussion of crony capitalism in chapter 8) proved toxic to reform efforts and, indeed, fatal to the political regime.
The “Insider–Outsider” Conundrum
For much of the period after the nationalizations of 1961, almost one-third of Egypt’s labor force was employed by the public sector (excluding the armed forces). In 2015 the compensation paid to government employees consumed 35 percent of budgetary revenues and accounted for 8 percent of GDP. The aggregate burden on revenues of salaries, pensions, and bonuses is thus very heavy. Moreover, numerous studies have shown that virtually every public-sector organization suffers from overstaffing and that many of their employees are simply involved in “make-work” activities.
A
