of the value of their (sure) position in the pre-reform situation, for the loss of what the literature calls their situation rents.
For all the foregoing reasons, the Egyptian government proceeds cautiously in dealing with questions of labor in the public sector. Its most successful episode of reducing jobs in public enterprises (it did not touch the general bureaucracy) occurred in the second half of the 1990s and for about five years in the early 2000s under an agreement with the IMF and the World Bank. An important part of the arrangements was the provision of a “golden handshake” equivalent to three years’ compensation to workers taking early retirement, and the creation of the Social Fund for Development that paid for retraining workers and provided funds for micro- and small-business startups to which the exiting workers (and others) had access. The IMF (1998, 53) pointed out that the elimination of these jobs in public enterprises was possible because the low wages and benefits paid in the public sector made the retirement packages affordable.
Apart from the overstaffing issue with public enterprises, there are substantial labor problems even with private enterprises. The legal protection against dismissals is, in practice, quite rigid not only for the public sector but also for the private. Background papers for the World Bank’s studies on private-sector development described repeated complaints by businessmen of how difficult it was to dismiss unproductive and even dishonest workers. They also described some ingenious methods that businesses had developed in order to circumvent these rules. The most popular techniques were hiring on temporary contracts, or obtaining signed but undated letters of resignation from workers at the time of hiring; these were then dated and presented to the authorities should the worker have to be dismissed.
However, such methods impose costs on the worker, on society, and on the employer. The temporary worker does not get all the benefits (such as a pension) that a permanent one would. These and other handicaps push an increasing number of workers into the informal labor market, in which wages are lower and benefits nonexistent. The informalization of employment imposes a cost on society; for example, the exchequer loses the revenue that it would have collected from formal enterprises. Costs are also imposed on employers. Businessmen who made use of the undated resignation letters reported in World Bank questionnaires that they had to bribe local authorities or representatives of the Ministry of Labor to accept the letter without delving too deeply into its background. Getting around the rigidity of the market thus creates transactions costs that hurt the interests of all the parties involved.
Political Economy and Dictatorships
The question whether a democratic or an authoritarian regime is more conducive for economic growth has been widely debated but has received no clear answer. The difficulty is that a priori arguments can go both ways. Thus, for example, a democratic regime may be said to be better for growth because it is buttressed by institutions that provide greater security for property rights, and hence better incentives for investment and innovation, that are the engines of growth. On the other hand, as Przeworski and Limongi (1993) show, it has also been argued that universal voting rights bestow power on groups that have little or no property. The acquisition of the franchise by such groups could shift the balance of political power toward them and enable them to overturn property rights in order to extract resources from the economically more successful. Thus, the enlargement of the franchise to a universal or very wide one would wither the latter group’s incentive to commit to long-term investment.
Similarly, it has been argued that an authoritarian regime is better able to disregard immediate pressures for redistribution and focus on investment and growth. However, as Olson (1991) and Drazen (2000) point out, dictators’ commitment to future policies must be viewed with skepticism—if there are no limits on the ruler’s power, there is no way of holding him to any commitments he makes. And North and Weingast (1989) stress that the risk that the autocrat will subvert property rights for the benefit of himself or his allies will lower the expected returns from investment and reduce the incentive to invest. Investment entails long-term risks, and the incentive to invest thus requires the investor to be confident of the regime’s long-term commitment to rights. More elaborate discussion of this subject will be found in Przeworski and Limongi (1993), Sirowy and Inkeles (1990), and Drazen (2000, 488–501).
Economic policymaking under authoritarian governments or dictatorships is an important subject for Egypt, because the country has been under such regimes almost continuously since 1952. However, the political-economy literature on dictatorships is limited and is generally concerned with discussions of whether dictatorship or democracy is better for economic growth.
Dictatorships are a very mixed group, and this heterogeneity makes it difficult to generalize. Moreover, being overthrown in a dictatorship is likely to involve much more severe consequences than in a democracy; it cannot be shrugged off as just a bad day at the office. Regime change would not only eliminate the dictator’s office, but also jeopardize his liberty and possibly his life and limbs. Similar risks to his family and associates are not negligible. Regime survival in a dictatorship, therefore, is a much more compelling instinct and will suffuse the government’s assessment of any reform proposal.
Alesina (1992) reports that, empirically, one cannot distinguish between the average growth performance of democratic and authoritarian regimes. He makes a distinction between “strong” and “weak” dictators. The former are those whose survival is not seriously threatened. However, this group itself is heterogeneous. Some “strong” dictators or authoritarians—such as Chung-Hee Park of South Korea—put economic development at the forefront of their agenda; others (for example, the Duvaliers in Haiti, Mobutu in Zaire, Ceaucescu in Romania)—indeed, probably the great majority—have been predatory and despoiled their countries.
“Weak” dictators are those in danger of being overthrown. Alesina argues that when such a dictator is in danger, his incentives are likely to be similar to those of an incumbent political leader in a democracy who faces an uncertain election. In such a situation, therefore, one would expect to see fiscal policies that are generally “loose,” in the sense of increasing budgetary expenditures, especially on items such as consumer subsidies, and “opportunistic,” targeting budgetary expenditures toward constituencies (such as the armed forces and the security services) that would shore up the ruler’s support.
Egypt’s history provides examples of such political-economy decisions. Chapter 5 describes how, when confronted with unrest following an attempt to rationalize some consumer subsidies, President Sadat chose to jettison the prime minister who had argued for reform in favor of the minister of interior, who was in charge of the security services. Again in 1977, following the riots over the cut in the bread subsidy, Sadat rapidly rescinded the price increases and asked the prime minister to personally take charge of the Ministry of Interior.
Egypt’s leaders are not alone in the opportunistic use of fiscal and military policies. Several Latin American dictators followed opportunistic policies, especially by using public expenditure to benefit key constituencies, particularly the military, when the ruler felt he might be overthrown (Alesina 1992).
An allied question is whether authoritarian/dictatorial governments are able to push through reforms more quickly than more participatory regimes. Mau offers an interesting example that would not be entirely foreign to the thinking of many policymakers working under authoritarian regimes.
Count Sergei Witte, a prominent reformer under the Czars,20 used to say that there were two essential elements for radical reforms in Russia: absolute monarchy, because you need not pay attention to your critics if His Majesty supported you, and speed, because somebody might persuade the Czar to change his mind before the reform could be made irreversible. (Mau 1994, 6)
There has been a fair amount of discussion in the literature on the subject. A useful distinction is
