accepted, and if it is, on what terms, in what amounts, and for what purposes.
The question whether aid supplements or displaces domestic efforts and whether it has succeeded in facilitating economic reform has generated an extensive literature. A settled conclusion, however, has not been reached. This is perhaps unavoidable; as Rodrik (1996, 30) remarks, “external resources reduce the costs both of reform [that is, by providing finance for some sort of cushion] and of doing nothing—that is, avoiding reform [that is, by continuing to provide finance for the status quo].” The studies tend to examine the experience of different countries and different time periods, and can use different criteria for judging success, so it is almost inevitable that they encompass a wide range of conclusions. In fact, as Adam and Dercon (2009, 173–74) point out, since Robert Barro’s (1991) paper on cross-country patterns of growth sparked the surge of research on the empirics of growth, “perhaps only one broad conclusion emerging from the wealth of growth regression results commands universal support. This is that ‘institutions matter.’”32
Proponents arguing for the success of aid (at times with nuanced caveats) can point to, among many others, Papanek (1972, 1973), Cassen (1994), Burnside and Dollar (2000), Sachs (2005), the U.N. Millennium Project (2005), Sen (2006), and Tarp (2010), while critics of aid can find much ammunition in (again among others) Bauer (1971), Boone (2006), and the writings of Easterly (for example, 2003, 2006). The increasing availability of data and the application of more refined models have at times cast doubt on the robustness of earlier findings and led to some to-ing and fro-ing between proponents and critics as they sought to attack others’ positions or to defend their own. Tarp (2010, 43) is not far off the mark when he quotes the singer Bob Dylan to say that with all the uncertainty concerning aid effectiveness, it might appear that “the answer, my friend, is blowin’ in the wind.” However, the conclusion of Tarp’s study is that “a substantial part of the modern aid-growth literature does suggest that aid has a positive impact on per capita growth,” but he cautions that “no excessive claims about parameter sizes and total aid impact should be made.”
In view of the unsettled nature of the general debate, it should surprise no one that examinations of the impact of aid on the performance of the Egyptian economy have been inconclusive. Critics of foreign aid argued that much foreign assistance harmed Egypt’s economy or was wasted, and that large donors imposed their own preferences on Egypt’s development pattern and distorted Egypt’s priorities.
These critics can find support from a variety of sources. Thus, Weinbaum (1986, 52) reports USAID officials in Cairo acknowledging privately that their analyses showed food aid had a negative impact on domestic Egyptian wheat production. Springborg (1989, 275–76) presents an embarrassing litany of failed USAID-associated projects, such as “U.S.-built buses that rapidly and noisily disintegrated on Cairo’s potholed streets;33 a cement factory that required a decade to construct; automated bakeries that did not bake bread; fish farms that produced no fish but did give rise to embezzlement charges against the U.S. project director and some of his Egyptian counterparts; a housing project that consumed more than $100 million without producing a single new dwelling unit; a sewage project in Alexandria that dumped effluent on the city’s beaches; pumping stations along the length of the Nile that remained uncompleted years after the pumps had been delivered; and various other embarrassing debacles that received greater or lesser attention in the Egyptian and U.S. media.” Critics also claimed that inadequate donor funds were committed to industrial investment, that too small a contribution was made to building up Egypt’s productive capacity, and that the deluge of concessional funds enabled policymakers to take the soft option and to abstain from structural reforms that would have improved the efficiency of the Egyptian economy.
Supporters of foreign aid to Egypt retort that some U.S. aid might indeed have been wasted, but the cost of this to Egypt was minimal because much of the assistance was in the form of grants. But the main point of foreign-aid advocates was that their opponents’ principal argument rested on a demonstrably dubious assumption, namely, that the absence of aid resources would have compelled policymakers to restructure the economy. They point out that in the fifty years since 1965, the Egyptian economy had seen periods when the economy was under resource pressure (as for example in 1982–91 and 2000–2004), and in neither episode had policymakers shown any appetite for structural reform. The response to a curtailment of external inflows had been to turn to international capital markets, even if Egypt had to pay on hard commercial terms. For aid advocates, the experience of the last fifty years only nurtures the suspicion that smaller aid inflows would simply have triggered more commercial borrowing, not economic reforms.
The idea that Egypt’s investment pattern was significantly distorted because of the predilections of donors also gets short shrift from aid advocates. They argue that Egyptian policymakers are adults whose vocabulary includes the word “no.” Whether to accept or to reject aid for a particular activity, project, or sector was ultimately an Egyptian decision. Aid was actively pursued by Egypt, not thrust down the country’s resisting throat. At bottom, Egypt had to seek external assistance because the country had opted for a political-economy stance that privileged groups who favored consumption over savings and imports over exports.
Moreover, there is no necessary reason why total investment in the presence of foreign assistance should be less than in its absence, and there was nothing to prevent Egypt from using its own resources to support its priorities. If total investment from Egypt’s own resources plus the very substantial foreign assistance was still inadequate to meet Egypt’s aims, it raised questions about the vigor of the country’s efforts to mobilize domestic savings and the strength of the country’s desire to move toward economic independence. Over the period 1960–2016, the domestic savings rate averaged only about 13.5 percent of GDP, showing that in the preferences of policymakers, consumption counted for more than savings. Exports of goods and services over the period averaged about 21 percent of GDP, compared with 29 percent for imports of goods and services, making it clear that the groups benefiting from imports retained an ascendancy over those championing exports.
The basic issue of Egypt’s receiving foreign aid is not technical, but political-economic. As numerous analyses have reiterated, Egyptian regimes since 1952 have maintained an implicit compact with citizens: the regimes would provide a mixture of subsidies and other benefits (garnished with the threat of coercion), the citizens would remain politically dormant. With the population growing and wants expanding, the GDP had to keep increasing in order to sustain the compact. A shrinkage or severely reduced growth of the GDP could imperil the regime. Therefore, if Egypt could not finance the expansion with its own resources, then these had to be obtained from abroad, be it in the form of concessional assistance or of borrowing from capital markets on commercial terms.
The role of foreign aid in Egypt’s development merits a serious discussion drained, as far as possible, of ideological prejudices. Foreign aid—whether from the West or from the Soviet Union—permitted Egypt a wider range of options. It enabled consumption, investment, and imports to be higher and exports lower than they would have had to be in its absence, and supported a military buildup and an expansive foreign policy. Those who argue that foreign aid has been a toxin coursing through the veins of Egypt’s economy need to be explicit about the political-economy trade-offs. They need to address questions such as: What economic and/or political elements would or should the country have been prepared to give up in exchange for reduced dependence on external resources? Which groups would bear the cost, in terms of reduced consumption and higher taxes, for self-reliance? How far could the living standards of the people have been compressed and/or what elements of its foreign policies should the country have abandoned in order to live within its means?
The cheerleaders for external assistance are under an equal obligation to analyze the effectiveness of that assistance, to consider who were the main winners and losers from the availability of the additional resources, and to explain whether the price that Egypt had to pay in a political coin was adequately compensated by what it received
