a sustainable development of the economy and a better distribution of its fruits. These criteria are taken as the touchstone against which to appraise the effectiveness of economic strategies.
Third, much of Egypt’s economic development since 1952 has involved the use of foreign resources, contracted bilaterally, multilaterally, or commercially. One could even say that a good deal of Egypt’s political maneuvering since 1952 has been in the quest to obtain such resources. How providers of external resources reacted to Egypt’s economic policymaking, and what the impact of their policy advice was, therefore requires scrutiny.
Fourth, there is no attempt to provide a recipe for dealing with an immediate situation, such as, for example, that resulting from the overthrow of the Mubarak regime in January 2011. The discussion of the way forward is on the enduring structural issues in the economic field that will have to be tackled by whatever regime is in power over at least the next two or three decades.
The Importance of Economic Health
Egypt’s economic future matters. With a population that accounts for about 40 percent of the Arab world; with a preeminence in Arab culture, education, and media; with a large and well-qualified diaspora that underpins the economic and social development of many other Arab countries; with a strategic location where the Suez Canal provides the shortest passage between Europe and Asia; and with the largest armed forces among the Arab countries, Egypt should rank as one of the most important countries in the world. And yet there is a perception that the country’s performance has fallen short of its potential.
While many reasons—historical, political, and other—have contributed to this state of affairs, economic weaknesses have been responsible for many of the country’s most serious political ills. To take but one example: even 150 years ago, the failure to generate sufficient foreign-exchange earnings created both the need for Egypt to borrow externally for the construction of the Suez Canal and also its inability to service this debt. The default provided the creditor countries a pretext to set up the Caisse de la Dette Publique in 1876 that, together with the “advisors” imposed on the Egyptian ministries (especially after the British occupation of Egypt in 1882), dictated Egypt’s principal economic policies and appropriated the country’s financial and material resources for the benefit of the creditors. The occupation continued de jure until the ratification of the Anglo-Egyptian Treaty in 1936 and de facto until the withdrawal of the British troops in 1954. Economic weakness cost Egypt its political sovereignty.
Lest one think that this is all ancient history, more recent examples of the interactions of economics and politics impacting powerfully on Egypt can readily be offered. Thus, because Egypt could not mobilize sufficient resources domestically to pay for the construction of the High Dam at Aswan, it had to seek funds from abroad. When the foreign loans that had originally been expected were canceled, President Gamal Abd al-Nasser took the political decision on July 26, 1956 to nationalize the Suez Canal and use the transit fees to pay for the dam’s construction. “The Canal will pay for the dam!” said President Nasser, according to two French eyewitnesses (Lacouture and Lacouture 1958, 472). This was a political policy undertaken in pursuit of an economic goal. The nationalization led to a war with the United Kingdom and France—the major shareholders of the Suez Canal Company—that in addition to damage inflicted on Egypt’s infrastructure induced the country to reorient its political and economic relations away from the West and toward the Soviet Union. These political actions had long-term economic consequences. They cut off Egypt’s access to the financial and technical resources of the West, thus potentially restricting the investment and growth rate of the country and constraining it to rely for its development on the less efficient technology of the communist countries.
Ironically, the political fallout from economic weakness did not impact only on Egypt—the British victory in the Suez episode was Pyrrhic. The uncertainty created in the region by the hostilities, the interruptions to trade caused by Egypt’s blocking of the Suez Canal, and the spike in oil prices made investors very nervous and led to an attack on sterling. In order to defend the exchange rate, the Bank of England was compelled to draw down its reserves (between September and November the United Kingdom lost 15 percent of its gold and dollar reserves), which began to approach a level at which a devaluation of the British currency looked inevitable.2 This alarmed the British government, which felt that a debased sterling “would probably lead to a breakup of the sterling area or (possibly even the dissolution of the Commonwealth) . . . and currency instability at home leading to severe inflation.”3 The government approached the United States for financial help, but the latter agreed to offer this assistance only under a number of conditions, such as complying with a U.S.-sponsored United Nations resolution that required Britain to quickly relinquish its military gains and withdraw its troops from the Suez Canal area. Subramanian (2011, 15) reports a senior advisor to the British government writing, “This was blackmail. . . . But we were in no position to argue.” Economic vulnerability had enfeebled Britain’s political hand and erased the country’s diplomatic weight. Another case of economic weakness begetting political subservience.
Other examples can be offered where external pressures resulting from Egypt’s economic weakness produced serious long-term results. With continuing inability to match government revenues and expenditures, Egypt was compelled to accept diktats from the International Monetary Fund (IMF) in 1977 to cut subsidies on bread and other consumer items. This resulted in the worst riots to take place in Egypt since 1952, with considerable damage to public infrastructure and production facilities. Perhaps even worse, the incident left scars on policymakers’ psyches that have to this day made them very wary of undertaking reform policies.
The book covers too much ground to allow a simple summary, but some points are worth emphasizing.
First, the overriding issue during the period covered by this study concerns the role of the state in the economy. The state spent the earlier part of the period imposing an extensive set of discretionary controls on the economy, and the latter part in dismantling many of them. Neither experience was entirely satisfactory. The task defined in Ikram (1980, 8) still remains: “The government will have to continue trying to strike a balance between the conflicting objectives of liberalization for the sake of productivity growth and intervention for the sake of an equitable distribution of income.”
Second, accelerating the GDP growth rate is imperative; Egypt’s demographic dynamics do not permit an alternative.4 Every two years Egypt adds a New Zealand or Ireland to its population; every three, a Denmark or Finland; every four, an Israel or Switzerland; and every five, a Sweden or Portugal. And while it adds the population, it does not add the capital assets, the technical knowledge, the institutions, and the governance of these countries.
Moreover, Egypt is not only experiencing a bulge in the population’s working-age cohort, but it also has an even larger “echo” generation below the age of ten that will enter the labor market in the near future. In 2016 there were about 10 million Egyptians aged 25–29, but also more than 13 million below the age of five years. This age structure offers a potential dividend, but also creates a danger.
The dividend is provided by the rapid increase in Egypt’s labor force and productive capacity, while the experience of countries that have passed through a similar demographic transition suggests that it could also raise the country’s savings rate. But if the economy fails to create a sufficient number of meaningful jobs, the demographic dividend could turn into a demographic nightmare as hundreds of thousands of young men and women crowd Egypt’s streets desperately seeking jobs, income, security, housing, and access to health and education for themselves and their families—a
