The Egyptian Economy, 1952-2000

Khalid Ikram

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134227532
• Edition: 1
• Topic: History
• Subtopic: Middle Eastern History
• Index: History

Interviews with former Prime Ministers and Cabinet Ministers along with previously unpublished analysis by the World Bank, IMF and USAID provide entertaining and interesting insights into Egypt's economic development policy during 1952 to 2000. Areas addressed include: * the performance of the Egyptian economy since 1950s
* the factors that have facilitated or retarded economic performance
* the Egyptian authorities approach to economic issues and policy-making
* the chief questions that policy-makers will have to deal with in the next twenty years.

Set apart by Khalid Ikram's intimate knowledge of the Egyptian policy-makers this book presents a unique account of economic development and policy-making in Egypt during 1952 to 2000.

1
Economic development and policymaking, 1952–73

In July 1952, the Egyptian monarchy was overthrown, and the contemporary phase of Egypt’s history began. The Free Officers, who led the revolution, came into power without a clear political agenda. “It has often been said,” wrote Roussillon in the Cambridge History of Egypt (1998, vol. 2:338), “that the … officers forming the Revolutionary Command Council had no program, almost no ideology, and barely any ‘philosophy.’” Similarly, Vatikiotis (1961:67–8) observed that “One finds few indications of any political program or plan of action…. There were perhaps as many shades of political belief as there were members of the Free Officers Executive.” And Baker (1978:101) commented that “They [The Free Officers] had no action program that would have provided some conception of the society their revolution aimed at creating.” Such views were not confined to foreign commentators; Mohamed Heikal wrote that “This movement … did not have an exact vision of the import and the profundity of the enterprise which it had undertaken.”¹ The revolution was instigated principally by resentment against the corruption of the monarchy and frustration with the failure of the political process to rid the country of British occupation.

Nor was the new regime wedded to a particular economic philosophy. In any case, Egypt’s recent history did not provide a model that had proved unambiguously superior to all the alternatives. Since the nineteenth century Egypt had known, sometimes through choice and sometimes by accident, a variety of economic systems. Under Muhammad Ali, the ruler was identified with the state as the major economic agent. Government monopolies were set up in agriculture, industry, and foreign trade, while import substitution was attempted under the aegis of the state. Muhammad Ali’s grants of lands to members of his family, senior government officials, and high army officials led to the creation of large private estates in agriculture. Land privatization continued under his successors, particularly the Khedive Ismail. Muhammad Ali’s defeat in 1839 by the Ottoman rulers and the European powers ended the import-substitution strategy and started a process of free trade. The period of free trade and laissez-faire reached its apex from the 1880s to the 1930s. The government still played a major role in economic development because of its special responsibilities for irrigation, but economic activity was overwhelmingly conducted by the private sector.

The government’s direct involvement with other sectors of the economy began to grow from the 1930s, when an escalating tariff structure intended to favor industry was adopted. During World War II, controls were introduced on foreign trade, supplies of necessities, prices, rents, and foreign exchange. After the war some controls were dismantled, but liberalization remained incomplete. The government continued to fix prices of basic consumer goods, using subsidies in an attempt to keep down the cost of living. Tariff levels were raised in the late 1940s and again in the 1950s in furtherance of specific import-substitution objectives. Yet private enterprises continued to operate in a relatively free environment, deriving benefits from protectionist policies which probably outweighed the cost of the price controls.

Predominance of the private sector, 1952–56

In 1952, the economic role of the state was virtually confined to investment in infrastructure (chiefly in the irrigation system) and social services. The main productive sectors – agriculture and industry, internal and foreign trade, banking, insurance, urban transport, and even a number of utilities, such as electricity and water – were in private hands. Mead (1967:272–3) estimates that the public sector accounted for only 13 percent of the Gross Domestic Product.²

In view of what transpired subsequently, it may be surprising that the architects of the 1952 revolution initially were favorable to private enterprise. During the first four years of the new regime, the government’s pronouncements on economic ideology emphasized the importance of the private sector. Official policies were also intended to reassure private enterprise. The government, for example, consulted regularly with the Federation of Egyptian Industries, and agreed to the Federation’s demand for lower taxes and higher protection by lowering customs duties on raw materials and capital goods and by raising tariffs on items produced domestically. Taxes on profits and undistributed dividends were also reduced. The government insisted that it would act as the partner of private enterprise and confine itself to heavy, or basic, industry. The rest of the manufacturing sector was explicitly reserved for private enterprise. Government investment continued to be directed largely toward the traditional areas of irrigation, drainage, and land reclamation. The main theme of the economic policy debate during this period was not the respective responsibilities of the public and private sectors, but rather the role of foreign investment. In this area, too, the authorities proceeded cautiously. Until 1957 the state continued to woo foreign capital through laws providing tax holidays and generous provisions for the repatriation of profits. The government also partially reversed the Egyptianization policy of the former regime by allowing foreign shareholders to hold a majority interest and control in any domestic company.³

Perhaps the most significant restraint imposed on the private sector was the agrarian reform of September 1952, which limited individual ownership to a maximum of 200 feddans. The main purpose was not to attack the principle of private ownership – the excess feddans were distributed to landless peasants. “The most immediate objective of the land reform law,” wrote Abdel-Faddil (1975:7), “was to break the power of the old ruling oligarchy, with its roots in big estates.” The most radical component of the agrarian reform was the introduction of agricultural cooperatives. To obtain inputs or agricultural credit, a farmer had to become a member of a cooperative and abide by its rules concerning crop rotation, output pricing, marketing, and so forth. Since the cooperatives were directed by the government, this was an effective, if indirect, method of control.

Decisions in 1952–54 did not attack private enterprise, but merely revealed the government’s intention to engage more actively in the economy. It was decided to build the Aswan High Dam at about this time (though the execution was much delayed) and the government engaged immediately in ambitious land reclamation projects. Some partial planning was introduced in 1953 through the creation of the Permanent Council for the Development of National Production, comprising representatives of both the government and the private sector. The Council studied projects, coordinated the public works program and the state investment budget, and paved the way for the government to participate as an equity owner in new industries for the first time since the 1860s.

Growing government intervention, 1957–60

The transition from a free, private enterprise system to a planned economy with a dominant public sector took place between 1954 and the early 1960s. The first small step was the government’s decision to take an equity stake in two new industrial companies established in 1954. The public sector then expanded in 1957 through the nationalization of British and French economic interests after the Suez Canal war, and through public investment in industry.

International developments also prompted increased government intervention. In the years following 1956, Egypt lost much of its access to Western sources of finance. This inevitably included countries such as Britain and France, which had participated in the Suez Canal war of that year. However, with Egypt turning to the Eastern bloc for arms and diplomatic support, finance from major Western-dominated international development agencies, especially the World Bank, also evaporated. The chief bone of contention between the Bank and Egypt was the Aswan High Dam.

The story of the Aswan High Dam project and the relations between Egypt, the World Bank, and the Bank’s principal shareholders was a complex interaction of politics and economics and, at times, of politics masquerading as economics. The United States and the United Kingdom had agreed to seek approval from their legislatures for providing $70 million ($54.6 million from the United States and £5.5 million from the United Kingdom) to cover the foreign exchange costs of the first phase of the project. The two governments also stated that they would be prepared to consider, in the light of then existing circumstances, providing additional resources to supplement the World Bank’s financing of later stages. The Bank was expected to participate in the foreign exchange financing of the project, which Mason and Asher (1973:638) report as amounting to $200 million out of a total foreign exchange requirement of $390 million.

Waterbury (1979:105) lists a number of conditions that were attached to the financial offer. Thus, for example, Egypt would have to allocate one-third of its internal revenues to the High Dam project; contracts would have to be awarded through international bidding with communist countries excluded; Egypt would have to avoid incurring additional foreign debt without the approval of the World Bank; disbursements would begin only after Egypt and the Sudan reached a new accord on the sharing of the Nile waters, and so on.

These conditions aroused considerable resentment in Egypt. The greatest unease arose from the division of the financing into two phases. The qualified nature of the offer of finance by the United States and the United Kingdom for the second phase was disturbing, because it provided a lever by which the Western countries could press Egypt to settle the Arab–Israeli dispute on possibly unfavorable terms. And, indeed, Mason and Asher (1973:642) in the World Bank’s authorized history of its first 25 years of operation concede that, “They [the Western powers] may have thought of it as potentially useful in this regard.”

In July 1956, the US and UK governments decided to withdraw from the financing of the Aswan High Dam. The World Bank’s offer then lapsed, because the financing for the project was left with a gap. In the Bank’s view, it would be a waste to commit its resources to a project that was incompletely funded and therefore might never be implemented. However, there is little doubt that the political views of the Bank’s principal shareholders swayed its decision. The cancellation of the financing led Egypt to nationalize the Suez Canal, in order to use the revenue from transit tolls to finance the construction of the High Dam. The nationalization was offered as a pretext by Britain, France, and Israel for invading Egypt.

Subsequent to the Suez Canal war, the phase of government policy in 1957–60 was aptly described by President Abd el-Nasser as “controlled capitalistic economy.”⁴ The government intervened vigorously in economic activity along four major paths.

First, although private sector activity was still encouraged, the new Constitution of 1956 set out an ideological framework within which such activity was to be conducted.

Second, the Suez Canal war of 1956 led to the sequestration of British and French assets, much of which were concentrated in banking and insurance. A special state Economic Organization was set up in early 1957 to manage these and other assets in which the government already had a share. This agency thus acquired considerable influence as a vehicle for promoting the government’s economic policies. By 1958 the Economic Organization controlled all the specialist banks in Egypt, seven commercial banks which accounted for nearly half of all commercial bank loans, and five insurance companies responsible for 68 percent of all insurance business transacted in Egypt. O’Brien (1966:90, 95) estimates it to have been responsible for roughly a third of aggregate output produced by the organized industrial sector, and to have employed about 20 percent of the labor force in that sector.

Third, a move to rapidly “Egyptianize” the main arteries of the national economy was put into effect. All foreign banks, insurance companies, and commercial agencies were required to be converted into domestically-owned joint stock companies within five years. The major banks and insurance companies were put under the control of the Economic Organization.

Fourth, comprehensive economic planning was introduced. In January 1957, a National Planning Committee was set up to prepare a long-term plan for social and economic development that was to come into effect from July 1, 1960. In 1958, however, a five-year plan for industry was launched, in which the state was to provide 60 percent of the finance, mainly for heavy industry. The industrial plan required a rapid acceleration in investment from the annual average of LE 34 million of gross investment in the previous quinquennium to an annual average of LE 45 million of net investment between 1957 and 1961.

Thus, in this phase of economic management, the government moved away from relying on the private sector as the main engine of growth, and state intervention and influence became increasingly important. This was most apparent in the area of capital formation. In 1952, the public sector accounted for about 13 percent of GDP and 28 percent of gross capital formation; by 1960, while still accounting for only 18 percent of GDP, the public sector undertook nearly 74 percent of gross investment.⁵ The share of government both in investment and in economic activity generally continued to rise; Hansen (1975:203) estimated that in 1973 perhaps 90 percent of investment and 63–70 percent of the total availability of resources was accounted for by the public sector.⁶ However, Amin (1968:41) points out that although the authorities had started to invoke a socialistic ideology, most nationalization was still ad hoc and was justified on a variety of non-ideological grounds.

Perhaps the biggest indicator of the change in the government attitude toward the private sector was the introduction of wide-ranging economic planning. The restrictions placed on private economic activity appear to be closely related to successive efforts to make the planning process more comprehensive. Although the biggest waves of nationalization did not occur until 1961, even during the late 1950s the government began to feel that a high rate of planned investment could not be attained with a predominantly private sector economy. Moreover, as O’Brien (1966:103) suggests, the introduction of a comprehensive five-year plan in 1960 compelled the policymakers to become much more sp...