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Egypt-The Politics of Economic Strategy

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Egypt Index


Aswan High Dam made possible large land reclamation and electric power generation projects.
Courtesy Susan Becker

The most important decision taken by the Egyptian government since Nasser was Sadat's infitah to foreign and domestic private capital. While the stagnation of the early 1970s raised the issue of economic reform, the decision to implement infitah did not take place in a political vacuum. A number of different elite factions prescribed different solutions to the economic problems. A handful of Marxists favored a "deepening" of the socialist experiment. Another small group called for a rapid move to free-market capitalism. The third, statist (see Glossary) trend, led by Prime Minister Aziz Sidqi, stood for a controlled role for private and foreign capital compatible with the dominance of the public sector. In May 1973, Sadat dismissed Sidqi, who was an influential possible rival associated with the Nasser era, and before long outstanding leftists, such as Minister of Planning Ismail Sabri Abdullah, were also forced out. The dominant thinking that emerged advocated creation of a new foreign sector, restriction of the public sector to large industry and infrastructure, and the opening of all other sectors to private capital. Some of Sadat's closest confidants, major figures of the Egyptian bourgeoisie such as Osman Ahmad Osman and Sayyid Marii, played major roles in swinging him toward this option. The legitimacy won in the October 1973 War gave him the strength to make this break with Nasserism.

Egypt's state-dominated economy, Sadat declared, was too burdened by military spending and bureaucratic inertia to mobilize the resources for an economic recovery. But postwar conditions, namely the diplomatic opening to the United States and the new petrodollars in Arab hands, presented a unique opportunity to spark a new economic take-off combining Western technology, Arab capital, and Egyptian labor.

An infitah would also consolidate Sadat's support among the Egyptian landed and business classes and among the state elite who had enriched themselves in office and were seeking security and investment outlets for their new wealth. In addition, Sadat viewed infitah as essential to winning American commitment to Egypt's recovery of the Sinai Peninsula from Israel.

Abdul Aziz Hijazi, a long-time minister of finance and liberal economist with links to Western and Arab capital, was appointed prime minister in 1974, charged with implementing the infitah. To neutralize resistance inside the state, Sadat encouraged a "de-Nasserization" campaign in which all those who had grievances against socialism publicly attacked it for having ruined the economy. As the emerging ills of infitah--inflation and corruption--generated discontent over the new course, Hijazi was sacked, and Mamduh Salim, Sadat's police "strong man," took over as prime minister with a mission to push ahead with infitah, overruling those who were obstructing it and those who were abusing it.

Once infitah was established as Egypt's economic strategy, intraelite conflicts centered on its proper scope and management. These conflicts typically pitted liberalizing economists, who were convinced that a fully capitalist economy would be more efficient than an economy incorporating a public sector, against more statist-minded bureaucrats and state managers, who wanted to reform, rather than to dismantle, the public sector. The latter were often allied with politicians fearful of public reaction to the rollback of populist measures such as subsidies and public- sector employment. One major episode in this conflict came in 1976 over pressures from the International Monetary Fund (IMF-- see Glossary) and foreign banks to cut subsidies and devalue the Egyptian pound (for value of the Egyptian pound--see Glossary) as necessary steps in the liberalization of the economy. Sadat's minister of economy, Zaki Shafii, and his minister of finance, Ahmad Abu Ismail, fearful of the consequences on the mass standard of living, urged him to resist pressures for rapid reform. But other economists, chief among them Abdul Munim Qaysuni, argued that Egypt could not afford costly welfare programs if it were to revitalize its productive bases. Top Western bankers, such as David Rockefeller and William Simon, urged Sadat to go beyond half measures if he wanted to make the infitah a success. Sadat overruled his own ministers and replaced them with a new team headed by Qaysuni, who began to cut the subsidies. But decision makers had misjudged their political environment. The subsidy cuts triggered the 1977 food riots, which shattered much of the support Sadat had carefully built up. The government backed down and did not again attempt such a radical cut in the social safety net for the poor.

Managing infitah remained the major problem of public policy under Mubarak. Rather than producing a dynamic capitalist alternative to Nasserite statism, infitah had stimulated a consumption boom that put Egypt in debt and made it heavily dependent on external revenues, which declined in the mid-1980s, plunging the country into economic crisis. Mubarak insisted that infitah would be reformed, not reversed, but the government's freedom of action was limited by conflicting domestic constraints. The interests created under Nasser remained obstacles to capitalist rationalization and belt-tightening. The public sector was still the main engine of investment, and public sector managers and unionized labor tenaciously defended it. The bureaucracy, employing a large portion of the middle class, was a formidable constituency. Meanwhile, Egypt's huge army had not been demobilized, and, indeed, Sadat had bought its acquiescence to his policy by replacing weapons from the Soviet Union with more expensive arms from the United States, for which the military showed a voracious appetite. Marshal Abu Ghazala rejected demands by Prime Minister Ali Lutfi that he pay off Egypt's military debts from revenues of arms sales overseas; instead he plowed funds into subsidized apartments, shops, and sports clubs for the officer corps. Populist "rights" acquired under Nasser had grown into a tacit social contract by which the government provided subsidized food to the masses in return for their tolerance of growing inequality. The contrast between the conspicuous new wealth and the mass poverty generated a moral malaise, making Egypt's debt a political issue. "We're asked to pay the debt," chanted demonstrators in 1986, "while they live in palaces and villas." Thus, attacking populist policies seemed likely to fuel Islamist political activism.

Infitah had itself, however, created interests resistant to reform. A larger and richer bourgeoisie was unprepared to give up opportunities for enrichment or to trim its level of consumption. Any reversal of the course that so favored this class would have cost the regime its strongest social support. Indeed, the increasing power of the bourgeoisie was manifest in its successful veto of several government reform initiatives. Prime Minister Ali Lutfi was expected to produce difficult reforms but was stymied by powerful business interests. The ability of the regime to raise domestic revenues to cope with the financial imbalance was limited because those who could pay represented the government's own support base. Thus, when importers staged demonstrations against increased customs duties, the government rescinded the duties, and the ruling party parliamentary caucus turned back its own government's proposal to tax lucrative urban real estate interests.

Caught between rich and poor, the regime opted for incrementalism. It gradually shaved subsidies, replacing the one piaster (see Glossary--about one United States cent) loaf of bread with a supposedly better quality, higher priced loaf; raising electricity prices; and eliminating subsidies on feed corn. The regime also partially reformed the exchange rate and raised taxes on imported luxuries. But, unable to undertake radical reform, it chiefly concentrated on negotiations with creditors for a rescheduling of debts, lower interest rates, and new loans to support the balance of payments, merely postponing the day of reckoning.

The growing power of the bourgeoisie and the determination of Mubarak's state to maintain its independence from this class was reflected in another case of economic policy making, a battle over control of foreign currency. The government wanted this control in order to protect the value of the Egyptian pound. In 1985 Minister of Economy Mustafa Said tried to close down black-market money changers who absorbed most workers' remittances but was dismissed when foreign currency dried up and business demanded his head. In 1986 the Lutfi government fell because of a bid by the governor of the Central Bank, Ali Nijm, to rein in the Islamic investment companies that also dealt in foreign currency. The new power of this rising independent bourgeoisie resulted from its ability to disrupt the economy, its payoffs to the press, and its connections to the political opposition and inside the elite itself. In 1988 Prime Minister Atif Sidqi personally led the government's efforts while the companies mobilized the Muslim Brotherhood (Al Ikhwan al Muslimun; also known as the Brotherhood) and the New Wafd Party in defense of the private sector. Aided by financial scandals that damaged depositor confidence, the government brought the companies under its regulative sway, but they retained considerable autonomy. Whereas Mubarak's state was no longer a mere champion of bourgeois interests as was the state under Sadat, neither had it regained the power over society of Nasser's days.

Despite the power of elites, they did not operate in a vacuum. Many of their decisions were reached in response to economic pressures that sharply limited their options. They also had to consider the political consequences of their decisions. The major change from Nasser's era was that the bourgeoisie acquired the capacity to advance and defend its interests in the system; the 1977 riots made clear, however, that mass reaction must also be included in regime calculations. Thus, while the Egyptian state remained essentially authoritarian, decision makers could not ignore societal wishes, nor could they escape environmental constraints.

Data as of December 1990

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