economic growth in egypt: impediments and...

Economic Growth in Egypt: Impediments and

Constraints (1974–2004)

Hazem El Beblawi

WORKING PAPER NO.14

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Commission on Growth and Development Montek AhluwaliaEdmar BachaDr. BoedionoLord John Browne Kemal DervisAlejandro FoxleyGoh Chok TongHan Duck-sooDanuta HübnerCarin JämtinPedro-Pablo KuczynskiDanny Leipziger, Vice ChairTrevor ManuelMahmoud MohieldinNgozi N. Okonjo-IwealaRobert RubinRobert SolowMichael Spence, ChairSir K. Dwight VennerErnesto ZedilloZhou Xiaochuan

The mandate of the Commission on Growth and Development is to gather the best understanding there is about the policies and strategies that underlie rapid economic growth and poverty reduction.

The Commission’s audience is the leaders of developing countries. The Commission is supported by the governments of Australia, Sweden, the Netherlands, and United Kingdom, The William and Flora Hewlett Foundation, and The World Bank Group.

T his paper focuses its analysis on the last three decades of the twentieth cen-tury. The basic assumption is that Egypt’s economic performance during this

period was less than satisfactory compared with the most successful examples in the Far East and elsewhere. The paper also assumes that Egypt’s initial conditions at mid-century compared favorably with the winners in the development race at the end of the century. Egypt has achieved positive progress, no doubt, yet com-pared with the higher performers in Asia, and given its favorable good initial condi-tions, the record seems quite mediocre.

Hazem El Beblawi, Advisor for the Arab Monetary Fund, Abu Dhabi, U.A.E.

Cover_WP014.indd 1Cover_WP014.indd 1 4/2/2008 4:37:52 PM4/2/2008 4:37:52 PM

WORKING PAPER NO. 14



Hazem El Beblawi

© 2008 The International Bank for Reconstruction and Development / The World Bank On behalf of the Commission on Growth and Development 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org www.growthcommission.org E-mail: [email protected] [email protected] All rights reserved 1 2 3 4 5 11 10 09 08 This working paper is a product of the Commission on Growth and Development, which is sponsored by the following organizations: Australian Agency for International Development (AusAID) Dutch Ministry of Foreign Affairs Swedish International Development Cooperation Agency (SIDA) U.K. Department of International Development (DFID) The William and Flora Hewlett Foundation The World Bank Group The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the sponsoring organizations or the governments they represent. The sponsoring organizations do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the sponsoring organizations concerning the legal status of any territory or the endorsement or acceptance of such boundaries. All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Cover design: Naylor Design

The Real Exchange Rate and Economic Growth iii

About the Series

The Commission on Growth and Development led by Nobel Laureate Mike Spence was established in April 2006 as a response to two insights. First, poverty cannot be reduced in isolation from economic growth—an observation that has been overlooked in the thinking and strategies of many practitioners. Second, there is growing awareness that knowledge about economic growth is much less definitive than commonly thought. Consequently, the Commission’s mandate is to “take stock of the state of theoretical and empirical knowledge on economic growth with a view to drawing implications for policy for the current and next generation of policy makers.”

To help explore the state of knowledge, the Commission invited leading academics and policy makers from developing and industrialized countries to explore and discuss economic issues it thought relevant for growth and development, including controversial ideas. Thematic papers assessed knowledge in areas such as monetary and fiscal policies, climate change, and equity and growth and highlighted ongoing debates. Additionally, 25 country case studies were commissioned to explore the dynamics of growth and change in the context of specific countries.

Working papers in this series were presented and reviewed at Commission workshops, which were held in 2007–08 in Washington, D.C., New York City, and New Haven, Connecticut. Each paper benefited from comments by workshop participants, including academics, policy makers, development practitioners, representatives of bilateral and multilateral institutions, and Commission members.

The working papers, and all thematic papers and case studies written as contributions to the work of the Commission, were made possible by support from the Australian Agency for International Development (AusAID), the Dutch Ministry of Foreign Affairs, the Swedish International Development Cooperation Agency (SIDA), the U.K. Department of International Development (DFID), the William and Flora Hewlett Foundation, and the World Bank Group.

The working paper series was produced under the general guidance of Mike Spence and Danny Leipziger, Chair and Vice Chair of the Commission, and the Commission’s Secretariat, which is based in the Poverty Reduction and Economic Management Network of the World Bank. Papers in this series represent the independent view of the authors.

iv Hazem El Beblawi

Abstract

The paper focuses its analysis on the last three decades of the twentieth century. The basic assumption is that Egypt’s economic performance during this period was less than satisfactory compared with the most successful examples in the Far East and elsewhere. The paper also assumes that Egypt’s initial conditions at mid-century compared favorably with the winners in the development race at the end of the century. Egypt has achieved positive progress, no doubt, yet compared with the higher performers in Asia, and given its favorable good initial conditions, the record seems quite mediocre.

By mid-twentieth century, Egypt’s agriculture had almost reached its limits. Egypt, therefore, faced a new challenge: a need to transform itself into an industrial society. This objective was only partially achieved.

The paper identifies three interrelated factors that helped hinder Egypt’s accession to a new industrial society. The first factor is a strong state and a weak society. An authoritarian state that in its endeavor to preserve its prerogatives had to give up good governance practices and limit the creative initiative of the individuals. The second factor is a semi-rentier economy. The availability of windfall revenues not only reduced the pressure for change but also promoted a new rentier mentality that undermined the emergence of an industrial spirit. The third factor is an inadequate education system. This system failed to provide the proper skills and values required for the industrial society. These factors, moreover, are interdependent and reinforce each other.

The Real Exchange Rate and Economic Growth v

Contents

About the Series ............................................................................................................. iii Abstract ............................................................................................................................iv Introduction ......................................................................................................................1 Historical Background.....................................................................................................2 A View with Hindsight ...................................................................................................5 Conclusion ......................................................................................................................35 References .......................................................................................................................38

The Real Exchange Rate and Economic Growth 1

Economic Growth in Egypt: Impediments and Constraints (1974–2004) Hazem El Beblawi1

Introduction

There is no shortage of studies or research papers on the Egyptian economy. Existing literature on almost every aspect of the said economy is abundant. The purpose of this paper is not to add another piece of research on the subject. Rather, it is my intention to draw few lessons from Egypt’s development experience as depicted by existing literature.

We shall focus my analysis on the last three decades or so. By mid-1970s (1974), Egypt had announced its new “Open Door Policy” of committing itself to a more market-oriented system. From that time to date, the Egyptian economy evolved more or less smoothly without any serious disruption. This does not mean that during this period there were no major changes in the economy. In fact, the Egyptian economy has undergone important changes. However, all this took place gradually, perhaps too slowly, and all happened within the same socioeconomic setting. Though my interest is primarily concerned with Egypt’s economic performance over the last three decades, I cannot totally overlook earlier developments.

The basic assumption of the paper is that Egypt’s economic performance during this period was less than satisfactory compared with the most successful examples in the Far East or elsewhere. Though Egypt’s long-run growth

1 Hazem El Beblawi is an Advisor for the Arab Monetary Fund, Abu Dhabi, U.A.E. He is also Emeritus Professor of Economics Alexandria University, and has taught at the University of Ein Chams, Cairo; the American University at Cairo and Kuwait; the University of California, Los Angeles; and the Ecole Pratique des Hautes Etudes at the Sorbonne, Paris. He has served as Under Secretary General of the U.N., Executive Secretary for the UN Economic and Social Commission for Western Asia (1995–2000), and Chairman of the Export Development Bank of Egypt (1983–1995). Beblawi has published several books and articles on money and banking, international trade, finance, and development. He also has a newspaper column in the Egyptian paper Al Ahram. His honors include Chevalier de Légion d’honneur, France; Commandour, Ordre de Léopold, Belgium; and Grand Officer, Ordre du Cèdre du Liban, Lebanon.

In preparing this paper, the author benefited from the assistance of Dr. Manal Metwaly, Cairo University.

The views expressed in this paper are those of the author and do not necessarily represent those of the Arab Monetary Fund.

2 Hazem El Beblawi

compares reasonably well with the average developing countries, it falls far below the higher performers in Asia. The core of the paper is an attempt to explain what went wrong, and why Egypt failed to join the club of higher performers. This should not, however, be misunderstood. Concentrating on the factors that impeded Egypt’s economic high performance does not mean that everything was bad in Egypt. Egypt has done remarkably well in maintaining political stability with a moderate economic growth. However, if the question posed is why did Egypt fail to match the best performers and what went wrong in this regard, the answer would inevitably emphasize the negative aspects. This is the logical consequence of the question asked. If you are not feeling well, and consult a doctor, he will most probably tell you what is wrong with you, even if you are otherwise in good general health.

We recognize that Egypt’s experience was not a total failure. There are, in fact, quite a few areas of notable success. However, I believe that the overall economic performance remains quite modest and in many aspects disappointing.

Of course, success and failure are relative concepts. All depends on the reference criteria or the measurement rod. If I compare Egypt’s performance with such countries as Somalia, the Democratic Republic of Congo, Rwanda, and the like, Egypt’s economic performance would look impressive. On the other hand, if the comparison is with China, India, the Republic of Korea, Singapore, Hong Kong (China), Thailand, or Malaysia, Egypt’s success will pale enormously.

We believe that it is not too unreasonable to set the measuring rod at the higher level. The reason for this choice is that Egypt’s initial conditions in the first half of the twentieth century compared favorably with the winners in the development race at the end of the century. Egypt compared favorably with India, China, and Korea in the mid-twentieth century. Hong Kong (China), Singapore, and Malaysia did not even exist, as national entities, at the time. Starting with reasonably favorable initial conditions in the early twentieth century, Egypt ended the race at the close of the century at a lower ranking compared to where it started. We will take the assumption of Egypt’s unsatisfactory performance as granted, with no further need for evidence. This is my assumption. The question is why?

Historical Background

Egypt is one among few developing countries to have experimented with development and modernization for almost two centuries. More often than not, these experiments were aborted before self-propelled growth could be sustained.

The French expedition in the late eighteenth and early nineteenth century exposed Egypt to a cultural shock through an encounter with the West. After the restoration of the Ottoman sovereignty, Mohamed Ali (1805–1849), motivated by personal and military ambitions, embarked on a serious program to modernize


Egypt. He shifted Egypt’s agriculture from basin to perennial irrigation, developed transport by building the port of Alexandria, and opened the Mahmudiya canal. He also started building an impressive industrial infrastructure. Militarily defeated (1840) by a coalition headed by the British, Mohamed Ali’s dreams were thwarted and so was his development program.

With the American Civil War in the 1860s, cotton prices rocketed to high levels, thus attracting many foreign investors to Egypt, mainly profiteers seeking to grab a newly found prosperity. Egypt became an export-oriented economy, a major supplier of cotton to textile industries. The opening of the Suez Canal a few years later consolidated Egypt’s position as a center of transport and communication. An enlightened ruler, Ismael Pasha (1863–79), though tarnished with oriental extravagance, hoped to make Egypt part of Europe. Property rights were recognized and the judiciary systems modernized with the promulgation of a civil code and the establishment of civil courts. An elected assembly, with limited power, was called for. However, financial mismanagement and rivalries between France and England to control the Suez Canal pushed the British to occupy the country. The second experiment with modernization was thus aborted too following a financial crisis and a foreign occupation.

After the First World War and under the pressure of popular unrest, the British government conceded limited independence to Egypt (1922) and a nascent liberal state emerged. A liberal constitution was adopted (1923). Though the concept of economic development was not yet invented, the establishment of Banque Misr ignited national aspirations for economic independence alongside with the claim for political independence. The world economic crisis of the 1930s took the best part of the following decade.

With the Second World War, Egypt, like other British colonies, became part of the war effort and joined the sterling block. With the end of the war, a chapter of modern Egypt was closed and a new era started with a military coup in 1952. Egypt was well positioned to begin a new phase of development. At mid-century, Egypt was better equipped than most developing countries that subsequently became economic champions by the end of the century.

Over the second half of the twentieth century, a more authoritarian regime succeeded the semi-liberal monarchy. During this new phase, the economic performance of Egypt was rather erratic and the ideological orientation of the country underwent major changes, though the power of the state remained overwhelming, albeit under different labels.

Under Nasser, a military man himself, the country was rather militarized with a command economy, inwardly looking and centrally managed. After breaking the wealth of large land owners, the declared policy of the new regime was to industrialize the country soon and fast. In fact, the economy showed reasonably good rates of growth (6 percent) in the early 1960s, but quickly lost steam after a military intervention in Yemen and a political skirmish with the

4 Hazem El Beblawi

United States. The l967 defeat (Arab-Israeli war) totally put an end to Nasser’s economic development program.

With Sadat, a new “Open Door Policy” was proclaimed to encourage the role of the private sector. Taking advantage of the availability of the petro-money in the Middle East in the mid-1970s, an incentive package was offered to foreign (Arab) and national investors. Also, restrictions on imports were eased. In spite of all the rhetoric of economic liberalization, the structure of the economy only changed a little. The public sector kept tight reins of all commanding heights of the economy; major industries, transport, banks, insurance, foreign trade, and so forth. A small private sector emerged in small and medium industries, with a boom in tourism and real estate. Egypt’s great success was in attracting foreign (mainly Arab governments) capital. At the mid-1970s the economy showed an impressive rate of growth for five or six years before lapsing again into anther recession.

The first decade of Mubarak’s rule (1981–91) showed rather mediocre economic performance: the budget deficit reached record levels (18 percent of GDP), inflation was no better, foreign debt skyrocketed to more than $50 billion, and defaulting on payments was not unusual. In the aftermath of the Gulf War (following Iraq’s invasion of Kuwait), Egypt embarked on its first economic reform under the aegis of the IMF, with generous foreign support, writing off of the American military debt ($7 billion), and the Arab debt (another $7 billion). The Paris Club wrote off another 50 percent of the public debt. Economic reform (a stabilization program) was implemented successfully, bringing the budget deficit to healthy levels (3 percent of GDP), inflation was kept under control, and a more stable foreign exchange was achieved. This success was followed by another relapse for almost a decade, before a recent vigorous recovery (beginning in 2004) took off over the last two or three years (figure 1). Figure 1: Egypt: Real Per Capita GDP Growth (1980–2006)

7

6

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1

0

–1

–2

–3

1980

1982

1984

1986

1988

1990

1992

1994

1996

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2002

2004

2006

Source: IMF World Economic Outlook Database (September 2006).


A View with Hindsight

Looking back at this story, I cannot fail to recognize in the filigree an Egyptian Malthusian situation with a race between population and resources. Egypt’s modernization took place against a background of uninterrupted demographic revolution. The population during Mohamed Ali was estimated at about 2.5 million with a cultivated area of almost 2.5 million feddans (acres). At the dawn of the twenty-first century, Egypt’s population had grown to more than 70 million, while the arable area did not exceed 8 million feddans.

Generally speaking, I can say that Egypt managed reasonably well during the nineteenth century, matching the population growth, but failed to maintain economic growth in tandem with population later on. In the twentieth century, Egypt lost ground and was held in a Malthusian trap.

But how can I say that Egypt failed in the twentieth century in spite of all the progress realized during this period in literacy, life expectancy, health service, nutrition, and so forth? Is not Egypt now a better place to live in? There is no doubt that Egypt now is much better than Egypt of the nineteenth century. Yet, this is not the right answer.

Success and failure, as has been mentioned earlier, are relative concepts. Development in any country is after all an historical process, to be judged within the overall historical context. What was considered highly developed by nineteenth-century standards could be quite backward in the twentieth century. Egypt has no doubt made important strides in many areas of social and economic developments. Yet it remains true that its relative place in the world hierarchy has not improved, and in many regards has deteriorated.

Why then, did Egypt succeed, in relative terms, in meeting the Malthusian challenge in nineteenth century while failing in the twentieth century?

We think that the answer to this question resides in the response undertaken to meet the population challenge. In the nineteenth century, the bulk of the development effort was concentrated in improving and upgrading agricultural productivity. Agriculture was underexploited with a large untapped potential. Egypt had only one major resource, fertile land, but until the First World War, agriculture was quite enough to sustain rapid growth (Issawi, 1995, p. 104). Agricultural development was thus adequate to meet the challenge. Table 1: Real Per Capita GDP Growth Rates

1980–2000 2001–2005 World 2.2 3.1 Developing Countries 2.4 5.1 Emerging Market Economies 2.6 5.0 Industrial Countries 2.1 1.4 Egypt 2.4 1.7 Source: IMF World Economic Outlook Database (September 2006).

6 Hazem El Beblawi

Table 2: Indicators of Agriculture Development Base year 1821=100

Years Agriculture Production

Cultivated Area

Crop Area

1821 100 100 100 1830–1835 164 109 — 1872–1878 1208 156 178 1895–1899 2247 162 206 1910–1914 2719 173 235 1930–1934 3033 180 260 1960–1962 4584 193 313 Source: Issawi (1985).

At the beginning of the nineteenth century, with a long history of

agricultural tradition, agriculture was no stranger to Egypt. All that Egypt needed was law and order, better irrigation and drainage systems, new crops, and better marketing channels. This is precisely what Mohamed Ali and his successors provided.

After long political instability, Egypt found with Mohamed Ali a strong ruler able to impose law and order. He also undertook a large program of building dams, opening new canals and improving the drainage system. Mohamed Ali controlled foreign trade and introduced cotton cultivation for the first time. Agriculture had become market-oriented, and tenure had been radically transformed and almost all farmland was privately own (Issawi 1995, p. 96). A few years after Mohamed Ali, the first railway was built. Egypt was thus one of the first countries to use railways, before Sweden and long before Japan. Institutional improvements were also implemented with the introduction of a legislative chamber, the recognition of land ownership, and the introduction of a clear legal and judicial system. Under British rule (1882–1922) Egypt was efficiently administrated and made impressive investments in irrigation and transport. Few countries could match Egypt’s superb irrigation system. All these innovations helped improve the environment for agricultural development. Moreover, though not directly related to agriculture, the opening of the Suez Canal added to the country’s assets. During the first half of the twentieth century, Egypt outperformed its neighbors in the Middle East, (Iran and Turkey). Charles Issawi gives some relevant indicators to that effect (table 3).

In the twentieth century, agricultural development reached its limits. The iron law of diminishing returns imposed its limits on further major changes in agriculture. Agriculture was not the solution any more. The last major agricultural project was the third heightening of Aswan dam in 1910. The solution to the population problem was elsewhere—in industry.


Table 3: Economic Indicators—Egypt, Iran, and Turkey (1925, 1938, 1950)

Indicator Egypt Iran Turkey Population (millions) 1925 14 12.5 13.1 1938 16.4 15 17.1 1950 20.4 19.3 20.9 Imports (millions of dollars) 1925 250 88 246 1938 184 55 119 1950 564 191 286 Railways (kilometers) 1925 4,555 250 4,700 1938 5,606 1,700 7,324 1950 6,092 3,180 7,634 Automobiles 1925 17,740 4,450 7,500 1938 33,700 15,000 11,300 1950 77,900 38,300 32,600 Cement output (metric tons) 1925 90,000 59,000 1938 1950 Refined sugar output (metric tons) 1925 109,000 5,000 1938 375,000 65,000 287,000 1950 1,022,000 54,000 396,000 Students in schools 1925 635,000 74,000 413,000 1938 1,309,000 234,000 810,000 1950 1,597,000 743,000 1,798,000 Cereals output (million metric tons) 1925 1938 3.63 3.09 6.46 1950 3.72 3.09 6.74 Cotton output (metric tons) 1925 1938 400,000 34,000 52,000 1950 364,000 26,000 99,000 Energy consumption 1925 1938 2.05 1.55 2.18 1950 4.42 4.51 5.40 Electricity output (million kWh) 1925 1938 1950 642 200 676 Source: Issawi (1995), pp. 99–101.

8 Hazem El Beblawi

However, by saying that agriculture had reached its limits, I mean “traditional agriculture.” Modern agriculture is a completely different thing; it is part of the industrial society and operated by entrepreneurs and farmers, not by peasants. There is still room for transforming Egypt’s agriculture into a more modern and scientific agriculture. By industry I mean more than simply adding a few manufacturing plants here and there. What is meant is the transition to an industrial society. Egypt needed its industrial revolution.

In all fairness, industrialization was earnestly sought after by most political decision makers as a way to overcome Egypt’s problems. Economic development was conceived as synonymous with industrialization. The challenge with industrialization is that it involves much more than building new industrial plants. It is a total transformation of the society, with new economic agents, motivated with a special spirit and a different mentality and new institutions. Although Egypt recognized the strategic importance of industrialization at the beginning of the twentieth century, the proper environment was lacking. The industrialization process was, unfortunately, implemented in the wrong environment. Why did Egypt fail to provide the proper environment for its industrial revolution?

It is not easy to present a comprehensive answer to this question. In what follows, I shall try to shed some light on what I consider to be factors of major significance. We can identify three factors of particular relevance to my question. These are:

• a strong state and weak society • a semi-rentier economy • an inadequate education system

The first factor refers to the clumsiness of the principal agent (the state) in affecting change. The state, with its political and bureaucratic perspectives, failed to properly perceive the needs of economic rationality for industrialization. The weakness of society denied the economy much-needed initiatives and creative contributions. The second factor emphasizes the emergence of a rentier mentality, which gave free rein to speculations and profiteering, thus corrupting true entrepreneurial spirit. Finally, the education system failed to provide the numbers and qualities of skills needed for an industrial society. These factors are, moreover, interdependent and reinforce each other.

In selecting these factors, I confine ourselves to those factors that are mainly under the control of the society. We do not think it helpful to complain of factors lying beyond the control of the country. Blaming imperialism or globalization, for example, is of no help. We take these external factors as given and deal with the world as it is.


A Strong State and a Weak Society In Egypt, the role of the state is legendary. A flat country, totally dependant on the management of the Nile, Egypt’s geography gave birth to the concept of a “hydraulic society” ruled by an absolute sovereign. The ruler of old Egypt was not only the archetype of absolute power, he was also divine. Modern Egypt did not remain the same, though old habits die hard. Sadat used to say that he was “the last Pharaoh.” He was wrong; he was not a Pharaoh, nor was he the last.

Exposed to international politics since the early nineteenth century, Egypt has grappled with liberal ideas since the early twentieth century with the adoption of a constitution (1923). A new constitutional monarchy was envisaged. It was, however, a timid, unsteady, and after all a short-lived liberal era. Less than two decades later, the Second World War broke out and the liberal experience was severely restrained.

The Roots of Recent State Hegemony Soon after the end of the Second World War, a coup d’état took over power in 1952, giving the newly born liberal era its coup de grâce. A strong, paternalistic but also modernized state tightened its grips on the country. After few years in limbo, the military regime embarked on a socialist approach by nationalizing the bulk of the national wealth. The new state thus monopolized both politics and economics. Though Sadat and after him Mubarak reversed the socialist orientation of the economy, the power of the state was hardly affected. The strength of the state was further enhanced by technological modernization of the security apparatus (police, intelligence services). The power of the media, radio and then television, can hardly be overestimated. It is usually asserted that technology is a factor of democratization. Although this is generally true, repressive regimes also benefit from modern technology. This is one of the external diseconomies of globalization. With the availability of highly sophisticated technologies in the marketplace, many repressive governments were able to hold to power, in spite of popular discontent, because of this imported technological superiority.

If I limit ourselves to the last 50 years, the strength of the Egyptian state showed remarkable resilience and continuity. Obviously, the makeup of the state changed over time to adjust to the new environment domestically as well as internationally. In spite of these changes, one thing remains, by and large, constant: the state is always paramount. The style could be different, the discourse more liberal, yet the substance continued with little change.

With the military coup of 1952, a new young and confident regime was established. The old liberal regime was discredited. It was, therefore, easy for the new military junta to ban political parties, nationalize the press, control the media, and adopt a one-party system. Civil society’s organizations were closely monitored, trade unions penetrated and manipulated, and the rule of law eroded. The new regime was heavily guarded by a strong police and vociferous

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propaganda. Less than 10 years after the coup of 1952, the new regime adopted a new ideology (socialism) and accordingly nationalized most of the economic wealth. The state became the only provider of public services, the sole employer, as well as the preacher and teacher. The state tightly monopolized political power, controlled economic wealth, and supervised information and opinions. In other words, there emerged a paternalistic state taking care of the individual from cradle to grave. This strong state did not lack legitimacy or popular support. It had proved its credentials by scoring a few spectacular successes, in particular the Suez Canal nationalization and then aborting the Suez campaign by the long-hated colonial power (Britain) and the no-less-hated ally (Israel). In the euphoria, it was easy for the people to abdicate their rights and prerogatives to a triumphant and proud state. The Egyptian state reigned supremely over the society among popular accolades. All this came to a tragic end with the l967 defeat. With this military debacle, the myth died out and enthusiasm turned into disillusion if not cynicism. The state continued nonetheless, with minor cosmetic changes. It remained a strong state but without a soul.

In the mid-1970s, the Middle East experienced a sudden financial upheaval with the oil price hikes. Overnight the region became awash with liquid money looking for placements. As I shall see later, the oil money was part of a rentier economy. Egypt’s Sadat turncoat policy seized the opportunity and announced his “Open Door Policy” to attract as much power as he could from this boom. The “Open Door Policy” was thus inaugurated in a context of easy money and windfall benefits. The Egyptian government received considerable sums in aid from brotherly Arab states. Remittances from Egyptian workers in the Gulf represented a substantial percentage of Egypt’s foreign exchange. The result was a strong surge in consumer imports. The consumer society was thus imported from the Gulf along with the oil money. The private sector flourished in the import business, with little inclination for industry.

Moreover, the newborn private sector had to work in an environment totally dominated by the public sector. The public sector was the major supplier and buyer in the economy. The private sector had to accommodate this public sector by creating alliances and common interests with it. This was a time when it was fashionable for every public sector enterprise to form a joint venture with a foreign or private company. Public interest was thus diluted, giving way to open corruption. The private sector, which was born in the womb of the public sector, improved its status with this public sector, graduating from a client status to a partner, but remained still too timid and too dependent. The partnership of the government and the private sector thus gave rise to a new category of rent-seekers. Also, the private sector failed to establish a credible image in the public opinion as a dynamic, creative body. Stories and/or rumors of corruption and profiteering undermined its picture in the public eyes. If the private sector remained weak, political parties, the labor, movement and civil society’s


organizations were even weaker. They could not flourish without serious political reform.

The state was not in a position to yield easily. It took the government almost a quarter of a century before proceeding seriously with the economic reform. Starting in mid-1970s with the “Open Door Policy,” the government needed almost two decades to implement the first stabilization program (1992) and another 10 years (2003) to push ahead with the privatization program. The political reform seems still harder to achieve. It is true that a multiparty system has been recognized, elections held, and human rights declared. But the facts on the ground are completely different. The state remains all-powerful. The same state inherited from a previous totalitarian regime continues to rule with the same symbols, the same methods, and in many cases with the same faces as well.

Strong State and Bad Governance But what is wrong with a strong state and a weak society? How does this affect economic performance?

First and foremost, a strong state is not a bad thing in itself. In fact it is an asset. The problem is that the combination of a strong state and a weak society breeds the malfunctioning of both the state and the society. In such a situation, power prevails over legitimacy, politics takes priority over economics, and loyalty precedes merit. Good governance in such a situation is most unlikely. This was as true under a central planning regime (the Nasser era) as under a market economy (Sadat and Mubarak).

But first, let us recapitulate how industrial management started under Nasser, and to what extent it has changed since.

Under Nasser’s central planning regime, the industrialization program was managed directly by the state. Industrialization became more of a political venture than an economic endeavor. Because at the time Egypt’s relations with the West were constrained, it had to rely heavily on the Eastern bloc as a supplier and then as a model. Importing machinery and spare parts from the Eastern bloc severely limited the choice of appropriate technology. The Soviet model of industrialization and management crept into the Egyptian industrialization program. Costing, efficiency, and marketing were looked upon as of secondary importance. There was an obsession of building new factories, and the bigger, so much the better. The viability, let alone the profitability, of these projects was of no concern. The public sector enjoyed a monopoly without competition. Foreign imports were severely restricted. Industrial management was mainly a technical or engineering matter with very little emphasis on economic or financial considerations. Industry was a national symbol, a prestige venture. But industry was also assuming a certain social responsibility; it had to absorb minimum numbers of new employees every year. The increase in the cost of production was not a concern. Industry operated in a captured market with no competition. If public sector enterprises needed more liquidity for working capital or for

12 Hazem El Beblawi

expansion, banks were there (also public sector) and funding could be secured with no limit. If other pressing needs for spending rose, money borrowed from banks did not have to be repaid promptly. Prices could not go up because the government was always ready to subsidize them and if need be would impose official, administrated prices. The emergence of a black market or shortages was not the concern of industry. Shortages, black markets, and queues became parts of daily life.

In this fancy world with no economic or financial restrains, there was no need for efficiency, competitiveness, or productivity. Costs and prices had no economic meaning; they were vitiated by subsidies and administrative decisions. The industrial public sector was in fact a branch of the bureaucracy governed by political decisions and totally divorced from the world of economics and finance.

This system could continue as long as the economy was kept closed without competition and foreign trading partners were prepared to trade with the country on a barter basis. The Eastern bloc provided Egypt with a complex network of barter relations.

After the mid-1970s, Egypt underwent a drastic change in its foreign relations, moving from a staunch anti-Western country into a close friend and eventually a docile ally of the Americans. In regional politics, Egypt also shifted from a so-called radical to a moderate state. Sadat, who before many others felt the wind of change, bet on the West. Two decades later, his bet was vindicated with the demise of the Soviet Union and the end of the cold war.

Troubles started to emerge in the 1970s, when Egypt embarked on the new “Open Door Policy” by opening up its market to imported goods. Politicians (especially Sadat) faced at the time a dilemma of choosing between keeping the economy protected or opening it up to benefit from the new affluence of the Arab money. Foreign money would not, of course, flow into a closed economy. Egypt chose the second option, but at a price. The public sector had to suffer from the new competition. Burdened by excessive manpower and large indebtedness to the banks, the industrial public sector was deep in trouble in the 1980s as it had to face the new realities of the market.

Sadat knew too well that the new alliance with the West would require, sooner or later, a parallel change in the internal political and economic system. But like his predecessor, Nasser, he was brought up in an authoritarian regime and acquiesced with it. So he chose to make a compromise; to lay the basis for a future change provided that the real change did not happen during his reign, only after him. He wanted to be the “last” Pharaoh. He announced the “Open Door Policy” for the initiation of a market economy and tolerated a multiparty system by decreeing the establishment of three new parties, and did not forget to nominate the party heads himself. It was a tailor-made democracy, a plural political system in theory but full power remained in the hands of the state—that is, the head of state. The “Open Door Policy” during Sadat was, in fact, no more than a small enclave of market economy within a large sea of public sector. A


special legal status was created through an investment law (1974) that provided privileges and incentives to new foreign (and national) investors. Import licensing was eased, allowing the remittances from workers to be used to satisfy the increasing demand for imported consumer goods by a long-suppressed middle class.

Mubarak followed in Sadat’s foot steps, but more cautiously. He took more than 10 years to embark on a first stabilization program, encouraged by strong support from the international financial institutions and with generous financial assistance from the Americans and the Arabian Gulf states, as has been mentioned. Ten years later, he gave another push to the privatization program. The private sector grew quite substantially in the meantime. If Mubarak was slow in pushing economic reform, he was even more reluctant to engage in political reform. Only very recently and after almost 25 years of his reign did Mubarak openly speak of the need for political reform. The state remained with Mubarak as it was with Sadat and Nasser before him, very strong, overshadowing all other players.

It is no exaggeration to conclude that Egypt implemented its development programs over the last 50 years or so, under a regime of a strong state and a weak society. During this period, Egypt followed two different strategies for industrialization. In a first phase, Egypt followed, to a great extent, a Soviet-type industrialization model. The model itself was flawed due to the fact that it overlooked efficiency considerations. The later collapse of the Soviet Union made this flaw obvious. In a second phase, Egypt opted for a more market-oriented economy. However, the necessary institutional prerequisites for good governance were lacking. During these two phases, Egypt suffered from a serious governance gap and lost its place in comparison with successful economies in the Far East and elsewhere.

During the centrally planned phase (Nasserite), concepts like efficiency, profitability, and so forth were almost alien to the political vocabulary; they were at most of secondary importance. Later phases, although characterized by more private sector participation, were not much better. The dominant state inherited from the past continued to infect the good governance of the economy.

All studies undertaken by the World Bank and other institutions indicate that Egypt suffers from a serious deficit in its governance context. The quality of the administration in the public sector is far below the equivalent equality in South East Asian countries. The World Bank estimates that if MENA countries (Egypt included) had matched the average quality of the administration in those countries of South East Asia (Indonesia, Malaysia, the Philippines, Singapore, and Thailand), its growth rates would have been higher by about one percentage point a year. In 30 or 50 years such growth would have created a quantum change in the economic landscape. The same study refers to the ambiguity of laws and regulations, worsened by a lack of transparency, giving rise to discretion and also to corruption. Additionally the weak property rights limit access to finance. The perceptions of corruption and unfairness are high. Scores

14 Hazem El Beblawi

on indices of corruption perception (Transparency International), economic freedom (Heritage Foundation), creditworthiness (Moody’s, S&P’s), and so forth all confirm the same impression of a serious deficit in governance.

The World Bank publishes on its Website the results of a study on governance in the world (Kaufmann and Mastruzzi, 2006). To measure governance, the World Bank’s study uses six indicators: voice and accountability, political stability/no violence, government effectiveness, regulatory quality, rule of law, and control of corruption. In figure 2 and the statistical table below (table 4), I show the results for Egypt in 1998 and 2005. The bad news are that it seems that in all cases the situation seems to have worsen in 2005 compared to 1998.

Figure 2 depicts the percentile rank on each governance indicator for Egypt, and table 4 gives the percentile rank for each indicator. Higher values indicate better ratings. The same study allows making comparisons among economies (figure 3). We have selected five star performers from East Asian economies for comparison with Egypt: Hong Kong (China), Singapore, Taiwan (China), Korea, and Malaysia. In all cases, Egypt ranked at the lowest position. The charts and statistical tables speak for themselves and need no further comment. Figure 2: Governance indicators for Egypt (1998–2005)

Voice and Accountability

Political Stability/No Violence

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Comparison between 2005, 1998 (top-bottom order)Country’s Percentile Rank (0–100)

0 25 50 75 100


Table 4: Statistical Table—All Six Governance Indicators for EGYPT (1998–2005) Governance Indicator Year

Percentile rank (0–100)

Estimate (–2.5 to +2.5)

Standard error

Numbers of surveys/polls

2005 18.4 –1.15 0.12 9 Voice and Accountability 1998 24.2 –0.89 0.24 4

2005 21.2 –0.90 0.21 9 Political Stability/ No Violence 1998 33.5 –0.33 0.26 6

2005 43.1 –0.35 0.15 11 Government Effectiveness 1998 54.1 –0.09 0.27 6

2005 34.7 –0.47 0.16 10 Regularity Quality

1998 47.8 +0.12 0.31 5 2005 54.6 +0.02 0.13 15

Rule of Law 1998 58.2 +0.01 0.20 9 2005 43.3 –0.42 0.15 11

Control of Corruption 1998 55.4 –0.23 0.21 7

Figure 3: Governance Indicators—Selected Countries (2005)

0

10

20

30

40

50

60

70

80

90

100

Hong Kong,China

89.6 100 52.2 92.1 91.3 92.8

Singapore 84 99.5 38.2 99 95.7 99.5

Taiwan,China

64.2 79.7 69.1 70.9 78.7 83.7

Malaysia 62.3 66.8 34.3 64.5 66.2 80.4

Korea, Rep. of

60.8 71.8 68.1 69 72.5 78.9

Egypt 21.2 34.7 18.4 43.3 54.6 43.1

Political Stability/no

violence

Regulatory Quality

Voice & Accountability

Control of Corruption Rule of Law Government

Effectiveness

(Per

cent

ile ra

nk 0

–100

)

Source: Kaufmann and Mastruzzi (2006).

16 Hazem El Beblawi

Box 1: Singapore’s Strong Bureaucracy Egypt’s authoritarian strong state does not seem to favor high economic growth, but Singapore provides a different example. We have here an example of good governance, actually one of the most successful, with an authoritarian regime. In fact, this is the exception that confirms the general rule. It can hardly be replicated. Without elaborating too much on Singapore’s experience, it suffices to remember it is a very small country with one of the highest population densities in the world and very few natural resources. It is a country facing a serious challenge for survival. Along with a long-trading authoritarian tradition, the country also has had the good fortune to have Lee Kuan Yew as prime minister. He established, it is true, an authoritarian regime, or better a Spartan system. However, he also succeeded in maintaining a strict and vigorous rule of law with a high level of integrity. This was not totally accidental. Lee Kuan Yew worked as a businessman under the Japanese occupation and was highly educated with a fine intellectual outlook. He graduated with a degree in Law from Cambridge University, United Kingdom, with double-starred First Class honors—a unique case among dictators. The laws of probability make such occurrences very rare indeed. On assuming power, Lee Kuan Yew made a point of having a small, competent, and well-paid bureaucracy. A public civil servant earns 25–30 percent more than his peer in the private sector—again not common practice.

That there is a governance deficit in Egypt is not subject for dispute. The real

question is whether this deficit can be rectified through economic reforms only, without a political reform. In other words, is a democratic political system a prerequisite for good governance? Singapore has done it and to a lesser extent, Korea. Why not Egypt?

Democracy and Good Governance In theory, democratic rule is not a prerequisite for good governance. Philosophers (Plato) conceived of nondemocratic republics ruled by philosophers. In the Arab world, some thinkers voiced similar ideas, such as the need for a “just despot.” But this would not work in Egypt or elsewhere in the Arab world. The genesis of Egypt’s authoritarian regime is based on grounds directly opposed to the requirements of good governance. In particular, there are limits as to what can be achieved in the areas of the rule of law, transparency, and accountability. This does not mean that there is no room for any progress in these areas. In fact, there is a lot that can be achieved, and in fact, some improvements have already been realized. But the fact remains, that there are limits beyond which the political interests will fight back. In authoritarian regimes, the rule of law, transparency, and accountability are tools in the hands of the ruler, and can only be allowed to function within certain limits and boundaries.

There is also another factor of no less importance: credibility. One of the problems facing any political regime is credibility. By and large in the Arab world, there is a credibility crisis. Because many promises were made in the past without delivering tangible results, most people became indifferent and unmoved. Without a political reform, people will remain skeptical about changes, and the cry of warning about the wolf would not necessarily be heard.


People have memories, and want to see real change on the ground to believe it. Therefore, many would continue to be cynics, and without people’s commitment, little can be achieved.

Let us begin with the rule of law. Every one agrees that a market economy cannot function properly in the absence of the rule of law. Although at present Egypt could not be considered a police state, it cannot be viewed as the Land of Law either. Perhaps, Egypt is the only country in the world that, with the exception of two years, has been continuously ruled under emergency laws since the Second World War. Though the government does not resort to the prerogatives given under this exceptional law, the mere fact that this exceptional power exists is an effective deterrent to assure that people would behave according to the state’s will. Also, because a government that is not freely elected needs the loyalty of its administration, it is no wonder that high-ranking officials are rewarded with power and financial benefits.

Ambiguities and discretions in laws and regulations are not always the result of ignorance or bad law drafting. In many cases, they are intentionally designed to increase the power of the administration. Also very often, the government has to turn a blind eye to many irregularities. No less serious is the habit of disrespect of the law. In many cases, the government took it upon itself to set the bad example. During Nasser’s era, one of his lieutenants declared triumphantly that the “law is on vacation.” Nasser’s practices of indiscriminate sequestrations, arrests, and nationalizations of wealth confirmed that the law was, in fact, on vacation. It is true that these abuses have not been in use lately, though police practices against government opponents from the radical Islamic movements are sometimes reminiscent of the old methods. This gives the impression that these methods are not dead, they are just frozen.

Moreover, the public sector, very much alive until the 1990s, was not very orthodox in respecting the law. Very frequently, the public sector did not comply with the norms and standards of production issued by the government. Governmental departments frequently violated building and zoning regulations. Defaulting by government departments and public sectors entities on payments to suppliers as well as to banks was normal practice. Judicial sentences were not easily enforced. When it comes to sentences against the government, it becomes even more difficult. The rule of law is in many ways anathema to authoritarian regimes. For them, law is an expedient in the hands of the government. It can be disposed of, if need be.

What about transparency? The same conditions apply as with the rule of law: transparency can be accepted, but only to a limit. As has been said about the rule of law, the market needs an accurate, continuous, and reliable flow of information. Since the market system is based on decisions made by individuals, these cannot be made rationally and efficiently in the absence of information. The market is a place for the exchange of information.

18 Hazem El Beblawi

The genesis of the political regime in Egypt—as has been mentioned—was laid by the military coup of 1952. For military people, as for many others, information is power. However, because the military outlook is focused on the enemy, information—as power—is better withheld from the enemy. Thus, secrecy and confidentiality became second nature in the decision-making process. The statistics office was renamed as the “The Central Agency of Public Mobilization and Statistics” (CAPMAS) and has always been headed by a military ex-general. The emphasis on “mobilization” is very indicative. Information is very much linked to security—that is, national security. It is not an economic means to wealth; rather, it is a weapon in the face of the enemy.

But information is not only a weapon; it is also a tool of government. The first thing that the new military regime introduced in 1952 was the establishment of a new “Ministry of Information and Guidance.” The word “Guidance” was dropped later, but the idea remained. Accordingly, the press was nationalized and of course radio and television were kept under government control.

We are now witnessing a tide of relaxation on the control of information, particularly within the context of the global revolution. New opposition newspapers have appeared and even private television channels licensed. However, Egypt is far from having a free press, and the government is keeping a tight hand on the “national” press and television.

Like most developing countries, Egypt’s statistics suffer from unreliability, untimeliness, and contradiction. However, under the advice of the World Bank and IMF, a recent serious effort has been undertaken to upgrade the database of financial information. This is a very important step forward. As late as the 1990s, Egypt had a hard time—during negotiations with the Paris Club—figuring out the total sum of its foreign public debt.

In spite of the efforts to upgrade the quality of information, there remain a few areas of total blackout related to what are considered sensitive political areas. Defense and armaments are among such areas, but not the only ones.

Information is not limited to public data; it should also flow from the private sector. Financial statements of corporations, financial securities data, and other disclosures of relevant information for the market are very important.

Finally, accountability does not fare any better. It is much less respected in authoritarian regimes. In Egypt, the political elite has wide immunity. The decision-making process is not clear. Many important decisions are taken behind closed doors by people with no names or faces. Except for the president, real power is illusive. No one knows for sure, who are the people around the president, how they work, and what are their responsibilities. Furthermore, the president is, of course, above accountability, because he is always right. It is also not uncommon in Egypt that wild projects pop up out of the blue, described as strategic to the survival of the country. A few years later, and after spending billions of pounds, these same projects disappear, also suddenly, without serious investigation and/or discussion. The Abu Tartour project for phosphate was an


example of such sudden appearance and disappearance, and Toshka in southern Egypt was another. But the range of unaccountability goes far beyond these examples.

With such poor respect for the requirements of the rule of law, transparency, and accountability, it was hard to learn from previous mistakes and unsatisfactory performance. It is no surprise that the learning curve in Egypt does not seem to be working properly, and the same mistakes are repeated again and again.

It is thus clear that the requirements for good governance cannot be satisfied sufficiently in Egypt without serious and credible political reform. Recent experiences of economic reforms in countries of transition confirm the dominant current view that increased democratization makes economic reforms and hence growth more likely.

Finally, I have to emphasis that with a strong state there is another face of the coin; a weak society. We will discuss this aspect further in the last section, in the context of the impact of education. A market economy needs a dynamic, vibrant society. Market success requires a special breed of individuals, entrepreneurs. In the mid-1970s, Egypt tilted towards a market economy. At this time, Egypt found herself among rentier economies. The regional environment has impacted Egypt’s experience as well. For Egypt, neighborhood did matter.

Semi-Rentier Economy Egypt has always been part and parcel of the Arab Middle-Eastern politics, influencing and being influenced by its neighbors. The Yom Kippur War (1973) and the subsequent oil prices shocks (1973–74 and 1979) did not leave the region or Egypt unaffected.

Oil prices, which had shown splendid stability during the first 70 years of the twentieth century, suddenly quadrupled between October and December 1973. At the beginning of the century, oil cost about $1.20 a barrel in the United States, only reaching $1.69 in 1970 (in Al Ahmadi, Kuwait)—a remarkable stability with no parallel in commodity prices in recent history. Following the 1973 war, OPEC ministers met in Tehran in December 23–24, and raised the price of oil to $11.65 from $3.01 per barrel. Spot markets reacted nervously, pushing prices to more than $20 per barrel. Five years later (1979), the market witnessed yet another shock with the Iranian Revolution. Oil-producing countries—the Gulf states in particular—were suddenly promoted to world financial prominence as major suppliers of liquid money.

Rentier Mentality A windfall wealth of unprecedented magnitude in a very short time revived the idea of unearned income, thus giving rise to the concept of rentier economies. The basic idea behind such a concept is that it creates a specific mentality; a rentier mentality (Beblawi, 1987). The difference between such a mentality and

20 Hazem El Beblawi

conventional economic behavior is that it embodies a break in the work-reward causation. Reward—in the form of wealth or income—is no more related to work or risk bearing, but rather to chance or situation. For a rentier—an individual or a state—reward becomes a windfall gain, an isolated fact, situational or accidental, as opposed the conventional outlook where reward is integrated in a process as the end result of a long, systematic, and organized production circuit. The link between new-found wealth and the emergence of a rentier mentality is a general phenomenon sparing no country, rich or poor. Holland, for example, though quite rich and advanced, was affected by the same virus subsequent to its exploitation of natural gas (the Dutch disease). Of course, individuals and societies learn from experience.

Most oil-producing countries went through painful experiences in the 1990s after the decline of oil prices and learned their lesson. In the 1970s and most of the 1980s, it was, however, a time for euphoria and unbounded optimism. This was a time when the rentier mentality manifested itself loudly and clearly. It was precisely at this very moment, that Egypt announced its conversion to the “Open Door Policy.” Whether this was a coincidence or not is beside the point. Oil money with its corollary—the rentier mentality—were reigning high in the whole Arab region and Egypt was no exception. It would, however, be an exaggeration to attribute the emergence of the rentier mentality in Egypt to the impact of oil money. In fact, rent was not a new element in the Egyptian economy. Since the mid-1950s, Egypt had benefited from the Suez Canal revenues, American wheat shipments, and massive economic assistance from the Soviet Union. It remains true that from the mid 1970s, oil money—directly or indirectly—became a dominant factor in the whole Arab economy, Egypt included.

Usually, but not necessarily, rent breeds bad-quality institutions. The so-called natural resource curse has been amply discussed in the economic literature (Arezki and van der Ploeg, 2007). With windfall gains, people are more tolerant of corruption and also less insistent on the rule of law. More often than not, the rentier economy and bad governance go together.

Announced at the height of the oil era, the “Open Door Policy” shaped an emerging Egyptian market economy by favoring consumerism, profiteering, speculation, and so forth. This is precisely the opposite of the intellectual environment that prevailed during the industrial revolution in Europe or Japan. Max Weber attributed the success of the capitalist market economy to the Puritan ethic of hard work and thriftiness in what he called the capitalist spirit. Schumpeter liked to emphasize the role of the entrepreneur as a vehicle for innovation. Though he later put the emphasis on economic organization rather than the entrepreneur, he remained attached to the idea of innovation as the engine for growth. In Japan in the late nineteenth century, and in other Far Eastern Asian countries in the late twentieth century, national pride combined with political will helped them achieve success. A market economy cannot


succeed without a proper culture akin to the capitalist spirit; a spirit of risk-taking, innovation, cost-effectiveness, competitiveness, far-sightedness, and rationality. None of the these qualities are part of rentier mentality.

Rent in Egypt Egypt is not, of course, a rentier economy in the full sense. It remains true, nonetheless, that the whole Arab world—oil rich as well as oil poor—has been affected one way or the other by the oil phenomenon. The whole region gained a strategic position on the world chessboard simply because of its oil endowment. Egypt, in particular, as a key player in the region politics, enjoyed a sort of a location rent, and it cashed in. It is no surprise, then, that Egypt received in 1960s the highest Soviet aid to a foreign country outside the Soviet block, and subsequently became, together with Israel, the highest American aid recipient a decade later. There is no harm in benefiting from a strategic location, but the problem is that with a rentier mentality, this could result in a diversion of national priorities as foreign policies become substitute for development efforts. For politicians in Egypt, foreign policy has always been the top priority. It is true that in most cases, this has paid handsomely, but one is entitled to ask: did it add effectively to developmental potential, or did it increase Egypt’s dependence on foreign aid? Very few countries have relied so much and for so long on foreign aid as Egypt. After almost a quarter of a century in the business of receiving American aid, it is legitimate to ask whether this aid was a good cure or whether it became an addiction.

Moreover, foreign aid has helped create different layers of parasitic rent seekers around the use and distribution of the aid. In Egypt, the American aid has bred a huge business of professionals helping in processing proposals and their implementation. The staff of USAID in the American Embassy in Cairo is one of the largest in the world, but it is also surrounded by an outside army of accountants, financial analysts, engineers, and experts in every aspect of social and economic life. Their contribution to the public welfare is doubtful, to say the least. It is worth referring also to the large bureaucratic Egyptian counterpart that benefits from the largess of the aid; trips, workshops, retreats, and so forth. Corruption is not totally absent, either.

Aid to Egypt is not confined to the Americans. The Arabian Gulf states, through Arab Summits or unilaterally, contributed generously to help Egypt in its effort to rehabilitate its dilapidated economy after the 1973 war and again after the first Gulf War (1992). The American aid came, in fact, to reward Egypt for its Camp David Accords with Israel and to replace the Arab aid, which was stopped, at the time, after the signature of the same Accords.

Workers’ remittances are a special form of rent. True, it is not easy to equate workers’ remittances to external rent. From the worker’s point of view, he is earning his income at the cost of effort and work. He is no rentier. However,

22 Hazem El Beblawi

from the recipient country’s point of view, remittances are more akin to aid or nonrequited money transfers.

Over the last three decades or so, workers’ remittances in Egypt represented a substantial and stable flow of financial resources. They represented the single largest source of foreign exchange revenue. Egypt is, in fact, one of the five largest recipients of remittances in the world (the others are India, Mexico, the Philippines, and Turkey). Over the period 1970–98, it was estimated that Egyptian remittances contributed, on average, 7.2 percent of the GDP and 13.5 percent of the exports of goods and nonfactor services, and at times reaching a maximum of 31.6 percent and 57.4 percent of GDP and exports respectively (Chami, Fullenkamp, and Jahjah, 2005).

Workers remittances are not simply capital flows such as foreign direct investment. Generally speaking, they are not profit driven. The World Bank and the IMF have analyzed these flows worldwide. Their analysis distinguishes between what they call the “endogenous migration” approach and the “portfolio” approach. In the latter approach, remittances behave like other capital flows in their search for better economic opportunities. The “endogenous approach,” on the contrary, proceeds from the relation between the migrant and his family as motivated by altruism and not profit. The remittances become then a kind of “compensatory transfers.” Since most of Egypt’s workers remittances are drawn from its expatriates working in the oil-producing countries, I believe that the compensatory approach is more relevant to my case. The bulk of Egyptian workers in the Gulf states are drawn from the lower middle class and many of them are semiskilled and unskilled labor. Although Egyptian labor migration to Europe or America is primarily a drain on its brains, migration to the Gulf states is a drain on its muscles as well. For most Egyptian expatriates, the trip to the Gulf was their first encounter with the world at large, and they discovered a world of abundance and affluence. Most of the workers were alone and more often than not living in hard and difficult conditions. Their only joy was to make their families—back home—happy, by inundating them with imported goods; and if they were wiser, they would save to buy a piece of land to enhance their social standing. Remittances transferred from the Gulf states to Egypt were part of family economics. Moreover, they carried with them the new culture of the host countries, including the rentier mentality.

Egypt’s economic policy in the face of the new situation of increasing demand on remittances transfers was quite strange, to say the least. With hindsight, it seems as if the governmental response at the time was designed to promote imports of consumer goods, create a black market for foreign exchange, and encourage speculation. Poor government management seemed to collude with a rentier mentality to squeeze fast profits and to help form new fortunes. How did this happen?


The “Open Door Policy” announced in 1974, eased imports restrictions and introduced a new system called “import without cash transfers,” which meant that banks were not bound anymore to make foreign exchange available to importers. Importers should manage on their own to procure foreign exchange. The implicit assumption was, of course, that workers’ remittances would provide the supply of foreign exchange to importers. With the removal of import restrictions and the introduction of the new system of “import without cash transfers,” demand for foreign exchange increased substantially. One would have expected a depreciation of the local currency. At the time, however, the foreign exchange rate was sacrosanct and the government persisted in maintaining the official exchange rate unchanged. The market response was immediate; a black market emerged and an informal network of moneychangers was formed with offices in most of the Gulf states to collect foreign exchanges from Egyptian expatriates. Workers’ remittances were thus rerouted away from the banks and rechanneled almost exclusively through this new informal network of moneychangers. The only sources of foreign exchange available to banks were the sovereign sources (oil, the Suez Canal, and proceeds from public sector exports). To make things worse, many banks—including public sector banks—supported this emerging network by extending credit to moneychangers. Thus, the combination of the government mismanagement and the prevalence of the rentier mentality resulted in the emergence of a black market, speculation, and the formation of sudden fortunes. To add insult to injury, a new form of “Islamic savings societies” was established to cater for those with religious apprehensions of “usury” banks. These societies collected billions of pounds from small savers—mostly expatriates—and became active players in import and trading activities. The odd thing was that these societies functioned freely with hardly any supervision from the central bank or any other governmental body. Naturally, these societies ended up being involved in fraud and scandals.

Over and above this financial disarray, the flow of workers’ remittances fueled speculation on land and real estate. A rentier mentality is basically a land-oriented mentality. Many Gulf investors rushed to invest in the real estate market, thus adding to the pressure on its prices. The government itself joined the fray by starting to sell land with a view to encouraging the establishment of new industrial zones and tourist resorts. Government land sales were implemented through local authorities that were not always above suspicion. It was rumored that many beneficiaries from these land sales succeeded in building huge fortunes for themselves. Multibillion-pound tourist resorts were built on the North Coast (west of Alexandria) as well as in the Red Sea area. The Red Sea area became an attractive tourist spot, while the Mediterranean Coast in the north remained highly underutilized.

24 Hazem El Beblawi

Table 5: Rent in the Egyptian Economy (US$ Millions)

Year Oil

Exports (1) Tourism (2) Suez Canal Revenue (3)

Workers’ Remittances (4)

American Aid (5)

Total Rent Resources

1993–1994 1,772 1,779.3 1,990.3 3,489.2 747.0 9,777.8 1994–1995 2,175 2,298.9 2,058.4 3,455.8 592.0 10,580.1 1998–1999 999.7 3,235.1 1,764 4,569.1 826.6 11,694.5 1999–2000 2,272 3,235.1 1,824 4,679.5 859.7 13,949 2000–2001 2,632 4,316.9 1,843 2,661.0 740.7 12,193.6 2001–2002 2,381 3,293.4 1,820 4,252.4 406.3 12,153.1 2002–2003 3,161 3,422.8 2,236 3,609.3 888.4 13,317.5 2003–2004 3,910 3,796.4 2,848 3,934.1 403.9 14,892.4 2004–2005 5,299 5,475.1 3,307 5,427.8 650.0 20,156.9

Source: (1), (2), (3) (4): Central Bank for Egypt (various issues); (5): Saleim (2006).

Beside these external types of rent, Egypt is not totally denuded of other

forms of rents. Oil and gas are typical natural resources generating rents. Historically, Egypt was the first country in the Middle East where oil was discovered. For the time being, Egypt possesses modest reserves in oil and a brighter situation with respect to natural gas reserves. Egypt is also importing petroleum products, but still is a net exporter in energy products. The Suez Canal, which was nationalized in 1956, is another important foreign exchange earner. Finally, with its rich historical heritage, moderate weather, and marine coast attraction on the Red Sea, Egypt enjoys a large potential for tourism. Total rent from different sources amounts to some 20 percent of Egypt’s GDP (table 5).

Rent to the Government Many of foreign exchange earners in Egypt (foreign aid, oil and gas, Suez Canal) are sources of government income. Giacomo Luciani (1987) emphasized the fact that the external rent available to governments freed them from the need of raising revenue domestically, mainly through taxation. This relative independence of governments from their taxpayers alleviates the pressure for political accountability. Rentier states have, in fact, a wide margin of maneuverability to spend unwisely and with impunity. The utilization of Egypt’s revenues from foreign aid, oil and gas exports, and Suez Canal incomes are usually not strictly monitored. Their accounting systems are not fully transparent and sometimes difficult to decipher.

Rent as income to governments not only provides impunity from serious accountability but also often is an invitation to adopt solutions of facility. This is not simply a manifestation of laziness; it could also make sense. If there is a path of least resistance, why choose any other path? Unfortunately, progress often requires choosing paths of hard resistance. Arnold Toynbee in his Study of History formulated a theory for civilizations based on challenges and responses.


Without enough challenge, no creative action would take place. Rent as easy money induces the choice of easy solutions, which are not necessarily the best ones. I will refer to two recent examples of Egyptian government’s decisions, reflecting this path of least resistance—that is, the rentier mentality.

The first example is related to Egypt’s response to competition from other producers of textile exports. Egypt has been a member of GATT since the 1970s, and, accordingly participated in the eight-year Uruguay Round negotiations that were concluded by the signature of the December 1994 agreements establishing the WTO. According to this agreement, cloth and textile exports were to be integrated in the GATT system and the quota system abolished over a period of 10 years (ending on December 31, 2004). Egypt was, of course, fully aware of this arrangement and had ample time to take the necessary measures to upgrade its cloth and textile industry to face the new competition once the quota system was abolished. It seems that this did not happen. The Minister of Trade and Industry announced in December 2004, a few weeks before the end of the quota system, that in order to maintain its share of cloth and textile exports in the American market, Egypt had no option but to sign an agreement with the United States (creating Qualified Industrial Zones, QIZ) to benefit from a free trade arrangement for the Egyptian exports. The issue is not whether this agreement was politically correct and/or economically beneficial. Rather, the issue is that the minister did not find it embarrassing to justify his decision by referring to the imminent exposure of Egypt exports to foreign competition, as if 10 years were not enough to take the necessary measures. Within a rentier mentality you need not plan for the future. God-given gifts will be available on time! The American proposals (QIZ) saved Egyptian textile exports!

The second example is related to the exports of natural gas. In late April 2006, the headlines of major governmental newspapers announced the inauguration of the largest plant for liquefied gas in Egypt and that Egypt would, therefore, be the sixth largest exporter of natural gas in the world. Less than four months later, the government announced its intention to acquire nuclear reactors because of the expected future shortages in energy resources. It is generally known that oil and gas reserves in Egypt will be depleted within two or three decades. Under the circumstances, one would question the wisdom of expanding Egypt’s exports of gas against such a background of energy shortage. However, within the framework of the rentier mentality, gas exports are the easiest way to generate foreign exchange. God will take care of the future generations!

Rent and Egypt’s Economic Performance A rentier mentality cannot explain all the economic development in Egypt over the last three or four decades. It helps, nonetheless, to understand many decisions and reveals some of the motives behind some of the actions taken. In a recent paper on economic growth in Egypt, Dobronogov and Iqbal (2004) distinguished five distinct phases of Egypt’s economic development over the last

26 Hazem El Beblawi

four decades. They based their model on the correlation between per capita growth in Egypt and the high-income OECD countries in what they referred to as the “convergence phenomenon.”

Without disputing the validity of the assumptions behind their model, the growth trends in the different phases, mentioned in that model, could equally be explained by the rise and fall of the external rent available to the Egyptian economy.

Phase 1: 1961–73, low growth with and divergence from OECD This phase included, in fact, two parts: 1961–65 and 1965–73. In the first part, Egypt showed relatively reasonable growth rates during the implementation of the first quinquennial plan (1961–65). However, this growth was disrupted by the termination of American food aid for political reasons in 1964. Egypt was subsequently fatally crippled after 1967 war with the closure of the Suez Canal and the loss of its oil resources in Sinai. A mobilization for a war economy then prevailed in 1967–73. The poor performance of this phase can be mainly attributed to these external factors.

Phase 2: 1974–85, high growth and convergence with OECD During this phase Egypt received substantive Arab financial donations, reopened the Suez Canal, and recovered its oil fields in Sinai. Moreover, workers’ remittances started to reach higher levels due to the increase in the numbers of Egyptian workers in the Gulf states.

Phase 3: 1986–91, low growth and divergence from OECD This was the time of the first decline of oil prices, which negatively affected both Egypt’s oil exports and workers’ remittances. It was also a politically turbulent and unstable domestic period, which disrupted tourism as well. Oil revenues, workers’ remittances, and tourism all were down during this phase.

Phase 4: 1992–98, high growth and convergence with OECD At the end of the first Gulf War (the Iraqi invasion of Kuwait) Egypt received, as a reward for its political stand, the write-off of the American military debt, the Arab debt, and half of the other public debts through the Paris Club. Egypt also benefited from substantial Arab financial support. This phase also saw the implementation of the first IMF stabilization program, which helped stabilize the macro aggregates.

Phase 5: 1999–2003, lower growth and slowdown in convergence This phase witnessed several shocks, including the aftermath of the Luxor terrorist attack on tourists in 1997, which seriously affected tourism. Oil prices also declined to their lower levels, and the effects of the global financial crisis of


1997–99 and domestic financial scandals in 1998–99 were also instrumental in the overall decline in economic growth.

The growing importance of rent in Egyptian economy since the mid-1970s thus helps explain a great deal of Egypt’s growth pattern during this period. However, it would be overstretching to attribute this rentier mentality only to neighborhood considerations. The educational system in Egypt failed to provide the skills and values needed for an efficient industrial society.

Inadequate Education System Education is the lifeblood of a good society, but also of a prosperous economy. Sweden was probably the first European country to introduce compulsory education. With a small population, limited natural resources, and no imperial ambitious, Sweden always managed to maintain a prime position among advanced economies. On the other hand, Japan’s economic success since the late nineteenth century and other Far Eastern countries’ success stories in the late twentieth century cannot be dissociated from their achievements in education. It is significant that students from Japan, Korea, and Singapore systematically score high marks on international tests (Hanushek and Woessmann, 2007). If there is no strict causational law between education and economic progress, historical observations confirm beyond any doubt an obvious correlation between the two. In their essay on “Education for Growth,” Krueger and Lindahl concluded that “cross-country regressions indicate that the change in education is positively associated with economic growth” (Krueger and Lindahl, 2001, p. 1130).

It is not my intention here to discuss here the entire issue of education in Egypt with all its ramifications, as I have no special expertise on the subject. However, it is my conviction that Egypt’s educational system, as it stands now, helps explain some features of the unsatisfactory performance record of the Egyptian economy over the last three decades.

A Bit of History Until the beginning of the nineteenth century, the Egyptian educational system was traditionally based on religious teaching. It was Mohamed Ali who first introduced a parallel technical and secular education to support his efforts for modernization. He sent missions to Europe (France) to train young Egyptians in technical schools while soliciting foreign experts to supervise his new ventures. He also founded a military school, as well as new medical, engineering, and language colleges. By the mid-nineteenth century, many foreign communities—French, English, Italian, and American—had established missionary schools. At the same time, Egyptian civil society was active in opening up new schools through the establishment of trust funds (Islamic Wakf). As a result of such efforts, the Egyptian University was opened in 1908 thanks to generous donations from rich families (in particular princess Fatima).

28 Hazem El Beblawi

With the announcement of Egypt’s independence in 1922, education ranked among the highest priorities of the new government. One of the first measures adopted by the new parliament was to enact a law introducing compulsory education (1925). The private Egyptian University was converted into a governmental institution, Cairo University (Foad University) in 1925. Subsequently, many schools were built, yet the rate of illiteracy remained high. In the 1937 census, illiteracy was estimated at some 85 percent of the population. In response to this alarming state, a new law for the eradication of illiteracy was enacted in 1944, though with little success. From the mid-1940s to the mid-1950s, new universities were added to Cairo University, including Alexandria (Farouk University) in 1942, Ein Shams (Ibrahim University) in 1951, and Assut (Mohamed Ali University) in 1949. Until the 1950s, Egypt’s education system followed, by and large, the western model of education. The quality of education was not far behind western standards. Egypt suffered more from insufficient educational opportunities than from the quality of the education products.

By mid-1950s a new political regime took over with a different approach to education. Emphasis shifted to providing free education for all. Secularization trends continued. Al Azhar University (a religious institution) was reformed (1961), introducing new modern disciplines alongside the religious teaching. Women were also allowed to enter to Al Azhar Colleges. The numbers of new schools increased substantially, though not enough to match the population growth. Moreover, the quality of education was relegated to a secondary priority.

With the “Open Door Policy” in the mid 1970s, yet another ideological reversal took place with the proliferation of private schools, and later on, with the opening up of higher education to the private sector. Another notable reversal was the increase in setting up new religious schools attached to Al Azhar. The actual education landscape seemed quite heterogeneous, including a large variety of different types of schools: private/public, secular/religious, free/paid, and Arabic language/foreign language schools. This variety gave rise to a sharp social divide within the society. Well-off families sent their children to private, mostly foreign schools, while the poor had no alternative but the public governmental schools and/or the religious ones (both are tuition free) (figure 4).

Education was, no doubt, a major factor in Egypt’s development. Moreover, its education system played a leading regional role in the propagation of education in the Arab world. Until the mid-twentieth century, Cairo, and to a lesser degree Beirut, were the two leading centers of education in the Arab world. In the second half of the twentieth century, Egyptian teachers and other professionals were to be found in every corner of the Arab world. Egypt owed its cultural leadership in the region to its role as the educator of the Arab world during most of the twentieth century.


Figure 4: Trends of the Growth of Religious Schooling

Primary Schools Middle Schools Secondary Schools

Primary Students Middle Students Secondary Students

2,500

2,000

1,500

1,000

500

0

Num

ber o

f Sch

ools

88/89 89/90 96/9795/9694/9593/9492/9391/9290/91

Year

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

Num

ber o

f Stu

dent

s

Sources: CAPMAS; Mina (2001).

Notwithstanding this vital role, there is consensus that Egypt’s education system failed to match the growing needs of an emerging industrial society. In what follows, I shall touch briefly on some of these shortcomings.

Quantitative Aspects First and foremost, Egypt’s efforts to eradicate illiteracy were quite slow and inefficient. Seventy years after the official introduction of compulsory education, close to one third of male adults and more than 60 percent of female adults are still illiterate (table 6). Compared to other developing countries, Egypt’s record in this respect is not particularly good. Table 6: Adult Literacy by Sex (percent) Year Both Sexes Male Female 1980 40 54 25 1985 44 57 30 1990 48 60 34 1995 50 64 39 Source: UNESCO, statistics.

30 Hazem El Beblawi

Primary school enrolment in 1991–92 was only about 80 percent of the corresponding age cohort. Middle school enrollment represented less than 70 percent of its age cohort. The highest dropout rate, nearly 15 percent, occurred near the end of the primary cycle with an additional 10–15 percent leaving school by the end of middle secondary school (Hanushek and Lavy, 1994). Comparison in dropout ratios between Egypt and some selected countries are useful (figure 5).

The situation has lately improved. According to the latest World Development Indicators (2006) from the World Bank, the gross intake rate in Egypt for schools in grade 1 has reached 100 percent for male students and 98 percent for female of the relevant age group. Table 7 shows the evolution of enrollment rates in Egypt between 1970–97. The average male enrollment between 1994 and 1999 reached 7.4 years (Galal, 2002).

Except for the persistence of illiteracy for so long, other quantitative indicators put Egypt within an average ranking. There seems to be a general agreement that Egypt has made substantial progress with respect to access to education (Galal, 2002). Perhaps the more serious problems of Egypt’s education system reside in its qualitative features.

Table 7: Evolution of Enrolment Rates in Egypt (1970–1997)

1970 1975 1980 1985 1990 1995 1996 1997 %

Change 1970–97

Pre-primary Total 1.2 1.9 3.2 4.5 6.1 8.0 8.9 N.A 641.7 Male 1.2 1.9 3.2 4.5 6.1 8.2 9.0 N.A 650.0 Female 1.3 2.0 3.3 4.5 6.1 7.9 8.7 N.A 569.2 Primary Total 67.6 70.0 73.1 85.4 93.8 99.8 100.5 101.1 49.6 Male 81.4 83.5 84.4 93.9 101.4 106.2 107.0 107.5 32.1 Female 52.8 55.7 61.0 76.2 85.8 93.1 93.7 94.3 78.6 Secondary Total 28.4 40.3 50.5 61.4 76.2 76.5 74.9 78.3 175.7 Male 37.8 51.1 61.3 71.6 83.8 82.2 79.6 83.0 119.6 Female 18.7 28.6 38.8 50.4 68.1 70.5 69.9 73.3 292.0 Higher Total 6.9 11.7 16.1 18.1 15.8 20.2 22.6 N.A 227.5 Male 10.0 16.0 21.3 24.5 20.0 24.2 27.1 N.A 171.0 Female 3.7 7.2 10.6 11.2 11.4 15.9 17.8 N.A 381.1 Sources: UNESCO Statistical Yearbook (2000); Partnership on Sustainable Strategies for Girls Education Organization (2001).


Figure 5: Dropout Rates for Education in Selected Countries (15–19 years old)

Source: Hanushek and Woessmann (2007).

32 Hazem El Beblawi

Qualitative Aspects Education aspires, among other things, to provide skills needed for economic growth. In their study on education quality, Hanushek and Woessmann (2007) conclude that existing evidence suggests that quality education—measured by the knowledge that students gain as depicted in tests of cognitive skills—is substantially more important for economic growth than the mere quantity of education. They have noticed that East Asian countries consistently score very highly on the international tests and that they also had extraordinarily high economic growth over 1960–90 period. In the measurement of the quality of education, the authors used a simple average of the mathematics and science scores over international tests. Egypt’s position in these tests is quite modest—far below East Asian countries but also below Israel, Jordan, and Iran. The proportion of science graduates in the total number of higher education students is lower in Egypt than Tunisia, Morocco, Israel, Iran, Jordan, and Turkey. No wonder that under these conditions, research work in Egypt has been very limited (table 8).

Education is not simply the transmission of knowledge; it is bringing about a way of thinking as well as helping to establish a system of values. One of the basic shortcomings of the Egyptian education system is that it disproportionately emphasizes memorizing abilities over problem-solving capabilities. There is an obsession with collecting facts (even scientific laws) over developing an analytical and critical mind. Education is mainly paternalistic with little room for discussion. It is a one-way road, and students at the receiving end are passive. Examination and evaluation methods are biased towards rewarding memorizing and eventually penalizing creativity. Table 8: Active Research Scientists, Frequently Cited Articles, and Frequently Cited Papers Per Million Inhabitants, 1987

Country Research Scientists

Article with 40+ citations

Number of frequently cited papers per million people

United States 466,211 10,481 42.99 Switzerland 17,028 523 79.90 Australia 24,963 280 17.23 Israel 11,617 169 38.63 Republic of Korea 2,255 5 0.12 India 29,509 31 0.04 China 15,558 31 0.03 Egypt 3,782 1 0.02 Saudi Arabia 1,915 1 0.07 Algeria 362 1 0.01 Kuwait 884 1 0.53 Source: Arab Human Development Report, 2002.


Over the last few decades tens of conferences were held, as well as hundreds of reports produced on education reforms. This is not the place to present or even to summarize their findings. It is sufficient to enumerate some of the very long list of burning issues and to comment on one or two of them:

• teachers’ qualifications • private lessons • cheating in classes and in examinations • female education • academic freedom • technical schools inadequacies • encouraging talents and creativity • eradication of illiteracy

Traditionally, Egypt had a cult of education. The educator was called allem, holder of science (savant), and was highly respected, if not venerated. This is no more the case. The profession of teaching is on decline.

A substantial percentage of public school teachers are poorly qualified. Less than one in five of the instructors in primary schools has pedagogical qualifications and almost half of the instructors in the secondary technical schools have no college degrees (Mina, 2001, p. 113). Teachers are, moreover, very poorly paid.

With the deterioration of the socioeconomic status of the teacher, the traditional cult of education degenerated in a new cult of diploma holding. Everyone wants to hold a diploma or a college degree, no matter by what means or cost. The diploma is a status symbol. With low salaries, mediocre qualifications, and declining social status, teachers and instructors in public schools have diverted their efforts to private tutoring, which has become a prosperous business. It was estimated that around 60 percent of students take private lessons (UNDP, 2005). Table 9 presents the socioeconomic distribution of students taking private lessons. Table 9: Percentage of Students Taking Private Lessons by Educational Level and Socioeconomic Group, 1997/98

Socioeconomic group Education Level Poor Middle Rich Basic 45.8 61.4 64.6 Secondary 66.1 88.6 83.6 High Institutes 53.3 67.7 85.7 University 7.8 11.7 16.2 Total 51.3 63.2 60.5

Source: UNDP (1998).

34 Hazem El Beblawi

A teacher who continues private tutoring until late at night can hardly be fit to instruct in the class the next morning. Public schools ceased to be a place for teaching, and accordingly the slogan of “free education for all” became more of a fiction than a fact. In such an environment, characterized by the collapse of the social function of the public schools and the degradation of the teachers’ social status, it is no wonder that absenteeism in schools and cheating in classes have become widespread. More alarming is the fact that teachers and parents are often aware of these facts.

The decline in the education system does not only negatively affect acquired skills, but also undermines the values and ethics of the new generations. When the teacher is perceived as uninterested in the classroom and only concerned about private tutoring, the notion of duty and responsibility will inevitably be distorted. If cheating in class is accepted as a fact of life, the notion of fairness and honesty will be trivialized.

No less serious is the social cleavage that resulted from the failure of education in public schools. In the past, the best education was provided by public schools. The public school was, in fact, a kind of melting pot where rich, middle class, and poor students shared their schooling experience. Today, public schools are mainly for the poor. The rich go to private and foreign language schools. Thus, students are not only separated by the quality of education, but also they belong to two different worlds. There are two stereotypes of students: one is cosmopolitan, open, mostly arrogant, and not infrequently unable to express himself properly in his native language (Arabic). The other is exactly the opposite, yet in many cases equally unable to write well in Arabic, or, of course, in any other language.

Education and Weak Society In the first section about the strong state and weak society, I mainly referred to the strong state. Here I elaborate a bit more on the weakness of the society. The shortcomings of the education system create many of the weaknesses of the society. An illiterate population is mostly unaware of its rights and also incapable of meeting the requirements of an industrial society. Dealing with machines and equipment in a factory assumes a minimum level of education. Technical instructions, disciplinary regulations, security measures, and so forth cannot be implemented in an analphabetic society. Of course, an industrial society needs more than the ability to read and write. It requires above all creative minds, risk takers, and farsightedness. Education based on memorizing is not suitable for such a dynamic industrial society. A rentier mentality would flourish and acquiesce in such a system of uncritical minds. Finally, an industrial society needs to develop the values of hard work, discipline, and honesty. Many of these qualities are sharpened through good education programs. We are not sure that these qualities are deep-rooted in the present Egyptian education system.


Conclusion

Notwithstanding an average economic performance, Egypt failed to join the club of high performers in Asia, including China, India, Korea, Taiwan (China), Indonesia, Singapore, or Hong Kong (China). Judging this state of affairs as a success or a failure is not simply a matter of personal taste; it depends to a great extent on the initial conditions. We claim that Egypt started the race with reasonably favorable initial conditions, which should have produced a better performance record.

The basic assumption of the paper is that Egypt has faced in the twentieth century a new challenge; a need to transform itself into an industrial society. This objective was only partially achieved. There were rigidities preventing the smooth transition to such a society, and many reasons for this. First and foremost is the presence of an authoritarian state, keen to preserve its prerogatives and powers. The result was a strong state facing a weak civil society. This civil society was not only oppressed by an overwhelming state but also burdened by the lack of appropriate skills and proper values needed for the new society. The inadequacy of the education system helped perpetuate these conditions of unpreparedness for the establishment of a new industrial society. At that juncture, the availability of easy money generated through a rentier economy reduced the incentives for change, thus helping maintain the status quo.

We identified three interrelated factors that helped hinder the accession to a new industrial society. First, an authoritarian state that in its endeavor to preserve its prerogatives had to give up good governance practices and limit the creative initiatives of individuals. Second, the availability of windfall money not only reduced incentives for change but also promoted a new mentality that undermined the emergence of an industrial spirit. Finally, an inadequate education system failed to provide the proper skills and values required for the industrial society. These factors are, moreover, interdependent and reinforce each other.

Diagnosis, though indispensable, is seldom enough; it has to be complemented by prescription. If my analysis is correct, then the questions arise: what next? What to do to rectify the situation? Are the three factors discussed above equally important, and do they have to be tackled simultaneously? Or are some factors commanding and others to some extent subordinate?

I believe that the most effective way to redress the situation is through the rationalization of the political regime. In Egypt, politics commands everything else. Improving the educational system will definitively help in the long run. However, the chances that education will be given higher priority on a sustained basis are quite remote. The political elite, groomed in an authoritarian political regime, have more immediate self-interests to take care of. It is also unlikely that the same elite would be instrumental to combat the logic of rentiers. The logic of a rentier economy is in fact very akin to the nature of an authoritarian political

36 Hazem El Beblawi

regime. In both cases, political elite and rentiers owe their privileges to chance rather than merit. Their positions are more often than not acquired, not earned. These elites are also political rentiers. It is therefore not farfetched to recognize the fact that the heart of Egypt’s economic predicament is political. Egypt needs a serious political reform to meet the requirements of a sustainable economic growth. In Egypt, bad governance is deeply embedded in the political regime.

Does it follow from the above that short of a political reform, Egypt would not be able to perform well? Not at all. Over the last three decades Egypt has known many cases of temporary growth spurts, as in 1976–79, 1982–86, and again 1996–2001. However, they are unlikely to be sustained for a long period.

Our study mainly covers the period 1974–2004. It so happens that over the subsequent three years (2004–07), Egypt’s economy has shown remarkable signs of vitality, with vigorous growth rates of the economy between 5–7 percent and export growth rates between 14–18 percent (of which oil and gas increased by some 4–8 percent), as well as substantial increases in capital inflows. These results were due to a series of financial measures taken to alleviate many constraints in the financial sector, as well as to reduce a great deal of the transaction costs. These measures include the rationalization of the exchange rate system by introducing an interbank market, the reduction of customs duties, the simplification and reduction of the tax rates, the strengthening the banking sector, the promotion the stock exchange, and so forth. No less important is the fact that the whole regional environment was favorable to growth. Most countries of the Middle East performed reasonably well in these years.

Notwithstanding the good performance, the recent picture in Egypt is not all that bright. Inflation rose to about 12 percent from 3–5 percent in the 1990s; unemployment remained high at 11–12 percent; and, most serious, the budget deficit increased to 9 percent of the GDP. Net domestic public debt increased to 80 percent of GDP, plus some 30 percent in foreign debt. The government dissavings (deficit) of some 10 percent of GDP is seriously penalizing the prospects of Egypt’s future growth by drastically reducing its domestic savings. It has been observed that one of the main factors behind the sustainable growth of the Asian Far-Eastern economies was their high domestic savings (between 30–40 percent). Egypt’s increasing budget’s deficit would, thus, deny her of one major source of economic development.

Throughout the study I have confined my analysis to the internal factors and ignored the external factors. Is this justified?

The reason for such an approach was to concentrate on those factors that reside, more or less, under the country’s control. But in fact, the impact of the external factors was overwhelming. We have referred to the oil situation in the Middle East, but oil was not simply money transmitted through remittances in a rentier type of economy. Oil has put the Arab region at the center of world politics. The political situation in the whole region was partially determined by external factors.


Also, the Arab-Israeli conflict had far-reaching effects on the political systems of the region, and Egypt was not exempt, of course. The genesis of the Egyptian authoritarian political regime was the military coup in 1952, which came as a direct consequence of the Arab-Israeli war of 1948.

Egypt’s economic performance has been seriously affected by world and regional politics. Yet, internal factors remain of paramount importance.

What about the future? Prophesying is always hazardous, but one thing can be said with some confidence: the future will not necessarily be the same. People do learn from their experience, or so I hope.

38 Hazem El Beblawi

References

Arezki, Rabah, and Frederick van der Ploeg. 2007. “Can the Natural Resource Curse Be Turned into a Blessing? The Role of Trade Policies and Institutions.” Working Paper WP/07/55. International Monetary Fund, Washington, D.C.

Beblawi, Hazem El. 1987. “The Rentier State in the Arab World.” In H. Beblawi and G. Luciani, eds., The Rentier State. London: Croom Helm.

Central Bank for Egypt. Various Issues. Economic Bulletin. Cairo.

Chami, Ralph, Connel Fullenkamp, and Samir Jahjah. 2005. “Are Immigrant Remittance Flows a Source of Capital For Development?” IMF Staff Papers 52(1): 55–81.

Dobronogov, Anton, and Farrukh Iqbal. 2004. “Economic Growth in Egypt: Constraints and Determinants.” ERF Working Papers No. 200420. Economic Research Forum, Cairo.

Galal, Ahmed. 2002. The Paradox of Education and Unemployment in Egypt. Cairo: The Egyptian Center for Economic Studies.

Hanushek, Eric A., and Ludger Woessmann. 2007. “The Role of Education Quality for Economic Growth.” Policy Research Working Paper WPS4122. World Bank, Washington, D.C.

Hanushek, Eric, and Victor Lavy. 1994. “School Quality, Achievement Bias, and Dropout Behavior in Egypt. Living Standards Measurement Study (LSMS).” Working Paper No. 107. World Bank, Washington, D.C.

Issawi, Charles. 1985. The Economic History of MENA Region. Translated into Arabic by Saad Rahmey. Beirut.

———. 1995. The Middle East Economy. Princeton: Markus Wiener Publishers.

Kaufmann, A. Kraay, and M. Mastruzzi. 2006. “Governance Matters V: Governance Indicators for 1996–2005.” Policy Research Working Paper No. 4280. World Bank, Washington, D.C.

Krueger, Alan B., and Michael Lindahl. 2001. “Education for Growth: Why and For Whom?” Journal of Economic Literature 39(4): 1101–36.

Luciani, Giacomo. 1987. “Allocation vs. Production states: A Theoretical Framework.” In H. Beblawi and G. Luciani, eds., The Rentier State. London: Croom Helm.

Mina, Fayez Mourad (2001). Education in Egypt: The Reality and the Future Up to 2020. Cairo: Third World Forum (in Arabic).


Saleim, Hassam Mohammed. 2006. “American Aid of Egypt.” Al Ahram Center of Publication and Translation. Cairo.

United Nations Development Programme (UNDP). 1998. Egypt Human Development Report 1997/98. New York: UNDP.

———. 2005. Egypt Human Development Report 2004/05. New York: UNDP.

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The Commission on Growth and Development Working Paper Series

5. Globalization, Growth and Distribution: Framing the Questions, by Ravi Kanbur, March 2008 6. Growth Strategies and Dynamics: Insights from Country Experiences, by Mohamed A. El-Erian and Michael Spence, March 2008 7. Political Competition, Policy Making, and the Quality of Public Policies in Costa Rica, by Fabrice Lehoucq, April 2008 8. Leadership for Growth, Development, and Poverty Reduction: An African Viewpoint and Experience, by Benjamin William Mkapa, April 2008 9. Growth Strategies for Africa, by Paul Collier, April 2008 10. The Role of Institutions in Growth and Development, by Daron Acemoglu and James Robinson, April 2008 11. Finance, Financial Sector Policies, and Long-Run Growth, by Asli Demirgüç-Kunt and Ross Levine, April 2008 12. Cities: Engines of Growth and Prosperity for Developing Countries? by Gilles Duranton, April 2008 13. Housing Policy in Developing Countries: The Importance of the Informal Economy, by Richard Arnott, April 2008 14. Economic Growth in Egypt: Impediments and Constraints (1974–2004), by Hazem El Beblawi, April 2008

Forthcoming Papers in the Series: Battles Half Won: The Political Economy of India’s Growth and Economic Policy since Independence, by

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Hazem El Beblawi

WORKING PAPER NO.14

www.growthcommission.org

[email protected]

Commission on Growth and Development Montek AhluwaliaEdmar BachaDr. BoedionoLord John Browne Kemal DervisAlejandro FoxleyGoh Chok TongHan Duck-sooDanuta HübnerCarin JämtinPedro-Pablo KuczynskiDanny Leipziger, Vice ChairTrevor ManuelMahmoud MohieldinNgozi N. Okonjo-IwealaRobert RubinRobert SolowMichael Spence, ChairSir K. Dwight VennerErnesto ZedilloZhou Xiaochuan

The mandate of the Commission on Growth and Development is to gather the best understanding there is about the policies and strategies that underlie rapid economic growth and poverty reduction.

The Commission’s audience is the leaders of developing countries. The Commission is supported by the governments of Australia, Sweden, the Netherlands, and United Kingdom, The William and Flora Hewlett Foundation, and The World Bank Group.

T his paper focuses its analysis on the last three decades of the twentieth cen-tury. The basic assumption is that Egypt’s economic performance during this

period was less than satisfactory compared with the most successful examples in the Far East and elsewhere. The paper also assumes that Egypt’s initial conditions at mid-century compared favorably with the winners in the development race at the end of the century. Egypt has achieved positive progress, no doubt, yet com-pared with the higher performers in Asia, and given its favorable good initial condi-tions, the record seems quite mediocre.

Hazem El Beblawi, Advisor for the Arab Monetary Fund, Abu Dhabi, U.A.E.


economic growth in egypt: impediments and...

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