Saíd El-Naggar
Published Date:
September 1987
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M. Said Nabulsi

Periods of Growth and Regression in the Egyptian Economy

Galal Amin’s carefully prepared paper is clear and concise. It summarizes succinctly the course of development in Egypt, noting that there were two periods of a decade each during which the country’s growth rates were among the highest in the developing world. The first period, 1956–65, was characterized by strong public sector intervention, and a radical transformation in infrastructure and the structural composition of the economy. In the second, 1973–84, as gross domestic product (GDP) rose at a rate of 8.5 percent and the liberalization subsequently referred to as the Open Door Policy was initiated, the country’s economic and social structure was exposed to far-reaching changes. During this period, productivity and employment receded sharply in the agricultural and industrial sectors and increased in the services sector.

It will be noted that those two decades were separated by a recessionary period in 1967–73, during which growth rates fell off markedly. Similarly, the decade of 1973–84 was followed by another period of stagnation, beginning in 1984, during which growth has ebbed and economic and social progress has suffered a setback.

Mr. Amin dwells in detail, with scholarly accuracy and analytical soundness, on the fundamental characteristics of the two growth periods, and his exposition pinpoints the main reasons for the retreat in the period intervening between the two decades of growth and for the stagnation of these past three years.

He points out the existence of two schools of thought regarding the thrust of recommended economic reform in Egypt: one is based on the principles of the market economy and economic liberalization and the other on the approach of a planned economy and government intervention through the public sector. He concludes that it is difficult to reconcile these two schools of thought and recommends instead concentration on two points. The first point is that a country’s economic policy is determined by the prevailing international economic climate and a certain domestic political and social framework, both of which are continuously changing, and that an economic policy with a large dose of liberalization can have a much greater chance of success in some international and domestic circumstances than in others. The second point is that national economic policy is unlikely to succeed without a minimum of coordination among its basic components, there being nothing worse than an economic policy that attempts to pursue conflicting objectives simultaneously: for instance, to achieve income redistribution simultaneously with increased attractiveness of private investment, or to protect the public sector while encouraging private foreign investment, or yet to attain greater self-sufficiency and to encourage exports at the same time.

Both points are well taken, particularly Mr. Amin’s emphasis on the importance of foreign and domestic variables in the orientation of economic policy. Such orientation may be in the direction of economic liberalization, greater reliance on the price mechanism, the provision of adequate incentives to production, saving, and investment, and ensuring a better distribution of income. It may also be in the direction of regulation and public sector control over production and distribution resources. But I do feel that he has overstated the importance of foreign and domestic factors and frameworks to the point where it can be said that he prefers to grant economic policymakers not just a very large measure of flexibility but also the freedom to change fundamentals of public policy in response to changes in the external or internal economic climate. Personally, I do not believe that this is either the most advisable rational economic policy or the easiest to pursue. There is nothing in the experience of the developing countries to prove that a doctrine of shifts from one integrated economic philosophy to another, for example, from a thoroughly market-oriented economy to a thoroughly protective and regulated one, can ensure balanced growth, the sound development of the productive structure, or better income distribution. Even it appeared theoretically convincing that such shifts were advisable, and that economic policymakers were capable of fine-tuning with respect to mechanisms, instruments, and timetables, such a policy would deprive the economy and society of the stability that is required for clear vision and decision making in both the public and private sectors. The changes that do take place in exceptional international situations such as wars and what they entail in terms of regulation and control of prices and capital flows have no bearing on the matter because economic and development considerations must be sacrificed in such circumstances. Nor is experience with domestic changes in political and social orientation relevant, for these also mandate economic policy modifications dictated by changes in the sources of decision making and philosophical approaches. But to alter economic policies and general policy frameworks in response to changes in certain variables—for instance, to take Mr. Amin’s case, to abandon a policy of economic liberalization because stagnation has set in on a hitherto active international economy, or to expand protection and regulation when complications develop—is really tantamount to presupposing the following:

  • That the policymaker has before him a full picture of the economy, with all the data required to provide him with full details on external and internal variables.

  • That the economic policymaker is endowed with supreme economic sagacity and sound judgment, so that we can fully rely on him to take the right decision at the right time.

While this is theoretically possible, experience shows that it is not only a heroic assumption but a dangerous one. Mr. Amin himself demonstrates it by explaining that Egypt’s economic policymakers erred three times in the method and timing of economic changes. They erred, in his view, in implementing what was referred to as the policy of economic liberalization in 1974. They erred again in 1977 and in subsequent years, when they failed to continue that liberalization and shifted to a policy of import restrictions and halfhearted and poorly coordinated liberalization. And, they erred a third time in the early 1980s in attempting to liberalize the economy further. Hence, Mr. Amin’s statement, at the conclusion of his third section that “this last fact could also be seen as ultimately the result of failure to adopt either a policy of wholehearted liberalization or a system of strict state control.” I concur fully and without hesitation.

Development in Egypt—Between Liberalization and Regulation

Mr. Amin analyzes the main ideas underlying the two schools of thought regarding the direction of Egypt’s economy. He points out correctly that those schools cannot be described, as some believe, as a pro-Fund school and an anti-Fund school. The fact is that the International Monetary Fund has never been a school of thought as such, but only a proponent of economic adjustment in accordance with certain economic methods and policies. This is not intended as either praise or censure of the Fund. The two schools of thought in Egypt have their roots in philosophies of the right and the left, and the difference of opinion between them focuses essentially on the principles of the two systems and their variants. Actually, the proponents of economic liberalization point to the following:

  • Economic liberalization is always the right path for Egypt’s economic development.

  • The difficulties of 1966–73 were the legacy of the preceding period of regulation and public sector domination of the economy.

  • The 1974–83 period that followed represented a return to the correct development path, as witnessed by its high growth rates.

  • The renewed development setbacks after 1983 can be attributed to hesitation about the extent of economic liberalization and about the correct implementation of a policy of free prices and market mechanisms.

The proponents of regulation and a dominant public sector, on the other hand, point to the following:

  • The policies followed in 1956–75 were the correct ones, witness the encouraging development results.

  • The setbacks of 1967–73 were dictated by the exceptional circumstances of the war, the drain on resources, and unforeseen disturbances.

  • Growth in 1974–83 was related to the oil boom and related economic activities, and the flow of remittances from workers abroad.

  • The current period is a most telling illustration of disturbances stemming from the end of the oil boom, the greatly distorted productive structure of the Egyptian economy, accumulation of foreign debts, and reliance on the outside world.

Although Mr. Amin makes a point of not committing himself to either of these schools and attempts to deal with the subject in a fine pragmatic manner, I feel that the thrust of his analysis is that the opportunity to avail ourselves of a liberal economic climate and the market mechanism is receding, if not completely gone. He affirms that, in the present international circumstances, the call for further economic liberalization, a greater emphasis on exports, and increased reliance on foreign financing is an invitation to fall again into the trap against which we were warned by Arthur Lewis. Consequently, he feels that Egypt erred twice in not orienting itself to the leftist approach and once by not availing itself of the rightist strategy.

While I do feel that prevailing international circumstances call for great caution on our part in the setting of our economic priorities, I also believe that recent events do not warrant the abandonment of a comprehensive economic philosophy that has proved its effectiveness in Egypt and in a number of developing countries, although I would agree with Mr. Amin that the implementation of a policy of liberalization must be designed with extreme caution in order to prevent the continuation of the present difficulties and the emergence of additional ones. Nor can I overstate the importance of conscious economic management in Egypt’s present circumstances, which require great alertness, a clear and steady sense of direction, and the ability to learn from the growth experience of others.

The Future of Development in Egypt and the Fund Prescription

Mr. Amin’s clear basic conclusion is that “external and domestic economic imbalances cannot be achieved, in Egypt’s present conditions, without a big curtailment of investment, [and] it would be unwise to rely for this curtailment on the workings of the price mechanism alone. If further liberalization of prices is not associated with an increased government intervention in the reallocation of investment, in directing imports, but particularly in redistributing income, not only may it prove insufficient for restoring the balance between resources and requirements, but it is bound to prove too costly, socially and politically.”

There is no fundamental difference here with the adjustment policy called for by the International Monetary Fund—which pursues, in its own way, the curtailment of consumption as well as investment and calls for a reduction of the government deficit and the external gap. Unlike the Fund, however, Mr. Amin stresses the need for a dominant and powerful public sector that will ensure that this objective is achieved and also that income redistribution is carried out. And he believes that the continuation of that intervention will protect society from the enormous economic and social cost to which he refers.

The fact is that the issue of the political and social cost has always been a sensitive subject and that it represents probably the greatest stumbling block not only for the International Monetary Fund but also for any judicious policy bent on successful economic management. And while I cannot quite agree in this respect with Mr. Amin’s call for the curtailment of investment without affirming the importance of private investment and the improvement of sectorial productivity I find myself in full agreement with him on the need for the Fund to take great care in deciding on the composition of its prescription, the amount of the dose, and the conditions under which it should be administered, to use medical jargon. I also share his feeling that the writing of the prescription is only one half of the Fund’s task. The other half, no less important, is to determine the timing of the medicine in accordance with the patient’s condition.

To conclude, I feel that Mr. Amin’s paper brings out the basic point that the so-called confrontation between the Fund and Egypt is in fact a self-confrontation between Egypt and Egypt. The ultimate decision is not a matter of having to sacrifice either the public or the private sector. The difference of opinion over the effectiveness of what is referred to as the Fund prescription is a relative disagreement over the advisability of some of the recommendations and over the timetable for implementing them. Mr. Amin believes that the market and price mechanism must be accompanied by rational government action and earnest management. Indeed, no one can doubt that the Egyptian economy is going through extremely difficult circumstances that may be the harbingers of unforeseeable dangers, the greatest of which certainly lies in the failure to deal with the problem resolutely and to respond to it with the necessary measures at the appropriate time. What comes to mind are the recent discoveries of French and Japanese scholars who ascertained the existence of hidden passages and secret entrances in the Pyramids. The Egyptian body economic also has hidden passages that will be revealed when the soil that covers them is swept away, and the treasures of the Egyptian economy await new penetrating rays that will expose them.

In this seminar and others like it, there is evidence that untrammeled political and economic thought is building a modest new nest for itself on the banks of the Nile. There may be a gleam of hope for an “adjustment” of a different kind, heralding a new approach that will deal with the root causes rather than with the symptoms.

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