EGYPT: ECONOMIC PROSPECTS THROUGH THE YEAR 2000
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
EGYPT: ECONOMIC PROSPECTS THROUGH THE YEAR 2000
A Research Paper
31 December 1987
This paper was prepared by a contractor with the Office of Near
Eastern and South Asian Analysis. Comments and queries are welcome
and mavb addressed to the Chief, Arab-Israeli Division, NESA
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EGYPT: ECONOMIC PROSPECTS THROUGH THE YEAR 2000
Summary
Egypt's deep-seated economic difficulties probably will not cause
an unraveling of the society by the year 2000, but they almost
certainly will prevent the generation of economic momentum and higher
living standards. Rapid population growth will offset substantial
gains in industrial facilities, modern technology, and human skills.
Egypt will have to run fast merely to keep even with the demands of
its expanding population, its sizable military establishment, its
deteriorating infrastructure, its frustrated young people, and its
international creditors.
The most likely scenario--with perhaps a 75-percent chance of
occurring--is a pragmatic middle-of-the-road coping with economic
problems. This coping scenario would reflect a blend of Egypt's
entrepreneurial spirit, its bureaucratic obstructionism, and its
time-honored cultural and religious practices. Major elements in the
economy would fit into this scenario as follows:
--Population will expand from 52 million in 1987 to 71
million in 2000, thus absorbing most of the government's
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energies in providing food, housing, education, and jobs
for the 1 million people added every eight months. This
population growth of 2.5 percent over the next 13 years
would preempt practically all of the anticipated GNP
growth of 3 percent. Although the government urges
religious leaders and the media to explain the need for
smaller families, it cannot itself launch an activist
antinatalist program because of the opposition of Muslim
fundamentalists.
--The administrative bureaucracy of some 3 million persons
will continue to resist reformist proposals for
streamlining regulatory procedures and privatizing a
broad range of economic activity. The bureaucracy will
remain a place to park many of the educated and
half-educated young persons who have no good alternative
employment.
--The administration of Mubarak and his successors in this
period will manage to live with, but not solve, the
problems of a crumbling infrastructure of water and
sewage systems, roads and public transport vehicles,
housing, the electric power supply, and the telephone
system. Projects financed by USAID and the World Bank
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W
will continue to prop up Cairo's efforts to keep support
services at a tolerable level.
--The armed forces, which serve as the ultimate hidden
buttress of the regime, will require gradually increasing
resources to build up military industry, purchase
expensive modern weapons, and maintain, if not enhance,
the perquisites of military personnel. These bedrock
requirements should take a fairly constant 10 to 15
percent of GNP.
--In agriculture, population will continue to press against
the essentially fixed supply of land and water.
Historically a major food exporter, Egypt now imports 60
percent of its food and this percentage will slowly grow
over the next decade as: (a) agricultural output grows at
about 2 percent annually, somewhat less than population;
and (b) standards of consumption gradually, rise. The
financially strapped and bureaucratically constipated
government will at best be able to effect only a fraction
of the reforms needed in agricultural procurement prices
and the crop mix. A five-year drought in the Nile
catchment area has caused an alarming drop in the water
level of Lake Nasser, behind the Aswan High Dam. This
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presumably is a temporary situation but, if the drought
continues, the authorities will have to cut the flow of
irrigation water substantially by early 1989.
--Industry will present a mixed picture of entrepreneurial
initiative in medium and small ventures and sluggish
state operation of large-scale companies. Foreign
capital will not be readily available because of the more
attractive investment opportunities in other Third World
countries. Managers will experience continued difficulty
in getting foreign exchange for needed industrial
equipment, spare parts, raw materials, and technology.
Output will expand on average by perhaps 3 to 5 percent.
--Sadat's dramatic "infitah" (opening to the West) policy
has increased the importance of foreign exchange earnings
in a nation that imports $10 billion in goods but exports
only $4 billion and that has to service a $40 billion
external debt. The annual gap is made up approximately
as follows: $3 billion in worker remittances coming back
in official channels; $1 billion in Suez Canal tolls; $1
billion in tourist receipts; $2 billion in U.S. support;
and large intermittent grants and credits from oil-rich
Arab nations, the World Bank, and the IMF. The coping
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scenario envisions these sources of assistance as a force
normally pushing the economy toward the middle, i.e., the
funds will generally increase under emergency conditions
and dwindle under less pressing conditions.
An alternative unraveling scenario stands a much smaller chance
of occurring, perhaps 15 percent. This pessimistic scenario would
develop against a background of a stagnant economy and a weakened
government that could no longer honor the "social contract" of
minimum food supplies at low prices and other welfare benefits. The
proximate cause of the unraveling might be major riots touched off by
an injudicious government announcement of cuts in food subsidies or a
harrangue in the marketplace by a fundamentalist preacher or a final
victory by Khomeini in his war with Iraq. As the unraveling gathered
momentum, all or some of the following developments might take place:
--a growing resort to unofficial and/or illegal markets to
obtain necessities, marked increases in prices, and a
rush to convert financial assets into dollar form.
--a further chilling of the investment climate, affecting
both local businessmen and foreign firms and bringing
large new projects to a halt.
--a sharp drop in tourist numbers and revenues.
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--an upsurge in religious fundamentalism within Egypt, a
revival that could rend the fabric of law and order and
spread to other Arab countries.
--a rekindling of hostility between Egypt and Israel.
--a reluctance on the part of the United States to continue
the $2 billion annual package of economic and military
assistance;
--an opening of opportunities for Soviet initiatives in
Egypt.
--a growing dilemma for the Egyptian armed forces, which
cannot lightly discard many years of training on and
integration of U.S. equipment.
--and, at some stage, the replacement of the present regime
with a new military regime of fundamentalist leanings.
Under this scenario, the resilience and adaptibility that
characterized the coping scenario would be lost, at first gradually,
then perhaps with a rush. Individuals and groups would face more
privations, challenges, and uncertainties than they could handle.
The confidence of the populace and the military establishment in the
regime would wane as it too became overwhelmed by new problems and
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uncertainties. As people became mutinous at the loss of income,
status, and psychological certainty, the effects would be felt in
lower production in agriculture, industry, and services. The whole
infrastructure of the economy and society--barely maintained under
the coping scenario--would suddenly appear grossly inadequate to an
aroused people.
A second alternative momentum scenario, with perhaps a 10 percent
chance of occurring, would most plausibly have its source in some
combination of higher oil earnings, worker remittances, tourist
revenues, Suez tolls, and foreign aid. This added inflow of foreign
exchange would depend on favorable international developments largely
beyond Egypt's control. Such positive developments are more likely
to originate in the fluid conditions of the international capitalist
market than in the highly constrained domestic Egyptian economy.
Once started, however, the process would rapidly lead to
self-reinforcing changes inside Egypt:
--With additional funds available for industrial raw
materials, agricultural chemicals, and transport
vehicles, the economy quickly could put its considerable
idle capacity to work and realize some of the gains from
new technology.
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--The government would have more manuever room for
implementing economic reforms, for example, adjusting
farm procurement prices, reducing controls over business,
and moving more vigorously to substitute gas for oil in
the domestic economy. ,
--Both domestic entrepreneurs and foreign companies would
sense a more promising environment for profits and for
long-term investment.
Cairo could take advantage of a probably fleeting opportunity to
make the most critical reforms and to shore up its shaky finances.
Or Cairo could fritter away the opportunity in, say, billion-dollar
outlays for new military equipment and for overambitious land
reclamation projects. (Table 1 compares the three scenarios in
outline form.)
The United States wants a friendly, prosperous Egypt closely tied
to the U.S. economically, as well as politically and militarily. The
U.S. hopes Soviet influence will be minimal in the Mid-East in
general and Egypt in particular. Related U.S. objectives are the
maintenance of a secure oil supply to Western Europe and Japan and
the preservation of Israel as a close ally at peace with Egypt.
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The U.S. $2 billion annual subsidy to the Egyptian economy does
not give Washington a vise grip on Cairo's policy. U.S. aid will
always have surprisingly little clout because of:
--the political restrictions on Cairo in embracing U.S.
suggestions;
--the ineffectual aid "absorbing mechanism" represented by
Egypt's bloated bureaucracy;
--the institutional constraints hobbling the U.S. aid
"disbursing mechanism"; and
--the sheer magnitude of the economic task itself,
particularly the inexorable advance of population.
U.S. aid by itself cannot produce an independent self-sustaining
Egyptian economy by the year 2000. Rather, U.S. aid will help feed
the additional people, rehabilitate important parts of the
Infrastructure, and support the moderate acquisition of modern
weapons. This limited view of U.S. aid fits comfortably into the
middle-of-the-road coping scenario.
The Soviet Union enjoyed a prominent position of influence in the
Nasser era of Arab socialism, only to lose its influence under Sadat
and his turn to the West. Moscow lacks the funds, the technology,
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and the administrative flexibility to compete with Western and Arab
sources of economic support. :Furthermore, the Egyptians have a deep
personal dislike for the Russians. Only in the event of the
unraveling scenario would Cairo likely solicit large-scale support
from Moscow.
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Table 1 (in Summary)
EGYPT: ALTERNATIVE ECONOMIC SCENARIOS, 1988-2000
Item
Background
Reconstruc-
tion of
Economy
Along
Western
Lines
Unraveling
Scenario
Coping
Scenario
Momentum
Scenario
Crescendo of
popular unrest
and takeover by
a military leader-
ship with strong
fundamentalist
leanings
Comes almost
to halt as
Western ties
and support
diminish
Economic Recentralization
Role of on emergency
Government basis
Mixture of good
and bad economic
events and
continued ability
of government to
adjust to these
events
Proceeds
unevenly on
pragmatic
basis
Sluggish
bureaucratic
management
Environment Disappearance of Multiple
for private initiatives obstacles
Investment in modern sector to moving
projects forward
Infra-
structure
Near chaos in
supply of
utilities and
maintenance of
transport
Nip-and-tuck
efforts to keep
utilities and
transport
operating
12
Increase in oil
earnings, worker
remittances, and
Suez revenues,
which gives
government
maneuver space
Picks up pace,
with higher
per capita net
investment
Sponsoring of
new initiatives
Substantial
reduction in
obstacles to
new ventures
Input of large
resources;
bottlenecks, as
new demands on
services arise
(continued)
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Item
Stability
of
currency
Support
from
United
States
Relations
with
Israel
Attitude
of
Egyptian
Military
Average
GNP
Growth
Unraveling
Scenario
Coping
Scenario
Momentum
Scenario
Foreign exchange
drought and
domestic hyper-
inflation; new
government
controls
Rapid drop-off '
in willingness to
make large grants
Rekindling of
hostility
Dilemma: cannot
lightly discard
years of training
with and integra-
tion of U.S.
equipment
Perhaps 1
percent
Movement toward
unified exchange
rate; domestic
price pressures
Continued support
at $2 billion
annual level;
emergency
supplements
Cautious economic
and political
relations
Supportive of
regime; enjoying
an absolute
budget priority
at current level
of outlays
Perhaps 3
percent
Smoother
movement toward
unified
exchange rate;
ongoing price
pressures
Willingness to
consider
support of new
long-term
projects
Room for
somewhat easier
relations
Moderate pickup
in military
modernization
projects
Perhaps 5
percent
Note: The unraveling scenario draws heavily on Charles Waterman,
"What If Mounting Economic Woes Led to Egypt's Unraveling?" Christian
Science Monitor, 25 July 1986.
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CONTENTS
Page
Summary 2
Section I. Introduction 16
II. The Economy's PrOductive Resources 20
III. The Inherited Economic System 31
IV. Dealing with Major Problems Through 2000 53
V. Three Alternative Economic Scenarios, 1988-2000 73
VI. Significance for the United States 82
Tables
Table 1.. Egypt: Alternative Economic Scenarios, 1988-2000 12
Table 2. Egypt: Basic Economic Facts 15
Table 3. Egypt: GNP and Population, 1950-2000 18
Table 4. Egypt: Economic Policy Positions, 1952-1987 45
Boxes
Box A. Egypt: Brief Chronology, 1952-1987 30
Box B. Egypt: Major Objectives in 1987-1992 Plan 47
Box C. Egypt: Economic Reforms Urged by Outsiders 50
Box D. Egypt: Class Structure in 1980s 71
Appendix
Appendix A. Egypt: Notes on GNP and Other Statistics 88
114
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Table 2
EGYPT: BASIC ECONOMIC FACTS
Area: 1 million square kilometers (387,000 square miles, equal to
Texas and Arizona combined)
Arable area: 4% of total area (along Nile River and in Nile
Delta)
Cultivated area: 2.5% of total, area, all irrigated
Population: 52 million (1987); growth rate: 2.8%; literacy: 45%
Religion: 90% Sunni Muslim; 10% Coptic Christian
Largest cities: Cairo, 14 million people; Alexandria, 4 million
people
Government: military-rooted republic since revolution of 1952
Dominant leader: Hosni Mubarak, b. 1929, president since October
1981
GNP: $36.4 billion (1987); $700 per capita
Defense outlays: 10% to 15% of GNP
Defense manpower: 500,000 men
Currency: Egyptian pound; widespread use of U.S. dollar
Exchange rate: multiple rates; market rate of 2.2 Egyptian
pounds equal 1 U.S. dollar (1987)
Inflation rate: 25% (1987)
Foreign debt: $40 billion (1987)
Natural resources: oil and gas, iron ore, phosphates, limestone,
and other minerals
Industrial output: textiles, foodstuffs, petroleum, chemicals,
construction materials, machinery, armaments
Agricultural output: cotton, grains, clover, fruits, vegetables,
meat
Exports: about $4 billion annually; oil, cotton, textiles
Imports: about $10 billion annually; foodstuffs, machinery and
technology, fertilizers
Foreign Aid: $2 billion annually from the United States; sizable
sums at intervals from oil-rich Arab nations; support from World
Bank and IMF
Worker Remittances: $3 billion through official channels, with
another $3 to $6 billion through non-official channels
Suez Canal earnings: $1 billion annually
Tourism earnings: $1 billion annually
International memberships: UN, IMF, World Bank, GATT
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Section I
INTRODUCTION
This report examines the prospects for stability and growth in
the Egyptian economy over the next 13 years, 1988-2000.
Section II describes the economy's natural resources, population
and labor force, capital plant, and technology. Section III deals
with the inherited economic system, which is a complex mixture of
time-honored traditions, bureaucratic socialism, and free-wheeling
markets; the section notes the different economic strategies of
Nasser, Sadat, and Mubarak. Section IV considers the prospects for
expansion in the major sectors of the economy to the turn of the
century. Section V compares three alternative scenarios for the
economy in 1988-2000: a pessimistic unraveling scenario, a
middle-of-the-road coping scenario, and an optimistic momentum
scenario; this section ties the economic reform tasks facing the
government to the chances for the appearance of each scenario.
Section VI considers the significance of the entire analysis for the
mpUnited States. Appendix A explains the deficiencies in Egyptian
economic statistics and the derivation of the estimates of total and
per capita national output, 1950-2000, in Table 3.
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A number of tables and boxes bring together key information on
these various topics.
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Table 3
EGYPT: GNP AND POPULATION, 1950-2000
Year
GNP
(bil 1986
$US)
GNP
Change
(percent)
Population
(mil midyear)
Population
Increase
(percent)
GNP
Per Capita
(1986 $US)
1950
7.68
21.198
___
360
1951
7.86
2.3
21.704
2.39
360
1952
8.02
2.1
22.223
2.39
360
1953
8.17
1.9
22.755
2.39
360
1954
8.39
2.7
23.299
2.39
360
1955
8.52
1.5
23.856
2.39
360
1956
8.32
-2.3
24.426
2.39
340
1957
8.64
3.9
25.010
2.39
350
1958
9.00
4.2
25.608
2.39
350
1959
9.57
6.3
26.220
2.39
360
1960
10.23
6.9
26.847
2.39
380
1961
10.63
3.9
27.523
2.52
390
1962
11.42
7.4
28.173
2.36
410
1963
12.39
8.5
28.821
2.30
430
1964
13.03
5.2
29.533
2.47
440
1965
13.54
3.9
30.265
2.48
450
1966
13.77
1.7
30.986
2.38
440
1967
13.55
-1.6
31.681
2.24
430
1968
13.69
1.0
32.338
2.07
420
1969
14.48
5.8
32.966
1.94
440
1970
15.13
4.5
33.574
1.84
450
1971
15.66
3.5
34.184
1.82
460
1972
15.97
2.0
34.807
1.82
460
1973
16.54
3.6
35.480
1.93
470
1974
17.30
4.6
36.216
2.07
480
1975
18.75
8.4
36.952
2.03
510
(continued)
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1976
20.16
7.5
37.737
2.12
530
1977
21.61
7.2
38.680
2.50
560
1978
23.58
9.1
39.755
2.78
590
1979
25.51
8.2
40.916
2.92
620
1980
27.42
7.5
42.239
3.23
650
1981
29.50
7.6
43.717
3.50
670
1982
31.21
5.8
45.122
3.21
690
1983
32.80
5.1
46.427
2.89
710
1984
34.34
4.7
47.765
2.88
720
1985
35.37
3.0
49.133
2.86
720
1986
35.37
0.0
50.525
2.83
700
1987
36.43
3.0
51.930
2.78
700
1988
37.52
3.0
53.348
2.73
700
1989
38.65
3.0
54.778
2.68
710
1990
39.81
3.0
56.219
2.63
710
1995
46.15
3.0 ay.
63.557
2.48 ay.
730
2000
53.50
3.0 ay.
71.169
2.29 ay.
750
Note: For methodology, see Appendix A.
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Section II
THE ECONOMY'S PRODUCTIVE RESOURCES
This section briefly describes Egypt's land and other natural
resources; its people and their skills; the extent and variety of its
capital plant; and the general level of its technology and
management.
A. Natural Resources
Egypt occupies a large squarish chunk of land in northeast
Africa, all essentially desert except for the 4 percent of the
territory lying along the Nile River and in the Nile Delta. This
vital 4 percent enjoys fertile soil, constant sunshine, and
practically 100-percent irrigation; the result is multiple crops and
notably high yields by Third World standards. Approximately 95
percent of the Egyptian people live in this green area, one-third in
the valley, two-thirds in the delta, including Cairo.
At present, the vast expanse of Egyptian desert contributes to
GNP mainly through the oil and other mineral industries. Future
possibilities--such as solar energy, nuclear power (at isolated
sites), construction materials, and industrial parks (on the fringes
of arable land)--lie largely outside the time frame of this report.
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Only 2.5 percent of the land area (out of the available 4 percent
that is arable) is under cultivation because of the competition for
land for industrial, military, governmental, and housing facilities.
Each year urbanization takes 50,000 acres out of cultivation, or
nearly 1 percent of existing farmland. The government has embarked
on ambitious schemes to reclaim land from the desert at a roughly
similar rate. U.S. and World Bank economists disagree with this
policy, citing the enormous cost per acre of reclamation, the low
productivity of reclaimed marginal land, and the cost-effective
alternative of increasing the cultivation and yields of existing
land. Further improvements in plant breeds, fertilizer application,
and water usage can raise some yields to two or three times current
levels. As described in Section V, the rationalization of the price
structure in agriculture is critical for the exploitation of Egypt's
agricultural possibilities.
Like the arable land, the supply of water from the Nile
constitutes a vital resource in essentially fixed supply. The
completion of the Aswan High Dam in 1971 has proved a mixed blessing.
The Dam has (a) regularized the flow of water, both seasonally and
annually; (b) increased the opportunities for multiple-cropping; (c)
provided a substantial new source of electric power; and (d) created
a vast new Lake Nasser with recreational and fishing resources. At
the same time it has (a) forced tens of thousands of people to move
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from their ancient villages; (b) deprived the Nile farmland of the
annual deposit of rich silt, with the result that farmers must apply
costly fertilizers to the land; (c) added to the salination of delta
cropland and hence complicated the process of flushing and draining
the land, with the consequent need for large-scale investment in
drainage facilities; (d) decimated the sardine fishing industry off
the Nile Delta; and (e) increased the incidence of schistosomiasis (a
debilitating snail-carried disease) in downstream areas.
A presumably temporary problem has been the alarming drop in the
water of Lake Nasser caused by five years of drought in the catchment
area. Output in the electrical turbines already has dropped by 20
percent. The authorities will have to cut the flow of irrigation
water substntially by early 1989 unless conditions improve.
Ideally, land and water resources should provide a Third World
country with a substantial food export surplus to exchange for modern
machinery and technology. Egypt possesses excellent food production
resources but has become a major food importer. The problem is
population, the subject of the next sub-section.
B. Population
In thousands of years of history the population of old Egypt had
ranged between 2 and 5 million people. Then in the nineteenth and
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twentieth centuries the introduction of the European agricultural,
industrial, and medical revolutions destroyed the balance between
human fertility and mortality. The population shot up as follows:
Year Population
1800 2.5 million
1850 5 million
1900 10 million
1950 20 million
1987 52 million
2000 (proj.) 71 million
From now through the remainder of the century Egypt will add on
average 1 million people every eight months. Because of urbanization
and education the annual rate of increase will fall from two and
three-quarters percent to two and one-quarter percent, but the
absolute gain will rise slightly on the expanding base. (Table 3
presents estimates of Egypt's population, 1950-2000.)
Egypt is steadily losing the social glue of the extended family
living passively for generations in one village, town, or city,
because of:
--The extensive rural to urban movement, especially to the
two great cities of Cairo (now 14 million people) and
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Alexandria (now 4 million people), and the fracturing of
family connections.
--The employment abroad of as many as 3 million men, which
entails the long absence of the family head, the
increased feminization of the Egyptian family, and the
destabilizing of patterns of family discipline and
lifestyle.
--The failure of an overcrowded and increasingly secularist
educational system to reinforce family values as in the
past.
--The absence of meaningful jobs for the 450,000 young
people entering the labor force each year, together with
the greatly inflated expectations of the younger
generation; for example, the waiting list for government
jobs for university and secondary school graduates is now
five years, with only one-third of the graduates able to
find other jobs before their number comes up.
--The permanent emigration of a large part of the most
highly educated and ambitious males, those staying behind
being vulnerable to recruitment into radical groups.
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Psychologically and politically, Egypt cannot and will not
introduce a birth control program that will appreciably cut back
population growth by the year 2000. For one thing, male status
depends largely on virility as evidenced by the number of children.
Also, with government and private social security entirely
inadequate, children represent a reliable prop in old age. And given
the near-subsistence living of the bulk of the population, sexual
congress often is the only pleasure open to a man and his wife. The
moderate Muslim leaders, but not the fundamentalists, can accept a
government policy that openly discourages large families through
education, propaganda, and even the provision of birth control
devices. President Sadat once told his wife that he could not move
decisively on the population problem because of fundamentalist
opposition.
As the long-time center of Arab culture and education, Egypt has
traditionally supplied teachers and technical people to the whole
Arab world. A large number of Egyptians have demonstrated commercial
and financial talent, as witnessed by the energizing of the
entrepreneurial class under Sadat's "infitah" (open door) policy.
Indeed, one professor of economics at the American University in
Cairo notes that members of the new infitah class are "much more
conscious of the value of time, have more respect for manual labor,
and much greater admiration for modern technology." The willingness
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of other Arab countries to employ more than 2 million Egyptian
professional people, craftsmen, and manual workers also attests to
the high economic potential of much of the population. Population
growth has undermined these strengths, multiplying the numbers of
people who are lethargic, time-serving, fatalistic, and not only
useless from the point of view of production but also an increasing
drain on Egypt's scarce resources.
Egypt's land yielded a substantial food surplus with the 20
million people of 1950 and might even today if the government had
adopted appropriate agricultural policies. Egypt now must import 60
percent of its food for a population of 52 million. The government
will find that most of any growth in GNP will be eaten up by the 19
million people added by the year 2000.
C. Capital Plant
By Third World standards, and Arab standards in particular, Egypt
has an extensive and varied capital plant of an increasingly modern
cast.
In agriculture, the irrigation and drainage system has undergone
substantial expansion and modification, attributable both to
pressures from population growth and the completion of the Aswan High
Dam. On-going investment in storage facilities, transport systems,
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and food-processing plants form part of the continued expansion of
agricultural capacity. Primitive methods of irrigation and
cultivation still exist, especially in outlying areas.
In industry, Egypt possesses broad-based plant and equipment that
give the potential for rapid expansion of capacity and output. The
economy boasts substantial capacity for the production of textiles,
petrochemicals, steel, aluminum, motor vehicles, electric power,
construction materials, processed foods, trainer aircraft and drones,
tanks and artillery, small arms, telecommunications equipment, and
the simpler types of factory equipment. Almost all of the output of
heavy and military industry comes from 350 public sector companies.
The existence of much outmoded Soviet-built capacity and socialist
mismanagement of many large industrial firms dilute Egypt's
industrial strength.
As for "infrastructure"--those portions of capital plant
furnishing general support to agriculture, inqustry, the government,
and the populace--Egypt has a large, semi-modern complement of roads
and railroads, ports, power lines, school buildings, hospitals, water
and sewer systems, and housing. Much of this infrastructure has been
crumbling since 1952, however, under the impact of the population
explosion, inadequate maintenance, the using up of resources in
preparation for war, and the subsequent physical damage from war.
D. Technology and Management
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A noted historian of Egyptian affairs speaks pessimistically of
Egypt's huge problems in expanding education, e.g., the worsening of
standards in the rush for more teachers and buildings, the small
attention paid to independent study as opposed to rote learning, the
social and job expectations associated with a certificate or diploma,
and the politicalization of the higher level student body. This
historian joins those other observers who see the dissipation of
Egypt's very real strengths under the impact of population growth and
political conflict.
Many valuable technological ties ended with the 1952 seizure of
power by the Free Officers, the subsequent confiscation of British
and French industrial properties, and the departure of Greek and
Italian craftsmen and technicians who kept going the day-to-day
machinery of economic life. The turn to the Soviet Union and its
satellites during the Nasser regime distanced Egypt still farther
from valuable on-going technological developments.
Today, Egypt is repairing its technological fences, through joint
ventures with Western governments and corporations, extensive
training of its students abroad, and generally closer ties to
international markets for technology.
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Some parts of Egyptian management get high marks, notably the
management of the General Egyptian Petroleum Company and the Suez
Canal Authority. Most other state firms suffer from an unseasoned
management, a surfeit of petty tutelage by an overstaffed
bureaucracy, and insufficient motivation of the working force.
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Box A
EGYPT: BRIEF CHRONOLOGY, 1952-1987
1952: the nationalist revolution of the Free Officers organization
led by Nasser and the establishment of independence after 2,500
years of foreign domination.
1967: the disastrous military defeat by Israel
1970: the death of Nasser and the accession to power of Sadat
1973: the Arab sense of "triumph" in their fourth war with Israel;
and the concomitant oil price revolution
1974: Sadat's establishment of the "infitah" (open door to the West)
policy
1979: the peace treaty with Israel and Egypt's alienation from the
other Arab states
1981: the assassination of Sadat and the succession of Mubarak to the
presidency.
1987: the May debt restructuring agreement with the International
Monetary Fund; and the November reintegration of Egypt into the
Arab world
[End of Box A]
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Section III
THE INHERITED ECONOMIC SYSTEM
The Egyptian economic system stands today as an inefficient
amalgam of:
--Commercial capitalism with its strong ties to
international markets in goods and technology and with
its myriad enterprises in trade, finance, industry,
agriculture, and services.
--Bureaucratic socialism with its massive administrative
and regulatory bureaucracy, its skeletal five-year
economic plans, and its array of publicly owned firms in
banking, heavy and military industry, electric power, and
transport.
--Arab traditionalism with its old-style village and small
town activities and its fundamentalist constraints on
moving too deeply into public ownership or Western ways.
A. Cultural and Political Elements
The economic system of any particular nation-state bears the
marks of its political and cultural history. In the case of Egypt,
one British observer identifies three major themes:
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--the continuity of Egyptian society from ancient times,
even though foreign rulers dominated the country for the
2,500 years prior to 1952.
--the shaping of the Egyptian outlook through the
Interwoven forces of the Muslim religion and the Arabic
tongue, beginning in the seventh century.
--the intensified clash today between the values of an
older Egypt and the social and technological values of an
awakened Egypt; this clash leads to ambivalence in the
leaders as they choose new social-political philosophies
and new international partners and to emotional
dislocation in the masses of people as they react to the
onslaught of technology and untested values.
Noting that Egypt's contemporary socioeconomic profile conforms
to the profile of most Third World countries of similar size (e.g.,
Iran, Mexico, Nigeria, and Indonesia), a second observer cites such
common features as "overpopulation, rapid demographic growth,
unchecked rural-urban migration, oversized urban centers, mounting
demands on services, strained infrastructure, deficit in the balance
of payments, foreign debts, inflationary pressures, maldistribution
of wealth, and sociopolitical unrest..." This concise portrait of
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the negative side of Egypt's situation needs balancing by
consideration of Egypt's formidable strengths, as presented in
Section II and other parts of this report.
B. Ownership of Productive Resources
The ownership of the factors of production in Egypt lies in both
public and private hands. The government owns (a) the large
industrial firms, which make up most of heavy and military industry;
(b) transportation and port facilities; (c) the commercial banks; (d)
the irrigation and drainage system; (e) the radio, television,
telephone, and postal systems; and (f) educational and health
facilities of any size. The government also has a dominant ownership
position in large joint ventures with foreign firms. Private
individuals own many medium-sized and essentially all small-sized
businesses, which predominate in the light, food, and service
industries. Well-to-do individuals also share in the ownership of
joint ventures with foreign firms.
Since the 1950s, when the Nasser regime destroyed much of the
power of the rich landowning class by limiting private farms to 100
acres, small and medium landowners predominate in rural areas; the
rich have at least partially evaded limitations on land holdings
through subterfuge, e.g., the registration of land parcels in the
name of relatives.
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C. Locus of Decision-Making
Since the revolution of 1952, Egypt's three ruling presidents
have continued the ancient pharaonic tradition of leadership. This
tradition holds that the ruler must be strong both in exacting the
obedience of his subjects and in taking care of their basic needs.
The Egyptian government under the president's direction makes the
macroeconomic decisions as to the proportion of national income going
for defense purposes, the scale of food and housing subsidies, the
authorization and scheduling of major investment projects, and the
use of foreign exchange. Cairo shares with Washington decisions over
the use of the annual $2 billion in U.S. aid and complains that it
should have .a stronger voice in the employment of these funds.
One conspicuous instrument of the central regime's
decision-making power is the five-year economic plan. The current
plan extends from fiscal year 1987/88 through fiscal year 1991/92,
the Egyptian fiscal year starting on 1 July. The Egyptian five-year
plan promises much more in government control over the economy than
it delivers. Indeed, the plan has evolved as little more than a
guideline for major investment projects, even though it purports to
set the level of GNP growth, the national product mix, the pattern of
foreign trade and the main lines of technological development.
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The identity of other decision-makers reflects the diverse
public/private character of the economy: managers of major public
enterprises, joint ventures, and private business firms; senior
military officers; private landowners, village headmen, money
changers, master craftsmen, and local entrepreneurs; and foreign
capitalists and managers. The "old rich" and "the new infitah class"
make decisions involving, for example, investment opportunities and
the import of luxury consumer goods. Tradition continues to play a
major role in decision-making, both in the behavior of owners and
managers and in the conduct of petty enterprises.
Only a small fraction of government employees and private
citizens participate in decisions of any consequence. Many
households five so close to the margin that choice among alternatives
has little meaning.
D. Implementation of Decision-Making
Internally, Egypt's mixed economy employs a variety of
bureaucratic channels, private markets, and social traditions to
implement economic decisions. Externally, national and international
organizations and global commodity and financial markets are the main
instruments of implementation and reflect Western economic practice.
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Every observer of the Egyptian scene sees the deadweight
bureaucracy as a major hindrance to the implementation of economic
decisions and to the general energizing of the economy. These
observers characterize the bureaucracy as "bloated," "over-staffed,"
"venal," "incorrigibly corrupt," and the like. The government has
meaningful work for only a fraction of public employees and lacks
funds to pay 3 million bureaucrats adequately. The general result is
a tremendous amount of idleness and makework, unending delays, a
nearly universal susceptibility to bribes, and considerable
moonlighting.
Even though the president can set the tone of economic policy and
make strong economic decisions, he faces a major constraint in the
ability of the bureaucracy to slow down the implementation of his
decisions. In general, the leader often must go with the tide; he
can do little in the short run to change Egypt's vast poverty, or the
instinctive venality of officials, or the deep-seated religious
animosities.
E. Paramount Role of the Military Establishment
Power in the Egyptian politico-economic system since the
revolution in 1952 has rested ultimately on the armed forces. Behind
a civilian facade, the top layer of government has the confidence and
support of the military establishment. Military spending at a slowly
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increasing level has an almost absolute priority. The government
must provide sufficient resources for adequate military pay and
gradual acquisition of modern weaponry.
The top government echelon values military strength as necessary
to deal with unsettledconditions in the Middle East, to hold
domestic factions in check, and to symbolize Egypt's importance as a
proud nation-state. Furthermore, the armed forces makes a positive
contribution to the economy in building bridges and sewer lines,
running factories that produce both military and civilian goods, and
training people in basic technical skills. Finally, the armed forces
with their 500,000 men and the public security forces with their
300,000 men constitute valuable sources of employment in this
underemployed nation.
F. Dollarization of the Economy
Even more so than most other Third World countries, Egypt depends
on the Western market economies for food, machinery, technology, and
financial support. This dependence runs counter to currents of
Egyptian nationalism, Arab regionalism, and Muslim fundamentalism.
One major consequence has been the dollarization of the Egyptian
economy to the extent that the dollar serves as a practically equal
companion money to the Egyptian pound:
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--The international oil market, the major source of Egypt's
export earnings, uses dollars as its unit of account and
medium of exchange.
--Expatriate Egyptian workers typically draw their pay in
dollars and channel great sums back into the economy by
both official and non-official channels.
--Suez Canal revenues also come largely in dollars.
--Tourists often pay in dollars, and the government
collects as many of these dollars as possible through
hotels and other tourist facilities.
--Individual Egyptians hold tens of billions of dollars in
their savings and business accounts, both in Egyptian and
foreign financial institutions.
--The bulk of Egypt's foreign aid receipts are in dollars.
--Businessmen, money changers, and black market operators
within Egypt often carry out their transactions in
dollars.
--The virulent inflation of domestic prices, in recent
years increasing from 15 percent to 25 percent annually,
encourages Egyptians of all ranks to deal in dollars and
thus reinforces the above tendencies.
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G. Drain of Rent-Seeking Behavior
Another major characteristic of the Egyptian economy is
rent-seeking behavior--the process whereby individuals strive to earn
incomes from exploitation of a good in fixed or short supply rather
than from expanding the existing supply of goods. Many Egyptians
seek incomes as go-betweens with foreign firms, speculators in
currencies, sub-leasers of scarce housing or land, bureaucratic
toll-collectors and influence merchants, or re-sellers of rationed
goods. In some of these instances, the person indeed performs a
useful economic service in facilitating transactions that raise
community well-being. In too many cases, however, the activity is a
rake-off, adding neither to the stock of products nor to the level of
Individual satisfaction.
Meantime, the nation as a whole rents its Suez Canal to shippers,
its pyramids to tourists, its oil deposits to foreign countries, its
workers to the Gulf States, and its geo-strategical position to the
major powers. Again, while some of this activity clearly raises both
national income and product, it frequently lacks the technological
push associated with modernization and economic momentum. Indeed,
rent-seeking ventures promise the most lucrative and immediate
returns when, as often is the case, they do not involve large
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investment in plant and technology or close association with the
government bureaucracy. Finally, rent-seeking proliferates in an
overpopulated society of shortages, subsidies, and massive
underemrloyment--like Egypt's.
Rent paid by Egyptians to other Egyptians within the economy does
not in itself raise national product, certainly not when the rent is
a simple pay-off. Rent paid by outsiders such as foreign governments
and tourists, on the other hand, adds to Egyptians' command over
goods and services, hence to national product.
H. Social Contract Between Rulers and Ruled
The Egyptian politico-economic system has remained stable since
1952 largely because of the observance of an implicit social contract
between rulers and ruled:
. Of prime importance in the social contract is the supply of
cheap food and other necessities to the populace through massive
government subsidies. The cost to the treasury of the food subsidy
has risen to an estimated $7 billion per year. In January 1977,
serious riots in Cairo and other cities erupted after President Sadat
announced cuts in subsidies for food. He had to rescind his order
immediately. Subsequently, the government has had to move cautiously
when reducing subsidies, for example, by juggling the quality and
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weight of bread. Because of the 15-25 percent domestic inflation,
fixed nominal prices for necessities mean lower real prices over time
and thus higher real subsidies. The mass of people, however, see the
prices in terms of current piastres, not the economist's real
piastres, and object to rises in nominal prices even when justified
by inflation.
2. Ever since Nasser saw education as the key to Egypt's
modernization, the government has moved to eliminate illiteracy and
has made free education up through the university level an important
plank in the social contract. Up to recently the goverment had even
promised jobs in the public sector to all high school and college
graduates. Moved by personal ambition, encouraged by public policy,
and prodded by their parents, young people have flooded the
educational system. The schools have unsuccessfully struggled to
find enough qualified teachers and have turned out masses of
ill-educated persons. About 450,000 young people enter the labor
market each year, with only a fraction of this number leaving the
labor market in the older age brackets. The waiting line for the
employment of college and secondary school graduates now contains
five classes. The authorities expect these young people to get other
jobs while waiting but only one-third are able to find jobs compared
with two-thirds of the people a few years ago.
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3. Implicit in the social contract is the provision of minimum
housing, water and sewerage, medical care, and other family support
items that form part of the society's infrastructure. Government
officials conceded some time ago that the economy was short 1 million
housing units and will be short 3.6 million in the year 2000, and
they were understating the problem. (Other sections of the report
deal with the crumbling of the infrastructure and the government's
efforts to prevent further deterioration.)
The ancient pharaonic tradition called for the ruler to see that
the people enjoyed a minimum level of goods, but Nasser greatly
enlarged that commitment under the banner of Arab socialism.
Although not a part of the basic social contract, Sadat's infitah
policy constituted a de facto commitment to the well-to-do, i.e., the
provision of considerable latitude to make money outside the
socialist constraints, both at home and abroad. This permissive
attitude seems necessary to reap the advantages of the opening of the
West and to retain the services of at least part of Egypt's best and
brightest. Indeed, the vitality of Egypt's own entrepreneurs rests
largely on their proven ability to deal with or perhaps circumvent
the venal bureaucracy. Another aspect of the government's implicit
contract with the well-to-do is a certain liberalization of foreign
trade which permits the newly rich to import luxury consumer goods.
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An extended version of the social contract might also include
the guarantee to the military of a certain minimum allocation of real
resources and an implicit arrangement with foreign creditors to
maintain a respectable facade,of honoring debt obligations.
I. Changes in the Rules of the Game Since 1952
Once firmly established in office, Nasser embarked on his own
personalized brand of Arab socialism: (a) nationalizing the banks,
oilfields, and large industrial facilities; (b) drastically curbing
the power of the large landowners through land redistribution; (c)
seeking Soviet aid and building up a large Soviet-style
administrative and planning bureaucracy; (d) rapidly expanding
Egypt's capacity to produce basic industrial materials; (e) greatly
raising the expectations of the rank-and-file through welfare
measures that included price controls, subsidies, rationing, and free
education; and (0 devoting perhaps one-third of the national product
to military purposes.
His successor Sadat, after leading a "triumphal" crossing of the
Canal in 1973: (a) instituted the "infitah" policy of expanded trade
and technology contacts with the West; (b) encouraged private
investment in both the domestic and foreign arenas; (c) initiated a
peace accord with Israel, thus easing the military burden; (d)
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patron; and (e) subordinated egalitarian policies to the needs of the
entrepreneurial class. He could do little about the burdensome
legacies of a bloated bureaucracy and inflated welfare expectations.
Mubarak has held to the eConomic course bequeathed by Sadat--at a
reduced pace. His caution reflects the end of the oil bonanza, his
wish to return to the Arab fold without upsetting the U.S. alliance
or disturbing the peace with Israel, and the constraints posed by the
continued poverty of the masses of the people and an upsurge in
Islamic fundamentalism. He has sought out practical remedies and has
tried to dampen the unrealistic expectations of the populace.
Table 4 lists these and other comparisons of the economic
policies of Nasser, Sadat, and Mubarak.
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Table 4
EGYPT: ECONOMIC POLICY POSITIONS, 1952-1987
Item
Period in
Power
Leadership
Style
Economic
Philosophy
International
Ties
Position in
Arab World
Ownership of
Resources
Economic
Decision-
Making
Decision
Implementation
Foreign
Aid
Agricultural
Policy
Industrial
Policy
Educational
Trends
Nasser
Sadat
Mubarak
1952-1970
Charismatic,
Emotional
Bureaucratic'
Socialism
Soviet
Socialist Bloc
Militant Leader
State Entities
Bureaucratic
Hierarchy
Bureaucratic
Hierarchy
From Soviet
Bloc
Land
Redistribution
State-Sponsored
Rapid Growth
Nationalistic,
Populist
1970-1981
Dramatic,
Introspective
Open Door
Policy
Western
Market System
Pariah (since
Camp David)
State and
Private
State and
Private
Trend toward
Market
From U.S.
and Arabs
Limited
Investment
Market-Sponsored
Rapid Growth
Technical,
More Elitist
1981-1987
Technocratic,
Cautious
Stable Mixed
Economy
Western
Market System
Gradual
Reconciliation
State and
Private
State and
Private
Trend toward
Market
From U.S.
and Arabs
Limited
Investment
Moderate
Growth
Technical,
More Elitist
(continued)
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Item
Nasser
Sadat
Mubarak
Population
Secondary
Secondary
Rising
Control
Issue
Priority
Priority
Infrastructure
Neglected in
Emergency
Emergency
Rush
Patchwork
Patchwork
GNP
Ups and Downs
Oil Bonanza
Slow Advance
GNP/Capita
Slowly up
Major Rise
Leveling Off
Income
Decided
Less
Less
Distribution
Leveling
Egalitarian
Egalitarian
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Box B
EGYPT: MAJOR OBJECTIVES IN 1987-1992 PLAN
In the Government Policy Statement presented to the People's
Assembly on 16 November 1987,'Prime Minister Sidqi declared that the
government hopes to implement many ambitious economic programs during
the 1987-1992 five-year plan, as follows:
1. Agricultural Sector
a. Raising annual production more than 80%.
b. Attaining self-sufficieny, except in wheat and corn.
c. Reclaiming 150,000 acres.
2. Industrial Sector
a. Raising production 42%.
b. Attaining self-sufficiency in most consumer goods.
c. Emphasizing production of industrial tools, spare parts,
and export goods.
d. Renovating especially the armament and textile branches.
3. Oil Sector
a. Increasing oil output by 5.6%; doubling gas output.
b. Pressing exploration for oil and gas.
c. Substituting gas for oil in all possible domestic uses.
4. Electricity Sector
a. Boosting power generation capacity by 3,529 megawatts,
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or by roughly 40%.
b. Pushing coal-generated and nuclear-generated power.
5. Transport and Communication Sector
a. Renovating 1,000 'km of railway track and completing
double-tracking of lines in Upper Egypt.
b. Building 376 km of new roads, converting 399 km from one
lane to two, and constructing nine bridges.
c. Increasing telephone lines by 465,000, to 2.1 million.
d. Raising port capacity by 8.2 million tons, or 27%.
e. Upgrading four airports into international airports.
6. Tourist Industry
a. Completing new luxury hotels.
b. Streamlining administration, security, and training.
7. Construction and New Communities
a. Building roads, water systems, and desalinating plants
in Sinai, the northern coast, the High Dam lake area,
Cairo, and other expanding areas.
b. Completing first phase construction of four new cities.
8. Housing Sector
a. Constructing one million housing units, 900,000 in urban
areas and 100,000 in reclaimed areas, with 630,000 for
low-income families.
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Public Utility Sector
a. Increasing the volume of pure drinking water by 44%,
with half of the increase in Cairo.
b. Augmenting substantially the capacity of sewer systems
throughout the country.
10. Social Services Centers
a. Raising the number of hospital beds from 96,700 to
115,700.
b. Funding new museums and theatres.
c. Ensuring basic education for all children and expanding
educational programs on radio and TV.
d. Strengthening the network of vocational training and
social rehabilitation centers.
e. Building or refurbishing 361 mosques and commissioning
300 new Islamic libraries.
f. Erecting 40 youth centers, as well as new sports
facilities.
11. Employment
a. Providing 2.1 million new job opportunities.
[End of Box B]
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Box C
EGYPT: ECONOMIC REFORMS URGED BY OUTSIDERS
Economist observers from Western and international organizations,
who stand above the daily struggle of Egypt's leaders to reconcile
mutually unattainable economic objectives, urge the government to
make the following reforms:
1. Unification of the exchange rate between the Egyptian pound
and the U.S. dollar: The process of unification has received a
considerable boost from the IMF agreement of May 1987, with a
gradually increasing number of transactions taking place at or near
the international market rate.
2. Introduction of higher real interest rates within the
domestic economy: The government has found it politically inexpedient
to set interest rates at a high enough level to ensure a positive
rate of return over and above the 25-percent inflation rate.
3. Reduction of subsidies on domestic energy consumption and the
vigorous substitution of gas for oil in domestic use: The government
in recent years has raised the domestic price of key petroleum
products from about one-tenth to one-fourth of international prices
and has made a partial start on constructing pipelines and modifying
equipment to accommodate the use of gas.
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4. Cut in domestic budget deficit: Because of built-in
commitments to important interest groups and the inability of the
government to firm up tax collections, the budget deficit has
continued at a high level.
5. Restraints on bank lending, as part of a general effort to
curb inflation: The recent cap on bank lending (part of the IMF pact)
has touched only one part of the inflationary process; prices are
advancing at an even faster clip, and the trend toward the use of
U.S. dollars continues.
6. Reduction of food and other consumption subsidies and an
increase in agricultural incentives: The government, remembering the
great riots of January 1977 touched off by Sadat's announcement of
subsidy cuts, has proceeded cautiously in trimming subsidies, e.g.,
by juggling the quality and weight of the subsidized loaf of bread.
The government lacks the financial means to raise agricultural
procurement prices and farmers' incomes as a stimulus to output.
7. Reduction in bureaucratic controls and interventions: The old
observation of one eminent observer still holds: "It is this
obstructionist monster of the state machine with its red tape,
lethargy, and choking legalism which has impeded a faster rate of
foreign capital flow into the country." Efforts to reduce the size
of the bureaucracy will run aground on the vested interests of
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incumbents and the practical need to provide government employment
for secondary school and college graduates.
8. Systematic rationalization of all laws that affect domestic
and foreign entrepreneurs: The laws include commercial law, trademark
and patent law, labor laws, import-export regulations, banking and
securities regulations, foreign exchange regulations, and income and
other tax laws: Revision of these laws has proceeded slowly on an ad
hoc basis; systematic and timely rationalization is unlikely.
9. Restraints on consumerism: The government has taxed and has
licensed imports of luxury consumer goods without, however,
substantially reducing the ostentatious lifestyle of the new infitah
class or curbing lower middle class appetites for radios, TVs,
refrigerators, and better housing.
Addendum: These outside observers recognize the overriding
importance of Egypt's large and growing population as the key barrier
to economic progress. Yet they do not, certainly not in any advice
offered under official auspices, urge draconian antinatalist policies
on a government that lacks the power to administer even mild
restraints.
[End of Box C]
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Section IV
DEALING WITH MAJOR PROBLEMS THROUGH 2000
This section describes the likely outcome of government and
private efforts to deal with the major problems of the Egyptian
economy through the year 2000. It identifies the problems that
probably will grow, those that will remain at about the same level of
intensity, and those that will diminish. It addresses the issue of
the likely effect of the fundamentalist religious revival on economic
affairs. Implicit in the discussion is the thesis that Mubarak and
his successors will have to devote most of their energies to keeping
things from getting worse; they will lack the administrative drive,
the political opportunities, and, above all, the economic resources
needed to delay present satisfactions in order to reap the long-term
advantages of added investment.
A. Exploding Population: The Problem No One Can Do Much About
A rise in population from 52 million today to 71 million by
the end of the century appears an inevitable feature of the
socioeconomic background. The rapid growth of population will
adversely affect developments in all the other problem areas
addressed in this report. The central government nonetheless cannot
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wfr
seriously contemplate an overt antinatalist program that would
consume administrative energies in a fruitless effort and that would
stir up fundamentalist unrest to no purpose.
Prime Minister Sidqi in his lengthy 16 November 1987
Government Policy Statement to the National Assembly devoted a
cautious paragraph to the population question, as follows:
There is no doubt that confronting the population problem
is essential. Only then can efforts toward development
produce effective results in raising the standard of
living. As mentioned in the previous government
statement, our brothers, the religious ulema and
preachers, should shoulder a big responsibility in
resolving this problem. Furthermore, the mass media and
the various information campaigns can and should play an
extremely important role in changing social behavior by
advocating small families.
B. Huge Bureaucracy: A Place to Park Redundant Labor
In his second term acceptance speech of 12 October 1987,
President Mubarak stated that "the ministries, state institutions,
public economic establishments, and public sector" employ about 6
million workers and that the government sector had added 892,000 new
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jobs in the past 5 years. Of the total, perhaps 3 million are in the
administrative bureaucracy itself, with each member, according to
Cairo nightclub opinion, performing on average only 27 minutes of
useful work each day.
With an estimated 450,000 entrants to the labor force each
year, hopes to trim the bureaucracy seem futile. The government does
well to waste little energy in raising the productivity of redundant
bureaucrats or in preventing their moonlighting on other jobs. The
regime presumably will do what it can to promote alternative
employment opportunities in the private sector and foreign countries.
One drawback to the existence of this bloated bureaucracy is a
built-in resistance to government measures for streamlining the
regulatory process or for privatization of the economy. The
bureaucracy does not choose to participate in any dismantlement of
the public sector.
C. Crumbling Infrastructure: Efforts to Keep Abreast of the Game
The strategy and degree of success of the government in
dealing with the crumbling of the infrastructure will vary widely
from sector to sector:
--A recently opened French-built subway line in Cairo
will carry several hundred thousand commuters each
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_
day in a system with just six stations; this is an
important step in keeping Cairo's commuting problem
within tolerable limits.
--Water and sewerage problems are a stark reality in a
country with a fixed and already overstretched water
supply; the government gives high priority to fixing
these national plumbing problems in cooperation with
West European and North American contractors; large
sums advanced by the World Bank and USAID go for this
purpose.
--Land, materials, and incentives are wholly inadequate
to keep the housing shortage from worsening; in the
face of a situation where millions are homeless, one
observer notes the amazingly large number of empty
and half-finished housing around Cairo; well-to-do
people are holding housing and apartment units for
their children and friends, since the amount of rent
forgone under government controls is quite small and
since tenants cannot be readily removed; investors
supposedly abandon projects from a combination of
rising costs and pessimistic revenue prospects; and
the number of homeless living in Cairo's great
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cemetery, the City of the Dead, has grown to a
million.
--Contracts with Western companies are beginning to
make palpable improvements in the notoriously
inefficient telephone system.
--With the doubling df per capita GNP since 1952, the
more than doubling of welfare outlays and popular
aspirations, and government efforts to broaden
educational opportunities, the staff and facilities
of Egypt's educational system have gradually
deterioriated in quality; well-to-do people hire
private tutors, and a private educational net has
sprung up to prepare students better for higher rungs
on the educational ladder; meanwhile, the government
faces the problem of strengthening vocational
training to support the technical upgrading of
industry and agriculture.
D. Expensive Military Establishment: Political Bedrock
One sacrosanct commitment of Egypt's resources--amounting to
10 to 15 percent of GNP--is the support of the military establishment
of approximately half a million men. In an age of alienation,
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frustrated expectations, and erosion of traditional social controls,
army support stands as the ultimate strength of the regime. The
government is attempting to boost the loyalty of the army through new
housing and other benefits for the officers and stepped-up training
for enlisted men that can mean a better job upon discharge. The
switch from Soviet to U.S. and French arms has resulted in a
hodgepodge of equipment, and the process of gradually modernizing the
army's weapons will require some increase in the military budget
through 2000. The major restraints on the military will be on the
pace at which it can buy foreign weapons and simultaneously improve
its material perquisites. Already officers are grumbling at what
they see as an erosion of their perks.
The Egyptian army performs useful work on roads, bridges,
telephone lines, and other contruction projects. According to a Wall
Street Journal article of a year ago, army farms annually produce 60
million eggs, 13.5 million tons of red meat, and thousands of tons of
fruits, vegetables, and dairy products. One-third to one-half of the
output of army factories consists of civilian products, such as
diesel engines, pumps, and desalination equipment.
E. Inadequate Foreign Exchange Earnings: Striking a Balance
Egypt will need ever-increasing amounts of foreign exchange,
mainly U.S. dollars, to pay for: food; industrial equipment,
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technology, and raw materials; and increasingly complex and costly
weapons. Recently, imports of goods have run at $10 billion per
year, exports of goods at only $4 billion. Furthermore, Egypt faces
an annual $4 billion outlay for paying interest and principal on its
$40 billion external debt; ongoing negotiations with creditor
nations, under the IMF umbrella agreement of May 1987, are stretching
out these debt service obligations. Items that will help fill the
gap between foreign exchangeincome and outgo are:
--$3 billion annually in worker remittances coming
through official channels (another $3 billion to $6
billion flows in through unofficial channels, outside
the government's statistics); these payments likely
will dwindle over the next decade, more or less rapidly
depending on oil prices and the policies of Arab Gulf
states in hiring foreigners.
--$2 billion annually in U.S. military and economic
support.
--large sums from oil-rich Arab nations on an irregular
basis, totaling roughly $1 billion in 1987.
--important sums advanced by the IMF and World Bank on
soft terms; these advances normally postpone, rather
than reduce, Egypt's foreign exchange difficulties.
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--$1 billion in Suez Canal fees, an amount apt to climb
gradually over the long run.
--$1 billion in annual tourist earnings; Egyptian tourist
officials optimistically expect this figure to reach $3
billion in the next decade; in any case, a substantial
increase will occur if Egypt retains its political
stability and relations with other Arab countries
continue to improve.
Oil earnings will depend in part on unpredictable movements of
price, which could put annual earnings from petroleum and petroleum
products between, say, $1 billion and $2.5 billion. As to volume,
Egypt's oil production can remain at 900,000 barrels per day with
reasonably good fortune but probably will not top that figure. Of
this amount, 300,000 b/d goes to pay the oil companies and 400,000
b/d goes for domestic use, leaving 200,000 b/d for export. As
population and GNP rise, domestic demand for oil will rise at least
in proportion, or, say, from 2.5 to 3.0 percent per year. Egypt is
taking steps to counteract this increase in domestic demand by the
substitution of domestically produced gas.
F. Widespread Dollarization: Restrained by Nationalistic
Sensitivities
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Because of Egypt's multiple exchange rates, its 15- to
25-percent annual inflation, its substantial price subsidies, and its
extensive international economic ties, widespread dollarization will
remain a salient feature of the economy. Oil earnings, worker
remittances, tourist expenditures, large investment projects, foreign
aid transfers, and even a substantial share of domestic financial
assets will continue to bear a dollar label. Egypt's sensitivity to
its national sovereignty will inhibit further dollarization on the
official level but will not prevent its continued advance on the
business and household levels.
G. Agriculture: More Food Imports Likely
According to World Bank economists, Egypt was able to boost
agricultural output by an estimated 3.5 percent a year in the 1970s
because of the initial impact of the Aswan High Dam on irrigation,
acreage, and the introduction of high-yielding varieties of crops.
Growth in the 1980s, however, fell by more than one percentage point
because of:
--The government's failure to provide an adequate
incentive for farmers to produce, especially those
crops in which Egypt enjoys a pronounced comparative
advantage.
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41
--The annual loss of 1 percent of the cultivated area to
urbanization, possibly offset in quantity, though not
in quality, by the reclamation of other land.
--The decline in some crop yields due to increased
salination and inadequate drainage, in part the result
of altered conditions brought about by the Dam.
--Labor shortages in some farm areas attributable to
rapid migration, especially of those males with the
most education and the highest technical skills.
--Institutional weaknesses in applied research, extension
services, and marketing.
Despite these unfavorable factors, gradual improvements over
the next decade in fertilizer application, plant strains, cultivation
methods, and water usage should enable Egypt to achieve 2-percent
annual growth in the agricultural sector. Changes in government
policy on agricultural procurement prices and farm incomes, if
properly carried out, could lead to much higher agricultural growth
rates. However, a financially strapped government acting through a
bureaucratic labyrinth almost certainly will not adapt, let alone
implement, more than a fraction of the necessary measures.
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Egypt, which now imports 60 percent of its food, almost
certainly will be importing air,even greater proportion in the year
2000. The loss of "food security" since World War II poses a
political issue which the government lacks the means to resolve.
H. Industry and Construction: Building on a Broad, Variegated
Base
Recent visits to a dozen small and medium Industrial
enterprises near Alexandria gave two U.S. Embassylofficials a new
appreciation of the ability of Egypt's entrepreneurs to surmount
bureaucratic barriers and economic obstacles. Each businessman had
his own particular mix of satisfactions and complaints. Among the
latter are the delays in getting licenses and permits,the uneven and
unfair application:of the tax system, the frequent interruptions of
the electric power supply, shortages of certain types of skilled
labor, and the difficulty of obtaining foreign exchange for purchase
of vital machinery and raw materials. These problems no doubt will
continue through the year 2000; they will impinge -on private
businesses in an individual pattern, depending on the products and
connections of the firm, and they will continue to test the
resiliency and adaptability of entrepreneur and manager.
The large state-owned industrial businesses face a different
set of problems, especially in their adjustments to international
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market conditions and absorption of modern technology. The General
Egyptian Petroleum Company and the Suez Canal Authority will continue
to benefit from competent management, accumulated experience, and
assured markets. Other state-owned businesses suffer from tangled
administration, loose discipline, and an ill-trained and ill-paid
labor force. Some, like the state steel and aluminum companies, have
built-in technology that makes them voracious consumers of energy in
an era where oil output must earn foreign dollars and where
government price policy improvidently encourages household
consumption of energy. Many will benefit from a sheltered and
expanding domestic market, especially if they can obtain foreign
exchange needed for equipment, technology, and raw materials.
The Construction branch of the Egyptian economy will
experience a brisk demand for its services over the next decade,
e.g., in expanding industrial capacity, implementing programs for
reclamation of land and higher yields in agriculture, building new
housing and tourist facilities, and playing a lead role in the
constant refurbishment of the infrastructure. Construction activity
will involve crafts ranging from primitive village brick-making to
the skills of electrical engineers at Aswan.
The industrial and construction sector should move fitfully
ahead on a broad and variegated basis, building on an already
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substantial base. Annual growth in real output ought to fall in the
3-5 percent range, but this admittedly is a guesstimate based on the
qualitative observations of foreign observers and not on research
into available quantitative information.
I. Services: Tied to Growth in Population, Industry, and
Agriculture
The outlook for support services, especially those based on
masses of unskilled urban labor and locally produced raw materials,
is a major bright spot. These services will both support the
operations of and share the fortunes of industry, mining,
construction, agriculture, the tourist sector, and households,
especially those households propped up by remittances. With cautious
encouragement of privatization and foreign investment under Mubarak,
services will help create the alternatives to joblessness or public
employment that the masses of newly fledged labor so desperately
need.
In the financial sector, the rise of the popular Islamic
investment companies, which pay generous dividends on shares in a
variety of business ventures, has been the most spectacular
institutional development of the 1980s. In some cases at least,
these appear to be fair-weather companies that cannot maintain their
high dividends for long and that will shortly add to the government's
already full plate of problems.
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J. Fundamentalist Revival: Constraint on Policy Initiatives
Economic and political frustrations and the powerful cultural
currents from the West have led a considerable number of Egyptians to
turn to Islamic fundamentalism. Many of these activists are young
have-nots; others are representative of the best and brightest
students in the university network. Until now, the fundamentalist
movement has not appreciably disturbed economic affairs, although it
restrains the pace of secularization and westernization in Egyptian
society.
If Egypt were to institute the strict Islamic code of
behavior, the following adverse economic developments would follow,
some immediately, some gradually:
--A disruption of business transactions based on
interest payments, which are anathema in the Islamic
code, and the adoption of makeshift alternative
arrangements for credits, probably along the line of
profit-sharing.
--A sharp drop in tourism, with the halt to the public
flow of liquor and to the public appearance of
bikini-clad women.
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--A reduction, in agricultural efficiency, as Islamic
inheritance laws would divide already small parcels
of land into still smaller holdings.
--A further erosion in educational standards, as
perhaps two hours of schooling per day would be lost
in mathematics, the sciences, and other modernizing
studies; on the other hand, the adoption of the
Islamic code conceivably could bring better
discipline and more serious study to offset this
re-allocation of time.
--A loss of output from many of the highly skilled
women in Egypt's labor force, as women returned to
traditional menial employment.
--A final blow to already remote prospects for a strong
antinatalist policy in this century.
A recent Wall Street Journal article explains how Mubarak is
trying to contain the fundamentalist revival without undue resort to
force. His assets, according to the article, are: (1) the
500,000-man army; (2) the 300,000-man central security forces, which
maintain internal security; (3) an emergency law under which suspects
can be held for two months without charge; (4) a strong margin of
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support in parliament; and (5) widespread admiration within the
populace for his integrity.
His liabilities, according to the article, are perhaps even
more formidable: (1) the exhaustion of the Egyptian treasury, in
contrast to the fundamentalists' ability to fund hospitals, schools,
daycare centers, and even some housing; (2) the hobbling of
administrative initiatives by "a hopelessly corrupt bureaucracy"; (3)
the demeaning reliance on $2 billion annually in U.S. aid, which
still isn't enough; (4) the growth of influence within the army and
police of militant fundamentalists; and (5) the ability of the
fundamentalists to assassinate and terrorize, i.e., to set the rules
of the game.
One bitter Egyptian, quoted in the article, asked how the
fundamentalists propose to solve the country's major problems:
Can they get us money from the international banks or other
countries without interest? Can they cancel the peace
accord with Israel and throw this country back to war? Can
they shut down the tourist income by imposing their liquor
and dress rules? Can Egypt take it? I don't think so, and
people will see that for themselves. The support will melt
away.
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For the future, the fundamentalists add to the problems of
Mubarak and his successors by narrowing the already small room for
policy manuever and by consuming the administrative attention that
ought to go to programs with the potential to spur economic growth.
At the same time, their growing social welfare activities help ease
the strain on government resources.
K. Soviet Return to the Arena: Not Likely
The Soviet economic presence in Egypt, nurtured by Nasser and
ended by Sadat, will not revive in the next decade except under the
unlikely circumstances of a complete unraveling of Egyptian society.
The innovative political-economic policies of Sadat and the cautious
continuation of these policies by Mubarak have reinforced economic
and psychological ties to the West, especially the United States.
The Soviets do not possess the means to subsidize Egypt at the
level maintained by the United States and Egypt's Arab brethren, who
in November 1987 ended Egypt's political ostracism. Moscow, already
overcommitted at home and in Afghanistan, Cuba, and Africa, has to
contend with near-zero growth in its own economy and internal
divisions over economic policy. Moscow lacks the ties to the
international market, the modern technology, and the administrative
flexibility normally provided by the West as a matter of course in
dealings with Egypt. Another substantial handicap is the personal
dislike Egyptians have for Russians.
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L. The Evolving Economic System: Three Currents
The three broad elements in Egypt's eclectic economic system
probably will fare as follows through the year 2000:
--Capitalism will move gradually ahead, in an uneven
pattern as domestic and foreign entrepreneurs take
advantage of a rising GNP, a somewhat better climate
for investment, and a more realistic system of foreign
exchange.
--Socialism will continue mainly as is, with large
welfare outlays and a massive bureaucracy as "societal
givens" and with little privatization of public firms.
(Mubarak believes that wholesale privatization would
lead to intolerable price increases for the poor.)
--Traditionalism, assuming the fundamentalists do not
take charge under an unraveling scenario, will retreat
slowly under the impact of education, technology, and
Western cultural influences.
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Box D
EGYPT: CLASS STRUCTURE IN 1980s
Upper-Upper Class: government ministers and vice ministers;
provincial governors; leaders of the national assembly; chief judges;
multi-millionaire financiers, traders, industrialists, and property
owners; general officers of the armed forces and internal security
forces; top-rank religious leaders; highest educational and
scientific authorities; heads of a few pre-revolutionary families of
impeccable social standing.
Lower-Upper Class: government bureau chiefs and senior rural and
urban officials; members of the national assembly; senior judges,
lawyers, and physicians; millionaire businessmen; senior managers of
leading state enterprises and joint business ventures with foreign
firms; field grade military and police officers; leading religious
figures, academics, and scientists; large landowners; heads of
families of next-to-top social standing.
Upper-Middle Class: senior government clerks; ordinary
college-educated professionals; medium-scale businessmen;
company-grade military and police officers; well-to-do master
craftsmen.
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Lower-Middle Class: low-paid public and private white-collar workers
with secondary education; small-scale businessmen; skilled craftsmen
and technicians, including operators of complex industrial,
agricultural, and transport equipment; village headmen; small
landowners; non-commissioned officers in military and police.
Upper-Lower Class: unskilled manual workers in industry and
transport; propertyless workers in agriculture; street vendors and
entertainers; porters, draymen, and runners; domestic servants;
military and police recruits.
Lower-Lower Class: the lumpenproletariat of surplus slum dwellers;
landless underemployed villagers; petty criminals; the destitute and
the outcast.
Note: This listing assumes that families derive their socioeconomic
status from the position of the senior male. The listing is
impressionistic, tentative, and subject to modification by better
00 informed observers.
[End of Box D]
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Section V
THREE ALTERNATIVE ECONOMIC SCENARIOS, 1988-2000
This section discusses three alternative economic scenarios for
Egypt in the 13-year period 1988-2000. The discussion does not go
into the details of Egypt's major economic problems or prospects for
individual economic sectors, which previous sections have addressed.
Table 1 in the summary provides a quick overview of the three
scenarios.
A. The Middle-of-the-Road Coping Scenario
The centrist coping scenario reflects the traditions and
temperament of the Egyptian people, both rulers and ruled, which have
given this nation-state the ability to absorb changes and challenges,
sidestep conflict, and adapt to adversity. These characteristics
have generated today's stabilizing tendencies of interwoven vested
interest groups, proven adjustment mechanisms, and strong balancing
forces:
--vested interests: the military; the bureaucracy
(hierarchical, overstaffed, slow-moving); the
well-heeled upper business community of private
capitalists, merchants, industrialists, and
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intermediaries; the skilled managerial and technical
people active in both public and private enterprises;
the prosperous farmers/landholders; and the centrist
religious leaders, professors, and editors.
--adjustment mechanisms: the social contract under which
a strong central government retains its mandate so long
as it compels obedience and takes care of the minimum
needs of the ruled; the bargaining and back-scratching
among organizations and individuals; the safety valves
of emigration and expatriate jobs; and the existence of
alternative economic choices offered by official,
private, black, and international markets.
--balancing forces, which keep activity close to the
middle: the ability to defer payments and to live off
capital and credit until the storm passes; the
existence of private social traditions to this effect,
most notably the extended family, the village, and the
religious community; the build-up of welfare supports
since 1952; and the availability of aid from the United
States, fellow Arab countries, and the IMF and World
Bank in time of emergency.
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On the economic front, unusually stable growing conditions in
agriculture presage a.fairly constant growth rate of 2 percent; this
rate could be much higher if reforms were forthcoming in the
agricultural price structure. Industrial and construction activity
depends on a wide variety of enterprises, products, and markets, some
of which will prosper and some fail, with most continuing to struggle
along. The reforms advocated by foreign economists (presented in Box
C) likewise will appear in piecemeal fashion but the government will
not sacrifice existing political stability for anticipated economic
efficiency. Mubarak's success in ending Egypt's ostracism in the
Arab world, without disturbing the alliance with the United States or
the cold peace with Israel, adds to the centrist atmosphere.
The Mubarak regime thus has been able to hold the country
together, i.e., contain the religious militants, play even-handedly
among the superpowers and neighboring states, and obtain a little
economic breathing room through the IMF agreement of May 1987. With
an exhausted treasury and the array of problems described in Section
IV, the president has small prospect under this coping scenario to
sponsor perceptible gains in Egypt's per capita output and productive
facilities. Population growth and minimum repairs to the
infrastructure will eat up the 3-percent growth expected from the
economy.
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This scenario implies piecemeal success in carrying out
economic reforms, perhaps in the following pattern:
--considerable success in unifying exchange rates.
--partial success in reducing the subsidization of energy
prices, encouraging the privatization of the economy,
reducing the most onerous bureaucratic roadblocks to
investment and production, and cutting the rate of
inflation.
--little or no success in reducing the cost of food
subsidies, adjusting the structure of agricultural
prices, trimming the budget deficit, closing the
foreign exchange gap, and stemming the tide of
consumerism.
In an interesting alternative view, an Italian think-tanker
has flatly rejected the centrist thesis of the present report:
The Egyptian economy is on a razor edge...On the one hand,
it might enter the [virtuous] circle characterized by high
wages and growing investments and be in a position to
exploit the country's great structural resources. On the
other hand, it might fall into a vicious circle
characterized by a rapidly growing population and become
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too involved mith its immediate problems to be able to
devote sufficient resources and political energies for
insuring its long term growth.
B. The Pessimistic Unraveling. Scenario
The pessimistic unraveling scenario starts with the notion
that the influx of Western goods, technology, and ideas--combined
with a population explosionin an, already overcrowded land--causes
awkward dislocations.in_traditional patterns of family and social
life. Individuals and groups face more challenges and uncertainties
than they can comfortably handle; The government, operating through
a corrupt and slothlike bureaucracy, appears less and less competent
in honoring the social contract. While some individuals profit
handsomely from opportunities for new deals, the great majority of
people grow mutinousHatAhe loss of income and status and at their
increased psychological uncertainty.
The economy sputters along at 1 percent growth. Oil export
earnings fall as the-government's efforts to substitute gas fall
behind schedule and as low domestic prices for oil-related products
remain only one-fourth of international prices. Inflation edges up
above 25 percent, and would-be investors shift into dollar assets and
foreign business ventures. Workers return from overseas employment
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and can find no jobs or jobs at only a fraction of their old pay.
Interruptions in utility and transport services perceptibly worsen.
After the situation has deteriorated, say for two or three
years, an injudicious act by a government official in a major city,
or a harrangue to a market crowd by a religious zealot, or a final
Khomeini triumph in his war with Iraq touches off major rioting. The
situation unravels; the regime falls; and a newly energized group of
military officers with fundamentalist leanings takes over. Then
follows:
--an end to efforts to restructure the economy along
Western lines.
--a chilling of the investment climate, affecting both
local businessmen and foreign firms and bringing large
new projects to a halt.
--a rekindling of hostility between Egypt and Israel.
--an upsurge of religious fundamentalism within Egypt,
which spreads to other Arab countries.
--a reluctance on the part of the United States to
continue the $2 billion annual subsidy.
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--an opening of opportunities for Soviet initiatives in
Egypt.
--a dilemma for the Egyptian armed forces, which cannot
lightly discard many years of training on and
integration of U.S. equipment.
This version of a downside scenario brings to front stage the
Muslim fundamentalists, who call for a puritanic Islamic state purged
of Western cultural and economic influences. Two other opposition
groups that could contribute to an unraveling are: the Nasserites,
who urge a return to Amabism, state socialism, and non-alignment, and
the Marxist leftists, who advocate close ties with the USSR and a
centrally planned economy.
Given the deterioriation of the domestic economy as sketched
above, the economic reform programs would grind to a halt for lack of
resources and government authority.
C. The Optimistic Homenton Scenario
The most likely starting point for the momentum scenario is
some combination of greatly enhanced dollar revenues from
remittances, oil, tourism, Suez canal fees, and foreign aid. This
inflow of extra dollars, coupled with an end to the drought in the
Nile headwaters, would immediately increase the economy's ability to
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use its considerable idle capacity, modernize capacity in all sectors
through stepped-up domestic and foreign investment, and accommodate
an increasing number of the prescribed economic reforms. GNP growth
under these conditions would spurt to perhaps 5 percent on average,
and room would open between available resources and population to
enable the regime to factor long-run elements into its economic
moves.
The shape and durability of the economic advance under the
momentum scenario would depend on the size and duration of the extra
dollar inflow, the perception of investment risk in Egypt by foreign
and local businessmen, and the regime's skill in dealing with
success. Cairo would possess a unique opportunity to press ahead
vigorously with, say, some priority projects for the refurbishment of
infrastructure, or Cairo could fritter away the opportunity in, say,
billion-dollar outlays for new military equipment and for ill-advised
land reclamation projects. Egypt, admirably steeled in handling
adversity, does not always deal so well with success. Accordingly,
momentum may disappear early, and the economy may return to the
4ar coping centrist position.
D. Percentage Chances of Each Scenario's Occurrence
The discussion in this section suggests that the coping
scenario is far and away the most likely of the three with perhaps a
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75-percent chance. The unraveling scenario, at 15 percent, probably
is more likely than the momentum scenario at 10 percent.
E. Relationship of the Scenarios to Egypys Economic System
The coping scenario envisions a gradual modernization of the
economy, with a continued slow shift to market determination of the
"what, how, and for whom" of production. The unraveling scenario
fits in with a move back away from privatization toward increased
governmental and religious control over the allocation of resources.
The momentum scenario employs the same general system of the coping
scenario but with a greater tempo in the privatization,
dollarization, and modernization of Egypt's economy.
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Section VI
SIGNIFICANCE FOR THE UNITED STATES
This section examines the significance of likely Egyptian
economic developments in 1988-2000 for the United States. It
sketches the importance to U.S. policy of maintaining close ties with
Egypt, the role of the large-scale U.S. aid program, and the
necessity for negotiation, compromise, and more sober expectations on
the part of both nations.
A. Prime Importance to the United States of a Friendly Egypt
The United States wants a stable, friendly, prosperous Egypt
closely tied to the U.S. economically, as well as politically and
militarily. The U.S. hopes Soviet influence will be minimal in the
Mid-East in general and Egypt in particular. Related U.S. objectives
are the maintenance of a secure oil supply to Western Europe and
Japan and the preservation of Israel as a close, democratic ally at
peace with Egypt.
For the Egyptian economy, the United States would like to see
continued modernization, steady increases in living standards, and
the further integration of Egypt in the international market system.
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These bread-and-butter objectives parallel the objectives of Egypt's
government and populace, with the exception of small minorities of
fundamentalists who would sacrifice modernization in the Western mold
for Islamic traditionalism and Marxists who would look to Moscow for
political guidance and economic support.
While most Egyptians share these U.S. hopes for the betterment
of their own economy, they remain hostile or indifferent to some of
the broader U.S. objectives, e.g., the preservation of a strong
Israel.
B. U.S. Annual Aid of $2 Billion as Focal Point
The United States stepped up its aid to Egypt as a reward and
reinforcement for Sadat's bold peace initiative, beginning with his
trip to Jerusalem in November 1977 and culminating in the signing of
the Egyptian-Israeli peace treaty in March 1979. The two signatories
together now receive more than half of U.S. aid disbursements.
Annual U.S. aid currently amounts to:
Recipient
Military Aid
Economic Aid
Total
Egypt
$1.3 bil
$0.8 bil
$2.1 bil
Israel
$1.8 bil
$1.2 bil
$3.0 bil
Sadat, however, overpromised the Egyptian people a new era of
peace and rising living standards. He shared to some extent the
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exaggerated Egyptian conception of the United States as a source of
vast wealth, which Washington could readily tap to help Egypt
surmount its economic problems.
A knowledgeable U.S. foreign service officer, in writing about
the failure after 1979 to realize Sadat's "peace dividend," has this
to say: "Unless a determined attempt [is] made to curb the expansion
of the government bureaucracy, cut government subsidies, eliminate
official corruption, and control the growth of Egypt's population,
real economic progress [is] impossible." He goes on to note that the
U.S. government cannot pry reforms out of the Egyptian government,
and points out that,, even if it could, large-scale reform would
generate intolerable political unrest.
A second U.S. observer recently stated that the impact of U.S.
aid will far fall short of its potential because of the political
restriction on Cairo in embracing U.S. suggestions, the ineffectual
"absorbing mechanism" represented by Egypt's bloated bureaucracy, the
institutional constraints hobbling the U.S. "disbursing mechanism,"
and the magnitude of the task itself.
Continued U.S. support of the Egyptian economy at the $2
billion level thus will not produce an independent self-sustaining
economy by the year 2000. Rather, U.S. aid will serve the less
ambitious purpose of enabling the Egyptian economy to accommodate 19
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million more people under essentially the same socioeconomic
conditions that exist today. Specifically, U.S. aid will continue to
help feed the people, rehabilitate important parts of the
infrastructure, and support the moderate acquisition of modern
weapons. This limited view of the impact of U.S. aid fits
comfortably into the middle-of-the-road coping scenario of the
previous section. As part of that scenario, the U.S. government can
expect calls for emergency aid whenever other sources of foreign
exchange falter.
C. Lowered Expectations, Negotiation, and Compromise
President Mubarak has cooled the dangerously inflated popular
expectations created by Nasser under the banner of Arab socialism and
by Sadat under the infitah policy and the accord with Israel.
Furthermore, he has practically completed his task of restoring Egypt
to the good graces of other Arab states, while maintaining friendly
relations with the United States and the cold peace with Israel.
Finally, he has broadened his options with cautious overtures to the
USSR.
The Egyptian government and people now realize that U.S. aid
is not a cure-all for their economic difficulties but that Egypt
cannot do without the aid. To some extent, the Egyptians are
forthcoming as a friendly ally and genuinely appreciate the aid. At
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er
a deeper nationalistic level, the Egyptians dislike their dependence
on the U.S., wish to have more control over the use of the aid, and
resent their inability to influence U.S. policy toward Israel on
their behalf. On the other side, the lessons of the Nasser and Sadat
eras should have demonstrated to Washington that massive aid does not
give the U.S. a vise grip on Egyptian policies even in the economic
sphere. The longer aid continues, the more it becomes an on-going
fact of life, i.e., it already has become a normal expectation for
the Egyptians and an on-going overhead cost for the Americans. From
a cynic's standpoint, the Egyptians are renting their political
goodwill and their strategic location and may soon ask for a rise in
the annual rent payment.
The future of U.S. aid flows to Egypt rests on the validity of
major assumptions made for this report, especially continued peace
with Israel, and on the outcome of negotiations between Egypt and the
United States on the size, the mix, and the timing of the aid
program. Even though Egypt has committed itself to a welfare state
it can ill afford, the United States can only suggest and advise, not
dictate. Mubarak and his successors must steer a course between
jeopardizing the American aid connection and appearing to be lackeys
of the U.S. government. Washington perhaps can find some comfort in
the fact that most Egyptians find the dependency relationship with
the United States far more palatable than one with the USSR.
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D. Positive Effect on Private U.S. Economic Interests
U.S. economic ties to Egypt benefit private American business
firms, in industry (including military industry), agriculture,
mining, communications, transport, and science and technology. A few
major joint ventures probably will come on stream over the next
decade, further benefiting U.S. business.
41,
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Appendix A
EGYPT: NOTES ON GNP AND OTHER STATISTICS
A. Inadequacy of the Egyptian Statistical System
Egyptian statistics suffer badly from the paucity of data in
most primary-level firms, incomplete collection of data, the tortuous
routing and massaging of data in the bureaucratic maze, and the slow
dissemination of final statistics. Moreover, the price structure
contains so many subsidized consumer prices, artificial procurement
prices, and gray market prices as to defy meaningful aggregation.
Finally, and perhaps of most importance, the 15-25 percent inflation
rate of recent years precludes the calculation of accurate real
values from the pound values alone.
The bureaucrats responsible for drawing up the five-year plan
lack adequate data for most planning purposes and in effect do little
more than draw up a list of major investment projects for the next
plan period. The plans for the various economic sectors are mutually
inconsistent, calling for an aggregate level of investment resources
several times the amount available in the economy. Box B, which
summarizes the overambitious goals of the 1987-1992 five-year plan,
provides illustrations of the unrealistic and uncoordinated nature of
Egyptian economic planning.
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.11e governsent-ogned enterprises, ecially tbose in
,sable dats. Invs, foreign trade data accvrately depiet,s -'; at go tbrovgb official dottrels. ) J 0 0
,, j , : 0 011
_
) , 1 ? 0
esp
'as of COe ecovOlitioNe covvaraWell 'pod accoq6acts
: t t ) -1 i.a 0 el
) ! 'ace? 1
)-... 41
tle Septiao s?
tati.stkoil s oOtori.ties 061i.art 0001 estioates ...) )OO
0 . 4
, kG,05, 'Dosestic Vrodoict, %Alia to .% covnts netiottal t ovtpvt on s ...ma.....
Iptlical basis, as opposed GIV , vbicb covnts national ovtpvt,
ne basis of tbe 'nationality of tbe ognets of be fSet0T5 Of
,dvction involved); _tYleSe estisates are in Wiptian povne's?
1;cavse dosestie prices %.11 povnds bave increased fro% 15 percent to
15 percent in recent, years, tbe correction of "carent pote`s" to
"constant povods" reckvires serr 1'0,101' i-eal adVstsents? If bonest
sen do not Knov tine rate of inflatioTt vitbin a range of , 3
percentage points, tbey c,annot, distingvisb real GW? grogtb of 2
percent frost real grogtb a A percent., bvt tbe oncertainties in tbe
inflation rate probably are sore serinvs tban 3 percentage poiot's?
tkccordingly , s World San?c report say present in a table Cairo's
official estisate of a stvrcly 1-percent real 11_,T01.0 %Mile providing
an accospanying text of eco?riosic difficaties tbat svggest a
considerably lover actval grogtb rate of , say , 2 or 5 percent?
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The GNP series in Table 3 does not purport to be the result of
a study of basic statistical sources and individual economic sectors.
Rather, the series comes from the piecing together of information on
growth in scattered years, taken from secondary sources in English.
The author of the present report designed the series to meet the
following reasonable conditions:
(1) Per capita GNP in 1986-87 is 700 U.S. dollars, as
estimated by the World Bank; other estimates vary widely, from about
$500 on the low side to about $1,100 on the high side; most of these
other estimates purport to be Gross Domestic Product (GDP) rather
than GNP.
(2) Per capita GNP has doubled since the Free Officers
revolution in 1952.
(3) GNP fell in the war years of 1956 and 1967.
(4) The highest rates of GNP growth came in the years after
the 1973/74 oil price revolution.
(5) The year 1986 saw zero growth because of lower oil
earnings, the plunge in tourism, and other economic setbacks.
(6) The rate forecasted for 1988-2000 (3 percent) should
reflect the argument in the text about the high likelihood of a
middle-of-the-road coping scenario for the economy.
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C. The Estimates of Population in Table 3
In contrast to the rough-hewn GNP estimates, the estimates for
population in Table 3 are close to the mark. These estimates came
from the U.S. Bureau of the Census. Table 3 presents both the
population and the GNP figures in more digits than are statistically
significant in order to facilitate calculation of rates of change.
D. Other Estimates in the Report
Some of the other estimates in the report, such as Egypt's oil
production, come from the dollarized international trade area and are
accurate. Other figures such as the 3-5 percent growth rate forecast
for industrial output in 1988-2000 are informed guesses.
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