Egypt - Economy the Role of Government

The role of government

Muhammad Ali's era saw strong state intervention in the economy; the subsequent century witnessed a passive state and the dominance of private foreign and domestic investors. Yet both failed to achieve economic development or to lift Egypt from poverty and dependence. The Gamal Abdul Nasser regime (1952-70) inherited an underdeveloped economy with great inequalities. A few rich foreigners and nationals controlled the country's wealth, from large landed estates to manufacturing and commercial firms, while the bulk of the population was poor and disenfranchised. The new regime, borrowing from the debates and programs put forward by various political parties and interests during the 1930s and World War II, undertook the task of economic restructuring.

The process transformed the state into the dominant economic agent in the country and culminated in a new economic system labeled "Arab socialism" in the National Charter issued in 1962. The government implemented a land reform program that aimed at eliminating what it referred to as a "feudalist" stratification of landholding and instead distributing land to small peasants and the landless. By 1964 a huge public sector had evolved, including all utilities, communications, and finance as well as large manufacturing enterprises, transportation, wholesale and foreign trade, some big retail stores, and construction firms. By 1973 the ratio of public to private in the composition of GDP was 58 to 42 in contrast to 15 to 85 in 1953. The government fixed the exchange rate of the Egyptian pound, began development planning, and controlled foreign trade. Nasser nationalized the Suez Canal in 1956 and in the early 1960s nationalized about 300 key enterprises owned by Egyptian nationals and foreigners. The private sector came under extensive regulation.

Because of the economic difficulties in the second half of the 1960s, which were exacerbated by the June 1967 War with Israel, the regime began to reconsider aspects of state controls and its attitude toward the private sector. A pronounced shift in orientation, however, awaited Sadat's takeover at the end of 1970.

A combination of economic problems, political considerations, and his own predilections led Sadat after the October 1973 War, to declare a new policy he dubbed infitah (opening or open door). The main ingredients of the policy were to relax existing government controls over the economy and bureaucratic procedures, to encourage the private sector, and to stimulate a large inflow of foreign funds.

The open-door policy succeeded in generating a large inflow of foreign funds in the form of remittances, foreign grants, and aid, especially from the United States after the signing of the Camp David Accords with Israel. The economy also grew at impressive rates. But the negative side of the policy was that the country was flooded with imports, and the government was compelled several times in the 1980s to reimpose import restrictions. The income gap between rich and poor widened, and conspicuous consumption reappeared.

Despite the infitah, the government found itself even more deeply involved in the economy. Subsidies grew from 1 percent of GDP in 1970 to 11 percent in 1979. The state's contribution to fixed investment remained high, at 87 percent in 1977. In the same year, government employment accounted for 32 percent of the total, but the increased personnel did little to clear up the bureaucratic snarls that blocked development. Private domestic and international investment went primarily to housing and trading companies. Foreign investment remained meager because of the cumbersome regulations, the bureaucracy, the political uncertainty, and insufficient incentives.

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