Introduction Mubarak Reforming The Economy Reforming Society

After Sadat was assassinated, Hosni Mubarak became president. His legacy is

often defined as the era of economic reform and structural adjustment policies. These

policies began in the late eighties, but it was only in 1991 that a rigorous program was

implemented in conjunction with the International Monetary Fund, the World Bank, and

the Government of Egypt.

The early nineties saw Egypt on the verge of economic collapse, the national debt

was over 49 billion dollars and the Gulf Crisis severely devastated the regional economy.

During Mubarak’s early reign, Egypt experienced rising unemployment, along with a

dependence on rents which led to major fiscal imbalances. The failure of public

industries, inflation, a surge in foreign debt, budget gaps, and a decline in trade forced the

government to adopt an International Monetary Fund supported stabilization plan.

However, when interregional migration continued to slow, many Egyptians lost their jobs

and the state lost remittances. However, as a reward for Egypt’s contribution in the Gulf

War, half of the state’s foreign debt was cancelled by international financial instructions

such as the IMF and World Bank. These institutions began to focus on aligning Egypt’s

development with reform policies. Egyptian economic reforms under Mubarak were met

with remarkable success that “vindicated the principles of neoliberalism” and promoted

privatization, trade liberalization, and deregulation. Egypt undertook several reformed

economic programs and eventually saw economic growth over 5% a year, a stable

Egyptian pound, a reduction in inflation, and a lower budget deficit rate.

Mubarak and Economic Reform

In terms of economy, the IMF/World Bank economic reform programs sought to

remedy the previous protectionist policies that Nasser had so vigorously promoted. The

ERSAP called for total economic liberalization, privatization, and the reduction of state

power in economic policies. The main purpose of the ERSAP agenda was to transform the

Egyptian economy into a more market focused system with a higher growth trajectory and

financial stabilization. This was pursued in order to eliminate rising fiscal imbalances and

distortions in the current economy by adjusting and reforming the public sector, monetary

policies, social policies, investment, exchange rates, trade liberalization, budget reduction,

balance of payments, and domestic prices. Economic growth would promote higher living

standards, reverse increases in unemployment, reduce poverty, and most importantly,

integrate Egypt into the world economy.

The economic reform and structural adjustment programs of the early nineties

followed the strategy that economic growth and development would thrive in a market

competitive economy free of government restriction. Given this opportunity, the

supplyside of the economy would respond appropriately. State owned enterprises were

detrimental to growth. Theoretically, socio-economic inequalities would subsequently be

minimized through the trickle down effect of market revenue.

In terms of public sector reform, the ERSAP sought to make the public sector

more efficient through privatization of certain institutions in the commodity and financial

sectors. Fiscal policy reform included the liberalization of prices, such as the adjustment

of energy prices to match international equivalents, the elimination of rent controls, and

the liberalization of agrarian land prices. Banks were allowed to set their own rates,

guided by treasury interest rates. A global income general sales tax was introduced,

raising prices of energy and public enterprise production. Wage growth rates were

restricted as well as a general reduction in public investment and subsidy cutbacks to 1%

of the GDP.

Real output growth recovered quickly after declining suddenly after the first years

of the ERSAP. Since 1993/94, real GDP has grown steadily and was at 5% in 1996/97.

Primary balances and government savings increased and the gap between savings and

investment decreased. The overall deficit declined from 15% to 2% of the GDP. This

reduction was achieved through an increase, representing a 42% turnaround in the overall

deficit, and through expenditure reduction, accounting for 58% turnaround in the deficit.

In terms of revenue, the exchange rate changes in 1991 aided in raising revenue

from oil and Suez Canal receipts, as well as taxes on international trade. A sales tax was

introduced to generate revenue as well. The government cut back on investments in

electricity and the tourism sectors. Subsidies and transfers declined by 2.4% within

current expenditures as well as modest reductions in wages and salaries. Throughout the

nineties, the budget deficit decreased, foreign reserves increased, and the gross domestic

product averaged annual growth of 4-5 percent. These numbers appear to confirm the rise

in Egypt’s economic performance. However, it is also important to look at the qualitative

effects of economic reform in terms of social development and poverty.

Source: International Labor Organization, Key Indicators of the Labor Market database

The Impact Of The Economy On Society

One of the main priorities of these reforms was a reduction in government

expenditure, resulting in a cut in social costs. This would, however, add to the recessional

effects, as well as have a negative effect on wages, employment, and social services.

Mubarak’s regime proposed a new Unified Labor Law which would “eliminate the job

security gained by public sector workers from the Nasser era.” This was an important step

towards expanding the private sector, with real wages in the private sector increasing by

16.6 percent. However, for many Egyptians, the security associated with public sector

employment surpassed the value of private sector employment. However, the government

maintained that the privatization and liberalization programs be focused on production

and expansion of the market in order to make the economy better, which would eventually

make up for social costs of the first policies. The state undertook these reforms under the

auspice that the protection of the poor was compatible with economic freedom.

Yet, pressures for liberalizing included price increases affected railway tickets,

electrical batteries, bus tickets, and school fees. The Planning and Budget Commission of

the People’s assembly “recommended the elimination of free secondary and university

education, and of subsidies for low-cost housing.” In order to cope with the social

repercussions of economic reform and regional instability from the Gulf Crisis (return of

migrants to the domestic economy), the government established the Social Fund for

Development. The Fund invested in labor intensive public works to help combat

unemployment, education and health programs, micro-loan and training enterprises, and

job replacement programs.

Furthermore, the Mubarak regime encouraged gradual reductions of the food

subsidy program throughout the nineties, however this decline was reversed after a

decade reaching a peak in 2004, accounting for 4.1 percent of total public spending, or

1.7% of the GDP. This was largely due to the international food crisis in the early 21st

century and the global in food prices worldwide. This rationale operates on the claim that

food subsidies are effective in targeting the poor, while in the Egypt’s context; this is

clearly not the case. There are huge leakages in the program due to inefficiency and lack

of proper targeting measures. The universal availability of such subsidies in Egypt,

without regard to specific income or welfare levels, demonstrates the financially draining

effect of the program. Thus, subsidies are often deemed fiscally wasteful and

uneconomical. Even so, food subsidies, one of the most well known social safety nets in

Egypt, remained relatively stable during Mubarak’s reign. One reason for this is that

subsidies and other social welfare initiatives are used by the state to provide legitimacy

through the social contract.

Political And Economic Policies That Affect The Poor

While the reforms under Sadat and Mubarak saw some success in terms of debt

reduction, controlled inflation, and economic growth, many scholars would argue that the

social aspects were devastating.120 This presents a controversial framework in which to

understand government reform initiatives and their role in poverty fluctuations. Economic

interests are inextricably linked to the politics of welfare, development and poverty.

However, the discourse of the Egyptian government, international donors, and economists

on economic development, division of resources, and poverty alleviation projects become

as sensitive and scrutinized as poverty research itself. Furthermore, one cannot exclude

the numerous critical events that took place throughout the late 1990’s to 2008. The

1998/99 world market crisis in Asia, the terrorist attacks that affected tourism in Egypt;

the events of September 11, 2001 and the subsequent global economic fall out; the Iraq

and Afghanistan wars and their impact on regional economies; as well as the

Choosing Social Stability or Fiscal Responsibility”, Review of Radical Political Economics 40.1 (2008):

35-49.

120 Mitchell, Timothy. "No Factories, No Problems: The Logic of Neo-Liberalism in Egypt." Review of

African Political Economy 26.82, (1999): 456.

2002/2003 financial problems which include the shortage of foreign currency, inactive

monetary policy, high inflation, large deficits, and the declining GDP growth rates all

impacted the economic circumstances in Egypt. These important economic events

affected Egypt’s growth performance and therefore the socio-economic aspects of the

population.

Shifts And Transitions In State Policy

The historical relationship between state and society has gradually changed from

Nasser to Mubarak. Nasser’s social policies targeted the entire population, particularly the

middle working class. Subsidies on basic food and nonfood commodities, free social

service programs such as healthcare and education, and wage regulations were

government methods to ensure agreement among the members of a society to cooperate

for social benefits. Guaranteed employment in public sector industries was a tradeoff for

complete autocratic authority and state control. This changed slightly after Sadat; whose

polices focused more on economic growth and the expansion of the private sector as

means to promote social development through the economy. Yet growth and development

were still primarily state led. Mubarak continued this tradition through structural

adjustment and economic reform policies. These policies have also marked a shifting

attitude towards the development and welfare of the population.

As mentioned earlier, Nasser’s polices were not targeted specifically towards the

poor. His reforms applied to the majority of the society. His laws were designed to

increase state control and autonomy while promoting economic inclusion and social

cohesion. By developing and catering to a strong social base, his regime gained a strong

political base. Free social services, a large-scale subsidy program, and guaranteed

employment for graduates of secondary schools and universities defined the tenets of

Nasser’s social contract with the people. This is not to say poverty was never an issue

during this period, however he targeted the general welfare of his constituents, which may

have represented a much broader group than the poor or ultra poor. His major social

polices did not target poverty, but rather merged poverty alleviation with benefits for the

majority of Egyptians.

On the other hand, Sadat and Mubarak sought to address the problem of inequality

and poverty reduction through the economic process and growth. Nasser’s approach

towards state controlled welfare was unsustainable and Egypt could not continue to afford

this generous social contract. Historically, poverty was not treated as a process, but a

problem and often only addressed as a function of economic deprivation. Poverty,

especially during Sadat’s time, was addressed through the economy as a limit of income,

consumption, or expenditure. Increasing these indicators would increase welfare. Social

reform was achieved through economic reform, the relationship between state and society

changed dramatically. Economic reform would result in economic growth, which in turn,

would benefit the population. However, in Egypt’s case, economic growth tended to reach

the upper echelons of society first before eventually dispersing to the rest of the

population, creating a “trickle down” effect, with the poor benefiting last and least

proportionally from growth. Yet trickle down development is criticized for not adequately

accounting for the poorest sectors of society; groups that are typically the most sensitive

to economic changes and who need the distributive benefits from growth the most.

Furthermore, during the Sadat era, there was a lack of focus on developing human capital

or investing in other assets such as health, education, employment, or targeted poverty

reduction programs. Welfare and social programs were not effective and social spending

was fiscally impractical. That, coupled with the lack of distributive gains from economic

growth led to social instability and state’s capacity to help ensure the capability, welfare,

and access for its citizens was diminished.

In 2004, Ahmed Nazif, minister of communication and member of the National

Democratic Party, was appointed head of a new cabinet that sought to continue the

structural adjustment polices of the early nineties. Under these reforms, Egypt would

appeal to a broader, market focused international base, which would subsequently attract

more foreign investment, increase state capital, and eventually reach all strata of society.

Privatization and economic liberalization polices were promoted throughout government

development schemes. The Egyptian government has continued to play a dominant role in

the economy despite pressures for deregulation, liberalization of the economy and the

growth of the private sector. Even in the early nineties, when development focused on

market-led growth as the prevailing method to encourage growth and reduce poverty, the

Egyptian government did not fundamentally reform or restructure its economy. Rather,

the state continues to take a gradual approach to any economic changes.

For example, any financial liberalization and privatization polices were very

gradual, a far cry from the sweeping economic reforms demanded by institutional backed

restructuring. Even at this gradual pace, structural adjustment, economic reform, and

growth did little to promote stabilization, instead economically isolating a large part of the

population.

However, there were some substantial changes in social progress and poverty

alleviation strategies in the past fifteen years. Instead of targeting the poor through

economic gains or universal social protection schemes, the state has slowly made progress

in addressing the needs of the poor through broadly targeted welfare programs, which will

be examined later in this chapter.

Human Development: Social Progress in Egypt

The role of the Egyptian State is the primary factor in the direction and

implementation of social and economic strategies. As mentioned before, poverty has been

historically addressed through economic changes in Egypt as a mechanism for social

betterment and progress.

According to Egyptian household income data, urban poverty had significantly increased

from 1980 to 1990 while rural poverty had more than doubled. Poverty was rampant

throughout the country. One major cause of this was the decline in oil revenues in the

early eighties. Yet, the rate and severity of poverty in Egypt are seen as particularly high

during this period as the focus on economic policies tended to surpass social welfare.

Some would argue that general mismanagement and bureaucratic corruption were the

primary culprits for the decline of societal welfare during this time although there was no

reduction in subsidies or in access to services. Either way, this was a crucial period for

Egypt not only in terms of economic reform, but social policy as well.

Several initiatives were, in fact, implemented in order to address rising socioeconomic

problems, such as the expansion of the Ministry of Social Solidarity and the development

of other social programs.

Social Programs

Social spending programs broadly include education, health, non-energy subsidies,

and other social sectors. Social spending increased from an average of 7.5% of GDP

between1996-2000 to approximately 9.8% between 2001-2005. Thus, it could be

logically inferred that the increase in social welfare programs in addition to higher rates

of economic growth would result in an overall decrease in poverty and welfare.

In terms of education, the HDI reports that male literacy improved by 12 percent

between 1996 and 2001 while female literacy improved by about 25 percent. Total

literacy for adults over ten years has risen from 52.3% in 1994 to 65.7% in 2004. Net

enrollment in primary education institutions rose from 85.5% in 1995 to 94% in 2005.

Furthermore, the ratio of girls to boys enrolled in both primary and secondary educational

institutions increased from 1990/91 to 2000/01.

According to the HDI, general health standards increased during time. Child and

infant mortality rates declined, demonstrating some improvement in the health sector.

Also, there was a rise in overall life expectancy rates, increasing from 47.5 in 1960-65 to

68.0 in 2000-03. The percentage of births aided by medical personnel increased from

47.6% in 1990 to 69.4% in 2003. The use of contraceptives increased during the same

time period. The prevalence of children under 5 years classified as underweight decreased

from 9.9% in 1992 to 8.6% in 2003. The proportion of households with access to

sustainable water resources has continuously increased throughout Egypt from 1996 to

2004.

“Expressed in numbers of deprived people, this decrease seems considerable when taking

into consideration that the population has increased from 55.2 million in 1992 to 69

million in 2004. Population without access to piped water has decreased from 12.1

million in 1992 to 6.1 million in 2004. Between 1991 and 2004, children dying before age

five decreased from 98.2 thousand to 28.6 thousand. During the same period, children not

in basic or secondary schools decreased from 2.9 million to 1.6 million. Illiterate adults

(15+) decreased between 1993 and 2004, from 18.9 to 16.2 million. It remains to be seen

if improvement on the national level has trickled down to close the regional and gender

gaps.”

The Egyptian Human Development Report recognizes these achievements during

the nineties as evident and impressive. The report argues that their data reflects a general

trend of human development improvement on the national level and that in terms of

human deprivation, all aspect with the exception of unemployment have shown

significant reductions over the last decade. Furthermore, “human deprivation reflects the

fact that economic growth over the last decade has had an impact on those people who are

economically disadvantaged.”

Yet, a more realistic interpretation of the Human Development Indicator

framework is needed to understand changes in living standards and the quality of life for

Egyptians during this time. For example, a high life expectancy rate does not

automatically assure a good quality of life, nor equal access to social facilities. The

quantitative nature of such measurement is merely an average, a number projected to

assert qualitative claims. Yet it can hardly claim an assertive, true to life representation of

the quality of welfare. Similarly, literacy rate percentages also prove difficult in

understanding changes in education standards. As Adams notes, “in many developing

countries functional literacy is much lower than recorded literacy, and it is often not clear

which variable is actually being measured.” Literacy, like poverty, is difficult to qualify

and measure in terms of concrete statistics. What constitutes the proper level of fluency,

especially in a country such as Egypt when the literacy level of formal modern standard

Arabic is quite difficult or takes longer to attain. While literacy levels have increased

over time, universal literacy does not seem to be a priority for the Egyptian government,

which spends over 30% of the educational budget on universities alone. Primary

education, the school when a child learns to read and write, is often disregarded in terms

of public policy.

According to the HDI report, the link between human development corresponds

directly with economic growth. It is interesting to note that while the HDI report paints an

idyllic picture of Egypt in terms of both economic and social prosperity, it also neglects

the massive socio-economic regional disparities in Egypt. This is especially apparent in

terms of education and health rate comparisons between Upper and Lower Egypt,

demonstrating the uneven progression in Egyptian development. Inequality is often

overshadowed by state led welfare gestures.

Mubarak To Present: The Role Of The State

Combating poverty was not a state priority for either Nasser or Sadat. However

recently, the Mubarak regime has brought the issue front and center, representing a crucial

platform for his National Democratic Party.

“The NDP banks on the role of the state as the patron of society and the honest

guardian of its values, potentialities and social security. It believes that the job of the state

is to make suitable the atmosphere for development and strike a balance between the

interests of society and the interests of individuals using the arm of law. The role of the

state is also to assist low-income segments to attain their basic demands and give due

care to people with special needs. The NDP, at the same time, has an unwavering belief in

the importance of the continual modernization of state institutions for them to be able to

carry out their development-related duties perfectly.”

The importance of the economy in Egypt cannot be ignored when discussing the

role of the state and the capacity of society. The Egyptian Government has continued to

play a dominant role in the economy despite pressures for deregulation, liberalization of

the economy and the growth of the private sector. “It is not merely a characteristic of the

Sadat era, but of all the years since 1967—and thus of Nasser’s era as well—that

Egyptian leaders have steadfastly attempted to give the impression of movement while

carefully avoiding the agonizing choices inherent in the current situation of no war, no

peace.”

For example, throughout the early nineties, when development focused on market-

led growth as the prevailing method to encourage growth and reduce poverty, the

Egyptian Government did not fundamentally reform or restructure its economy. Instead,

the state promoted a gradual approach to any economic changes, which it continues today.

Is this good for the ultra poor? According to poverty analysis, while general poverty has

decreased and social protection measures have expanded, inequality has remained fairly

stable from 1990-2005. This is not a result of active and efficient polices of the state, but

rather a gradual evolution in society.

Yet one can argue that, even at this gradual pace, structural adjustment, economic

reform, and growth did not promote stabilization, instead economically isolating a large

part of the population, the ultra poor feeling the brunt of these policies. Thus, it is

plausible that the success in decreasing general poverty rates shadows the negative

impacts felt by the ultra poor. Was this a conscious decision to ignore the ultra poor by the

government? This thesis argues that historically, Egypt has largely followed a state led

growth process with policies that often serve the interest of the polity, it was not until late

in Mubarak’s era that the state attempted to actively target poverty in its polices. While

perhaps not a conscious decision, the government did not actively address the issues of

ultra impoverishment, instead reflecting on the overall welfare of society. However, while

both economy and society progressed to some extent throughout the nineties, the

government recognized that many of it’s polices did not cater to those who needed it

most. Many institutions have been put into place and several polices have become more

targeted for effectiveness (which will be further elaborated in the next chapter) to give

attention to the poor in society.

Conclusion

“It has always been the gift of politicians in all countries to redefine issue in such

a way that the real choices and options are obscured. There is nothing so distasteful to a

politician as making choices, especial when the adoption of option A cannot be reconciled

with option B.”

State leadership and cooperation is crucial in the implementation and success of

any antipoverty strategy. The relationship between people and state is determined by a

combination of many dynamic factors that depend strongly on external and domestic

influences. Rising poverty rates are a function of the macro-economy, state policies,

opportunities at home and abroad, and existing welfare regimes and the transfers of public

goods. This thesis looks primarily at the internal aspects of the power relations between

different political structures and its impact on the welfare of the population. Government,

domestic institutions, civil society, and the role of a powerful bureaucracy, play a

significant part in the application and effectiveness of poverty reduction and social

protection policies. Furthermore, during the 1980’s and 1990’s, the role of donors and the

international community became more involved in development and poverty alleviation

schemes. In order to understand how the government targets the ultra poor, one must look

how their general role as the State can or does affect the most marginalized section in

society.

Poverty has since become a national issue with the state attempting to counter it

on several different levels. This has marked a shift from older, traditional methods for

targeting poverty (through increasing income or GDP) and are replaced by more modern

methods (for example the Human Development Indicator frameworks, reports and

programs from the Ministry of Social Solidarity, as well as current poverty research in

Egypt) for understanding the process and these new methodologies are becoming more

integrated in state policy.

For example, the Social Fund for Development, established in 1991, has based its

principles on not only income generating initiatives, but through employment,

institutional cooperation, social and civil awareness and access to financial capital.

Capacity building, rather than income generation is the new platform for poverty

alleviation and social programs. Furthermore, this institution does not target deprivation

through poverty reduction programs only, but seeks to address social betterment through

national development and employment as well. Many of these initiatives mark an

increasing trend in policy and government programs to address poverty in a more

comprehensive manner. Poverty reduction is not merely a matter of social policies that

benefit the broader population (Nasser) or a factor of economic growth (Sadat and early

Mubarak) but as a multidimensional process that addresses the complexities of

deprivation. There are many other initiatives such as the Productive Families Program,

which began in 1964 to help improve the living standards of impoverished women by

providing services and capital in small-scale enterprises. Programs such as the Mubarak

Social Solidarity Program and Nasser Social Bank also provide financing and micro

lending to generate income for the poor. These programs focus on income generation for

government social interventions. The Ministry of Social Solidarity demonstrates the

importance of human development, civil society, and the ultra poor in government

policies. These programs and initiatives will be further discussed in chapter three.

Chapter Three

POLICIES OF THE STATE THAT AFFECT THE POOR:

EGYPT AS A TRANSITIONING WELFARE STATE?

The last chapter focused on the historical social contract between the Egyptian

Government and its people. This chapter will examine the policies and government

initiatives that affect the poor in the social, political, and economic spheres. In order to

understand the policies and objectives of the state towards the poor, it is important to

examine the social and political models that reflect the kinds of choices society and state

make to provide welfare. To what extent has this model changed under Nasser’s socialist

authoritarian regime, Sadat’s attempt at a liberal rentier economy, and Mubarak’s

extension of free market capitalist polices and his attempts to embrace welfare reforms?

This chapter focuses on the policies of the government that affect the poor. First,

this is examined within the historical framework presented in chapter two and focuses on

the conditions of the poor within a particular regime. An analysis of the different

mechanisms for poverty reduction within the state, such as entitlements, services,

provisions, subsidies, incentives, and welfare will provide the framework. Second, this

chapter will contextualize the theoretical criteria for a welfare state and Egypt’s attempted

transition from a rentier state to a welfare state. In order to establish this transition, the

role of rentier economics and Washington Consensus style development will be examined

as important factors that contributed to state polices and behavior in society. Third, state

initiatives in social services (such as healthcare education, and social