After much wrangling, economist Hazem Beblawy has been named Egypt’s interim Prime Minister.

The emerging media narrative, from the New York Times to the Egypt Daily News casts the new Prime Minister as an economic reformer, stymied in his efforts to overhaul the national economy in his stint as Finance Minister in 2011 under the interim military government, but determined to get it right this time.

Conventional wisdom says Beblawy’s reforms will require cutting Egypt’s expansive subsidy system, which makes up a substantial part of the state budget. Other likely actions include finalizing negotiations on a pending IMF loan to support the country’s economy in the coming years.

Each of these steps are part of a standard package of neoliberal reforms offered by international financial institutions, which are designed to improve a country’s macroeconomic indicators.

This neoliberal package, which has been criticized (including by the IMF itself) for not taking into account local factors, may be particularly challenging in Egypt.

The Egyptian state is deeply involved in the national economy, including in several idiosyncratic ways.  To be successful, Dr. Beblawy will need to reform these state interventions.

So what do we know us about Beblawy’s plans for Egypt?

His career and writing certainly paint him as an ardently liberal economist, believing in orthodox free trade and open markets.  Subsidies are sure to be on his chopping block, and international financing will certainly be sought.

At the same time, Beblawy himself has warned against the effects of relying on external funding in the long term.  In his 1987 edited volume The Rentier State, Beblawy writes that Egypt is affected by regional “rentier mentality.”

Despite the country’s relative lack of oil resources, Beblawy rightly identifies Egypt as a semi-rentier state that extracts international financial support due to its geo-strategic importance. Beblawy emphasizes the distorting and deleterious effects of the rentier mentality, championing a need for “work-reward” causation.

More than two decades ago, the United States was Egypt’s exclusive source of support. Today, Gulf countries are playing an increasingly important role, with Saudi Arabia, the UAE, and Kuwait each pledging billions in aid to the new military-backed regime this week alone.

So how and where does the Egyptian state intervene within the country’s economy, and what challenges and opportunities do Beblawy and the new cabinet face?

Points of Intervention

Subsidies 

In his most recent interview, Beblawy’s most attention grabbing comments were on the issue of subsidies.

Comprising nearly 23% of the country’s budget for 2012-2013, and covering necessities such as food and fuel, subsidies have always been a sensitive issue in Egypt.

Presidents Hosni Mubarak and Mohamed Morsi both faced criticism for (mis)handlings the subsidy regime, to say nothing of Anwar Sadat who faced a revolt over the issue.

Beblawy’s calls for “sacrifices from the public” will worry large segments of the Egyptian population who currently live below the poverty level.

Funding from international financial institutions will almost certainly call for major cuts to subsidies, possibly without considering the political ramifications of such a move.

With a population ready and willing to take to the streets to protest policies perceived as harmful to its interests, subsidy cuts will almost certainly be politically dangerous.

The broader and deeper problem, however, is the fact that a large percentage of the country cannot afford bread. As a major importer of grain, the country is also susceptible to the vagaries of the international market.

These subtler and more complicated issues are unlikely to be addressed by any short-term financial plan to cut subsidies that are recommended by neoliberal elites.

Employment and Wages

Nasserist policies in the 1950s vastly expanded the public sector in Egypt.

The Egyptian government employs more than 5 million people despite efforts since the late 1990s to reduce state employment and privatize state assets.

For comparison, the United States employees roughly half that number of civilians in a country more than three times the size.

Currently, wages for government employees make up over 21% of the state budget. Millions of employees toil in state-run agencies, from public factories to the Ministry of Education.

Neoliberal policies involving lay-offs and privatizations have already caused problems for previous governments. Both strategies were implemented by the Mubarak regime before the January 25 revolution, and angered the former president’s support base.

Beblawy already attempted to reform the government’s problematic employment system during his stint as Finance Minister, pushing for increases in wages for government employees, and the setting of a maximum wage for public workers.

Through these policies, Beblawy attempted to consolidate the country’s labyrinthine and abuse-prone bonus system into one fairer wage. Under the current system, employees are paid paltry salaries that are often bolstered by performance-based bonuses.  These bonuses often unjustly accrue to high-ranking officials, and are intermittently canceled for working class positions.

While these past policies may have been admirable, they would likely blow an even wider hole into state budgets if implemented this time around.

Beyond this, both Beblawy’s Social Democratic Party and the Constitution Party, headed by Mohamed El Baradei, have called for increased freedoms for trade unions. This will mean dealing with the country’s legacy union, the Egyptian Trade Union Federation (ETUF), as well as two independent trade union federations to negotiate new wage and labor market systems.

The Egyptian Trade Union Federation is a large and powerful organization that holds assets around the country, and represents millions of workers.  Over the past two years, it has been a battleground for Mubarak era unionists and the Muslim Brotherhood, as each competed to influence workers. Independent unions emerged in 2007 and have led successful strikes, first for recognition and later for increased salaries.

The ETUF and independent unions want a say in handling the Egyptian economy, and have the capacity to organize major strikes and protests in defense of their interests.

Perhaps even more so than the Morsi government, Egypt’s interim government is reliant on the military. As such, it will likely be forced into the unpleasant position of mediating between the military and workers once again.

The military has a long history of banning strikes as a matter of course to “preserve stability” and “ensure the wheel of production turns.” During the military interim government in 2011, the independent unions rejected the military’s strike ban, challenging it in court.  Similarly, the ETUF has been vocally critical of “interference” in its traditional prerogatives, including the right to call for strikes.

Beblawy, a former International Labor Organization (ILO) official, may also want to institute “tripartite social dialogue” with labor, business, and the government, with an eye toward achieving Egypt’s removal from the ILO’s “black list” of labor abusing states.  Egypt returned to this list in June of this year.

Beblawy will, however, likely feel pressure from both businesses and international financial institutions to include “flexibility” in the labor market by preserving employers’ rights to hire and fire at will.

Taxes

In a memoir on his tenure in government in 2011, Beblawy writes that, at the time, he was unwilling to try and reform the tax code because of the lack of political will, and fear of a public backlash.

It is hard to imagine that Beblawy will have more success this time, though his writing on rents suggests he recognizes the need to generate domestic revenue instead of relying on sympathetic foreign governments and structural adjustment policies promoted by international financial institutions.

With Muslim Brotherhood leaders calling for full scale civil disobedience, a new tax policy is unlikely to be well received by the public, especially since a number of well known companies have close ties either with the government’s military backers, or the disenfranchised and enraged Islamists.

If Beblawy were to engage in tax reform, his rhetorical support for income distribution and social justice suggests reforms toward progressive taxation as opposed to the flat taxes implemented in 2005.

It is likely this will engender pushback from businesses that would experience an increase in tax rates, possibly at the same time as their government subsidies decrease.  Egypt’s subsidy system consists of both individual and business subsidies. With both tax reform and subsidy reform a possibility, some business may face increased operational costs from two different directions.

Tax revolts are not unheard of in Egypt, whether it be in the form of strikes by tax collectors or simple non-compliance. In short, changes to Egypt’s tax system will be difficult to put into effect.

Transparency and Good Governance

In several interviews, Beblawy has mentioned his unwillingness to take extra payments over his government salary (such as speaking fees) in tandem with calls for increased transparency over government spending.

While creating greater government transparency is an admirable goal and certainly in line with the neoliberal ideas he is espousing, the Egyptian military remains the gorilla in the room.

In addition to being the main recipient of the rents Beblawy has been warning about for almost 30 years, the interim constitution released yesterday suggests a continuation of no civilian oversight over the military’s budget.

Among the elements immune from public review in the name of military “secrets” are the actual size of the army, property owned by the armed forces, and the military’s financial interests, such as its manufacturing of non-military goods.

Government transparency will, however, be hard to achieve in Egypt even without an attempt to grapple with military spending.

In past interviews, Beblawy has made some damning historical observations about the Egyptian government, noting that money simply seemed to “leak” from the budget, and pointing to problems with graft during the Mubarak regime.

He has described petty corruption and bribery as an accepted part of the political system, and a tax on those with the least formal routes of access to power, namely, the poor and working classes.

Conclusion: Crafting a Strategy

These challenges would be difficult to tackle under a regime enjoying widespread national support and unity.  In the current environment, it may well be impossible.

Dr. Beblawy and his cabinet are likely to be forced to lurch from one economic crisis to another, putting out fires, as best they are able.

Beblawy’s orthodox, neoliberal economic outlook may give him a unified set of tools to deal with the Egyptian economy, but these are almost sure to fail when addressing the state’s political economy, a much subtler task.

 

 

2 Responses

  1. Alanna Hartzok

    I greatly appreciate this informative article. However, when author Harthorn states that Beblawy has an “orthodox, neoliberal economic outlook” I cannot agree. Harthone tells us that Beblawy understands the concept of economic rent as unearned income and the problem of Egypt as a rentier state.
    An innovative reform along these lines would be to socialize the land and resource rents and untax productive factors of workers and productive capital. This would put Egypt on a path of the new economics beyond both the old right and old left. Economists at the World Bank and the IMF are beginning to see the value of undergirding democracy with this economics approach. The ones who will pay more into the public budget are the ones holding the greatest proportion of land and natural resources, usually the 1%. Let’s build economic democracy for Egypt, the US and elsewhere.

    Reply
  2. Ian Hartshorn

    Alanna, I thank you for your comment. I don’t think your proposal disputes the notion that Dr. Beblawy’s writing indicates he follows orthodox economics. While the World Bank and IMF in recent years have become more flexible in their application of neoliberalism (as mentioned in my article) I don’t see much political capacity/will for the type of undertaking you propose for Egypt. Perhaps we will see in the coming months.

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