Economic Research Forum (ERF)

Breaking Egypt’s unsocial contract

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What have been the economic and political underpinnings of Egypt’s transition between social contract models? This column explores possible pathways to a new, more equitable and sustainable social contract, and the challenges such a contract would face. It examines the power structure in Egypt’s current ‘unsocial contract’ and whether it is possible to make the transition to a different but better social contract.

In a nutshell

Egypt’s current ‘unsocial contract’ filled the void left by the failure of the ‘old’ social contract, and it survived the upheavals of January 2011.

The new social contract needs a move away from politically motivated industrial policy to one that introduces and enforces an incentive regime oriented to encouraging higher productivity through structural transformation.

The starting point should be a national dialogue, one that looks completely different from the current ‘pretend’ version we have in Egypt.

Egypt’s ‘old’ social contract was based on a state-controlled economic model. Under this model, university education was guaranteed to all high school graduates with guaranteed income thereafter. Cheap, high-quality social services and consumer subsidies supported the wellbeing of the masses. These sources of income and security were provided in return for citizen acquiescence to the lack of political participation and a flawed rule of law.

That contract became unsustainable in the face of both crisis and reform. The old model has broken down, being replaced by an ‘unsocial contract’ that favours the elite, with stagnation and repression for the majority.

Despite being briefly interrupted by the upheavals of 2011, the ‘unsocial contract’ is a model that has proved successful. It filled the void left by the failure of the ‘old’ social contract and survived the upheavals, powering the transformation of June 2013. How to break this model is the essence of the people’s dilemma.

The economic reforms put in place to address the increasing crisis of the old development model accelerated the end of the old social contract. Liberalisation meant that jobs were no longer within the purview of government. Employment should instead be found in the growing private sector resulting from reform. But that growth has largely failed to materialise, as policy has been unable to address the deep structural problems in the Egyptian economy.

The little growth that did materialise in pursuit of Egypt’s capitalist development path also meant a widening rift between government and workers. While during the Nasser period, unions were part of the ‘socialist establishment’, as Sadat’s ‘open door’ introduced the first reforms, the situation changed.

Unions were instrumental in the 1977 ‘bread riots’ during negotiations with the International Monetary Fund. By the time of the early years of the Mubarak regime, strikes were being put down with increasing repression and violence. By the 2000s, an independent union movement emerged as part of active opposition to the regime, with increasing frequency of strikes calling for social justice.

While higher wages to spread growth would be integral to a new social contract, for that to happen there has to be growth. That in turn has to be based on higher productivity. But Egypt faces a deep-seated structural problem of being a relatively high-cost/high-wage, low productivity economy with scant prospect of breaking into international markets.

In addition, productivity growth cannot come from industry alone but needs to be buttressed by a stable business, political and social environment. The problem is exacerbated by ‘crony capitalism’, in which profits come from rents and favouritism rather than from increased competitiveness. The nature of crony capitalism is central to Egypt’s transition to the current ‘unsocial contract’ and presents the first constraint on transition.

The government has granted preferential access in public procurement and privatisation, and other favours such as leaking private market information, allowing a new class of ultra-rich to emerge. Prominent business people became politicians, and vice versa. In return for government favours, these business people, often literally, bought votes to keep the government in power in the pseudo-democracy.

In addition, the government uses its power to intervene in markets to buy political favour rather than to promote reform. Most recently, the assets of several prominent businesses have been seized with an offer to give them back in return for loyalty to the regime.

In the Asian economic model, successful implementation of inclusive growth models has been put in place by a developmental state. Egypt has not had such a state in recent decades and is not moving in that direction.

The army is consolidating its power, and indeed consolidating its role in the economy, exploiting its ability to take advantage of the lack of a level playing field. Finally, ‘foreign influences’ are widely mistrusted, with a clamp down on NGOs, the usual recipients of foreign contributions. This includes thinktanks promoting open policy discussions.

The new social contract needs a break from crony capitalism and a move away from politically motivated industrial policy to one that introduces and enforces an incentive regime oriented to encouraging higher productivity and a non-captured, comprehensive, coherent and effective export strategy including sectoral strategies in manufacturing and tradable services sectors.

The new social contract can no longer be based on government jobs. Rather, it needs an industrial policy that is able to develop the capital base – physical capital, human capital, environmental capital, and social and political capital – in a way that involves the whole population in sustainable, inclusive growth. Sustainable economic growth through structural transformation that creates a large number of high value private employment opportunities is at the heart of the contract.

Key elements of a more sustainable future social contract thus include a focus on impartial industrial policy, which is inseparable from a number of other economic policies. But the starting point should be an actual national and rational dialogue, one that looks completely different from the current ‘pretend’ version we have in Egypt.

For sustainability, it is crucial to put in place a robust, transparent and structured process of stakeholder dialogue in policy design and implementation. This dialogue should include government, unions, political parties, civil society, industry, academics, intellectuals and the media – a process known as ‘embedded autonomy’.

A functioning social contract encompasses a wide array of stakeholders with potentially opposing interests, namely private enterprises, workers and consumers. Within those, it should encompass the spectrum of interests. Firms’ interests differ by size, market orientation, ownership and sector; and those of workers by occupation and sector.

The government should be impartial serving all of these interests collectively, keeping each at arm’s length with an eye on overall welfare to guard against capture. But is this dialogue currently possible? With the political clampdown on independent discussion, are there any political coalitions that can promote more inclusive policies?

The discussion above alludes to the force of the current constraints that pull Egypt back to its ‘unsocial contract’. Our job as intellectuals is to advise and hope. And that’s what I just did.

Further reading

Altenburg, Tilman, Maria Kleinz and Wilfried Lütkenhorst (2016) ‘Directing Structural Change: From Tools to Policy’, German Development Institute Discussion Paper No. 24.

Altenburg, Tilman and Wilfried Lütkenhorst (2015) Industrial Policy in Developing Countries: Failing Markets, Weak States, Edward Elgar.

Diwan, Ishac, and Jamal Ibrahim Haidar (2016) ‘Do Political Connections Reduce Job Creation? Evidence from Lebanon’, ERF Working Paper No. 1054.

El-Haddad, Amirah (2016) ‘Government Intervention with No Structural Transformation: The Challenges of Egyptian Industrial Policy in Comparative Perspective (in Arabic); رؤية لاتجاهات السياسة الصناعية المصرية فى ضوء بعض الدراسات المقارنة, ERF Working Paper No. 1038.

Evans, Peter (1995) Embedded Autonomy: States and Industrial Transformation, Princeton University Press.

Foster, Lucia, John Haltiwanger and C.J. Krizan (2001) ‘Aggregate Productivity Growth: Lessons from Microeconomic Evidence,’ in New Directions in Productivity Analysis edited by Edward Dean, Michael Harper and Charles Hulten, University of Chicago Press.

North, Douglass, John Joseph Wallis and Barry Weingast (2009) ‘Violence and the Rise of Open-access Orders’, Journal of Democracy 20(1): 55-68.

Loewe, Markus (2013) ‘Industrial Policy in Egypt 2004-2011’, German Development Institute Discussion Paper No. 13.

Rodrik, Dani (2010) ‘Structural Transformation and Economic Development’, paper presented at the Economic Policy Research Foundation of Turkey, Ankara.

Rougier, Eric (2016) ‘Fire in Cairo: Authoritarian-Redistributive Social Contracts, Structural Change, and the Arab Spring’, World Development (78): 148-71.

Vidican, Georgeta, Matthias Bohning, Gina Burger, Elisa de Siqueira Regueira, Sandra Muller and Susanne Wendt (2013) ‘Achieving Inclusive Competitiveness in the Emerging Solar Energy Sector in Morocco’, German Development Institute Studies No. 79.

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