Freeman

ECONOMICS ON THE TRAIL

Whatever Happened to the Egyptians?

Socialist Interventionism Prevents Economic Prosperity

AUGUST 01, 2001 by MARK SKOUSEN

Filed Under : Protectionism, Regulation, Poverty

“Governments are generally reluctant to admit mistakes and to change mistaken policies until much harm has been done.” —P. T. Bauer and B. S. Yamey 1

In Whatever Happened to the Egyptians? (American University in Cairo Press, 2000), a popular book in Egypt, author Galan Amin raises a good question. Thousands of years ago Egypt was the birthplace of one of the world’s greatest civilizations, with remarkable advances in architecture, astronomy, mathematics, and economics. The pharaohs ruled the world for centuries.

But today Egypt is a fallen nation. On our arrival earlier this year at the port of Alexandria, once the “city of dreams,” we saw garbage and dust scattered profusely on the public highways. Arriving in Cairo to see the ancient pyramids, we saw filthy canals, undrinkable water, dire poverty, noisy traffic, teeming millions, incessant vendors, and more dust.

I picked up a copy of a guidebook on what it’s like for a Westerner to live in Cairo. Author Claire Francy lists so many shortages that she urges foreign residents to bring the following with them: answering machine, major appliances, computers, modems, printers, telephones, fax machines, cosmetics, flashlights, pantyhose, wines, books in English, clothes, and shoes. Yes, shoes. “In a city with nearly as many shoe stores as feet, it is almost impossible to find decent shoes.”2 Oh, the joys of import-substitution laws!

And yet Egypt has tremendous resources: oil, cotton, some of the best fertile land in the world along the Nile Valley, a first-rate irrigation system, the Suez Canal, and a huge labor force (nearly 70 million and growing rapidly). Yet true unemployment is 20 percent, and underemployment is endemic. Egypt suffers from a huge “brain drain,” with 2.5 million Egyptians working abroad. The nation has illiteracy rates of 66 percent among women and 37 percent among men. It imports half of its food. After Israel, this Arab-African nation is the highest recipient of U.S. foreign aid in the world.

Islamic Economics

What’s the cause of this economic collapse? A few blame their Islamic religion for their troubles. Over 90 percent of Egyptians are Sunni Muslims who, critics say, pray too much (five times a day), are overly generous to the poor (and thus support a socialistic welfare state), bear too many children (Egypt has one of the highest birthrates in the world), and suffer an excessive financial burden (in the practice of providing housing for their children as a marital dowry). Egyptians are constantly celebrating holidays, among them the month-long Ramadan consisting of daytime fasting and nighttime feasting, when business activity becomes erratic.

But religion is not the true cause of Egypt’s struggles. The real culprit is socialist interventionism in the economy. As one unnamed economist states, “The Egyptian economy bears the legacy of economic policies dating from the 1950s which were motivated by concern for equity and assistance to the poor. These policies were characterized by price regulation, subsidization of consumer goods, a dominant public sector and state control.”3 When Gamal Abdel Nasser gained power in 1954, he established a “democratic socialist state,” nationalized everything under the sun (including the local beer company), and dramatically increased government control of the economy. Moreover, under a Napoleonic code, Egypt suffers from a regulatory nightmare of paperwork and bureaucracy.

One of the most harmful policies in Egypt has been import-substitution laws—the use of tariffs, quotas, subsidies, and restrictions to protect and promote local production of all kinds of consumer goods, from shoes to toothpaste to automobiles. This form of protectionism has been popular in Third World countries since development economists such as Gunnar Myrdal and Paul Rosenstein-Rodan claimed that import restrictions would stimulate domestic industry and employment. In Egypt, for example, the U.S. government spent roughly $200 million to help Egypt create a domestic cement industry, even though cement could be obtained more cheaply abroad.

Such policies have proven counterproductive. Today Cairo is covered with dust caused by the local cement factories. Egypt’s import-substitution laws have created shoddy workmanship and above-market prices in shoes, appliances, and consumer products. Today most economists have changed their mind about import-substitution laws, admitting that they stifle growth. They point to the rapid expansion of East Asian nations, which eschewed import substitution and have concentrated on producing inexpensive exports.4

Fortunately, Nasser’s successor, Anwar el-Sadat, began a program of reducing the role of government. After his tragic assassination in 1981, Hosni Mubarak accelerated market policies of privatization and foreign investment, and eliminated price and exchange controls. The local beer company is now in private hands. Yet even today, 36 percent of the labor force is employed by the government and the economy continues to suffer from over-regulation and controls.

Egypt has made substantial progress since 1990, when the Fraser Institute ranked it 88th in the institute’s economic freedom report. Today it is ranked 52nd.5 But clearly the Egyptian leaders have a long way to go to fulfill the Koran’s promise of “wealth and children” as the “adornments of this present life.”


Notes

  1. P. T. Bauer and B. S. Yamey, The Economics of Underdeveloped Countries (Cambridge: Cambridge University Press, 1957), p. 157.
  2. Claire E. Francy, Cairo: The Practical Guide, 10th ed. (Cairo: American University in Cairo Press, 2001), p. 68. This guidebook is both shocking and indispensable for anyone moving to or studying this strange Arab nation. I placed exclamation points on practically every page.
  3. Cited in W. W. Rostow, Theorists of Economic Growth from David Hume to the Present (New York: Oxford University Press, 1990), p. 423.
  4. Doug Bandow, “The First World’s Misbegotten Economic Legacy to the Third World,” in James A. Dorn, Steve H. Hanke, and Alan A. Walters, The Revolution in Development Economics (Washington, D.C.: Cato Institute, 1998), pp. 217, 222–23.
  5. James Gwartney and Robert Lawson, Economic Freedom of the World, Annual Report 2001 (Vancouver, B.C.: Fraser Institute, 2001), pp. 9–10.

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August 2001

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