From
the ‘60s to the present—Needs have changed:
A
state that subscribes to socialist principles is obviously unwilling to
admit that prices obey the law of supply and demand and chooses, instead,
to fix prices, at least of some commodities. But because supply and demand
is an infallible economic law, prices fixed by decisions of the state are
bound to become, in time, lower than the real prices of these commodities.
It follows that in order to maintain the prices at predesignated levels,
the state must carry the difference between the sale prices and the real
prices. Hence the need for subsidies.
But
with the index of state-fixed prices held constant, on the one hand, and
real prices steadily rising, on the other, clearly the cost of covering
the ever-growing gap between the two becomes progressively heavier. One
has only to look at those countries which adopted the system of subsidies
to see that the payments they made to finance their commitment in the
early years were marginal compared to the cost of maintaining such
programs. Eventually the cost of financing subsidies spiraled out of
control, leaving these countries with no funds to spare for any
significant investment.
Subsidies
were introduced in Egypt in the 1960s when the state was controlling
wages. This, in turn, entailed state control over prices, especially of
basic commodities for which demand is, in economic terms, non-elastic.
Since the, and especially in recent years, debate has been ongoing—and
often acrimonious—over subsidies. There are three main schools of
thought, all of them, it should be noted, sharing a very narrow
perspective on the system as it is applied in Egypt. They are:
1.
The so-called “right” calls for the removal of subsidies due to
their heavy burden on the economy. They note that the sum spent by the
government to finance its subsidies program in 1989 alone—just over 10
billion pounds—causes deteriorating economic and social conditions and
with the social injustice and class chaos now prevailing in Egypt,
subsidies represent partial compensation for the destitute classes, a
lifeline, as it were, that can save them from drowning under the wave of
soaring prices.
2. The remnants of the Nasserite movement and the standard-bearers of
socialism and communism regard subsidies as an inalienable right of the
lowest social classes. Conveniently overlooking the heavy toll exacted on
the economy by the subsidies policy, they vociferously support it as an
obligation on the part of the government towards the suffering masses. In
fact, their real—Machiavellian—concern is the destabilizing effect
which the removal of subsidies could have on the Egyptian street.
3.
The third group is made up of an eclectic mix of public figures and
opinion leaders exactly the size of the Egyptian budget deficit.
So
the primary justification for subsidies is that they provide economic
support to the middle and lower classes, helping them meet their basic
needs. But at what cost? Has the state revealed the real cost of the
subsidies policy to Egypt? Have political and popular institutions
explained the range of effects—positive and adverse—of this policy? Do
the mass media project a true picture of the situation?
An
outside observer might assume that the views on subsidies held by the
various players on the Egyptian political stage are consonant with their
general line of thinking. However, he would be mistaken. To explain this
inconsistency, we must look at Egypt's recent past which for the most part
was devoid of a free political life in which divergent views could be
aired. This period also saw the emergence of amorphous “groupings” of
individuals, in contradistinction to Western democracies where like-minded
people come together on such clearly-defined common ground as unity of
thought, ideological consensus, orientations and strategic goals.
Thus
we find a party like the Socialist Labor Party,53 which is
actually an offshoot of the now-defunct fascist party, Misr El Fatat54
or Young Egypt, using similar arguments to the leftists to defend the
subsidies policy. This is less of a paradox than may at first appear if we
remember that fascists are among the most ardent believers in the
supremacy of the state and its patriarchal role. But while there might be
a certain logic in this meeting of fascists and leftists, it is totally
illogical for a party like the Wafd,55 whose whole philosophy
is based on liberalism as the mainstay of economic life, to support the
subsidies policy and to castigate the government whenever it tries to cut
down on its expenditures in that direction.
In
fact, both proponents and critics of the subsidies policy depart from the
wrong premise. It would be wise for them to liberate themselves from the
conventional political dogmas in which the debate is mired and ask
themselves, rather, who actually benefits from subsidies.
More
specifically, it is high time for the man in the street to learn that the
subsidies which appeared to serve his interest in the short term have
become a very real threat to his well-being in the medium and long term.
Having determined his income artificially, thereby creating a work climate
not conductive to productivity, the state then decided to help him meet
his basic needs by setting up another artificial system, the subsidies,
which ultimately is detrimental for all concerned—the man in the street
and the state.
The
funds sunk into the subsidies program could—and should—have been
invested in projects yielding a high rate of return for the state and,
ultimately, for its citizens. Thus as a direct consequence of the
subsidies policy huge opportunities for investment, production and wealth
were lost. Another, less obvious consequence of the policy is the spread
of unemployment: with huge amounts of capital channeled into subsidies
rather than into new projects, no new job opportunities were created for
the rising generations and the state found itself in the bizarre situation
of feeding the fathers instead of employing the sons This is an extremely
dangerous social trend which helps lay the groundwork for social chaos and
turmoil, and could even lead to civil war. For some inexplicable reason,
this aspect of subsidies is largely ignored. No one ever suggested not
only were the 10b. pounds allocated to subsidies in the fiscal budget for
1989/1990 lost at the end of that year, but also millions of job
opportunities which could have been created for our youth if that sum, or
even part of it, had been spent in setting up new projects.
Indeed,
only by offering employment opportunities in real and productive jobs can
the need for subsidies be eliminated. Young people who are given the
chance to perform real work can dispense with subsidies, unlike the
millions now holding down jobs artificially created by the state who
cannot make ends meet on their "salaries" which are, in fact,
nothing more than a handout. One has only to compare private sector
salaries, which afford a reasonable standard of living, with those in the
public sector to understand this.
Failing
public companies: Blame subsidies:
Among
the most insatiable recipients of subsidies, severely depleting the meager
financial resources of a poor country like Egypt, are the public companies
which are either operating at a loss, barely breaking even or, at best,
showing a narrow profit margin incommensurate with the capital invested in
them. Somehow, this wasteful allocation of resources does not win much
attention from any side in the subsidies debate.
For
example, no one has noted that loss-making public sector units, as well as
those realizing net annual returns below a given level (say, 7% in real
terms, or constant money value, i.e., after taking inflation into
account), are not only allowed to continue through massive injections of
financial aid but also receive vast sums of money which are distributed
among employees as "profits." This prodigal outflow of capital
is ultimately financed by the average Egyptian citizen, whose loss takes
more than one form:
-
He is deprived of the profits which can legitimately be expected from any
project and which should be used either in defraying the cost of public
services and utilities or in setting up projects that can generate
employment.
-
He is deprived of the funds actually generated by profitable
sectors of the economy which, instead of being deployed to create new jobs
and improve public services and utilities, are used to shore up moribund
sectors of the economy.
Sound
economic thinking equates loss-making concerns with those realizing
marginal profits, since both can be replaced by more efficient forms of
investment which can, by generating the minimum profits, avoid the losses
we have spoken of. This indirect form of subsidies, more than any other,
must be confronted head-on; we must not be deterred by the hue and cry
anticipated by the agitators who have been spawned by Egypt in the last
three decades. We have listened long enough to these demagogues and, as we
see the economy deteriorating at an alarming rate year after year, our
patience has worn thin. They must be silenced and their subversive acts
put down with an iron fist, a course of action the government followed
when it stepped in firmly to quell the disturbance at the Hilwan Iron and
Steel Works in August 1989.56
The
time has also come for responsible members of the mass media to bring this
sorry state of affairs to light. The public must be made aware that the
money used to subsidize floundering public companies and keep them
operating at a loss could have been used to generate jobs and finance
infrastructure projects. A campaign must also be launched to alert
productive members of the labor force that they are being forced to accept
a steady decline salaries—and thus in their living standards—for the
sake of the inefficient workers who contribute nothing to the national
economy and actually constitute a drain on it. Leaving the field free to
the leftists, Nasserites and certain trade unionists with a vested
interest in maintaining the status quo would be a major strategic error.
Failure to face up to the problem now will only allow it to grow more
intractable and make the cost of solving it in the future prohibitive in
political, social and economic terms. It is therefore imperative to
confront the problem decisively before it is too late, despite the
backlash that can be expected.
Needless
to say, we must not overlook the security dimensions of the problem. The
security apparatus in Egypt is as duty-bound to stand up to the saboteurs
of law and order (a duty they carried out in masterly fashion during the
Hilwan events in August 1989) as to the fundamentalists who would turn
Egypt into a religious theocracy and to the drug dealers who are
destroying its youth and, with them, its hopes for the future.
A
methodological approach to reducing—and canceling—subsidies:
Advocates
of political liberalism and a free market economy maintain that only by
abandoning the subsidies policy can Egypt hope to climb out of the long slump
which has made it one of the world’s poorest nations. Indeed, it is among
the 10 countries with the largest debts in the world. While there can be no
question that subsidies are a major cause of Egypt's economic woes, it is
equally true that the seeds of the problem were sown by the political choices
Egypt made after 1952. After all, economic backwardness, like economic
progress, is the fruit of political choice. It follows that no solution can be
envisaged, either on the theoretical or practical level, as long as Egypt
remains committed to those political choices. At the same time, removing
subsidies in one fell swoop will not solve the problem. In order to create a
favorable economic climate in which Egypt can move ahead from economic
stagnation, subsidies should be phased out according to a comprehensive plan
that provides for the reallocation of funds to spheres and projects that will
generate high profits and create new job opportunities. It is only through the
successful implementation of a rational plan—reducing subsidies while
simultaneously increasing investments in productive projects—that the
subsidies controversy can be settled in a manner that will maintain social
harmony and win over public opinion to the merits of their cancellation.
For,
unless tangible benefits accrue from the removal of subsidies, it will be
extremely difficult to convince the public of the wisdom and advantage of such
a course. On the other hand, if a reduction in subsidies were to be
accompanied by, say, an expansion in government spending or bigger budgets for
certain ministries, this would alienate the public opinion and bring into
doubt the government’s credibility—an image it would find hard to shake;
nor would it represent any real advantage in economic terms. The real measure
of success here is not the extent to which the removal of subsidies will
lighten the burden on the government but how far the savings generated by
their removal can be channeled into investment areas that translate into
higher incomes and new jobs.
A
prime minister who can satisfy this dialectical equation will be the economic
reformer Egypt has long been waiting for—ever since, in fact, ill-advised
political and economic choices plunged her into poverty and hardship.
The
defenders of subsidies versus the silent proponents of a free economy:
To
complete the picture of the subsidies tragedy, which is sapping the vitality
of the Egyptian economy and taxing it to the limits of endurance, we must take
a look at the configuration of the country’s political map. While public
life in Egypt is teeming with prominent representatives of the left, it is
noticeably lacking genuine proponents of a free market system who also believe
in the bankruptcy of socialist regimes, in general, and of those applying a
command economy, in particular.
Rather,
it is a hybrid class of middlemen, brokers, merchants, speculators and other
symbols of the ‘70s who are—mistakenly—regarded as the custodians of
liberalism and a free market economy. This class emerged as a result of the
erratic course of government in the 1960s-‘70s and enjoyed its heyday under
Anwar Sadat's economic open-door policy. The mercantile mentality of the
members of this class, their narrow intellectual horizons and cultural
insularity renders them incapable of grasping the rudiments of liberalism and
a free market economy. It is as unimaginable to regard them as upholders of
these values as it would be to apply this description to supporters of
corruption, illegal currency dealers and drug traffickers. In short, then,
while the left can boast thousands of champions in Egyptian public life, the
school of thought which believes in liberalism and a free market economy has
practically none.
The
mass media and subsidies:
An
important responsibility rests on the shoulders of the mass media to explain
to the man in the street that the real beneficiaries of subsidies are the
moneyed classes, the members of Egypt's new "upper class," while the
working class and the poor can only lose out in the medium and long term. In
fact, the continued application of this policy will impoverish them still
further and destroy any hope of a better future for themselves and their
children. To get this message across, however, is to swim against the tide of
public opinion. The official media spent so many years convincing Egyptians of
their right to receive government assistance in the form of subsidies that
this belief is now firmly entrenched in the public consciousness, making any
attempt to debunk it a daunting task. Moreover, any such campaign would bring
fierce reaction from the proponents of a command economy and the demagogues
who will not allow their vested interests to be swept under the carpet of
reform. This is nothing new: the history of humankind is one long struggle
between the harbingers of reform and those who will stop at nothing to
preserve the status quo and with it their considerable privileges. The mass
media must stand up to them.
Few
have been the examples of public figures in Egypt who have stood up for a free
economy—and they should be lauded. In fact, only those ministers who have
not succumbed to pressure and intimidation and who translated their
disenchantment with the subsidies policy into concrete action have achieved
real success. For example, thanks to one minister of petroleum who remained
uncowed by the vilifying campaign launched against him by an opposition party
notorious for its foreign affiliations ,base tactics and extremism, Egypt
succeeded in building up a strategic reserve of gas as a buffer against any
potential energy crisis. He boosted Egypt's natural gas reserve from 10 to 30
years by encouraging private investment in this domain, echoing Egypt's
success in becoming an oil-producing and exporting country since the
mid-‘60s due to private investment. In addition, a minister of tourism
braved the loud protests emanating from the left to institute reforms in that
sector, also opening it up to local and foreign private investment, and
succeeded in multiplying Egypt's revenues from tourism several times over in
recent years. But these are isolated incidents. Too few people are willing to
brave the wrath of the self-appointed keepers of the faith, who defend
subsidies as a sacrosanct right of the people and decry those who call for
their reappraisal, labeling them traitors. That is precisely why, despite
their negative aspects, subsidies remain a cornerstone of the regime.
The
crisis of confidence between the government and the people:
This
chapter would be incomplete if it failed to address the crisis of confidence
between the government and the people of Egypt. One government after another
has pledged to institute reforms, to rationalize government spending, to
improve government performance and to secure a better future for the Egyptian
citizen. But the Egyptian citizen, though assured by successive governments
that they will rationalize spending, sees them doing just the opposite.
Although Egyptians are renowned for their stoicism and forbearance in the face
of hardship, their patience is stretched to breaking point by the obvious
discrepancy between a government's words and its deeds.
A plan by the government—any government—to rationalize subsidies and
divert some of the massive subsidy allocations into investment projects stands
no chance of success unless a real attempt is made to actually implement the
plan. In other words, it must be carried out in full view of the people, the
press and the world. And it is high time this happened.
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