Markus Loewe (German Development Institute / Deutsches Institut für Entwicklungspolitik, DIE)
and Lars Westemeier (University of Bayreuth)
*This memo is part of POMEPS Studies 31, Social Policy in the Middle East and North Africa. Download the full PDF here.
Most governments in the Middle East and North Africa (MENA) spend considerable shares of GDP on their social insurance and transfer schemes that still perform poorly in terms of efficiency, equity, and sustainability. This is partly because the energy and food subsidy schemes that dominate social policy spending benefit rich households much more than the poor. However, social insurance schemes in MENA also target the rich and middle classes rather than the poor and tend to suffer from high administration costs, low investment efficiency, and elements of regressive redistribution.
Nevertheless, until recently, no country in the region has embarked on systemic reforms in its social policies. Jordan and Tunisia did during the 2000s, and in Egypt, reforms were not taken up until President Mubarak appointed Ahmed Nazif as prime minister in 2004. “Hidden retrenchment” (see El-Meehy in this volume) does not adequately describe the phenomenon as Egypt’s social insurance schemes continued to operate – for better or worse – much as they had always done since being set up. The government simply did not dare to touch the issue.
When the Nazif government finally drafted concrete reform plans in 2006, they were heavily criticized by parliament, the mass media, and academia. Non-government organizations (NGOs) started a judicial trial against the plans and won in 2008. The pension reform plan, in contrast, was enacted only briefly before it was revoked for a “lack of social consensus.” Only in late 2017, President Sisi was able to push through at least a public health insurance reform.
This memo discusses why the Egyptian government – despite its authoritarian character – did not dare to embark on social policy reforms for so long and why NGOs were able to obstruct the reforms that the government finally did work out in the late 2000s. I will then examine why the government under President Sisi faced comparatively limited resistance and was able to enact some public health insurance reforms.
The memo aims to provide insights into the process of social policy-making and institutional change under authoritarian rule. I argue that because reforms in social policy always produce winners and losers, they can be extremely sensitive, even for authoritarian regimes. Political regimes that legitimize their rule by their performance, e.g. in improving the social and economic well-being of citizens, as most MENA governments did during recent decades are particularly sensitive to changes.
Reforms in social insurance legislation are critical because they affect, almost by definition, primarily the urban middle classes, who are normally the main beneficiaries and risk to suffer most from any reform. At the same time, however, urban middle classes have also traditionally been the main clientele and allies of political regimes in MENA societies – not least because they tend to be better equipped to understand the impact of policy changes, form opposition, and organize resistance.
Social insurance reforms can thus undermine the stability of political regimes unless they are able to:
- convince relevant social groups – especially urban middle classes – that reforms are necessary and better for everybody than the status quo – at least in the long term;
- compensate at least the most influential social groups – again, typically the urban middle classes – for any loss they incur through the reforms; or
- repress civil society to prevent resistance.
This memo illustrates how Egypt’s government under President Mubarak had to abandon both its social pension and health insurance reform plans, because it failed to convince the urban middle classes of the necessity of reforms, it could not afford to compensate them for possible losses, and did not try to repress them. In addition, the government was undecided about the main goals and elements of a reform and, therefore, far too reticent and defensive in the communication of its plans, quickly losing control over the public debate.
Under President Sisi, in contrast, the Egyptian government made clear from the beginning that it was determined to reform at least social health insurance. It was able to convince parts of the population of the necessity of reforms and did not allow any time or space for controversial discussions on its reform plans. Right from the start, the government argued that any opponent was jeopardizing not only progress in social policies but also the unity and stability of the nation.
The memo is based on our analysis of research, policy, and print media documents as well as telephone interviews with key witnesses of the policy processes.
Social insurance in Egypt
Immediately after the 1952 revolution, the Egyptian government started to build up, step by step, an ambitious social insurance system in terms of people and risks covered. The last step was completed in 1980 with the institution of a social insurance scheme covering all workers not otherwise covered by either the “general social insurance schemes” (established in 1975) or the “social insurance scheme for employers and self-employees” (established in 1976). Egypt, thereby, became one of the first countries outside the OECD world to achieve comprehensive social insurance coverage, at least on paper.
In practice, however, Egypt’s social insurance system benefitted mainly employees and workers with permanent employment contracts in the formal economy, i.e. the urban middle class. The system is highly fragmented, offering different benefit packages to different segments of the labor force, with comprehensive health insurance offered to formal sector employees only. These employees are entitled to free medical treatment in all hospitals and clinics of the Health Insurance Organisation (HIO). While all residents can use the separate national health system, which is run by the Ministry for Health and Population (MOHP). It suffers, however, serious deficits in terms of quality, hygiene, and equipment. Effectively, this means that 41 percent of the population, particularly low-income, informal sector workers, are without real health protection. Likewise, the different pension schemes also differ significantly in terms of benefit levels. Large parts of the population do not comply with either scheme because they are unaware of their rights or do not perceive enrolment beneficial for them. From 1998 to 2012, the effective coverage rate of all schemes has declined from 51 percent to 41 percent. This is partly due to the decline in public sector jobs and rise of informal employment.
In addition, Egypt’s pension and health insurance schemes are inefficient and unsustainable. The pension schemes invest their reserves at low, sometimes negative real interest rates. They offer overly generous minimum pensions and early retirement options. And members can easily manipulate the level of their pensions, which depend only on the contributions paid during the last two years before retirement. Many employees agree with their employers to underreport salaries during most of their work lives (to lower the contributions paid by employee and employer), while overstating salaries during the last two years (to maximize pensions). As a result, Egypt’s pension schemes will soon spend more on pension payments than they generate from members’ contributions.
Egypt’s health insurance schemes are already in deficit. Almost a quarter of HIO’s budget is financed by the central government even though only about half of the population has access to its services. Administrative costs account for 19 percent of total spending. Many patients also go directly to HIO hospitals even though their health problems could also be dealt with at the primary health care level, where services are cheaper. As a result, secondary and tertiary health care account for 56 percent of HIO expenditures while primary health care accounts for only 18 percent. In addition, preventive care is neglected, and staff recruitment focuses on physicians, particularly specialists, rather than nurses, midwives, and therapists.
Attempts to reform pension schemes
Debates on the necessity to reform Egypt’s pension schemes started as early as 1998 but the topic was never given much room in the political system. This changed with the appointment of Ahmed Nazif as prime minister in 2004. He had orders from President Mubarak to reform Egypt’s social insurance system entirely and thereby bolster the president’s re-election campaign.
At the time, large parts of the population as well as policy makers agreed that reforms were due but for very different reasons and with different goals. The Ministry of Insurance and Social Affairs (MOISA) was, first of all, interested in extending the effective coverage of social insurance to additional groups of employees, while NGOs and political opposition parties focused more on improving the quality of social insurance benefits. The Ministry of Finance (MOF), in contrast, was mainly concerned with cost containment and the long-term financial sustainability of the pension schemes, as were foreign donors such as the World Bank, USAID, and the European Commission.
In 2006, the government published a first draft pension reform law, which was discussed and heavily criticized in the mass media but passed parliament in June 2010 after an extensive debate and a just few modifications as Law 135. It provided for the establishment of a new pension system in Egypt covering all labor market entrants. Members of the old system were meant to have a choice to stay in the old or change to the new system.
The main features of the new system would have been:
- Lower contribution rates than in the old system, but without any upper ceiling so that contributions were to be paid on all labor income;
- The government was to pay 15 percent of the contributions of informal sector workers;
- The pension insurance organization could invest up to 40 percent of surpluses on the capital market rather than buying government bonds; and
- Pension levels were computed from all contributions ever paid into the system, accounting for the remaining life-expectancy of pensioners so members no longer had any incentive to retire earlier than necessary or to manipulate income declarations.
Pensioner associations, trade unions, and many journalists accused the new law of privatizing the public pension scheme and shifting all risks to pensioners. Indeed, it would have taken away several privileges of employees and workers with unlimited term contracts, for example generous early retirement options and the possibility to manipulate income declarations as described above. And at the same time, other social groups would have benefitted from the reforms. Low-income earners and informal sector workers would have benefitted from the extension of coverage and the reduction of contribution rate, while the business elite would have benefitted from the investment of pension scheme surpluses on the capital market.
As a result of the public outcry, the government paused implementation of the pension reform law for several months. And in January 2011, it was overrun by the uprisings. In late 2011, the interim military government put the reform law officially on ice. By 2013, newly appointed President Sisi repealed the law entirely with the justification that it lacked sufficient social consensus. So far, the initiative has not been taken up again.
Attempts to reform health insurance schemes
Initiatives to reform Egypt’s social health insurance system followed a similar path during the Mubarak era but were taken up again later by President Sisi.
In 2005, President Mubarak promised publicly to achieve universal health protection by 2015, and he commissioned the MOHP to draft a reform law accordingly. However, just like in the case of pension reforms, different ministries had contrasting understandings about the main goals of such reforms. The MOHP was primarily concerned about the fragmentation of the health sector and the fact that some population groups enjoyed better health care than others, while the MOF aimed at improving the cost recovery rate. At the same time, NGOs lobbied mainly for improvements in access to and quality of health care.
As a result, the government was reticent and defensive in the communication of its reform plans, losing control of the public debate at an early stage. It did not publish the first draft reform law, which was meant to be discussed within government and parliament only. However, the draft was leaked and slammed in the mass media even before the government had the chance to explain the rationale of its plans. As a result, the reforms were associated with neoliberalism and the interests of the business elite from the beginning. Foreign donors were accused of having imposed reforms on Egypt.
The MOF rejected the draft reform law in December 2007, arguing that its implementation would be much too expensive. Hence, the MOHP drafted a revised reform law until March 2008. Like previous versions, the new draft aimed primarily at integrating all Egyptians into social health insurance. However, in contrast to the first drafts, the new one restricted its cover to a “basic benefit package” and introduced co-payments for patients (25 percent on health care, 33 percent on medicine). In addition, it provided for a splitting of HIO into a social health insurance company and a health service provider that would have to compete with private providers.
The idea of splitting HIO and introducing co-payments were heavily criticized as a means of creeping privatization and the exclusion of low-income groups. Protests came from opposition parties (e.g. Tagammuc), civil society organizations (e.g. the Committee for the Defence of the Right to Health), trade unions and professional unions (especially the medical syndicate) – all known as advocates for the interests of the urban middle class.
Finally, the NGO Egyptian Initiative for Personal Rights (EIPR) filed a suit against the draft law, and in September 2008, the Court of Administrative Justice suspended the draft law arguing that the government could not transfer the hospitals, clinics and related companies of HIO to a private holding company. These assets belonged to HIO contributing members rather than the government.
The court’s decision is notable, first, because it was brought about by a relatively small NGO and, second, because it was made at a time when the Egyptian judiciary’s independence had already become questionable.
But the government formulated another draft law in October 2009, which was leaked again by a newspaper and also heavily criticized by NGOs, while EIPR started another lawsuit.
In order to prevent another defeat in court, the MOHP revised the draft again. The ministry stressed that the new draft exempted the lowest earning 20 to 30 percent of the population from co-payments and that many chronic diseases were now covered by the social health insurance. Nevertheless, few policy makers backed MOHP anymore, and the initiative was completely ended in 2010.
Little happened in the first years after the uprisings in 2011. President Morsi announced a reform initiative but never started it. During 2014 to 2015, President Sisi issued several decrees without prior announcement on the extension of health insurance coverage to additional population groups (children under 6, female-headed households, farmers) and to include 17 more diseases. He increased the government’s subsidy to HIO from 106 to 326 million USD and commanded that emergency health care was free of charge for everyone within the first 48 years. But no systemic reform was started.
This changed unexpectedly in November 2015 with the announcement of yet another reform initiative by President Sisi. Within just two years, a new reform law was drafted, approved by the government and adopted by parliament. This time, only a few protests occurred and there was no lawsuit. Enactment is scheduled for the first half of 2018.
The new law is similar in many aspects to earlier drafts but it provides for a gradual implementation of reforms (starting with poorer governorates and ending with Cairo and Giza) during a period that extends until 2032. After implementation, all households will have to pay contributions (1 to 4 percent of labor income above 170 and below 525 USD per person and year) to HIO. Also, the health systems of HIO and MOHP will be merged, but private providers have the option to offer the same services at the same price. Primary health care facilities are scheduled to be upgraded. And co-payments will be charged for secondary and tertiary health care.
Apparently, President Sisi had learned several key lessons from previous reform attempts:
- He ensured that the entire state apparatus was committed to the reforms and had a broad consensus on its goals. There appeared to be no discussion whatsoever on the law within the state apparatus or in public before or after it was published;
- The necessity of the reform and its goals were communicated long before concrete reform plans were published so that some popular support for the reform could emerge;
- The reform law was pressed through the legislative process at a speed that did not allow opponent NGOs to organize any protest or legal suit; and
- Relevant NGOs were threatened in such a way that they did not dare any more to challenge the government.
After the turbulent period between 2011 and 2013, many Egyptians were afraid of further unrest and reluctant to criticize the government, which portrayed itself as the savior of the country and guarantor of stability. President Sisi repeatedly stressed that his policies were essential for the stability of Egypt and that Egyptians only had to look at the fate of Syria, Yemen, or Libya to see what instability could bring. In such an atmosphere, the government no longer had to carefully heed of the interests of single social groups – not even its former key clientele, the urban middle class.
The case of social insurance reforms shows that relations between the government and society have changed fundamentally in Egypt. In the past, the government felt obliged to consider the effects of reforms on social groups, in particular the urban middle class – at least in sensitive fields such as social policies. It used to legitimize its rule, among other ways, by its performance in improving the socio-economic situation of citizens. Since the accession to power of President Sisi, however, the government legitimizes itself mainly by the provision of stability and security rather than social benefits. In addition, it uses more repression to safeguard its rule. It seems that a new form of authoritarianism has come into being, in which the government is less reluctant to implement even very unpopular reforms.
 For example, many social insurance schemes in MENA have minimum pension rules, which benefit social insurance members with below average earnings. These are, however, lower middle class people rather than the poor, because the very poor are typically not covered at all by social insurance. The costs of these provisions are born by the government budget, which is mainly financed by indirect taxes, and these are paid by all consumers. Hence, the very poor contribute to the funding of a social policy element that benefits middle class people only. See Loewe, 2013b; and Loewe, 2018.
 Due to the sensitive nature of these topics and to preserve confidentiality, those interviewed were promised not to be mentioned by name.
 Loewe, 2010.
 Loewe, 2013a.
 Loewe, 2014.
 El-Moudden et al., forthcoming.
 In high-income countries, administration costs of non-contributory public health schemes range between 2 and 4 percent, while those of social health insurance schemes are somewhat higher (up to 7 percent9, cf. OECD (2017). In middle-income countries however, administrative costs range between a and 16 percent even for non-contributory public health schemes, cf. WHO (2010).
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