Ferdinand Eibl, King’s College London

*This memo is part of POMEPS Studies 31, Social Policy in the Middle East and North Africa. Download the full PDF here.

What happens if regimes have the incentive to distribute welfare broadly among their population but lack the capacity to do so? Doner et al. (2005) argue countries escape this dilemma by becoming developmental states. While their argument may explain the dynamic of industrial upgrading in “Asian Tigers,” this certainly does not capture the dynamics of socioeconomic development in the Middle East in which developmental states have been strikingly absent. Using the case study of Egypt, this note develops an alternative explanation of how regimes can “square the circle” by adopting what I call “cheap social policies.” I will argue that this concept helps us make better sense of past and present Egyptian social policies and has broader implications for the study of social policies, especially in a developing context. The note is structured as follows: section one introduces the concept of cheap social policies and retraces its origins in the Egyptian context. Section two empirically demonstrates how cheap social policies have shaped welfare provision in Egypt, past and present. Section three will outline the broader implications of the concept for the study of social policies in the Middle East and beyond.

Origins of cheap social policies in Egypt

Following the 1952 revolution that established the Egyptian republic, the new regime’s expansion of social policies was characterized by (i) a strong incentive for welfare distribution stemming from the specific nature of the authoritarian coalition and (ii) an extremely challenging geostrategic environment in which social spending had to compete with the regime’s need to safeguard against external threats.[1] The Free Officers behind the 1952 coup lacked a clear plan of action for socioeconomic development and exhibited noticeable ideological ambiguity when it came to welfare distribution (Beattie 1994, 68). However, the intra-elite conflict within the ruling Revolutionary Command Council (RCC), which came to a head with the 1954 ouster of president Muhammad Naguib, prompted Abdel Gamal Nasser to reach out to working and middle class constituencies to outcompete his rival (for a similar argument in the context of party regimes, see Brownlee 2007). In the words of Beattie (1994, 98), the events of 1954 “crystallized Nasser’s thoughts regarding real and prospective sources of regime support.” The events of 1954 thus stood at the origin of Egypt’s broad-based regime coalition.

As the nascent regime soon came to realize, though, the ambition for large-scale welfare distribution needed to be reconciled with ensuring survival in the face of strong external threats. The Arab-Israeli conflict and foreign policy more generally did not feature prominently amongst the Free Officers’ concerns when they seized power in 1952. In fact, wanting neither peace nor war, the Free Officers exhibited a certain ambivalence vis-à-vis Israel (Barnett 1992, 84). A key indicator of this low level of threat perception was the “heavy cuts in expenditure on defense” (IMF 1954, 15) carried out between 1952 and 1954.

The Gaza raid of February 1955 carried out by Israel and the Suez War in late 1956 fundamentally changed the regime’s risk perception, however, and shifted the regime’s spending commitments from socio-economic development to defense. Defense expenditures rapidly increased by 116 percent between 1955 and 1960 in absolute terms, whereas social expenditure only rose by 39 percent in the same period. Putting these outlays into broader perspective, defense expenditures consumed yearly about two thirds of what was spent in the first 5-year plan altogether. (Al-Jiritli 1974, 42). With Egypt lacking a natural resource endowment, social policies thus had to compete, from the beginning, with security-related expenditures, which greatly undermined the regime’s distributive capacity. The 1979 Egypt-Israel peace treaty did not fundamentally alter this situation as military spending was gradually shifted toward the Ministry of Interior in an attempt to buy the support of the military and coup-proof the Sadat and Mubarak regimes. Additionally, high levels of debt service, aggravated by the cost of post-war reconstruction, weighed on the budget (Barnett 1992). Furthermore, in the institutional balance of power among different ministries, Egypt’s education and health ministries never developed the political weight of their counterparts in, for example, Tunisia. And the Ministry of Supply, responsible for food subsidies, was viewed as a constant target for cost cutting.

My assessment of Egypt’s welfare effort thus partly concurs with El-Meehy’s in this volume in that Egypt certainly had the ambition to build a generous, universalist welfare regime. But I argue that it was hampered in doing so by its challenging geopolitical environment. Within this particular context of strong incentives to distribute but little fiscal capacity to do so, as I argue, Egypt resorted to cheap social policies consisting of the following: (i) a heavy reliance on “free” social policies distributing rent-generating statutory rights to lower and middle classes; (ii) the systematic use of windfalls to finance social expenditures; (iii) devising social policies that alleviate the regime’s shortage of resources. In the following section, I will focus in particular on the latter two features and demonstrate how they have shaped Egyptian social policies in the past and to what extent they explain the current trends in social policies in Egypt.

Cheap social policies in action

Use of windfalls

In the historic build-up of Egypt’s post-1952 welfare regime, there were two main sources of windfalls: confiscations and nationalizations. Large-scale confiscations occurred in two waves. The first wave, carried out in 1953, confiscated the fortune of the Egyptian royal family. In total, the measure expropriated the riches of 407 royal family members and transferred the money to the newly established Council for Social Services (CSS). The amount was estimated at 129.5 million EGP (Egyptian National Archives 1953). This was the equivalent of 62 percent of Egypt’s total government expenditures in the financial year 1952/53 or 13.7 percent of the country’s entire GDP. The availability of these vast financial resources was reflected in the country’s welfare budget, which increased by over 60 percent from 57 million in 1951 – the country’s last pre-coup budget – to 91.9 million in 1953.

The second wave of confiscations occurred in the wake of the 1956 Suez Crisis. Tignor (1992, 276) estimates the total value of expropriated assets at 1 billion USD, the equivalent of 2.89 billion EGP. This value amounts to 250 percent of Egypt’s GDP and nine times its total government expenditures in 1956. Relative to the annual revenue from the nationalization of the Suez Canal (22.2 million EGP; Owen 1991, 365), this transfer of wealth can only be described as enormous. In addition to confiscations, the regime carried out nationalizations of domestic industrial assets in several waves between February 1960 and March 1964 (O’Brien 1966, 125).

While the importance of these expropriations for Egypt’s industrial development has been recognized (Amin and Nawwar 2006, 88), their importance in the field of social policies has largely been overlooked. Yet windfall money was an integral part of the regime’s strategy to finance social policies. In fact, a number of archival documents highlight the role of expropriations in supporting the regime’s welfare effort. The most important windfall in this context was certainly the confiscation of the king’s fortune to fund social projects, which was a critical element of Nasser’s strategy to outcompete Naguib (Mohi El Din 1995, 168; Baghdadi 1977, 79–89). Alongside these large-scale projects, cabinet minutes form the Egyptian National Archives also document the frequent recurrence of expropriations for smaller-scale projects. Table 1 summarizes all confiscations carried out for social purposes in 1953-54. The table illustrates the government’s widespread practice of using expropriations of land and real estate to expedite the expansion of Egypt’s educational system. This overview only represents a snapshot of the total amount of expropriations carried out and, though spotty, cabinet minutes throughout the 1950s contain references to confiscations such as the ones described herein (see, for example, Egyptian National Archives 1955, 1958, 1959).

Table 1: Confiscation measures for social purposes (1953-54)

Cabinet Session Expropriation Measure
2 September 1953 Confiscation of 3 empty buildings in Cairo after the owner refused to rent them out to the Ministry of Education
8 September 1953 Confiscation of 7 other buildings and land by the Ministry of Education
13 September 1953 Confiscation of 1 empty building and land by the Ministry of Education
18 October 1953 Confiscation of 1 building and land for educational purposes
4 November 1953 Confiscation of land by the Ministry of Social Affairs
11 November 1953 Confiscation of land for educational purposes
2 December 1953 Expropriation of two buildings and land by the Ministry of Education
23 December 1953 Confiscation of land for educational purposes
20 January 1954 Confiscation of a building and land to construct a school after the owner’s refusal to extend the tenancy contract with the Ministry of education
30 June 1954 Confiscation of a building of educational purposes

In addition to this qualitative evidence, there is also quantitative evidence to suggest that windfalls and social policies have historically been linked in Egypt. Figure 1 shows the short-term and long-term effect of expropriation acts and oil/gas revenues per capita on welfare spending as a share of GDP for the period (1952-2010). The values are derived from an error correction model with panel-corrected standard errors. Key data on expropriation acts is taken from Hajzler (2011), who defines an expropriation act as “the involuntary divestment of assets of any number of direct investment firms, within a given 3-digit industry and in a given year.” (Hajzler 2011, 122).[2] The model contains a number of standard controls, such as GDP per capita, defense spending, and ODA receipts.

Figure 1: Short- and long-term effects of windfalls on welfare

Note: Whiskers indicate 95-percent confidence interval.

As shown, the occurrence of an expropriation event is strongly and positively associated with an increase in welfare expenditures. The model suggests that one expropriation act increases social spending by 0.7 percent of GDP on average in the year after the act, with no visible knock-on effects in the long term. Conversely, a 100 USD increase in oil/gas revenues per capita – roughly one standard deviation – hikes up welfare spending by 3 percent of GDP, not in the short-term but in the longer term. Given that average social spending change in Egypt amounts to 0.11 percent of GDP over the time period, increases of this magnitude represent a considerable boost in welfare expenditures and demonstrate the close link between fiscal windfalls and welfare expenditures in Egypt.

As expropriation events became increasingly rare, with the last one taking place in 1995, it is important to ask to what extent the relationship between windfall money and social expenditures still holds in the present period. By far the most important financial windfalls in recent times, next to Egypt’s gas exports, have been the significant receipts from privatization programs that started in the 1990s under the auspices of the IMF and accelerated under the Nazif cabinet from 2004 onward. Revenues from public divestments were substantial, amounting to several percentage points of GDP in a few years, especially after Egypt decided to privatize some state-owned banks in the 2000s. Interestingly, privatization proceeds are not positively correlated with social spending, which is also in line with the general claim that the late Mubarak period did not see any major upward shift in welfare spending or the implementation of major social policies (e.g. Soliman 2011). Instead, the bulk of the privatization receipts were used to reduce national debt and clear non-performing loans in the public banking sector.

Given that the fiscal capacity of Egypt had not fundamentally improved in the 2000s compared to previous decades – taxes as a share of GDP, for instance, remained at similar levels – the partial delinking of windfalls and social policies points to changes in the regime’s support coalition and the diminishing importance of lower and middle classes in it, relative to business communities and capital owners (King 2007). That said, the persistent association between gas rents and welfare outlays suggests that the logic of cheap social policies based on windfalls partly persisted throughout the Mubarak era.

Social policies to make money

Another defining feature of cheap social policies is the designing of social policies to alleviate the shortage of resources and thus support the regime’s welfare effort. Arguably, this puts the logic of distributive social policies on its head as social policies devised in such way become a mechanism of resource generation instead of resource distribution. Given conditions of resource scarcity and the need to cater to a large support base, these social policies become extremely advantageous since they enable the generation of additional revenue while bolstering domestic legitimacy. A main area where revenue-generating social policies were historically implemented was social insurance. The correspondence between the Ministry of Social Affairs and the Council of Ministers in the preparation of the social security legislation, preserved in the National Archives, gives us an important indication of the motives behind key social security legislation introduced in the early 1950s.

When presenting the draft law to the Council of Ministers in November 1952, the Minister of Finance pointed to the “copious resources” that the funds will make available to the government and the extent to which this would support the national economy (Egyptian National Archives 1953). In fact, the explanatory note contains no reference any social motives whatsoever. In a second note, dating from June 1953, the Ministry of Finance and Economics urged the Council of Ministers to extend social insurance to all new state employees (Egyptian National Archives 1953). Underlining the “present conditions of austerity,” the minister highlighted the “vast funding opportunities” (Egyptian National Archives 1953) that would become available if social insurance were to be extended. In turn, this would help the government finance its development projects.

The same arguments for social legislation appear again in the context of the 1955 law, which extended social insurance to the private sector and thus considerably broadened its coverage. The archival notes strongly suggest that economic reasons played a major role in the government’s motivation to pass the law (Egyptian National Archives 1955). Particularly insightful is an explanatory note from the Ministry of Social Affairs to the Council of Ministers from July 1955 laying out two key motives behind the draft law. First, social insurance was meant to “calm down” workers and to make them more productive, so social considerations, albeit in a rather paternalistic sense, did indeed motivate the adoption of the 1955 law. Second, and important for my argument here, the generation of resources was again a primary argument presented in favor of the law: “Given the enormous amount of money that the social insurance system will accumulate after a while, the social insurance fund will become a powerful source of money that the government can rely on to finance social reforms and economic development projects” (Egyptian National Archives 1955). Taken together, both notes demonstrate that the idea to implement social policies to fund social policies was not something the regime “discovered” along the way. On the contrary, the generation of resources was a central motivation behind the social insurance legislation.

Ample borrowing from Egypt’s social insurance funds by the state since 1952 demonstrates the importance of social policies as an income-generating mechanism. At the height of war preparation in 1971 to 1972, the government covered over two-thirds of all expenditures from the social security fund. The average between 1960 and 1976 was 42 percent. Borrowing continued through the 1980s and 1990s when state owned enterprises started to use the social insurance funds to access cheap loans. Since 1993, surpluses from the work accident insurance have been used to cover resulting deficits in Egypt’s health insurance fund. Crucially, until the late 1990s, borrowing occurred at interest rates consistently below inflation, which effectively amounted to an expropriation of savings.

Looking at social insurance as a mechanism of revenue generation can also explain why extensions of social security coverage have frequently occurred during moments of acute balance of payments problems, such as the early 1990s, when university students were allowed to join the health insurance scheme for a reduced fee (4 EGP per month). By increasing domestic saving and curbing consumption, Egyptian governments have used coverage extension of the social security scheme to counter-balance current account problems. And in fact, when running a simple logit regression on the timing of coverage extensions in Egypt, these seem to be systematically correlated with falling foreign currency reserves (data from IMF 2015) as shown in Figure 2. The figure highlights the growing likelihood of coverage extension as reserves start to shrink, which is indicated by the increasing slope of the graph left of the zero line. It is interesting to note that the envisaged extension of social security by President Sisi occurs in a similar context.

Figure 2: Predicted probability of extension of social security coverage

Note: Whiskers indicate 95-percent confidence interval.

Conversely, coverage extensions of social security that are not revenue-generating, at least in the short term, have been very difficult to implement. The primary example in this context is the envisaged introduction of a universal health insurance scheme under Mubarak in the late 2000s (see also Loewe and El-Meehy in this issue). As many lower-income groups would have been unable to pay for their premiums, the Egyptian state would have had to shoulder an additional cost of at least 17 billion EGP, nearly twice the size of the country’s health budget of 10 billion EGP in the late Mubarak period. As former Health Minister Tag Eddin clearly states: “Money was the key issue in the failure of the health insurance reform […] Our budget was never enough and our spending lower than needed. […] In the drafting of the budget, the Ministry of Finance would only ever give us the ‘leftovers’” (personal interview). This explanation thus complements the narratives on health insurance reform in Loewe’s and El-Meehy’s contributions. Given these historical patterns and the fact that the structural constraints weighing on President Sisi are essentially the same as those of his predecessors, with ongoing pressure from the IMF to reduce spending, the recent decision to introduce universal health insurance should be viewed with caution: as Loewe points out, the envisaged implementation period of 15 years, governorate by governorate, is extremely long, allowing for policy slippage and backtracking along the way.

Broader implications

This analysis has underlined the historical constraints weighing on social policies in post-1952 Egypt and how this led to the implementation of cheap social policies. I also pointed out that the logic of cheap social policies keeps structuring important trends in current social policies and thus proves to be a useful analytical category to understand the Egyptian case. Beyond Egypt, the concept also adds potential value.

Although it is true that social policies do not always serve social policy goals, a specificity of cheap social policies is that they are designed to generate financial resources for the regime rather than distribute them while, at the same time, serving ulterior political goals of regime maintenance. Further, the concept offers a theoretical mechanism to understand how inter-state war and external threats have shaped social policies in the Middle East, potentially developing countries writ large, where the fiscal base for redistributive taxation cannot be easily extended due to institutional constraints. The durable “conscription of wealth” (Scheve and Stasavage 2010) has therefore been an elusive notion for many developing countries, which have frequently relied on one-off expropriations and nationalizations to serve their distributive goals (see also Albertus 2015). It should be pointed out that, in theory, regimes’ distributive ability could be undermined by other factors (e.g. devastation from disasters, debt burdens, etc.). That said, a key characteristic of external threats, particularly in the Middle East, is that they have been long-lasting and thus exerted permanent pressure on government budgets. There is, in my view, not many other macro-political variables with an equally constraining effect.

Finally, the concept could be easily extended to take into account other forms of “cheap” social policies. For example, forbearance or non-enforcement in the context of social policies could be additional rent-generating mechanisms that, albeit meaningful and beneficial for target groups, do not aggravate the fiscal burden on the state budget. The exploration of such mechanisms and the circumstances under which they are implemented promises to yield important insights into social policy making in the Middle East and beyond.

 

[1] The following argument draws on previous macro-comparative work by scholars such as Yom (2016), Slater (2010), and Waldner (1999), who have all pointed to the coalitional underpinnings of authoritarian regimes as a key explanatory variable.

[2] In its current form, Hajzler’s expropriation dataset comprises all events between 1960 and 2006, which means that I needed to extend the data forwards and backwards to cover the full time period under investigation.


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Squaring the circle: “Cheap social policies” in the Middle East