ECON4094: Economics of Egypt
Topic 1: Socialism &
Nasser's Era
Dr. Ahmed El Safty
The materials presented in this section are based mainly on:
M. Riad El-Ghonemy, “An Assessment of Egypt’s Development Strategy, 1952–1970”, in: Elie Podeh and Onn Winckler (Edited), “Rethinking Nasserism, Revolution and Historical Memory in Modern Egypt”, University Press of
Florida, 2004.
Khalid Ikram, “The Egyptian Economy, 1952–2000: Performance, policies, and issues”, Routledge studies in Middle Eastern economies, 2006, Chapter 1.
Introduction
The topic focuses on the changing characteristics of the Egyptian Economy during Nasser’s Era
(1952-1970), in comparison to pre-Nasser’s Era. Accordingly, the overall timeframe would be
divided into three sub-periods as follows:
► Pre
1952 Revolution.
► The
Period of Private Enterprise Economy, 1952–1956.
► The
Period of State Intervention and Arab Socialism, 1956–1970
2
1
Pre 1952 Revolution
Agricultural, Private, Market-based
Economy
3
The Characteristics of the Egyptian Economy before the
Revolution of 1952
1.
The economy was essentially agricultural
►
►
2.
Ownership of land was limited to a small number of elites
►
►
3.
Agriculture and industry, internal and foreign trade, banking, insurance, urban transport, and even a number of
utilities, such as electricity and water, were privately-owned businesses.
Foreigners dominated the economic activities
►
5.
About 11,500 owners (0.06% of total population) owned almost 38% of the cultivated land.
Of them, 60 landowners were holding 5 % of the land.
The main productive sectors were in private hands
►
4.
Only 1-2% of the labor force were employed in the industrial sector.
The economy was dominated mainly by production and exporting of cotton.
Foreigners controlled the entire banking system (except Bank Misr), the insurance companies, foreign trade,
energy, industry, and the principal means of public transportation (except the railways).
The economic role of the state was confined to investment in infrastructure
►
Chiefly in the irrigation system and social services.
4
2
The Period of Private Enterprise
Economy, 1952–1956
No Socialism from the start
5
The Characteristics of the Egyptian Economy during the
Period 1952–1956
1.
The government emphasized the importance of the private sector
►
►
►
►
2.
Government investment was directed toward the areas of irrigation, drainage, and land reclamation
►
3.
Official policies were intended to reassure private enterprise.
The government consulted regularly with the Federation of Egyptian Industries, and agreed to the Federation’s
demand for lower taxes and higher protection by lowering customs duties on raw materials and capital goods
and by raising tariffs on items produced domestically.
Taxes on profits and undistributed dividends were also reduced.
The government insisted that it would act as the partner of private enterprise and confine itself to heavy, or
basic, industry. The rest of the manufacturing sector was explicitly reserved for private enterprise.
The public sector represented only 13% of the GDP, while the private sector accounted for 87% of the GDP.
The economic policy debate was not public vs. private sector, but rather the role of foreign investment.
►
►
Until 1957 the state continued to woo foreign capital through laws providing tax holidays and generous
provisions for the repatriation of profits.
The government also partially reversed the “Egyptianization” policy by allowing foreign shareholders to hold a
majority interest and control in any domestic company.
6
The Characteristics of the Egyptian Economy during the
Period 1952–1956 (cont’d)
4.
The agrarian reform of September 1952 was introduced, limited individual ownership to a max of 200
feddans.
►
►
►
5.
The main purpose was not to attack the principle of private ownership – the excess feddans were distributed to
landless peasants.
It redistributed 13 percent of total agricultural land among small tenants.
It introduced agricultural cooperatives. To obtain inputs or agricultural credit, a farmer had to be a member and
abide by rules concerning crop rotation, output pricing, marketing, and so forth.
There was a new gradual trend towards a more active role for the government in the economy.
►
►
►
►
The government decided to build the Aswan High Dam at about this time (but the execution was delayed)
The government engaged immediately in ambitious land reclamation projects.
Some partial planning was introduced in 1953 through the creation of the Permanent Council for the
Development of National Production,
The Council studied projects, coordinated the public works program and the state investment budget, and paved
the way for the government to participate as an equity owner in new industries.
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1956 - Main Switching Point:
The High Dam & The Suez War
The major event that led to a switch of economic policy orientation was the problems of financing the
Aswan High Dam and the Suez War of 1956
1.
2.
3.
The US and the UK agreed to seek approval from their legislatures for providing $70 million to cover the foreign
exchange costs of the first phase of the project. They stated that they will consider providing additional resources to
supplement the World Bank’s financing.
The World Bank was expected to participate in the foreign exchange financing of the project ($200 million out of a
total of $390 million).
However, conditions were attached to the financial offer that were sensitive:

Egypt would have to allocate one-third of its internal revenues to the High Dam project;

contracts would have to be awarded through international bidding with communist countries excluded;

Egypt would have to avoid incurring additional foreign debt without the approval of the World Bank;

disbursements would begin only after Egypt and Sudan reached a new accord on the sharing of the Nile waters;

the qualified nature of the offer of finance by the US and the UK for the second phase provided a lever by which
the Western countries could press Egypt to settle the Arab–Israeli dispute on unfavorable terms.
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1956 - Main Switching Point:
The High Dam & The Suez War (cont’d)
4.
5.
6.
In July 1956, the US and UK governments decided to withdraw from the financing of the Aswan High Dam. The World
Bank’s offer then lapsed, because the financing for the project was left with a gap. However, there is little doubt that
the political views of the Bank’s principal shareholders swayed its decision.
The cancellation of the financing led Egypt to nationalize the Suez Canal to use the revenue to finance the
construction of the High Dam.
The nationalization was offered as a pretext by Britain, France, and Israel for invading Egypt.
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3
The Period of State Intervention
and Arab Socialism, 1956–1970
Socialism with a twist!
10
Movement towards Planned Economy
The transition from a free, private enterprise system to a planned economy with a dominant public sector
took place between 1956 and the early 1960s:
►
In the years following 1956, Egypt lost much of its access to Western sources of finance.
►
Subsequent to the Suez Canal war, the phase of government policy in 1957-60 was aptly described by
President Nasser as “controlled capitalistic economy.”
►
The public sector then expanded in 1957 through the nationalization of British and French interests
after the Suez Canal war, and through public investment in industry.
11
New Era: Characteristics of the New Economic Policy
Orientation
1.
Although private sector activity was still encouraged, the new Constitution of 1956 set out an
ideological framework within which such activity was to be conducted.
2.
The Suez Canal war of 1956 led to the sequestration of British and French assets. A special state
Economic Organization was set up in early 1957 to manage these and other assets in which the
government already had a share:
►
This agency acquired considerable influence as a vehicle for promoting the government’s economic policies,
and by 1958 the Economic Organization controlled all the specialist banks in Egypt, 7 commercial banks which
accounted for nearly half of all commercial bank loans, and 5 insurance companies responsible for 68% of all
insurance business transacted in Egypt. The Agency, thus, was responsible for roughly a third of aggregate
output produced by the organized industrial sector, and to have employed about 20% of the labor force in that
sector.
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New Era: Characteristics of the New Economic Policy
Orientation (cont’d)
3.
A move to rapidly “Egyptianize” the main arteries of the national economy was put into effect:
►
4.
All foreign banks, insurance companies, and commercial agencies were required to be converted into
domestically owned joint stock companies within five years.
Comprehensive economic planning was introduced:
►
In January1957, a National Planning Committee was set up to prepare a long-term plan for social and economic
development that was to come into effect from July 1, 1960. In 1958, however, a five-year plan for industry was
launched, in which the state was to provide 60% of the finance. The industrial plan required a rapid acceleration
in investment by the government.
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The major features of the expanded role of the
Government
The success of the land reform, the nationalization of the Suez Canal, and the sequestration of British and
French properties encouraged the Nasser administration to extend government control over the whole
economy.
The major features of this expanded role were:
1.
2.
3.
4.
5.
6.
Tightly planned investment allocations
Administered pricing
Control of foreign trade
Tighter control of farming
Adoption of a welfare-oriented strategy in which private and public ownership of assets coexist
A shift away from a profit-making liberal capitalist system toward a welfare-oriented distribution
of wealth
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New Ideology: The National Charter & “Arab Socialism”
The National Charter stressed the concept of “Arab socialism,” to be created in a “socialist, co-operative,
and democratic society”:
1.
This broad concept aimed at such ambiguous ends as social solidarity, social justice, and raising the living standard
along a socialist path, permitting private enterprise and ownership to function under “guided capitalism” free of
monopoly.
2.
It also emphasized the elimination of exploitation in transactions within the domestic market through the dominance
of a large public sector and regulation of profit margins, wage rates, and consumer prices, as well as through the
protection of tenants and the substantial reduction of rental values both in farming and in housing.
3.
The continued emphasis on “elimination of exploitation” in the development strategy seems to be more of an
expression of the violation of Islamic moral principles in business conduct (what is permitted, halal, and what is
prohibited, haram) than of Karl Marx’s conception of exploited and exploiter in terms of his notion of surplus value
accumulation.
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1960 - Switching from Egyptianization to Nationalization
First: major signal of the government’s new direction in policy came on February 13, 1960, when Bank Misr and the
National Bank were taken into public ownership. The step was significant because, whereas previous nationalizations
had been of foreign firms, these banks were owned chiefly by Egyptian nationals.
The National Bank
►
Although privately owned, performed all the normal functions of a central bank.
►
It had a monopoly of the note issue.
►
It was the lender of last resort.
►
It had control of the bank rate.
Bank Misr
►
was not only the largest commercial bank left in the private sector, but also a most important holding company.
►
It had 29 affiliated companies accounted for an estimated 20 percent of Egypt’s industrial output, including half of all
textile production.
16
1960 - Switching from Egyptianization to Nationalization
(cont’d)
Second: Control over cotton
►
Alexandria cotton futures market was closed & the state Cotton Authority given the exclusive right to purchase cotton
►
Subsequent laws Egyptianized all companies dealing with the cotton trade and brought all firms engaged in external
trade under state control.
Third: Rapidly expanded nationalization
►
The biggest waves of nationalization occurred in June and July 1961 in what has come to be called in Egypt the
“Socialist Revolution.”

The remaining banks and insurance companies were taken over,

As were 44 companies in basic industries;

Half the capital of 86 firms was expropriated;

The shareholders of another 147 firms were dispossessed of a large part of their assets by a law that limited
individual holdings to a market value of LE 10,000.
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1960 - Switching from Egyptianization to Nationalization
(cont’d)
Fourth: After the 1961 nationalizations, the private sector was relegated to a relatively minor role.

Private property was not abolished, but the opportunities for private economic activity and decision-making, especially
in investment and production, were severely circumscribed.
Fifth: The takeovers were later justified as part of the “Arab Socialism”

It was a cardinal element of the National Charter (al-Mithaq al-Watany) presented by President Abd el-Nasser in May
1962 to the National Congress of the Popular Powers.
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Main Provisions of The National Charter (al-Mithaq alWatany)
The main idea was that economic development could not be left to individual efforts motivated by private profit, but
must be based on socialism. The Charter outlined the framework for the conduct of economic activity. The main
provisions were the following:
1.
The economic infrastructure should be publicly owned, as should the majority of heavy and medium industries and
mining.
2.
Banks and insurance companies should be only in the public sector.
3.
The entire import trade should be in the public sector, as should three-quarters of the export trade.
4.
The ownership and control of internal trade could be in the private sector, but the public sector should take charge of
at least one-quarter of internal trade.
5.
Apart from internal trade, the sphere of private ownership and control was defined as land, buildings, construction,
and light industry. The application of land reforms, rent control legislation, and taxation measures would help to
prevent any “exploitation.”
6.
The “basic rights” of citizens to social welfare that the state would provide. The framework included medical care,
education, employment, minimum wages, and insurance benefits in old age and sickness.
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Conclusion: Evaluation of the Economic Policy Orientation
of 1952-70
An overall view of the years 1952–70 would highlight the following features of the economic system:
1.
The state maintained considerable influence in agriculture, not only because of its traditional
responsibilities for the hydraulic system, but also because of the cooperative system and the control it
exercised in selling inputs and buying the major crops.
2.
An extensive system of cost and price controls. Price administration affected all the major sectors of
the economy, such as agriculture, housing, and industry. The stated objectives of price administration
were to improve income distribution and resource mobilization.
3.
Welfare-oriented policies of the first two decades of the revolution had two broad aims: greater equity
in the distribution of income and wealth, and increased consumption of goods and services.
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Conclusion: Evaluation of the Economic Policy Orientation
of 1952-70 (Cont’d)
4.
labor legislation, education, health, and employment:

The minimum wage in industry was raised. Strikes were made illegal, but labor conditions were
improved by an insurance scheme for industrial workers financed by contributions from the
employer, profit-sharing schemes whereby 25 percent of the net profit was distributed among the
workers and employees, increased sickness leave and higher sick pay, and constraints on the
employer’s ability to dismiss workers.

Public education expanded rapidly after the revolution, and with these increased expenditures the
number of students rose sharply.

Expenditures on health rose, the number of hospital beds more than doubled, and the availability
of medicine at subsidized prices and the number of pharmacies and public health centers steadily
increased, but all these were far more accessible in urban than in rural areas.
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Conclusion: Evaluation of the Economic Policy Orientation
of 1952-70 (Cont’d)
5.
A shortage of foreign exchange and an insufficiency of domestic resources with which to finance its
policy goals:

Since the end of World War II, Egypt more or less continuously ran a deficit in its balance of
payments. This deficit was financed at first by drawing down sterling reserves accumulated
during the war. After the reserves had been spent, Egypt began to accumulate foreign debt.

The foreign exchange problem was made worse by the cessation of assistance from the West.

Egypt came to rely increasingly on supplier credits, so that annual debt service payments rose
rapidly.

The foreign exchange situation deteriorated further after the war with Israel in 1967. In general,
the government attempted to deal with balance of payments difficulties by restricting imports;
there was no systematic attempt to increase exports. Such fluctuations played havoc with
capacity utilization and were a major reason for increasing unit costs in industry.
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Conclusion: Evaluation of the Economic Policy Orientation
of 1952-70 (Cont’d)
6.
The pressure on domestic savings arose from the budget deficits. During the 1960s the deficit arose
because, although revenue growth outpaced that of nominal GDP, current expenditures grew even
faster. The rise in expenditure was greatly influenced by expenditure on defense.
7.
The economic system was characterized by increasing inefficiency. The impact of price distortions,
of direct government intervention with acreages, and of the imperfection of market forces were
significant.
8.
A major source of the difficulties faced by the state in the implementation of its economic policies was
the schizophrenic strategy concerning development. On the one hand, the state’s goal of rapid
economic growth necessitated a high level of investment, and therefore of savings. However, this was
contradicted by the simultaneous pursuit of another goal, namely, increasing the consumption level of
the population. This latter goal was supported by a policy of guaranteed employment and rising wages,
which worked against the pursuit of the first goal.
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