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When Cheap is Costly: Rent Decline,Regime Survival and State Reform inMubarak's Egypt (1990–2009)Amr Ismail Ahmed AdlyPublished online: 03 Mar 2011.

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When Cheap is Costly: Rent Decline,Regime Survival and State Reform inMubarak’s Egypt (1990–2009)

AMR ISMAIL AHMED ADLY

It has been held that external rents significantly affect the formation of stateinstitutional capacities as constant flows of rents tend to weaken the state regulative,monitoring and extractive capacities vis-a-vis the economy.1 However, if more rentswere associated with weaker state capacities, would a steady and consistent decline inrents reverse the trend towards state capacity building?

Egypt provides a puzzling case of how rents have been associated with statecapacity building. Throughout the 1990s, rents flowing to the Egyptian state fromoil exports, foreign aid and Suez Canal fees have been consistently declining aspercentages of total Gross Domestic Product (GDP) and state revenues. While oilrevenues declined from 11 per cent of total revenues in 1990 to a mere 2 per cent in2000, the share of the Suez Canal stagnated at around 4 per cent throughout thesame period. Moreover, the share of foreign aid in total GDP witnessed a systematicdecline since 1994, from 5 per cent to almost 1 per cent in 2000.2

The oil sector has special relevance. Whereas, it represented almost 50 per cent oftotal exports in the 1980–2005 period, it was in crisis after the 1986 glut.International crude oil prices did not exceed the 1982 level ($31.55) until 2004($37.41), hitting a historic low in 1998 ($11.9).3 Moreover, the oil sector was facingdeeper and more serious problems regarding the decline in oil production andreserves and rising local consumption, leaving an ever slimmer share to be exported.Figure 1 shows the two trends.

According to the Ministry of Petroleum, oil exports decreased from 9.5 milliontons in 1993/94 to 2.9 million tons in 1998/99. The decline in production wasparalleled with a secular increase in local consumption from 17.4 million tons in1993/94 to 23.9 million tons in 1998/99 and then to 29 million tons in 2006/07.4 Thispattern threatened a deficit in the oil balance of payments and the inability toprovide enough foreign currency to meet the sector financial commitments towardsforeign contracted companies.5

Low oil prices throughout the 1990s were translated into sheer decline andstagnation of total exports which actually shrank in absolute terms between 1990and 1999 at an average rate of –2.46 per cent. The decline was not offset before 2000when the absolute value of exports exceeded that of 1990. Moreover, the decline inoverall rents has been associated with an ever decreasing ratio of state revenues to

Middle Eastern Studies,Vol. 47, No. 2, 295–313, March 2011

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total GDP6 which fell from 35 per cent in 1994 to 20 per cent in 2004 in addition torecurrent foreign currency shortages.7

Amid the decline in oil production, ‘the rapid expansion of the gas industry wasfortuitous, for it substituted for the decline in oil output that was occurring as energyconsumption escalated’ and thus sustained Egypt’s absolute total energy productionfrom 1992/93 through 2001 when it started to rise through 2006.8 However, despitethe expansion in natural gas exports, the share of rent-based revenues accruing fromfuel sales and the Suez Canal kept declining as a percentage of total GDP from anaverage of 4.2 per cent (1990–2000) to 2.99 per cent (2001–08). Meanwhile, the shareof rent-based revenues in total government revenues has not changed dramaticallywith the exception of the interval between 2005 and 2007 when fuel pricesskyrocketed. Whereas they averaged 17.6 per cent (1990–2000), 15.45 per cent (2001–04) they soared to 40 per cent (2005–07) to plunge again to 24.9 per cent in 2008 asenergy prices collapsed with the financial crisis.9

Despite their consistent decline or stagnation, rents assumed a critical position instate finances. Even though the ratio of external rents to total GDP remained rathermild as compared to other major oil producers, the relative importance of externalrents has been revealed in their disproportionate weight in total state revenues andforeign currency earnings. During the period 1991–2008, whereas oil production andthe Suez Canal revenues – the two biggest sources of state rents – stood for an annualaverage of 13per cent of total GDP, their share in state revenues hovered around30 per cent10 in the form of non-tax and tax transfers. As late as 2007, internationalgas sales accounted for 23 per cent of total government revenues.11 Moreover, oiland natural gas exports averaged 50 per cent of total merchandise exports for thesame period of time.12 The greatest part of the oil and gas exports accrued to thestate, whose Authority of Petroleum held almost 85 per cent of the total output,rendering the energy sector the government’s ‘goose that lays golden eggs’.13

Despite the decline in external rents, exports and state revenues, there was hardlyany state capacity building to restructure and diversify non-oil exports. In fact,dependency on oil and mineral exports persisted throughout the 1990s, constituting

Figure 1. Egypt’s oil production and consumption.Source: http://www.eia.doe.gov/cabs/Egypt/Oil.html.

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almost half of total exports.14 The structure of exports did not change either, asdemonstrated in Figure 2. Manufactured exports averaged 37 per cent of the total inthe period between 1990 and 2007. As Springborg and Clement held: ‘Egypt wasde-globalizing’.15

Despite decreasing rents and the Structural Adjustment Programme (SAP) stresson export diversification and promotion in the post-1990 years, the Egyptian statefailed to restructure exports through promoting non-oil and manufactured products.State agencies operating in the field of trade and industry failed in either providingincentives or sending the right signals for manufacturers to redirect their production.Trade policy management kept extending heavy protection to leading sectors whichhave traditionally possessed a comparative advantage, such as textiles and clothing.Relatively high nominal and effective rates of protection combined with the lack ofclear export incentives recreated features of import-substitution industrialization16

oddly combined with piecemeal trade liberalization. Real exchange rate appreciationcreated an anti-export bias and discouraged producers to export.17 Moreover, theincentive system targeted industries indifferently without positively discriminatingexporters. No direct export-support scheme was initiated until 2002, i.e. 12 yearsafter the adoption of SAP.18

State agencies operating in the fields of trade and industry suffered frominstitutional stagnation throughout the 1990s, leaving them locked in the stateplanning era from which they once came. The structures, mandates and capacitiesof almost all of the relevant state agencies remained unchanged, which had threeimplications for the export drive:

1. Despite the sea change that took place throughout the 1980s and mainly in the1990s, with an ever expanding share of private investment in total GDP andespecially in industry, institutional structures were kept mostly unchanged. Forinstance, the share of the public sector in manufactured added value shrank from55 per cent in 1992 to 33 per cent in 1999 and finally to a mere 7 per cent in 2000while the private sector share peaked to 93 per cent in the same year as comparedto just 45 per cent in 1992.19 It was not until 2004/05 that relevant state agencieswent through institutional reform;

2. Institutional fragmentation: industrial, trade and general investment policiesremained fragmented among a number of state agencies that were seldom linked.

Figure 2. Oil exports as a percentage of total exports in Egypt (1990–2008).Source: Calculated from World Trade Organisation time series.

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This rendered policy-making subject to various considerations, logics and evenobjectives. The contradictions shown above in trade and industrial policiesthroughout the 1990s serve as a clear example where inwardly-orientedindustrialization was oddly coupled with gradual trade liberalization resultingin industrial expansion unparalleled by manufactured export increase. Anotherexample is the management of the incentive system: while general investmentincentives were managed by the General Authority for Free Zones andInvestment, temporary admission and drawback schemes have been adminis-tered by the Ministry of Finance, through the Customs Authority, and theMinistry of Economy and Trade, through the General Organization for Exportand Import Control beside the Industrial Surveillance Organization (Ministryof Industry). All three authorities had executive mandates regarding theimplementation of both schemes on the procedural level without any concerngiven to aspects of monitoring or evaluating export performance;

3. Lack of institutionalized channels with the private sector: as a by-product of thetwo earlier points, state agencies operating in the fields of industry and tradefailed to develop strong institutional channels to communicate with the Egyptianprivate sector despite its increasingly dominant role in the manufacturing sector.Ironically enough, an increasing stress on the role of the private sector was puton achieving the objectives of the industrial and exporting policies in theconsecutive five year development plans. However, the inclusion of the privatesector within a national development plan did not instigate the establishment offluid channels of communication with the state leaving that section of the planliterally ink on paper.20

Why has not the consistent and steady decline in external rents through the 1990sinstigated state capacity building with the aim of export restructuring?

The literature on rentier economies and states has attributed external rents acentral role in shaping economic structures, the nature of ruling regimes as well asstate institutional capacities. Rentier states display strong dependency on externalrents generated by activities in which ‘only few are engaged’ while ‘the majority[is] . . . only involved in the distribution or utilization of it’.21 The externality of rentsis not just attributed to the source from which they accrue but also to their narrowbases in the domestic economy. Conversely, productive revenue bases involve abroad array of domestic economic activities from which the state raises revenuesthrough taxation. Rentier revenue bases can be either locational/geopolitical wherethey flow thanks to the strategic importance of a given state: military and economicaid would be typical, or dependent on natural endowments such as oil and naturalgas exports. While in the former case rents accrue from abroad, in the latter they areproduced by small enclaves in which a negligible fraction of the population isengaged.

The bigger the share of rents in total GDP, state revenues and exports is, the moresignificant they become. In heavily populated countries with fairly diversifiedeconomies, the ratio of rents to total GDP is often modest. However, the relativeweight of external rents is revealed in their disproportionate weight in total exports,foreign currency earnings and state revenues. For instance, in the case of Egypt,though oil production and Suez Canal revenues – the two biggest sources of state

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rents – represented an annual average of 10.9 per cent of total GDP in the period1991–2001, they constituted almost 30 per cent of state revenues22 while oilcomprised 50 per cent of total exports for the same period. Additionally, bothpossessed a considerable weight as sources of foreign currency earnings.

Earlier trends in the literature have underscored the impact of rents on thestructure of the economy or the nature of the political regime. Economically, theliterature drew heavily on the Dutch Disease syndrome where ‘windfalls’ of rentsdivert resources from productive investment into rent-seeking and speculativeactivities leading to an unfavourable transformation in the structure of economicincentives. Politically, a strong bond has often been assumed between thedependency on external rents and authoritarian regimes.23

Recent trends in the literature have explored how rents affect the process of stateformation and the evolution of institutional capacities. This burgeoning scholarshipstarts from a critique of the Dutch Disease argument as being too economistic andstructuralist and as downplaying the role of agency.24 Moreover, the Dutch Diseasethesis does not explain the difficulties of readjustment associated with the decline ofrents that economies and states have to face in a switch from one developmenttrajectory to another. According to this school, long-term accruals of rents tend toweaken regulatory, developmental and extractive state capacities while strengtheningdistributional functions.25

For rents to account for state formation, they have to be considered within theparameters of the broader question of how state institutional capacities come about.Distributional and historical traditions of institutionalism maintain that institutions-as-rules reflect the distribution of asymmetrical power relations among social andeconomic contenders.26 Rules emerge out of the agents’ interaction where ‘actionsare bounded by a parochial and myopic conception of the process in which they wereengaging, in the sense that these decision agents were not concerned with whether thelarger system that might (and was) being built around what they were doing wouldbe optimized by their choice’.27 From this perspective, institutions are not rationallydesigned to achieve an optimal outcome. Rather, they develop stochastically inpursuit of narrowly-defined interests of the agents involved.28 Hence, whether stateeconomic institutions are efficient and developmental (or not) is a function of howthe most powerful groups identify and pursue their interests.

In this vein, the stress has been put on the compatibility between long-term statecapacity building and immediate or rather short-term interests of state incumbents toattain and retain political power. Kohli argued that ‘state effectiveness is asconcerned with the political organization of the state as it is with bureaucraticcapabilities. A central concern then is with power, as distinct from competence orinformation’.29 Accordingly, state incumbents are interested in maintaining andreproducing their power, at least as much as they are interested in advancingdevelopment.

Students of rentier states hold the critical conjunction between rent occurrenceand weak state capacities to be the state revenue bases. According to Doner et al.,30

elite motives to undergo state capacity building is related to power and resourceconstraints. The less rentier bases state incumbents possess in order to deliver side-payments, the more they are motivated to create productive bases through realeconomic growth. State revenue bases have often been pointed out as the critical

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linkage between the state and the economy.31 Resource constraints in this regard callin the distinction between productive and rentier bases of state revenues. Productiverevenue bases refer to state dependency on taxing the economy as its prime sourceof income. In this context, state income becomes closely related to achievingeconomic growth and broadening the tax base through increasing national income.Conversely, in the presence of rents and contrary to Doner’s model, state incumbentsdo not face the systemic vulnerabilities that may pressure them to erectdevelopmental capacities and thus have little incentive to develop domestic revenuebases for the state.

The literature has hitherto stressed the positive association between politicalcoalition building and state capacity building which defines the extent to whichincumbents would pursue institutional reform as a means to political survival.However, coalition building and sustenance can adversely influence the drive forstate reform if the immediate interest of incumbents to remain in office contradictslonger-term objectives of institutional change. Shafer32 and Karl33 have givenextensive accounts of ‘arrested institutional adjustment’ where a decline in externalrents fails to instigate state capacity building, be it extractive or developmental,due to the presence of strong rentier constituencies in the ruling coalition that blockinstitutional changes.

Structural restraints on institutional adjustment have been the subject of sectoralanalysis. This trend holds the principal exporting sector through which domesticeconomies are inserted into the global division of labour as key to explaining theproblems of restructuring amid declining rents.34 Countries dependent on sectorscharacterized by high asset specificity and capital intensiveness (high/high sector)such as minerals and oil, face considerable challenges to restructure even amiddepleted reserves, shrinking output and price gluts. Long-term dependency on thesesectors erodes state absolute and relative capacities and thus overrules prospects ofrestructuring. Rent-based state revenues weaken the regulative, extractive andmonitoring capacities vis-a-vis the economy, which Shafer labels as the absolutecapacity. Moreover, high/high exporting sectors erode the relative capacity of thestate to mobilize allies with whom economic restructuring can take place. High/highsectors create strong vested interests that pressure state incumbents to maintainthe status quo as a prerequisite for their political survival despite the overallwelfare loss.

Shafer’s structural analysis may explain extreme instances of dependency onmineral sectors where a single sector accounts for sizeable shares of GDP, exportsand state revenues. However, it lends little help in explaining the adjustmentproblems facing semi-rentier states where dependency on oil and minerals isexaggerated in the exporting sector while their share in total state revenues and GDPis not as great. Egypt is a case in point where the oil sector is significant as it suppliesnearly half of total exports but its share in GDP was below 10 per cent in the 1990s.Additionally, the oil sector employs a negligible proportion of workers and has hadlimited capacity to mobilize as the sector remains monopolized by the stateAuthority of Petroleum in collaboration with a few multinationals. Despite theweakness of vested interests and the overall limited weight of the sector, the Egyptianstate has failed by and large to restructure exports away from oil and mineralproducts.

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Adding more ‘agency’ to the framework, Karl developed quite a sophisticatedargument linking state revenue bases and coalition building with state capacitybuilding. Karl holds that the patterns of state expenditure during boon years ‘fuel[s]the perception on the part of organized interests that exercising influence is the onlyway to receive pecuniary rewards, and it undermines any public-sector efforts toextract resources from civil society’.35 The way that coalitions are created andcemented greatly affects state institutions as they undermine extractive andregulatory capacities, replacing them with distributive ones. This sets stateinstitutional capacities on a certain trajectory and raises the cost of futureinstitutional change. The result is usually a long-term debilitating process of statecapacities and a large veto coalition of rent-seekers erecting barriers to change andthus increasing the obstacles to institutional reforms when there is a dire need forthem in post-boon years.

It can be stated thus far that the extant literature on rents and state institutionalcapacities assumes no spontaneous or automatic association between the decline inthe former and the instigation of the latter. Rather, the link between external rentsand capacity building has been often politically mediated by the incumbents’strategies and tactics to hold political power through coalition building andsustenance. Overall, the compatibility between longer-term drives of state capacitybuilding and shorter-term concerns of power retention has been perceived as the keyto explaining state formation. While in some cases both processes coincide andreinforce each other, providing adequate incentives for incumbents to pursue statereform, in other cases political survival dismisses or de-motivates incumbents toundertake reforms.

Why does the consistent and steady decline in external rents not always result instate capacity building with the aim of export diversification and restructuring? Thisstudy argues that whether incumbents respond to rent decline with capacity buildingor not depends on the institutional channels through which they attain and retainpolitical power, i.e. political regime dynamics. These institutional features determinethe extent to which dwindling rents adversely affect the incumbents’ chances ofpolitical survival. In this setting, for the decline in external rents to instigate statereform, capacity building has to become a means for the incumbents’ politicalsurvival.

Given that state capacity building often entails political and economic costs aschanges in state policies and regulations alienate certain constituencies, forincumbents to bear the cost, they must have their ‘backs to the wall’ and thus have adirect stake in state building. The incumbents’ incentive to undertake reform is theoutcome of the interplay between long-term processes of state building and moreimmediate concerns of coalition building and sustenance. The incompatibility of bothmay leave the economy in a low/low equilibrium where incumbents dismiss reforms.

Holding that the impact of rent decline on capacity building is mediated by theinstitutional characters of the ruling regime, this study puts forward the followinghypothesis: Facing a decline in rents, the greater distributional pressures on theincumbents to maintain their power base, the more they are motivated to undergostate capacity building. The intensity of distributional pressures depends on theinstitutional configuration of the political regime through which incumbents attainand retain power in two senses:

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1.1 the more incumbents are subject to competition and timely contestationthrough elections, the more they have to meet distributional commitments tobuy supporters;

1.2 conversely, the more incumbents resort to repression as an alternative todistribution, the less pressure they will face.

By regime I mean the rules that permeate relations within the state apparatus andbetween the state and society. The political regime defines the institutional channelsthrough which state incumbents attain and retain political power. In authoritarianregimes, incumbents are subject to limited competition and are not exposed to timelycontestation through elections. This does not imply that they are relieved ofpressures vis-a-vis the coalition on which they rely. It rather suggests that it ischeaper to buy passive support, or rather passive opposition, from key constituencieswhile limiting political participation instead of mobilizing active support to winoffice in more competitive regimes.

Building state capacities to restructure exports might have served as an answer tothe decline in external rents in the post-1990 period had it been perceived as a meansto the incumbents’ political survival. I argue that this was not the case in post-1990Egypt. Even though the state kept assuming a distributive role as the main instrumentof regime legitimization, it could survive while spending considerably less to buysupport. Egyptian incumbents capitalized on two institutional features typical ofauthoritarian regimes: frequent resort to repression and limited exposure to politicalcompetition in order to adjust to declining rents, exports and revenues throughlowering their expenditure without compromising their hold on political power.

Given the limited venues of political competition, the ruling incumbents were notpressured to deliver side-payments in order to mobilize active support. Rather,passive support, or passive opposition, was required. Instead of creating newconstituencies to remain in power, the Egyptian elites had only to appease thealready present constituencies of state patronage inherited from the Nasserist era:public sector workers and government employees. In a word, they could maintaintheir constituencies at a lower cost. Simultaneously, the incumbents could evade theeconomic and political cost of state reform which could have alienated key andsizeable regime constituencies such as public sector workers in troubled industries(e.g. textiles) and bureaucrats and civil servants in structures inherited from thestate-planning era.

Indeed, post-1990 macroeconomic indicators reveal that consistent budget cutswere the response to the decline in state revenues. Government expenditure as apercentage of GDP declined constantly from an average of 36.8 per cent in theperiod 1990–95 to 26.6 per cent in 1995–2004. This decline was reflected in thebudget deficit as a percentage of GDP which was slashed from 22 per cent in 1990/91to 1.5 per cent in 1995/96.36 It may be true that the budget deficit started to pick upin the second half of the 1990s but this was due to the decline in revenues ratherthan the increase in expenditure which remained almost flat through 2005 and farbelow the level of the early1990s.37 Overall, the average percentage of the budgetdeficit in the period 1991–2004 hovered around 4 per cent. The fact that stateincumbents could survive politically while distributing less, reveals that they weresubject to less pressure to retain power.

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Less pressure to maintain political power was revealed further in post-1990external debt management. Following the massive debt relief of the early 1990s,according to which almost 50 per cent of the external debt was cancelled, theabsolute value of external debt stock remained almost constant around US$30billion with an average zero per cent growth for the period 1993–2007.38 Figure 3shows the ever decreasing share of external debt stock as a percentage of total GDP.Strikingly, external debt service as a percentage of exports consistently declinedthrough the 1990s despite export stagnation. The ratio of debt service to exportsdecreased from15.6 per cent in 1993 to 9.6 per cent in 2000 and further to 5.6 per centin 2006 and 6.2 per cent in 2008/09.The conscious refrain from debt-financing39

through the 1990s relieved the state of dependency on a positive export performanceto secure credit worthiness and foreign currency earnings needed for debt serviceand thus added a new disincentive for export expansion and restructuring.40

In his authoritative study, Soliman attributed Mubarak’s regime survival to thesuccessful security-oriented fiscal management where the regime kept targeting thestate bureaucracy as well as broader categories of the urban poor providing themwith minimal subsistence.41 Mubarak’s regime has been focusing on supplying theminimal income to state bureaucrats as the main bases of the regime, even if theirsupport becomes confined to a passive form through refraining from opposition. TheEgyptian bureaucracy kept expanding in the post-1990 years42 and the share ofwages sustained its expansion from 23.98 per cent of total expenditure in 1990/91 to30.57 per cent in 1997/98 and maintained that level until 2006 (28 per cent).43 Theaverage share of wages in total expenditure stood at an average of 23.57 per cent inthe period 1990–2007 and at almost 30 per cent of total current expenditure of thesame period.

Direct subsidies primarily targeting the urban poor through food provisions keptdeclining as a percentage of total expenditure from 12.23 per cent in 1990 to 5.23 percent in 2000. The regime undertook contractionary measures without arousing anypopular reaction similar to the earliest subsidy cut in 1977 which caused thenotorious riots. Coupling the provision of subsistence with systematic repression wasinstrumental in depoliticizing the broader constituencies of public sector workers,bureaucrats and the urban poor. Such a formula was aided by falling inflation ratesthrough the 1990s as compared to the 1980s which offered a truce to wage-earners ingeneral and state workers in particular.44

Figure 3. Macroeconomic indicators (1990/91–2008/09).Source: Central Bank of Egypt.

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In the absence of viable competition for office, the post-1990 Egyptian regimecould depend solely on passive support. Mubarak’s regime, not unlike itspredecessors since the 1952 military takeover, was made up of a tight-knit innercircle of a few rule-makers from military, security and intelligence backgrounds whowere usually placed within the entourage of the president.45 Apart from this innercircle of state incumbents, there lay a broad coalition of beneficiaries which variedfrom middle peasants, students and unionized labour under Nasser (1954–70) to astronger presence of private business under Mubarak (since 1981). Presidents havebeen tenured for life through re-election for an unlimited number of terms.According to the 1971 constitution, the presidential office did not depend on directelections until the constitutional amendments of 2005. Rather, it was subject toindirect nomination and election by the People’s Assembly which has always beenfirmly controlled by the government’s single party and made up of therepresentatives of the main beneficiaries of state patronage.

Presidential elections have been subject to prohibitive restrictions to the extentthat none of Nasser (1954–70), Sadat (1970–81) or Mubarak (1981–2005) has everrun in multi-candidate elections. Given the constitutional and extra-constitutionalguarantees of life-long tenure in the presidential office, mobilizing active support hasnever been a question of power retention. Instead, avoiding large-scale upheavalsthrough riots, coups and other forms of commotion was often the concern.

Resort to repression in the 1990s was decisive for regime survival in two respects:the first and most important was the successful crushing of militant Islamists aftera relatively brief struggle (1993–97); the second was politically-mediated repressionwith the aim of limiting the capacity of the opposition to organize, compete inelections and extend its popular bases. In both ways, security became an increasinglyimportant instrument for the Egyptian regime’s survival. A good proxy for tightersecurity control is the rising ratio of security expenses to total GDP which keptrising from 3.5 per cent in 1987 to almost 4.8 per cent in 1997 and police personnelfrom 9 per cent of total government employees to 21 per cent during the sameinterval.46

As for the first instance, the gravest threat to regime survival in the 1990s wasposed by armed Islamist movements and mainly by the two groups of Al-Jihad andAl-Jammaa Al-Islamiyya. Even though their violent engagement with the state canbe traced back to the 1980s, their attacks came in earnest between 1993 and 1997.The wave of political violence included assassination attempts on political figuresand frequent targeting of the police and tourists. The regime refused to negotiatewith any of the groups and assumed solely a security crackdown strategy that wassingle-handedly successful in bringing the militants to their knees in a rather shortperiod of time. The quick and decisive victory the regime achieved on armedIslamists in the 1990s without resort to any political compromise proved theefficiency of repression and relieved incumbents from further pressures.

As for politically-mediated repression, given the restrictions imposed on politicalparticipation and the demobilization measures, the regime could reduce its need foractive support to a minimum. However, it could not eliminate it totally.Parliamentary elections, especially of the lower chamber or the People’s Assembly,remained an arena of contestation between the regime and its rivals. Since the time ofNasser, the regime depended on a single party which dominated the legislature

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and which was made up of representatives of the beneficiaries of state patronage.The primacy of a single party endured despite the introduction of multi-partyismfrom 1974. Under Mubarak, the National Democratic Party (NDP) remained asingle party almost merged with the state bureaucracy and controlling theoverwhelming majority of seats in the parliament (often above 80 per cent).

The endurance of such a structure through the 1990s depended greatly on thefrequent resort to repression and the reconfiguration of the regime’s patronagenetworks. Political life in Egypt was run under emergency law from 1981 whichafforded the regime a broad margin to employ security measures for political ends.The biggest opposition group, the Muslim Brotherhood, remained banned, anddespite the de facto participation of its members in parliamentary elections asindependents, they remained subject to harassment, arrest, military trials andimprisonment. Political restrictions on association and expression limited the basesof legal political parties, which remained by and large decorative. Moreover,parliamentary elections were subject to open security intervention against oppositioncandidates to secure the NDP a majority.

Repression was necessary but not sufficient. Ruling incumbents reconfigured theirpatronage networks and redefined the beneficiaries to be included in the NDPmembership through the 1990s. The decay in the regime’s ‘political purchasingpower’, as labelled by Soliman,47 led to an inability to maintain the broad networksof clientelism and patronage on which the regime had depended in the 1970s and1980s to mobilize, albeit restricted, active support. The solution was found inoutsourcing patronage through incorporating private capital holders into the NDPparliamentary majority. Privileged access to state patronage has been the only meansto attract private capital holders to join the ranks of the regime mainly throughwinning seats in the parliament as members of the ruling NDP.48 Private capitalholders made use of personal benefits like parliamentary immunity, favourableaccess to public bank credits and public procurement contracts.

During this process, private capital holders compete with each other within theruling NDP as well as outside of it as independents with the legal option of joiningthe NDP after being elected. Through these ‘independent members to be’, the NDPmanaged to secure a sweeping majority in the 1995, 2000 and 2005 parliamentaryelections. The weight of these independent/NDP members has been considerable,rising from 100 MPs in 1995 to 207 in 2000 and stood at 161 in 2005 out of a totalof 444.

By bidding capital holders to compete for state patronage, the regime couldemploy privately accumulated capital belonging to its adherents to cultivate patron–client networks by proxy among the electorate and thus secure a parliamentarymajority. Campaign spending is one indicator. Soliman underscored the much higherexpenditure on electoral campaigns, in 2000 being the highest in modern Egyptianhistory. The 2005 elections witnessed ever higher expenditure estimated at LE5 billion (the equivalent of US$1 billion).49 It is noteworthy that inflated campaignexpenditure went simultaneously with the increasing share of businessmen inparliamentary seats, which rose from 12 per cent in 1995 to 17 per cent in 2000 and22 per cent in 2005.50

In this setting, not only could the regime secure a parliamentary majority, but itcould also individually incorporate and co-opt big private capital holders. Despite

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their overall financial weight, these capital holders have constituted a heterogeneousgroup and have been bitterly competing to join the ranks of the NDP asparliamentary representatives. Individual incorporation ensured that the increasingpresence of capital holders in the legislature would not be translated into rule-making capacity, which in fact remained dominated by the executive. Moreover,individual cooptation of capital holders has had two serious implications for theruling regime.

First, the reproduction of the ruling regime necessitated that throughout economictransformation societal groups be kept in a position of mere beneficiaries rather thanpartners in policy-making,51 i.e. exclusive control of the pace and scope of transitionserving the political stability of the regime. This may explain why the regime, whileaccommodating individual interests of capital holders, levied many restraints on theprivate sector collective forms of organization and representation in the post-1990years.

Second, through incorporating private capital holders into the regime networks ofpatronage, the interests of the most affluent and willing to engage in public actionbecome deeply embroiled in the regime’s power structures. This is expected to reducetheir demands for regime change in addition to neutralizing their potential to joinopposition movements or parties.

It has been shown hitherto that the ruling incumbents during the 1990s couldadapt to the decline in external rents through cutting expenses, resorting torepression and outsourcing patronage to adherents from amongst private capitalholders. The ability of the regime to adapt to its fiscal crisis discouraged theincumbents from bearing the economic and political costs of erecting extractivecapacities to raise tax revenues which added to the disincentive to develop andrestructure exports. How did underdeveloped extractive capacities negatively impactthe export drive in 1990s Egypt?

Despite the sheer decline in state revenues owing to decreasing rents, no taxreform was seriously pursued prior to 2001.52 With persistently weak extractivecapacities, state incumbents have had little stake, directly and in the short-term, inthe generation of either economic growth or export diversification and expansion.The share of taxes in total revenues did not increase considerably, remainingbelow 70 per cent throughout the whole period, and averaging 65 per cent between2001 and 2006 as compared to 61 per cent between 1990 and 2000 which reflectslittle change. Moreover, it declined to 57 per cent in 2008/09.53 Over and above, ifthe share of oil and the Suez Canal in total taxes is considered, changes inextractive capacities become significantly undermined, indicating the absence of anysignificant development in the dependency of the state on productive revenues-bases. Figure 4 shows some state revenue-related indicators.

The decline in external rents in the 1990s took its toll on state revenues and totalexports as the first declined roughly from 30 per cent in 1990 to 20 per cent in 2004.As late as 2008/09, the ratio of revenues to GDP had not surpassed that of the early1990s. Meanwhile, the other was contracting at a rate of –2.6 per cent in the period1990–2000. However, little state capacity building has taken place in either area toextract more resources from the economy or to diversify exports. Throughout thatperiod, it was less costly for the ruling regime to cut expenses and refrain fromforeign borrowing.

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The regime’s strategy of ‘subsistence politics’ seemed to have touched its limits in2005/06 as political survival became more costly. Distributional claims on stateresources considerably intensified, primarily by the traditional ‘silent bases’ of theregime: public sector workers and civil servants together with some sections of theurban poor and private sector workers. There are several indicators that demonstratethe rising distributional pressures on the state treasury in the 2000s as compared tothe 1990s:

1 The budget deficit started to pick up from the mid-1990s. However, it remainedbelow 4 per cent of GDP until 2000, rose to almost 6 per cent in 2001 andapproached 8 per cent in 2002.54 According to the Central Bank statistics, theoverall deficit averaged 9.23 per cent for the period 2001–06 approaching the pre-SAP rate. The widening deficit resulted from declining state revenues andincreasing expenditure; expenditure as a percentage of GDP averaged 30.8 percent for the period 2001–06 as compared to 26 per cent for 1995–2000;55

2 The deficit was mainly financed by an ever increasing domestic debt that grewexponentially from 72 per cent of total GDP in 1999 to 86.4 per cent in 2001/02and later to a staggering 89.8 per cent in 2002/03.56

The rise in expenditure was mainly fuelled by the increasing burden of wages andsalaries on the one hand, and subsidies on the other. Both venues of expenditurehave been used to appease broader popular constituencies as mentioned in theprevious section. Whereas the share of wages remained relatively constant, subsidiesalmost doubled from 16.52 per cent in 2004 to 30.82 per cent in 2007 and 35.49 percent in 2008. Their combined share averaged 53.61 per cent of current expenditurefor the period 2004–09 as compared to 37 per cent for the first period. Table 1 showssome trends.

The ratio of total subsidies to GDP increased from 1.5 per cent in 2000/01 to7.9 per cent in 2006/07 exceeding their value in 1990 (3.3 per cent) upon inception ofthe SAP. Subsidies went principally to energy and food products that both directlyand indirectly supported the livelihood of broad constituencies of consumers. Thebulk of subsidies covered energy products: their share totalled 77 and 74 per cent in2005 and 2006 respectively. Subsidized bread occupied the second position with

Figure 4. State revenue-related indicators (1991/92–2008/09).Source: calculated from the CBE time series.

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11 and 14 per cent in 2005 and 2006 respectively.57 In absolute terms, subsidiesincreased by a massive 424 per cent between 2003/04 and 2006/07.

The geometric increase in the share of subsidies since 2003/04 was primarilytriggered by an unprecedented wave of protest since the 1940s58 amid increasinginternational energy and food prices. Protests assumed a multiplicity of formsranging from strikes, sit-ins, demonstrations and riots. They were undertaken bylabour, civil servants and professionals in the state service sectors ranging fromphysicians and pharmacists to university professors. The driving force behind thevast majority of these protests was the demand for increases in wages, salaries andbonuses.59 The wave of strikes gained momentum in 2005. Between June 2005 andMay 2006 there was a 25 per cent increase in the number of labour protests, jumpingfrom 198 to 250.60 Labour protests continued with vigour through 2007; a three-daystrike organized by spinning and weaving workers at one of the biggest public sectorfactories employing 27,000 workers lasted for three days, marking the biggest labourstrike since 1994.61 Figure 5 provides a general view of the rising trend of protestsince 1998.

As compared to 1998, the number of protest activities increased 400 per cent by2008. Despite the fact that these protests were undertaken by a broad variety ofsocietal actors, there has been an overwhelming representation of state workers, bethey public sector workers or civil servants. For instance in 2007/08, 66 per cent oftotal protest was undertaken by state workers as compared to 34 per cent by privatesector workers. As shown in Figure 6, the share of state workers in total protestreached 66 per cent between 2007 and 2008. The share of state workers does notseem to have varied much through previous years.62

The rising trend of distribution-related protest has had three deep implications forthe incumbents’ retention of political power:

1 The exponential increase in the number of protests, demonstrations and sit-ins inthe interval between 2004 and 2009 has been unprecedented under anauthoritarian regime that has dealt heavy-handedly with forms of collectiveorganization. The rise in protests came in a context where labour strikes and sit-ins were outlawed unless they were called for by the state-controlled EgyptianTrade Union Federation (ETUF), while being illegal under any circumstance forcivil servants. Furthermore, Egypt has been under emergency law since 1981,according to which demonstrations and strikes together with many other formsof collective action have been severely restricted;

Table 1. Comparative figures of the share of wages and subsidies in total expenditure (%).

Indicators Average (1990–2000) Average (2004–08)

Wages and salaries 20.76 21.07Subsidies 7.73 27.05Total 28.49 48.12

Sources: Data for (1990–2000) from Central Bank of Egypt; data for (2004–09) from theMinistry of Finance.

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2 As Figure 6 shows, the majority of protests were performed by civil servants andpublic sector workers which constituted the two largest quiescent constituenciesof the regime through the 1990s. Increasing inflation and the rapid deteriorationof real wages have dealt a blow to the regime’s attempt to deliver minimalsubsistence levels in return for passive opposition or support. The same applies tobroader strata of the urban poor who have depended on food subsidies and werebelieved to have triggered the 6 April riots at the industrial centre of Al-Mahalla

Figure 5. General indicators of protests (1998–2008).Source: Awlad Al-Ard Centre, visited on 16 November 2009.

Figure 6. Distribution of labour protest (2007–08).Source: Calculated from Awlad Al-Ard.

Figure 7. Average consumer prices in Egypt (1992–2009).Source: http://www.indexmundi.com/egypt/inflation_rate_(consumer_prices).html

(IMF: Average consumer prices).

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Al-Kubra in 2007. According to Soliman, low inflation rates in the 1990s offeredwage workers ‘a truce that they badly needed’.63 However, by 2004 inflation ratesincreased considerably assuming new heights and approaching the pre-1992 levelprior to the embarking on SAP.Higher inflation rates took their toll on the meagre real wages of civil servants

and public sector workers together with other poorer groups, especiallybecause food prices were among the hardest hit due to the global food crisis(2007–08).

3 Despite the fact that distributional claims on state resources were the drivingforce behind labour protests in the 2000s, that coincided with a rise in politicalprotest and opposition. In 2003, the first protest movement in post-1952 Egypt,Kefayya, the Arabic word for enough, came to being, calling on Mubarak to stepdown. In the 2005 parliamentary elections, the Muslim Brotherhood (the biggestopposition movement) won 88 seats or the equivalent of 20 per cent. Even thoughlabour protest remained by and large separated from political organizations dueto security restrictions and repression,64 the coincidence of both was no doubtalarming for the regime.

In sum, the 2000s witnessed a rising protest movement from amongst the very‘silent constituencies’ of the regime a decade earlier. These movements were triggeredby distributional demands and claims on state resources and coincided with risingpolitical opposition. Both seemed to intersect in the call for a national strike on6 April 2007, synchronizing with an earlier intended public sector workers’ strike atAl-Mahalla Al-Kubra. Even though the national strike was aborted, demonstrationsat the industrial centre escalated into rioting in which three protestors were killed.Those riots were the first since 1986 and the third since 1952.

The ruling regime had to appease these constituencies. On Labour Day, 1 May2007, less than a month after the riots, Mubarak announced, in person, a 30 per centraise for civil servants and public sector workers. The raise was unprecedented as itmore than doubled the average figure of 10 or 15 per cent for previous years.65

Institutions are not perfectly adjustable to changes in their external environment.Even if long-term dependency on external rents weakens the state capacities toregulate, reorient and monitor the economy, a drop in these rents does not implyspontaneous state capacity building. Rather, what matters most in institutionbuilding is how the key contenders, state incumbents in this regard, manage theimpact of the decline in rents on their strategies to attain and retain politicalpower.

The institutional features of ruling regimes through which incumbents holdpolitical power determine the extent to which falling rents adversely impact on theincumbents’ chances of survival. Since 1990, Egyptian incumbents have capitalizedon the frequent resort to repression and limited political competition in order tocontain the repercussions of the decline in external rents. They managed to survive ata low cost through buying passive acquiescence from broad and unorganizedconstituencies. The end result was a lack of incentives and settling at a low/lowequilibrium where rents kept declining, exports were not restructured yet theincumbents remained in office.

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Notes

1. T. Besley and T. Persson, The Origins of State Capacity: Property Rights, Taxation and Politics

(Working paper no.13028, Cambridge, MA: National Bureau of Economic Research, 2007);

R. Schwarz, ‘The Political Economy of State-Formation in the Arab Middle East: Rentier States,

Economic Reform, and Democratization’, Review of International Political Economy, Vol.15, No.4

(2008), pp.599–621; T.L. Karl, The Paradox of Plenty: Oil Booms and Petro-States (Berkeley:

University of California Press, 1997); K.A. Chaudhry, The Price of Wealth: Economies and Institutions

in the Middle East (Ithaca, NY: Cornell University Press, 1997).

2. S. Soliman, Aldawla al daeefa wal nizam al-qawi, Idarat al azma al maleya fi misr [The Weak State and

Strong Regime: The Management of the Financial Crisis in Egypt] (Cairo: Dar Meret, 2005), p.62.

3. IOGA, History of Illinois Basin posted crude oil prices http://www.ioga.com/Special/crudeoil_

Hist.htm (accessed 14 Oct. 2009).

4. Ministry of Petroleum, http://www.petroleum.gov.eg/MinistryMinisterStudies.aspx.

5. Ibid.

6. Soliman, Aldawla al daeefa.

7. Central Bank of Egypt, Time Series, http://www.cbe.org.eg/timeSeries.htm (accessed 10 Oct. 2009).

8. R. Springborg, ‘Gas and Egyptian Development’, in R. Looney (ed.), Handbook of Oil Politics

(London: Routledge, 2010), p.2.

9. Figures calculated from the Central Bank of Egypt, Time Series.

10. Soliman, Aldawla al daeefa.

11. Springborg, ‘Gas and Egyptian Development’, p.11.

12. World Trade Organization, Time Series.

13. Springborg, ‘Gas and Egyptian Development’, p.11.

14. The average share of fuel and mineral exports was 59 per cent for the 1980s, 47 per cent for the 1990s and

41 per cent for the 2000s. WTO, World Trade Organization, Time Series on International Trade, http://

stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language¼E (accessed 13 Feb. 2009).

15. R. Springborg and H. Clement, Globalization and the Politics of Development in the Middle East

(London: Cambridge University Press, 2001).

16. S. Soliman, State and Industrial Capitalism in Egypt, Cairo Papers in Social Science, Vol.21, No.2

(Cairo: The American University in Cairo Press, 1998).

17. G. Abdel-khalek, Stabilization and Adjustment in Egypt: Reform or De-industrialization (Cheltenham,

UK and Northampton MA: Edward Elgar, 2001).

18. World Trade Organization, Trade Country Review 2003.

19. Ministry of Industry and Mineral Resources, Nashrat Al-Intag Al-Sinaii [Industrial Production

Bulletins], 1994, 1998, 2004).

20. F. Ibrahim. Former Minister of Industry. Phone interview conducted by the author, 18 Aug. 2008,

Cairo.

21. H. Beblawi and G. Luciani (eds.), The Rentier State in the Arab World (London: Croom Helm, 1987),

p.51.

22. Soliman, Aldawla al daeefa.

23. G. Luciani, ‘The Oil Rent, the Fiscal Crisis of the State and Democratization’, in G. Salame (ed.),

Democracy without Democrats: The Renewal of Politics in the Muslim World (London and New York:

I.B. Tauris, 1994); Soliman, Aldawla al daeefa; Beblawi and Luciani, The Rentier State in the Arab

World.

24. Karl, The Paradox of Plenty.

25. R.F. Doner, B.K. Ritchie and D. Slater, ‘Systemic Vulnerability and the Origins of Developmental

States: Northeast and Southeast Asia in Comparative Perspective’, International Organisation, Vol.59

(2005), pp.327–61; Besley and Persson, The Origins of State Capacity; Swartz; Karl, The Paradox of

Plenty, p.26 J. Knight, Institutions and social conflict (Cambridge and New York: Cambridge

University Press, 1992), p.24.

26. Schwarz, ‘The Political Economy of State-Formation’.

27. P.A. David, ‘Path Dependence and the Quest for Historical Economics: One More Chorus of the

Ballad of Qwerty’ (University of Oxford Discussion Papers in Economic and Social History, 1997),

p.40.

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28. B. Amable, The Diversity of Modern Capitalism (New York: Oxford University Press, 2003), p.42.

29. A. Kohli, State-directed Development: Political Power and Industrialization in the Global Periphery

(Cambridge and New York: Cambridge University Press, 2004), p.8.

30. R. Doner et al. ‘Systematic Vulnerability and the Origins of Developmental States’, pp. 327–61.

31. C. Tilly, Coercion, Capital and European States, AD990–1992 (Cambridge, MA and Oxford:

Blackwell, 1992); Karl, The Paradox of Plenty.

32. M.D. Shafer, Winners and Losers: How Sectors Shape the Developmental Prospects of States (Ithaca,

NY and London: Cornell University Press, 1994).

33. Karl, The Paradox of Plenty.

34. Shafer, Winners and Losers.

35. Karl, The Paradox of Plenty, p.57.

36. Abdel-khalek, Stabilization and Adjustment in Egypt, p.117.

37. In the absence of external debt financing and low tax revenues, the Egyptian government relied

primarily on domestic debt to finance the budget deficit. Domestic debt stock soared from 54.49 per

cent of total GDP in 1990/91 to 85 per cent in 2007 with an average annual increase of 13 per cent. The

main source of domestic credit has been the National Investment Bank using deposits of pension and

social security funds on which management the State keeps a monopoly.

38. Central Bank of Egypt, Time Series.

39. The president’s verbal instruction to keep external loans within the limits of the annual debt

service.

40. In the absence of external debt financing and low tax revenues, the Egyptian government relied

primarily on domestic debt to finance the budget deficit. Domestic debt stock soared from 54.49 per

cent of total GDP in 1990/91 to 85 per cent in 2007 with an average annual increase of 13 per cent. The

main source of domestic credit has been the National Investment Bank using deposits of pension and

social security funds on which management the state keeps a monopoly.

41. Soliman, Aldawla al daeefa, p.79.

42. The number of employees in the government bureaucracy increased from 3,948,000 in 1990/91 to

5,657,583 in 2007/08 (Ministry of Administrative Development).

43. Central Bank of Egypt, Time Series.

44. Soliman, Aldawla al daeefa.

45. R. Springborg, Mubarak’s Egypt: Fragmentation of the Political Order (Boulder, CO: Westview Press,

1989).

46. Soliman, Aldawla al daeefa, p.84.

47. Ibid., p.245.

48. S. Soliman, Al Musharaka alseyaseyya fi alintikhabat alneyabeyya 2005 [Political Participation in the

2005 Parliamentary Elections] (Cairo: Algamiyya almisriyya lilnohoud belmusharaka almogtamaeyya

we mufawadeyat elitihad alurobi, 2006), p.85; E. Kienle, A Grand Delusion: Democracy and Economic

Reform in Egypt (London and New York: I.B. Tauris, 2001).

49. Alreyadh, 25 Oct. 2005, no.13637.

50. Soliman, Al Musharaka alseyaseyya, p.85.

51. N. Ezeldin, Al-Ommal wa Rigal Al-Aamal: Tahawolate Alforass Al-seyasseyya fi Misr [Workers and

Businessmen: The Changes in Political Opportunities in Egypt] (Cairo: Markaz al-Ahram

lilderassat al-seyasseyya wal strategeyya, 2003), p.303; Soliman, Aldawla al daeefa; Kienle, A

Grand Delusion.

52. Soliman, Aldawla al daeefa.

53. Central Bank of Egypt, Time Series.

54. Soliman, Aldawla al daeefa, p.63.

55. Central Bank of Egypt, Time Series.

56. Soliman, Aldawla al daeefa, p.64.

57. Information and Decision-making Support Centre (IDSC), Report No.13, Al-Da’m Adat Litahkik

Al-Adala Al-Ijtimaeya, 2008, p.7 (in Arabic).

58. J. Beinin, Egyptian Workers, 2004–08: A New Kind of Social Movement on the Margins of the Neo-

liberal Order? (Paper presented at the Mediterranean Program 10th Mediterranean Research Meeting:

Workshop on Social Movements in the Middle East and North Africa, Florence, Montecatini Terme,

Italy, 25–28 March 2009).

59. BBC Arabic, 26 Dec. 2007, http://www.bbc.co.uk/arabic/ (accessed 16 Nov. 2009).

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60. Almasri-alyoum, No.687, 1 May 2006, http://arabic-radio-tv.com/newspapers/egypt/almasry-alyoum.

htm (accessed 16 Nov. 2009).

61. Aljazeera, 5 Feb. 2007, http://aljazeera.net/portal (accessed 16 Nov. 2009).

62. Beinin, Egyptian Workers, p.22.

63. Soliman, Aldawla al daeefa, p.187.

64. Beinin, Egyptian Workers.

65. BBC Arabic, 30 April 2008, http://www.bbc.co.uk/arabic/ (accessed 16 Nov. 2009).

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