How Anwar Sadat’s Open Door Policy Integrated Egypt into Developed Market Economies
LONDON: In the winter of 1973, Anwar Sadat was enjoying his time in the sun. He was “batal al-ubur” – the “hero of the crossing”. The 1973 war against Israel was a huge propaganda success, no matter how much different the reality is from how the Egyptian media portrayed it.
After years of planning, the Egyptian army had successfully crossed the Suez Canal, catching the Israeli army unawares. National pride had been restored and the Egyptian public had bestowed a new title on Sadat.
But with us, Sadat’s problem was the state of the economy. The expectations of the Egyptian public were high after the military victory; the confrontation with Israel could no longer be used as an excuse for all the hardships they suffered.
The defeat of the 1967 war six years earlier had nearly bankrupted Egypt and seriously damaged the industry. Both inflation and external debt were high.
During his 14 years in power, Sadat’s predecessor Gamal Abdel Nasser had courted and won the support of the Soviet Union.
Together, Nasser and the Russians built the Second Aswan Dam, a project intended to launch Egypt on the dual track of industrial and agricultural development.
The ambitions had not been fully realized. The early years of the dam project were hit by youthful problems. Land downstream of the dam has been affected by increased salinity and waterlogging.
When Sadat took power after Nasser’s death in 1970, the economy was still run according to the dictates of central planners.
Commodity prices were controlled and investments in projects were centrally dictated, resulting in widespread shortages and waste.
Egypt’s young population stood at 34.5 million, with growth rates of around 2.5%.
The economy has been hampered by low levels of productivity, a lack of proper education and a consequent shortage of skilled workers. Farmers were told what to plant. In today’s terminology, price indicators were not effective.
Other problems persisted. One of Nasser’s legacies was the creation of a huge public sector and an overregulated state economy, mimicking the Soviet Union.
It had opened up higher education to all and guaranteed a job for every graduate without worrying too much about the quality or relevance of the training.
University graduates flocked to ministries, municipalities and state-controlled businesses where security of tenure was guaranteed. This has resulted in low levels of productivity associated with a tendency to hamper innovation and entrepreneurship.
Nasser had also orchestrated the emigration of large communities of artisans, craftsmen and small Italian and Greek traders, the mutamasriyun.
While the reforms of the 1950s had shattered the power of the big landowners, these smaller players had been alienated by the state, which seized their property.
Between 1962 and 1964, for example, all land owned by foreigners was expropriated. The Jewish community had also practically fled the country in the 1950s.
The result of the exodus was a collapse of municipal and other services and an absence of skilled workers in the public sector and in public services such as electricity supply.
Sadat had never been afraid of a challenge and liked the dramatic gesture. He had worked as a spy for the Germans during World War II against the British, then had been Nasser’s deputy. He decided to break with his predecessor by reopening Egypt to foreign investment.
This was the infitah – or openness – also known as open door economic policy. It was a package of liberalization measures linked to some political easing.
The policy involved a rejection of close ties with the Soviet Union, the establishment of closer relations with the United States and the Arab Gulf States, and the removal of the military from the economy.
After Nasser’s death, Sadat foreshadowed the reforms with a national action plan in 1971 and, by 1972, expelled thousands of Soviet military advisers.
In 1974 he promulgated a new investment regulation called Law 43. Tariffs were lowered and foreign banks were encouraged to return to the country. Sadat rolled back some of the confiscations of private property.
The main objective of the new law was to attract Arab and foreign investment capital. To this end, it created a new organization, the General Authority for Investments and Free Zones, under the aegis of the Ministry of the Economy.
According to Hadi Salehi Esfahani’s The Experience of Foreign Investment Under Infitah, the law provided incentives and included a promise to refrain from nationalization and confiscation of invested capital, except through legal proceedings. It exempted investors from a number of labor regulations; it granted an exemption of five to eight years from income tax; allowed a suspension of the payment of customs duties and allowed importation without a license.
The results were mixed, but the trajectory of the Egyptian economy was on the rise. According to “Egypt’s Development In the 1970s,” by Henry Bruton, private investment under Law 43 was slow at first, and did not reach 100 million Egyptian pounds ($ 6.6 million) until 1979. Investment was heavily concentrated in sectors such as banks, design offices, fast food restaurants and construction.
However, GDP growth rates reached 8-10% per year during the 1970s and the balance of payments developed favorably. Cotton and rice yields have increased significantly.
Towards the end of the decade, Egypt was aided overwhelmingly by a relatively sudden injection of foreign exchange as large oil and gas fields entered service and were monetized.
The economy was also supported by increased financial assistance from the United States, revenues from the Suez Canal, and the start of the Egyptian tourism industry. The canal had been closed in 1967 but Sadat reopened it in 1975. Revenue from ships passing through the canal began to flow to the Egyptian state.
The Gulf states have also opened up to Egyptian labor as their oil and gas reserves flowed in. It turned out to be a kind of double-edged sword for Sadat.
Many skilled and educated Egyptians chose to migrate to take advantage of the higher wages offered in the Gulf states and elsewhere. On the positive side, workers began to send money back, as they still do today.
Remittances rose from zero in 1971 to over $ 2.2 billion in 1979, according to official figures, but were likely higher if informal transfers are included.
The combination of workers’ remittances, oil and gas revenues, Suez Canal revenues and tourism revenues propelled foreign exchange reserves to $ 2.5 billion in 1980 from less than $ 0.5 billion in 1972.
But the budget deficit has swelled, inflation has skyrocketed, imports have increased dramatically, and income disparities have widened. Defense spending remained a heavy burden.
In 1977, the Central Bank began printing 20 pound notes. In 1979, the pound was devalued and then lost almost half of its value, for the first time falling below parity with the pound sterling.
In addition, the World Bank and the International Monetary Fund were mandating an end to the subsidies on basic foodstuffs which were a major cause of the persistent budget deficits.
In 1977, Sadat announced price increases for flour, rice and cooking oil at the behest of the World Bank. This caused massive riots by the poor Egyptians.
Most of the major Egyptian cities have been hit by violence. More than 70 people have died. Fear of provoking similar levels of riots has gripped the Egyptian ruling classes ever since.