A Comparison in the Political Economy of Development between Egypt and South Korea, 1960-2013Ahmad Nassar

ContentsFrom Import Substitution to Export Promotion.........................2The South Korean Model Under Pressure................................6

The Asian Flu and the IMF Bailout....................................7Recovery and Expansion...............................................8

Nasserist Economics in Egypt........................................10Al-Infitah and Anwar Sadat..............................................14

Mubarak’s Reign, 1981-2011..........................................15Seeds of Unrest and the 2011 Revolution.............................17

Differences between Egypt and South Korea...........................19Works Cited.........................................................22

The Egypt of today is reminiscent of the South Korea of the

1970s and 1980s. During this time period, South Korea was

suffering from military dictatorship that was heavily supported

by the US government. As both nations were late to industrialize,

they had experimented heavily with import substitution and

protecting infant industries with ruinous consequences. They also

implemented liberalizing reforms recommended by the IMF that lead

to crises as well. However, South Korea has been more successful

at adapting policies to fit its national agenda and this is

evidenced by its relative stability and almost uninterrupted

growth for the last two decades. In 1960, the GDP per capita for

South Korea was $155 and its population was 25 million people

according to the World Bank. At the time, Egypt’s GDP per capita

was $149 and its population was 27 million people. By 2012 South

Korea’s GDP per capita had grown to $16,684 and its population

had increased to 50 million people. Egypt at this time had a per

capita GDP of only $1,976 and its population had mushroomed to 82

million people.

The causes for this disparity will be explored in detail.

From Import Substitution to Export Promotion

In May 1961, the democratically elected government was

overthrown by General Park Chung Hee who ruled until his

assassination in 1979. The policies before General Park took over

included many import substitution industrialization policies that

were created to help protect the infant industries in the era

after World War II and the Korean War. The government gave

preferential interest rates on loans given to certain companies

and allowed them to buy foreign currencies. Tariff barriers were

placed and a ban on manufacturing imports was enforced to protect

local industries from global competition. As what occurred with

other nations that had sought to protect infant industries with

the hope that companies would benefit from importing advanced

technology from foreign firms, Korean industry did not improve

(Cha, 2010). Import substitution policies had increased the costs

of raw goods, making Korean exports more expensive, and

diminishing its comparative advantage. In addition to this,

Korean industrialists were more concerned with bribing officials

to perpetuate their favored status and increase profits instead

of increasing productivity and creating more jobs, an excellent

example of crony capitalism.

The widespread corruption caused living standards and

efficiency to falter, and invariably lead to the collapse of the

First Republic in April 1960. General Park Chung Hee overthrew

the Second Republic in May 1961 and replaced much, though not

all, of the import substitution policies with export promotion

(Cha, 2010). Exporting firms were rewarded with preferential

loans based on their performance, an unbiased and objective mode

of measurement. This solved the problem of corruption and vastly

increased productivity by placing firms under the pressure of

export markets.

With the slogan “Export Number One”, the Korean government

aggressively pursued a policy of export promotion starting in

1964 (Mah, 2010). The government increased export subsidies by

placing emphasis on light industries (LI), such as garments and

textiles, because the Korean economy had a comparative advantage.

By 1967, the textile industry had shared one third of all

manufacturing sectors in terms of the number of workers (Mah,

2010). Exchange rate devaluation also contributed to export

promotion. Between 1964 and 1974, the exchange rate was devalued

several times to make exports more competitive. In 1964, the

dollar was 255 won and by 1974, the dollar was worth 484 won.

The government developed land sites specifically for industrial

complexes and sold them to firms at low cost (Mah, 2010). In

1967, Korea became a ‘contracting party’ to the GATT and Korean

exports were given most-favored-nation (MFN) status.

Korea’s growth during this period is also in part due to the

government’s draconian labor policies. Minimum wages were set

much lower than market wages, labor unions could operate but had

no right to strike, wages in the public sector matched the

private sector, and multinationals did not create wage inflation.

These anti-labor reforms pushed the cost of labor down

dramatically, and helped make Korean exports competitive. The

reforms also made Korea an attractive location for foreign direct

investment because companies do not have to worry about an unruly

workforce (Alam, 1989).

The 1970s saw a return to import substitution policies to

build heavy and chemical industries (HCI). The Communist victory

in Vietnam and changing geopolitical dynamics were a considerable

factor for the Korean leadership. At the time, Nixon had

withdrawn 24,000 troops from South Korea and Carter promised to

withdraw the remainder by the next few years. Negative American

public opinion to further interventions in East Asia coupled with

Nixon’s rapprochement with China and détente with the USSR worried

the Korean leadership because it showed the US to be unreliable

in its security arrangements.

The South Korean leadership began to prepare for a time

where the US would not be the primary guarantor of protection

from North Korea. General Park turned to producing heavy weapons

domestically instead of relying on the American military for

protection (Cha, 2010). This required heavy government investment

in heavy industries and intervened greatly in the financial

markets to provide low interest loans government-selected

conglomerates that were picked to develop various HCI sectors.

The government prioritized iron and steel, non-ferrous metals,

shipbuilding, electronics, and chemical industries as the major

HCI industries (Mah, 2010). This overinvestment in HCI caused

distortions in the market and created structural issues that were

noticed in the 1970s and 1980s. These distortions include

inflation, an accumulation of non-performing loans as a result of

an inefficient banking system, and rapidly slowing growth.

The ending of import substitution came once again with

political turmoil as General Park was assassinated by the South

Korean intelligence in 1979. The succeeding regime of Chun Doo-

Hwan made attempts at taming the artificially expanded HCI sector

by de-regulating the market (Cha, 2010). By 1981, the government

had begun to start emphasizing a policy of encouraging research

and development as a means to counter the overinvested HCI

legacy. This lead to an increase in high tech electronic products

in the 1980s, and as a result export values increased

dramatically. Export values increased from $1 billion during

1962-1966 to $77 billion during 1977-1981 (Mah, 2010). The

proportion of South Koreans enjoying growth by the end of the

1970s increased, as measured by the Gini coefficient. (Cha,

2010).

The continuous growth of the Korean economy came under

threat by the political unrest in 1987. Massive labor unrest

broke out in the streets of Seoul, a consequence of the

repressive anti-labor policies instituted in the 1960s. The wages

of Korean workers was forcibly kept low to keep exports

competitive. Until the late 1980s, the hourly wage of a Korean

worker in manufacturing was 75% that of a worker in Taiwan and

80% that of a worker in Hong Kong (Minns, 2001). Between 1980 and

1983 all independent unions were dismantled, 500 journalists and

80 professors were fired, and 500 politicians were either

arrested or banned from politics entirely. On June 10, 1987

millions of Koreans marched in Seoul to protest the torture of a

female student activist at the hands of the police (Minns, 2001).

The South Korean Model Under Pressure

The government was faced with either crushing the protests

violently, or giving concessions. It chose the latter, and the

government announced that the next president would be elected

directly. After this major concession, a shift in the balance of

power between the government and the working class occurred. An

empowered working class battled the government over 3700 times in

the summer of 1987, and the number of unions tripled within two

years (Minns, 2001). The working class pressure caused Korea to

slowly lose its comparative advantage in many products. In

addition, growing protectionism in the US during the 1980s and

more competition from China and the Philippines, which had begun

to be more competitive in cheap electronics and textiles

manufacturing, threatened to undermine the progress that South

Korea had made in the past three decades (Minns, 2001).

Another major obstacle to Korean growth was the never ending

reach of the chaebol, which are giant family-owned conglomerates.

In the previous era, the government could face off with the

chaebol and win to pass necessary regulation, but by the late

1980s they had become too big to control (Minns, 2001). When the

Chun government attempted to weaken the chaebol by financing

smaller institutions, the conglomerates would just buy out the

smaller companies themselves. In other words, the chaebol had

become “too big to fail”. Contrary to the notion that

conglomerates contribute to jobs by reinvesting in the economy,

the chaebol did no such thing. Out of the land that the chaebol

owned in 1988, only 10% was earmarked for plant construction. The

rest was being held for real estate speculation. In the absence

of state oversight, the chaebol was more concerned with short-term

profit making instead of long term capital accumulation (Minns,

2001).

The chaebol had an increasingly globalized footprint by the

late 1980s. By the end of 1994, Korean companies had invested in

2650 projects overseas (Minns, 2001). As a less amount of the

chaebol were located inside the country, they became less willing

to accept restrictions from the government. The directive ability

of the state was weakened further by the liberalization of Korea

to foreign capital flow. Starting in 1981, foreign securities

firms began opening offices in Korea and foreign investments were

allowed on the Korean Stock Exchange. Over the decade,

restrictions were reduced further and by 1992 foreigners owned

11.2% of listed stocks (Minns, 2001). This liberalization of

capital, coupled with a highly leveraged corporate sector, caused

the accumulation of foreign debt and made the Korean market

vulnerable to a foreign credit crunch. Indeed, a major financial

crisis hit the Korean economy in the form of the Asian Flu of

1997-1998.

The Asian Flu and the IMF Bailout

The 1997 Financial Crisis, otherwise known as the Asian Flu,

hit the economies of East Asia. Most affected were South Korea,

Thailand, and Indonesia with contagion spreading to the other

Southeast Asian nations. The accumulation of non-performing loans

by the chaebol and the heavy expenditure on capital rather than

production was a cause for alarm. The outward orientation of the

South Korean economy worked to its disadvantage in this case.

With the Japanese yen depreciated and a decrease in the price of

semiconductors, Korean export revenue decreased dramatically.

With the US economy recovering from a recession, former Federal

Reserve Chairman Alan Greenspan increased interest rates, causing

a shift of capital out of South Korea to the United States. The

effect of these events would not have been so adverse had it not

been for the heavily leveraged chaebol. By 1996, the 20 largest

chaebol had begun showing returns below the cost of the loans they

had borrowed. In 1998 alone, the top five chaebol laid off over

80,000 workers and the unemployment rate had risen to 8.5% by

January 1999 (Minns, 2001).

The liberal economic reforms undertaken by the Korean

leadership ironically lead to a desperate plea for an IMF

bailout. In one of the largest IMF bailouts in history, the

Korean economy was injected with $57 billion in December 1997,

with another $10 billion to follow (Minns, 2001). In return, the

developmental state was dismantled almost entirely as per the

requirements of the IMF bailout. The complete opening of the

South Korean market to foreign goods and investors, the removal

of state controls on business borrowing, and a change in the law

to facilitate the sacking of hundreds of thousands of people

throughout industry were the changes required by the IMF (Minns,

2001). In 1997, the Korean economy was ranked as the 11th largest

in the world and its GNP was $500 billion. By 1998, its ranking

had dropped to 17th place and its GNP had sunk to $312 billion

(Minns, 2001). The national debt-to-GDP ratio more than doubled

in less than a year, from 13% to 30%, a rate at which it has been

at ever since.

Recovery and Expansion

In spite of the harsh conditions imposed by the IMF, the

Korean economy recovered from the crisis and continued to grow.

As a result of the crisis, the Korean won had depreciated

greatly, thus exacerbating the crisis further. Before the crisis,

the dollar was worth 800 won and after the crisis this plummeted

to 1700 won (Minns, 2001). The stabilization of the currency

market was aided by short-term debt rescheduling, the IMF

bailout, and the collapse of import demand resulting from a tight

monetary policy which severely reduced domestic economic activity

(Koo & Kiser, 2001). The IMF bailout forced the Korean Central

Bank to increase interest rates to combat capital flight, and

this was eased after the currency market stabilized.

The banking sector was stabilized through the

nationalization of Korea National Bank and Seoul Bank. To prevent

further capital flight, the government guaranteed full deposits

for all financial institutions. The combination of these two

policies helped prevent a run on the banks. This was performed

entirely with public funds, despite the IMF’s recommendation that

private capital be used. The government institution Korea Asset

Management Control (KAMCO) used public funds to purchase the

nonperforming loans and this gave the government a larger role in

the decision-making processes of many financial institutions. The

government pressured these financial institutions to lend money

to small and mid-size businesses to help generate growth (Koo &

Kiser, 2001). Changes in the Korean labor laws helped save many

firms that would not have otherwise survived. The government, big

business, and labor groups reached an agreement that legalized

the use of temporary labor and codified layoffs. This signaled

that labor groups were flexible and willing to negotiate.

However, unemployment shot up and the share of workers working in

manufacturing decreased more than 10% in the two years between

1997 and 1999 (Koo & Kiser, 2001). With a history of labor

unrest, the labor reforms surprisingly were accepted without any

major opposition by the unions; perhaps, this is because the

Korean workers assumed that the pro-labor government in power

would grant concessions later.

The Korean economy had largely recovered by 1999, and

experienced GDP growth of around 4-5% from 2003 onwards. The next

major setback was the 2008 Financial Crisis, but it successfully

mitigated its effects. The country escaped currency devaluation

because its vast reserve of foreign currency. With a GNP of $1.51

trillion, the South Korean economy is the 15th largest in the

world. Estimated growth for the next 20 years is between 3 and

4%, similar to rates in developing nations such as Brazil and

Russia. The country has been identified as a Next-11 economy, a

list of economies compiled by Goldman Sachs that have the

potential of being the largest economies of the 21st century

(International Monetary Fund, 2010).

Although development was mostly a success in South Korea,

this is far from the truth in Egypt. Starting with the

experimental Nasserist policies of the 1960s in import

substitution, to the destructive IMF inspired austerity Egypt has

had a tumultuous economic history.

Nasserist Economics in Egypt

The economy of Egypt under President Gamal Abdel Nasser was

nationalist socialist. Between 1960 and 1972, Egypt had a

socialist, centrally planned model of development. Private

investment had been discouraged after Nasser had nationalized all

major industrial means of production between 1961 and 1963.

During this decade, Egypt borrowed heavily to finance its

intervention in the Yemen Civil War and to combat Israeli

aggression. Around $2.3 billion was borrowed from the USSR, the

European Economic Community, and the United States (Abdulla,

1984). A major problem facing the Egyptian economy at this time

was the lack of skilled labor. Much of the skilled laborers had

emigrated for better opportunities, and the workforce was under

capacity because of the scarcity of technical schools and

universities. By 1968 and 1969, the majority of emigrants had

higher education, a textbook example of “brain drain”.

The unskilled workforce was also at a disadvantage. Egypt at

this time was industrializing, and the move from the countryside

to the city for many was difficult. The majority of unskilled

workers was illiterate, malnourished, and had to adjust to a

factory routine instead of an agrarian one. This was not helped

by the politicization of management at the time. Positions were

passed out based on loyalty rather than merit. In 1961, a new law

made it so that two out of seven board members would have to be

elected by salaried workers. In 1963, this was amended so that

four out of nine would have to be elected. Certainly, this had a

major negative effect on efficiency. The elected representatives

were not technocrats most of the time, and unqualified to have

such positions.

Government planners devised five-year-plans as a form of

import substitution to increase productivity and living

standards. The First Five Year Plan had predicted a surplus of

$40 million in the Balance of Trade in 1965, when in reality the

figure a deficit of $200 million (Abdulla, 1984). Populist

reforms were enacted to enhance the regime’s image in the eyes of

the masses. Between 1960 and 1965, labor productivity increased

9%, while the average wage increased 20%. By 1965, labor

productivity was only 90% of what it had been in 1960 (Abdulla,

1984). Government regulation had made it almost impossible to

dismiss workers, and this had a negative effect on labor

productivity. The centralized nature of the government meant that

there were a number of planned projects that were designed to

benefit infrastructure and well-being (Abdulla, 1984). The

Ministry of Planning and the Ministry of Industry both used

inaccurate and crude observations that resulted in overoptimistic

forecasts. Manufacturing plants were established in areas where

they could not be supplied with raw goods. The textile industry

was ignored by the government planners who failed to see the

potential in the industry, considering that Egypt was one of the

world’s largest producers of cotton (Abdulla, 1984).

The First Five Year Plan was optimistic in forecasting

future savings. By 1965, the level of national saving was

supposed to have risen from 11% to 21%, which did not occur. Most

developing economies have a high marginal propensity to consume

(MPC), and people tend to hoard whatever they have. In addition,

the expansionary government policies of the time had a ‘crowding-

out’ effect on private investment, according to economist Nazem

Abdulla, and increasing the MPC (Abdulla, 1984). During this time

period, the MPC increased from 85.7% to 90.8%, which means that

the MPS decreased. Government spending as a percentage of total

consumption was 18.2% in 1960 and increased to 27% in 1970.

Aside from decreasing the marginal propensity to save,

government spending in an underdeveloped economy has other side

effects. Domestic consumption of locally made goods decreases the

number of goods available for export, thus limiting the

availability of foreign exchange reserves. This scarcity in

foreign reserves means that it is more difficult to pay for

imports, and in Egypt’s case, this makes capital goods needed to

industrialize more expensive. Another negative side effect is the

increase in inflation caused by government spending, which

further exacerbated the country’s Balance of Payments (Abdulla,

1984).

An important motive of the First Five Year Plan was to

increase exports, and the variety of commodities was diversified.

However, at the time Egypt was still heavily reliant on its

cotton exports. Between 1960 and 1972, Egypt failed to increase

its cotton exports, due to fierce competition from Sudan and

because of the cotton worm that had devastated crops. However,

the variety of exports was diversified, evidenced by the fact

that cotton as a percentage of exports decreased from 70.3% to

45.4% between 1960 and 1970. However, due to government policies

that kept the demand for some products high because of food

subsidies, Egypt was forced to rely heavily on foreign loans to

finance its imports (Abdulla, 1984).

Policymakers experimented with export promotion through

export subsidies and import taxes. Discriminating against luxury

goods in favor for capital goods was also another method to help

improve the Balance of Trade, which had recorded deficits since

1954. Rather than trading in currency, bilateral agreements

between Egypt and the USSR resembled bartering arrangements.

Egypt would export raw materials such as rice, cotton, and

phosphates and import from these countries finished goods. In

order to purchase food from with western economies, Egypt needed

foreign currency, which it did not receive in its arrangements

with the USSR. Therefore, Egypt had to borrow to finance its

trade gap (Bromley & Bush, 1994). Even though Egypt had a

positive balance with Eastern Bloc countries, its negative

balance with the west completely underscored any perceived

benefits of Egypt’s arrangements with USSR. This was the major

cause of Egypt’s Balance of Trade dilemma (Bromley & Bush, 1994).

By 1962, Egypt was paying the Sudanese government

reparations for the negative effects of the High Dam, and

indemnities to shareholders of the nationalized Suez Canal. These

payments, coupled with the cotton crop failure of 1961 forced

Egypt to turn to the IMF for help. In the agreement, Egypt

begrudgingly devalued its currency in return for 20 million

Egyptian pounds of credit (Hansen & Nashashibi, 1975).

The supposedly positive benefits of the currency devaluation

did not occur because of the expansive government spending due to

military expenditure resulting from the Yemen War. In 1966,

another crisis arose and Egypt once again went to the IMF for

credit. The fund recommended another further currency devaluation

of 40%, a reduction in subsidies, and an increase in domestic

taxes (Abdulla, 1984). The 1967 Six Day War made economic woes

even worse. The loss of the revenue caused by Israel’s conquest

of the oil fields in the Sinai Peninsula, the closure of the Suez

Canal, and the drastic decrease in tourism added insult to injury

(Hansen & Nashashibi, 1975).

Al-Infitah and Anwar Sadat

In September 1970, Nasser died of a heart attack, drawing

millions into the street for his funeral procession. Anwar Sadat

came to power, and he began his program of infitah, or economic

liberalization. Sadat’s strategy was to utilize Arab capital,

western technology, and Egyptian natural resources by removing

Nasser’s restrictions on capital. Sadat also sought to decrease

Egypt’s reliance on Eastern Bloc countries because of the nature

of trade relations between them. Trade with the USSR had made

trade with other nations difficult because the bilateral

agreements made foreign currency scarce, forcing Egypt to borrow

in order to have liquid capital to purchase imports from western

nations (Bromley & Bush, 1994).

The import substitution policies of the 1960s were supported

by two conditions. The first being an era of cheap fossil fuels

and the second being the intense rivalry between the US and the

USSR during the Cold War. After the 1973 oil crisis had increased

the cost of fuel, industries that had previously been sheltered

could not generate a profit even within the highly protected

domestic market. The second condition, the relationship between

the US and the USSR, also changed at this time. With a détente

between both sides, Sadat could no longer play both sides against

each other, as Nasser had in the 1960s. Foreign aid from both

sides dried up, and this important component of the import

substitution model of the 1960s was no longer a factor by the

early 1970s (Waterbury, 1984).

The laws that Sadat enacted to liberalize the markets were

Law 43 of 1974 and its revision, Law 32 of 1977. This governed

foreign, specifically Arab, investment in Egypt, the

liberalization and partial privatization of foreign trade, moves

toward multiple and periodically adjusted exchange rates, and the

streamlining of the Egyptian banking sector. Public anger at

these policies was potent, and this is proven by the Bread Riots

of 1977. In an effort to alleviate the debt crisis, Sadat sought

funds from the IMF. The fund ordered Egypt to end its food

subsidies and ordered state workers to accept lower pay. On

January 18 of that year, hundreds of thousands of people

protested the requirements by the IMF in what was named as the

Bread Riots and 79 people died in the ensuing violence. The

rioting did not end until Sadat rolled back on ending food

subsidies (Waterbury, 1984).

GDP grew at an average of 9% per year between 1974 and 1982,

and supporters of infitah claim that it was the result of the

liberalizing reforms undertaken. However, this logic completely

ignores the impact of the ‘gang of four’: petroleum exports, Suez

Canal revenues, remittances, and tourism (Waterbury, 1984). By

the late 1970s, revenue from these sources overshadowed all other

sources of foreign exchange. In effect, the open-door policies

had made Egypt into a rentier state. At the beginning of infitah in

the early 1970s, none of these sources of revenue had a hegemonic

role over the economy. In 1980, these rents had increased to 38%

of GDP from 15% in 1975. Some believe that the distribution of

income in Egypt has worsened, and that a new petit-bourgois

emerged from exploiting the profits of the infitah (Waterbury,

1984). During this time period, severe inflation was also

witnessed, averaging between 15% and 18% and civil service

employees on a fixed salary suffered, while private sector

employees were better off than in the 1960s.

Mubarak’s Reign, 1981-2011

Sadat was assassinated in October 1981 by Islamists, and

Hosni Mubarak took over after his death. Hosni Mubarak became

president and continued with the liberalizing reforms of Sadat.

These reforms did little to stem public sector debt. By 1989,

servicing the debt on Egypt’s loans was approximately 40% of

total foreign exchange revenues. Stagflation persisted and the

nation was stuck in a debt trap. Once again, aid was requested

from the IMF. A debt restructuring of $8 billion was agreed upon

by creditor states at the Paris Club, but the 1987 IMF agreement

did not proceed due to the Egyptian government’s fear of another

austerity-inspired riot similar to the one it experienced in 1977

(Seddon, 1990). In 1988, Mubarak extended the state of emergency

that had been in place since Sadat’s assassination. His claim was

to protect against “terrorism”, but ostensibly the state of

emergency was used to crack down against opposition who disagreed

with government policies.

In the fiscal year between 1988 and 1989, the inflation rate

had spiraled to 25% and the government was in disagreement over

the size of the budget deficit. From an original amount of 7.2

billion to 6.9 billion Egyptian pounds, this was still not enough

for the IMF’s 2 billion pounds or less. Planned government

expenditure was down, especially cutting into salaries and

subsidies, and a 24% increase in revenue was planned based on a

consumption tax (Seddon, 1990).

The 1990s saw more privatization neoliberal reforms that

benefited mostly the ruling elite who would purchase state assets

at bargain prices. The cronyism of the 1990s enriched three

sectors of the elite: state officials who implemented reforms,

former bureaucrats who were new entrants into the business

sector, and the established business elite. The established

business elite of Egypt in the 1990s composed of mainly 32

individuals who were importers that benefited from the import

substitution policies to stay competitive. These cronies, and

others, were instrumental in opposing transparency and

anticorruption efforts. They resisted any change in the political

environment that would have ended the regime and, thus their

privileges.

The example of Ahmad Zayat provides evidence to this

narrative. When the Egyptian government wanted to privatize Al-

Ahram beverages (ABC) in 1997, Zayat secured for himself and his

company, Luxor Group, a favorable deal. Within several months,

Zayat had made 36% profit on his purchase of ABC. He agreed to

construct a new brewery near Cairo in exchange for a ten-year tax

exemption. Zayat monopolized the beer and wine industry, and then

sold ABC to Heineken for 1.3 billion pounds in 2002. This was the

most profitable turnover in Egyptian history after the 1952

revolution (Sfakianakis, 2004).

Seeds of Unrest and the 2011 Revolution

Wages during this time period had not improved, and this was

in the face of an inflation rate of roughly 10%, increased

productivity, and longer hours. With the brutal state security

apparatus, opposition to these liberalization and privatization

policies became dangerous. GDP per capita in terms of purchasing

power parity grew from $1,271 in 1981 to $6,140 in 2011. Despite

this growth, the disparity between rich and poor became more

pervasive during this time period (Maher, 2011) The Egyptian

Trade Union Federation (ETUF), which was supposed to be looking

out for the interests of the working class, was a tool for the

Egyptian intelligence services. The ETUF supported the

liberalization and privatization programs, which had an adverse

effect on the working class (Maher, 2011).

Between 2004 and 2010, there were over 3,000 labor actions

in Egypt—all of them opposed by the ETUF. The textile workers

were the most active, but were joined later by building workers,

food processing workers, and operators of the Cairo metro system.

Egypt once again experienced bread riots in 2007 when food prices

increased 24% (Maher, 2011). In the winter of 2009, municipal tax

collectors staged a strike for three days in the streets of

Cairo. They won a 325% increase in wages and the right to form an

independent union, the first ever in Egyptian history. Fittingly,

the IMF issued a positive report on the Egyptian economy in

February 2010, saying that “economic performance was better than

expected” and was happy with the government’s “careful fiscal

management” (Maher, 2011).

It was obvious that class antagonism was brewing in Cairo at

this time. The revolution in Tunisia encouraged many Egyptians to

do the same. The urban middle class joined with the working class

to protest in the streets against the corruption of the Mubarak

regime. 900 people died in the violence between the state and the

people between January and February 2011. The fall of the Mubarak

regime instigated another economic crisis. Its foreign currency

reserve dropped from $36 billion in 2011 to $13 billion in 2013.

The unemployment rate is currently 13%, up from 9% in 2010

(Kinninmont, 2012).

Elections in 2012 put the Muslim Brotherhood into power.

Members of the Brotherhood are among some of the biggest

capitalists in the country, and at times the conflict between

Mubarak and the Brotherhood was over business not ideology. The

group is heavily supported diplomatically and financially by

Qatar. In April 2013, Qatar announced that it is willing to loan

Egypt $5 billion dollars in a move that is widely criticized by

Egyptian media as interference in the internal affairs. This

comes as the Egyptian government is having difficulty agree on an

IMF loan worth $4.8 billion. The government has rejected the

offers put forth by the IMF on several occasions in the past two

years.

Deliberations are currently under way to find an end to the

crisis.

Differences between Egypt and South Korea

Although the South Korean model of development may not be

applicable to other industrializing countries, it certainly

invites a great degree of envy. There are a number of

similarities between the economic histories of South Korea and

Egypt.

Both nations were post-colonial states in the 1960s. Egypt

had received its independence from Britain and South Korea had

been liberated from Japanese imperialism after the end of World

War II. A common rubric for post-colonial, late industrializing

states to pursue is import substitution to protect infant

industries. Under General Park in Korea and Nasser in Egypt, such

policies were actively pursued, and produced inefficiencies in

both economies as described earlier.

Both nations at the time also had a strong working class

within an authoritarian system of government, but the unions in

South Korea were much more militant than the Egyptian unions.

This is in part due to the implicit social contract between

Nasser and the working classes that exchanged benefits for

loyalty to the pro-labor regime. In South Korea, however, its

militant unions had a limited number of alliances in power,

forcing them to become more radical.

The Cold War also played a critical role in the economic

policies of both countries. After the US looked as though it

might withdraw its soldiers from South Korea, General Park

heavily invested into developing defense-based heavy industry. In

the case of Egypt, Nasser would play both great powers against

one another to gain concessions and aid from both sides, because

Egypt was a non-aligned country at the time. After the death of

Nasser and the détente between the USSR and the US, Sadat could

no longer maneuver between both sides of the Cold War and

squarely chose to be in the US camp.

That being said, there were also a number of differences in

the policies pursued by both countries as well. Due to geographic

circumstances, South Korea chose an outward orientation and began

to aggressively promote exports through subsidies. Much of the

minerals and resources on the Korean peninsula are in the North,

thus South Korea is resource poor, a primary reason for its

outward orientation. In contrast, Egypt maintains large deposits

of oil, phosphates, and zinc. It controls the Suez Canal and

generates roughly $5 billion in revenue per year, and receives

millions of tourists every year who flock to see the country’s

ancient remains. Egypt engages in rentier state behavior because

of its geographic circumstances, while South Korea could do no

such thing and looked for ways to increase exports as a means of

generating revenue.

Government spending in Egypt had some negative

consequences because of the crowding-out effect on an economy

with an already low marginal propensity to save and this further

exacerbated the Balance of Payments deficit. The South Korean

economy by the 1970s was heavily driven by exports and did not

suffer from a crowding-out effect. This does not mean that the

Korean government did not spend heavily, which it did. Instead of

wasting away public funds on inefficient projects, the Korean

leadership invested greatly in research and development (R&D). By

2007, only 0.2% of Egypt’s GDP was devoted to R&D. Korea on the

other hand, spent 3.36% of its GDP on R&D, more than 16 times

than Egypt. This lead to advances in high tech industries and

generated higher export revenue.

Another distinction between the economies of South Korea and

Egypt is the role of crony capitalism in development. This

manifested itself differently in the two countries. The chaebol in

Korea are powerful, and almost impossible to regulate. However,

because they employ thousands of people and control billions in

assets both domestically and abroad they are vital contributors

to the Korean economy. This is fundamentally different from the

so-called “Whales of the Nile” in Egypt, who are parasitic in

their dependence on government contracts and have a visceral

hatred of transparency laws.

Ironically, while both nations had to go to the IMF for

emergency loans on multiple occasions, they were both hailed as

examples of neoliberal reform. South Korea received in 1997, one

of the largest IMF bailouts in history. The requirements of the

bailout were harsh: the opening of the South Korean market to

foreign goods and investors, financial deregulation, and the

introduction of new labor laws that lead to the sacking of

thousands of people. South Korea quickly recovered from this and

its economy has grown almost at a consistent 3-4% per year. When

compared to IMF meddling in Egypt, the consequences are not the

same. Egyptian policymakers have had several IMF emergency loans,

but have yet to capture the rate of growth required. What has

followed instead is a weakening of the state controls on the

economy, and the emergence of cronyism that lead to the 2011

revolution. With negotiations currently under way between the IMF

and Egypt, the future is unknown. If the parliament accepts the

conditions of the IMF they risk creating more unrest, but a

rejection of the IMF loans risks spiraling the economy into free

fall.

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