Political Economy of Globalization: Turkey and Egypt
Ji-Hyang Jang
Department of Government
Introduction and Perspective of Research
This study is intended to discuss the how global pressures for financial
liberalization affect political changes as regional responses. Some
scholars argue that globalization undermines democracy and at least
diminishes state's capacity to provide social needs(Evans 1997: 85, Rodrik
1997: 21, Schmidt 1995: 77). Other debates can also be summarized by a set
of gloomy prospects, such as deepening marginalization, increasing poverty
of losers, or highly concentration of production and investment on the
rich North(Stallings 1996: 386, Weise 1997: 25).
However, in this study, I will examine impact of globalization on domestic
regimes whose type is authoritarianism and that lack political pluralism
and accountability of government. My questions is; Does globalization make
the authoritarian regimes democratic, or does it toughen authoritarian
rule? Henry suggests that real financial liberalization enhances the
structural power of commercial bankers and the structural power endangers
any patrimonial authoritarian regime. Thus, financial reform is more like
to pressure an undemocratic regime toward greater accountability,
political pluralism, and democracy(1996: 8-9).
In addition, I will examine the relations of financial liberalization and
political changes across countries, Turkey and Egypt, and scrutinize the
divergent processes and outcomes by highlighting both similarities and
unique aspects of two countries. Through comparison, the similarities
rooted in trait configuration owing to same region Middle East, will be
considered as initial conditions and the most differences will be
classified as the plausible intervening variables.
Initial similarities, especially, are a useful starting point against
which to measure different outcomes. In Turkey and Egypt, state-led
industrialization was launched and sustained by determined leaders,
Ataturk in 1920s and Nasser in 1950s. The phase of central economic
planning based on rapid industrialization, tight control over foreign
capital, extensive public ownership, and populist policies had lasted
until the financial liberalization has been started in both countries.
In my approach, dependent variable is the political changes in Turkey and
Egypt as regional responses to globalization and independent variable is
global impetus of financial liberalization. These variables are selected
to answer to how pressures for economic liberalization affect local
political regime and whether the pressures alter the regimes toward more
democracy or not.
In terms of economic performances as a part of regional responses to
globalization, Turkey is often presented as one of the most successful
examples in the MENA countries of a country that experienced a severe debt
crisis in the late 1970s and that then, under the IMF begun a sweeping
process of structural adjustment and economic liberalization(Owen 1994:
153). Compared with Turkey, Egypt that started the adjustment program in
the mid-1970s, however, portrayed low economic performances and even
frustration. But since early 1990s, the current Mubarak regime has made
effort to be on the track of openness and privatization and achieved
better results.
With regard to political changes as dependent variable of this study,
Turkey exhibits greater degrees of political pluralism than those of
Egypt. Turkish government, through financial reform, makes progress in
political accommodation of Islamist opposition and thus accomplishes
gradual evolution of political pluralism with significant growth of civil
society. On the other hand, the nature of political arena in Egypt reveals
restriction of political participation and even political
deliberalization.
Turning to independent variable that is international financial
liberalization that external debt pressures reinforced in most Third World
since mid-1970s, both countries have differed in the common course of
structural adjustment caused by similar reasons. Under the severe
indebtedness burdens, Turkey dealt with its crisis through military take
over of 1980 and the implementation of an adjustment program by civilian
authoritarian Ozal's regime. Forced by the same factor that is debt
crisis, Egyptian liberalization policy 'infitah' toward macroeconomic
stabilization as well as structural adjustment was launched by Sadat in
1974 and since 1991 Mubarak regime has poised to undertake the second
infitah.
Finally, the intervening variables of my study should explain why the
economic performances and political changes to financial liberalization
between Turkey and Egypt are diverse. There have been debates about the
reasons for differential outcomes in achieving economic and political
development. In this study, I suggest two intervening variables to explain
divergent responses to global pressures; the first is financial system,
especially banking system and the second is liberalization and structural
adjustment strategy of state.
Both Zysman and Henry argue that international impetus for
financial reform has divergent national responses that depend on the
structure of domestic financial system. Henry, specifically focuses on a
commercial banking sector within financial system because the commercial
banks are virtually the only source of funds for business for most Third
World including the Mediterranean Debt Crescent. Moreover, according to
him, a key variable in explaining structural differences is each country's
colonial banking legacy(Zysman 1983: 56, Henry 1996: 9-10).
In Turkey, banking oligopolies gained structural power and might
encourage banker's collective action to promote greater political
pluralism as well as constrain patrimonial rulers and their crony
capitalists in corruptive patronage linkage. On the other hand, in Egypt
financial pluralism and fragmented banking sector had not build up
business constituencies that might facilitate political transitions.
Compared to oligopolistic concentrations of capital in German model based
Turkish system, Egyptian banking system lacks finance capital accumulation
and heavily depends on the state.
In addition to the banking system, an adjustment strategy of state
is another intervening variable. According to Zysman, selective credit
allocation is the single discretion necessary to all state-led strategies
and the provision of industrial finance is necessary for the state to
enter continuously into the industrial life of private companies.
Furthermore, purposive intervention of state to promote competitive
development or to protect specific industries requires technical abilities
of state, such as the capacity for discretion and discrimination(1983:
76-8, 86).
In the case of developmental interventionist states, such as Japan
and East Asian NICs, the states played an essential role by supporting
human capital as well as physical facilities through more education and
vocational training. Besides, their successful performances as activist
states were accomplished on the basis of capacities to access to
international market for exports, to provide external capital as well as
internal savings, and to accumulate of physical and human
capital(Stallings 1996: 375-9).
However, in the 1980s the interventionist states renounced activist credit
policy and surrendered much of state's power over the flow of capital to
the market(Loriaux 1997: 1). In the new international context of
development, global liberalization forces, indeed, contribute to national
economic policy not to control over the allocation of credit but to
facilitate structural adjustment(Stallings 1996, 17).
Henry, simply put, maintains that only oligopolies could convert their
market power into real command over credit allocation by highlighting
democratic virtues of oligopoly to constrain the overuse of power by
patrimonial state in his study of Mediterranean Debt Crescent(1996: 296).
Although many states in MENA countries including Turkey and Egypt have
played as interventionist, there is little doubt that the states could
exercise their power as developmental interventionism with the respect of
the required qualification of player state as mentioned above. More
importantly, from a perspective of new international political economy,
states should concentrate on the implementation of adjustment reform task
rather than inefficient interventionism without prerequisite capacities.
In Turkey, the implementation of Ozal's liberalization policy
which consist of export-led growth strategy, out-ward oriented reform, and
allowance of Islam financial sector was relatively successful. Through the
fulfillment of reform policy, state economic intervention has been waned
and the nature of political economy has been close to market oriented and
laissez-faire regulatory regime with predominant private sector. Also,
Islamic banks have been accepted to the secular authoritarian state.
Turkish economy, however, has been one of mixed economy in which the
private sector was politically and economically subordinated to the
state(Waterbury 1993: 261). The state is not withdrawing but, rather
redefining its role in the economy(Harik 1992: 21).
Yet, financial liberalization policy in Sadat's regime is quite
different from that in Ozal's. Infitah was in-ward oriented policy that
even prolonged the viability of the existing import substituting
industrialization strategy(Waterbury 1993: 6). Infitah regime under Sadat,
moreover, exercised its arbitrary power to repress and exclude political
opposition including Islamist.
Infitah, namely, was not an attempt to reduce state's intervention
or to dismantle the state sector in economy(Waterbury 1993: 65). Thus, the
nature of political economy in Egypt has been still similar to central
planning and administered markets with large scale public sector. Indeed
state still dominated credit allocation, retaining a hegemonic role in
political economy. In contrast to Turkish case, the reform efforts to move
from market socialism to state capitalism largely failed. In addition, the
political environment has been less favorable to synergies with moderate
Islamist in Egypt than Turkey(Henry 1996: 260).
Country Profile 2: Egypt
1. Economic Performances and Political Changes
1) Economic Performances
As for external debt in Egypt, despite quite high debt proportional to
GNP, it has seemed to be on the process of slightly decrease. Indeed
Egypt, during much of the 1980s, falling into arrears, seemed almost
beyond the pale of IMF influence. Finally, in 1991, its participation in
the Second Gulf War reduced the external debt by half and eliminated the
troublesome military debt to the U.S.(Henry 1996: 33, 37-8). In respect to
Foreign Direct Investment, the trend of FDI has remained fluctuated, and
hence Egyptian integration with the global economy has not stabled, yet.
The value added of the manufacturing sectors which could be assumed as the
motor force of industrial development in Egypt contributes 15 percent to
GDP, compared to averages of 11 percent in MENA and 21 percent in Turkey.
The other indicators exhibit that Egypt still possesses a greater deal of
public enterprises and weaker as well as thinner private sector compared
with Turkey(Henry 1998: 3-4). The value of shares traded presents that
Egyptian case has been less active. Turnover's growth also appears
relatively slow move compared with dramatic increase in Turkey between
1990 and 1995(Henry 1998: 7-8).
In the meantime, the living conditions of numerous Egyptians
failed to improve or deteriorated under the adjustment reform even though
inflation as well as imbalances were quietly reduced(Kienle 1998: 232).
Total Debt Stock
(EDT)
/GNP(%) 1970 1980 1990 1991 1992 1993 1994 1995
Turkey -- 27.4 32.3 33.4 35.2 37.8 50.6 44.1
Egypt -- 89.2 97.3 102.2 89.4 79.4 78.1 73.3
Source: World Development Indicators, World Bank, February 1997
Foreign Direct Investment (net)
(us $ million) 1970 1980 1990 1991 1992 1993 1994
1995
Turkey 58 18 684 810 844 636 608 885
Egypt 0 548 734 253 459 493 1,256 598
Source: World Development Indicators, World Bank, February 1997
Indicators of Private Sector Activity Manufacturing sector
% to GDP
1995 State-owned enterprises in
manufacturing as % of GDP
1991 Private investment as
% of GDP
1994
Turkey 21 7 80
Egypt 15 33 59
Source: World Development Indicators, World Bank, February 1997
States and Markets
Net private capital flows
(us $ million)
1995 Domestic credit to private sector
(% of GDP)
1995 Mean tariff, all products/c
(%)
1990-3
Turkey
Egypt 294 47 28.3
Source: World Development Indicators, World Bank, February 1997
Stock Market
Market capitalization
% of GDP Value traded
% of GDP
Turnover ratio value of shares traded as % capitalization
Listed domestic companies
IFC global index price-earnings ratio
1990 1995 1990 1995 1990 1995 1990 1995
1990 1995
Turkey 12.7 12.6 3.9 31.2 45.2 242.5 110 205
13.2 8.5
Egypt 5.0 17.1 0.4 1.4 7.3 11.0 573
746 ---- ----
Source: World Development Indicators, World Bank, February 1997
2) Political Changes
Since mid-1980s, elections in Egypt were worked by a considerable degree
of irregularity and malpractice and the government party has won every
election with over two-thirds majority. While the government party has
been given essential support by state bodies at all levels, the opposition
parties remain surrounded by restrictions preventing them from making
contact with any important interest group in society. This strategy
involved the continued ban on groups that had a link with significant
social forces, for example, the Nasserite and the Muslim Brotherhood(Owen
1994: 187-9).
Especially, since the early 1990s, Egypt has experienced a
substantial degree of political deliberealization that undermines
democratization. Repressive amendments to the penal code and to
legislation governing professional syndicates and trade unions as well as
unprecedented electoral fraud to exclude Islamist opposition have been
witnessed. As a result of attacks on tourists, the Mubarak regime bore
down not only on extremist groups but also on moderate elements in the
Muslim Brotherhood. Such erosion of political participation and pluralism
has made a possibility of democratization run into trouble(Henry 1996:
276, Kienle 1998: 219-20).
2. Global Impetus of Financial Liberalization
As a result of debt crisis and international pressures, Egyptian policy of
infitah-'liberalization' or 'opening-up'- was announced by Sadat in 1974
and it was also a response both to internal problems and to shifts to
international economic and political environment(Richard and Waterbury
1990: 240). Besides, after the October war with Israel of 1973, Egypt was
no longer able to finance its own investment and had to turn to outside
sources(Waterbury 1993: 64).
The main thrust of infitah was to liberalize the banking sector, allowing
foreign commercial banks to operate foreign currencies. Foreign exchange
regulations were relaxed and a new foreign investment code was drawn up to
attract capital flows(Waterbury 1993: 65). In the first infitah, however,
few of new banks would be viable once Egypt had made the necessary
macroeconomic adjustments. Meanwhile, they had compounded the difficulties
of management and sabotaged government reforms(Henry 1996: 46).
After Gulf war, Egypt was poised to begin the second infitah under
Mubarak regime. In April, 1991 when an IMF standby loan imposed tight
monetary policies in return for a license to receive international debt,
Egypt gained substantial debt relief by siding with the coalition against
Iraq. As the regime took additional measures to pave the way for a new
agreement on structural reform with the IMF, the regime could attain
momentum(Henry 1996: 252-3). Egypt, in turn, has been firmly on the path
of reform since the second infitah and some positive results were
achieved.
3. Financial System and Politics of Liberalization
1) Banking System
Egyptian commercial banking system has exhibited mixed ownership, but
still heavily concentrated on public sector banks. The public sector banks
could not become aggressive oligopolists because they lacked the necessary
autonomy. On the other hand, the private sector banks remained weak,
dispersed, and fragmented with a British financial legacy that encouraged
competition(Henry 1996: 293, 1998: 13). The four largest private sector
banks hold only 16 percent of the deposit, revealing very low degree of
concentration in the capital structure. The only exceptions were the
Islamic banks and one small family holding, the Nile bank. Both of them
were purely private sector in the sense that they were wholly owned by
private individuals(Henry 1996: 229).
Unregulated competition without presupposed health of banks merely
weakened the commercial banking system rather than enhancing its
structural power. In addition, in more etatist systems the structural
power of local capital is more problematic(Henry 1998: 11). Regarding the
effect of Egyptian tradition of British banking system and considering its
affinity of French model, the infitah banks in the late 1970s and 1980s,
consequently, became leaky vessels of public as well as private capital
instead of gaining autonomy(Henry 1996: 294).
Even in more prosperous times, however, an oligopolistic German
style manipulation of the system would have been unlikely to succeed in
Egypt(Moore 1986: 647). That is, without concentrated capital Egyptian
banks lack meaningful autonomy and structural power while state continues
to control the finance capital.
Meanwhile, Islamic financial sector could offer an interesting
potential shortcut toward simultaneous economic and political transitions
because Islamic capital might have offered the respective banking systems
with sufficient autonomy as well as competition. Moreover, Islamist might
have coalesced with the managers of Egyptian remittances(Henry 1996: 296).
2) Politics of Liberalization
Egyptian government under Sadat instituted an adjustment policy not to
promote liberalization of financial system but to press the political
opposition. The economic policy may be viewed primarily as a political
tactic for sustaining authoritarian regimes rather than as a set of
reforms for stimulating free enterprise or market(Moore 1986: 634).
Indeed, infitah is connected with Sadat's attempt to limit and then
destroy the organization of the Arab Socialist Union, as forming part of
the power base of his Nasserite rivals(Owen 1994: 143). However, Sadat did
not consistently liberalize either finance or politics and accordingly the
first infitah had made little economic sense although he had carefully
tailored economic to political strategy, (Henry 1996: 95). For example,
Sadat deliberately multiplied centers of power and let the new banks serve
his political purposes. Elite factionalism instead of political pluralism
extended its roots into economic enterprises.
Before infitah, import substituting industrialization was pursued with
rigor in the 1960s and faced the growing g balance of payments crises just
like other MENA countries did. In an attempt to overcome these crises,
Egyptian government tried to shift to an export-led strategy, but it
remained at the drawing board without long run growth strategy. After the
economic opening in the late 1970s and 1980s, Infitah, nonetheless, did
not solve Egypt's balance of trade problem. Rather the liberalization of
imports and failure of export promotion exacerbated its
macroeconomics(Richard and Waterbury 1990: 26-7, 33, 242).
In the meantime, Egypt was able to avoid a thorough reform since mid-1970s
with ample revenues from worker's remittances and local rents from
tourism, Suez Canal, and U.S. aid. By the early 1990s, however, country
had run out of options for maintaining macroeconomic balances as rents
decline, and their potential solutions would likely be all the more
painful under Mubarak regime(Richard and Waterbury 1990: 16).
Owing to compelling political logic and inefficient industry strategy in
the first infitah, Egyptian liberalization did not reduce state's
intervention in economy and rather state sector grew prodigiously during
the 1970s and state gave up none of its regulatory powers(Waterbury 1993:
65). Furthermore, there is no doubt that the basic stimulus to the
policies of liberalization pursed by both Sadat and Mubarak were needed to
confront certain fundamental problems within Egyptian economy. Rather the
reforms wore seen in terms of their role in creation of domestic coalition
for regime supporters(Owen 1994: 197).
As for the attitudes to Islamist of infitah regimes, the continuous
restriction and exclusion as well as manipulation have been exercised. In
1988, by liquidating the substantial segments of the Islamic business
communities, the Mubarak regime cracked down Islamic money management
companies relentlessly and none of them survived. Yet, official Islamic
banking sector survived the crisis of the money management companies and
offered a channel for reconciling the Islamist mainstream to Egypt's
political economy (Henry 1996: 273-5). After the tourist attack of
extremist Islamist in the early 1990s, nevertheless, any potential
synergies with Islamists were now at risk although officially recognized
Islamic banks and moderate Islamic oppositions appeared to be building a
capital base to support political pluralism.
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