Privatisation became a buzzword of the late 1990s and the trend looks set to continue. But as Michael A. Gordon points out, the process is not a panacea for all economic ills.

While the saying, 'change is good' may hold for people in their personal lives, it is anathema for many governments. Economic liberalisation has been the mantra for many economies but it carries a cost both politically and socially. And this cost is the very reason why governments of the Middle East have not endorsed it as enthusiastically as some of their counterparts in Europe and Asia. Much is at stake, and no one understands this more than the entrenched interests found in various state-owned enterprises and government ministries.

Take Egypt, for instance. The great experiment in socialism under President Nasser in the 1960s initiated a period of expansion of the state sector to all corners of the Egyptian economy. Though never embracing the ideology of Marxism, Nasser used the rhetoric of the day to bolster an economic independence from the encroaching interests of the West.

The rhetoric made itself known in suspicion and scepticism of the private sector, leading the government to nationalise large swathes of the economy. Banking, insurance, food processing, tourism and energy sectors all found themselves firmly in the hands of government administration.

Under Sadat, Nasser's successor, cautious attempts were made to liberalise the economy and break out of the cycle of crises and bailouts. As the now familiar plot unfolded, however, state intervention in the economy actually increased during this time.

Sadat abandoned his predecessor's adherence to socialism partly for ideological reasons, but primarily to encourage foreign investment. This was critical since the state could no longer finance its own production, and outside funds were necessary to bring in the much-needed cash. This need for funds to shore up the moribund state-owned industrial and financial sector would come to underline Egypt's conundrum to this day.

After Sadat's initiation of infitah (economic liberalisation), the government under Mubarak would continuously take baby steps to liberalise the economy to both appease foreign creditors such as the International Monetary Fund (IMF) and to manage financing crises as they appeared.

But full-scale liberalisation, including the much needed privatisation of perpetually loss-making enterprises, would only come into its own in the late 1990s. In essence the main drive for Infitah came not from private business groups but from the fact that each administration was losing its credibility in its capacity to deliver goods.

The lacklustre performance of the majority of state-owned enterprises is attributable in part to restrictive management and financial regulations that govern the operations of these companies. Ironically, however, the reasons for minuscule revenues (if there were any) have also been directly tied to the liberalisation policies implemented for over two decades. Liberalising sectors of the economy without changing the operating conditions of the state-owned enterprises puts those companies in a precarious situation. Opening the environment to competition in the absence of administrative reform governing state companies dooms them to failure without constant injections of fresh funding. In such a scenario, the state becomes a victim of the very programme that was intended to save it.

Egypt has, albeit at the pace of the perennial snail, moved toward a market economy. In January Mokhtar Khattab, the public enterprise minister, announced that 70 public-sector companies would be offered for sale in 2000. Though quite ambitious considering the history of setbacks and half-hearted commitments to privatisation, 1999 was a very successful year for cleaning off the government's plate. But why has the trip taken so long?

The potential for social upheaval in implementing such policies no doubt weighs heavily on the minds of government officials. At varying times the public payroll has included as much as 10 per cent of the entire Egyptian population, or 35 per cent of the workforce. With such an overwhelming percentage of the population dependent on the state for jobs, a policy endangering that security would be undertaken with considerable trepidation. When the Sadat regime administered austerity measures in early 1977 to curb rising expenditures (attributable in large part to the profligate losses of state-run companies), widespread rioting erupted in Cairo and elsewhere, resulting in close to 100 deaths. Not surprisingly, shortly afterwards Sadat rescinded the austerity measures. Explosive crises of this type reinforce the notion that the status quo, however unsatifactory, is preferable.

Decades of ubiquitous intervention by the government have engendered a culture of expectations. College graduates in Egypt were guaranteed employment with government ministries or, indirectly, with state-run companies. This practice is now being slowly abandoned, but it illustrates in colour the system of patronage that is readily fostered and difficult to shed.

Two sectors in particular that will no doubt prove wearisome in the privatisation process are banking and insurance. Those opposing reform are well entrenched in the financial industry. Moreover, public-sector banks and insurance companies are important tools of government policy. The banks, for instance, offer unprofitable services to remote areas such as in Upper Egypt, which private banks would not approach. They are also the largest buyers of Treasury bills and bonds and therefore a major source of liquidity.

Once an administration eventually finds the wherewithal to liberalise, then an equally arduous task awaits: how to liberalise. When dealing with the selling of state-run companies, the Egyptian government has had a limited stock of private investors from which to choose. The government fears that by selling national assets to a limited number of buyers power becomes concentrated in the hands of a few. Domestic sources of potential buyers for state assets are, not surprisingly, finite. Islamic investment companies step in to fill that void. But an administration that has worked to suppress a growing groundswell of support for Islamism will find little comfort in passing over ownership of national assets to an adversary.

Foreign buyers, the most capable and available of funding sources, are not always the most acceptable to nationalist regimes. Memories of exploitative foreign control are still vivid, but this is nonetheless changing in Egypt and elsewhere in the Middle East. Few economic sectors are now off-limits to foreign investors.

It must be remembered that title of ownership does not necessarily imply free rein of action. In Egypt, the state casts a large shadow over the private sector, even after privatisation. And, if the policies governing the private sector are detrimental to its functioning, then no real change has occurred. Protectionism and monopolies are hardly more benign to the consumer under a different name.

Despite the setbacks experienced and those destined to come, Egypt is at the forefront of privatisation efforts. Predictions of massive sell-offs in 2000 are to be taken lightly, but the government seems firmly committed to the process. It is doubtful that an ideological revolution has blown through the presidential palace. More likely a shortage of dollars is the culprit.