The Role of the State: The Case of Egypt

This paper adopts a neo-industrial approach to analyze the changing economic role of the state under liberalization, taking Egypt as a case study. An analytical framework establishes the boundaries of the state in a less-developed economy. This concludes that state intervention should embrace - in addition to stabilization, regulation, correcting for market failure and redistribution- the process of 'catching up' by manipulating industrial policy and building up institutions that reduce uncertainty and promote the acquistion of knowledge. The second part of the paper tests four hypotheses on the weaknesses in Egypt's process of liberalization: (1) under-regulation of product and factor markets has resulted in increased misallocation and monopoly behavior; (2) over-regulation of the institutional structure has raised transaction costs and created agency problems; (3) the persistence of centralized controls over public enterprises is responsible for deteriorating performance; (4) divestiture is necessary for efficiency only if the state is unable to break the link between the bureaucracy and state-owned enterprises. The evidence supports each hypothesis and highlights the importance of legislative reform as a necessary complement to comprehensive liberalization. The paper summarizes the achievements of the recent stabilization and liberalization program and stresses the need for the state to play a new role in the context of poverty alleviation and in the integration of the informal sector into the modern economy.