3 The State, Foreign Aid and the Political Economy of Shelter in Egypt – Market Economy and Urban Change

Chapter 3

The State, Foreign Aid and the
Political Economy of Shelter in

Mohamed Hamza


During the last three decades the complex relationship between national development strategies and shelter policies in the developing world has been recognized. Shelter provision appears to have been strongly driven by external, as well as internal, forces, neither impacting nor exerting pressure in isolation from the other. This interaction is crucial in determining policies and outcomes. In this context, the state became a mediator between external and domestic interests. Externally, it had to respond to international donors pressing agendas as a condition of financial assistance. These pressures vied with domestic interests of extending state legitimacy, but simultaneously resisting the potential threat that radical reform in the sector might constitute.

On the other hand, regardless of the development paradigm, governments as well as international agencies have most often addressed housing through a pragmatic managerial approach, which attributes the housing problem to technological or production factors such as the use of inappropriate materials and standards or centralized bureaucratic organizations. This approach provides only second-level analysis, which fails to address the conceptual issues underlying the intervention processes. A structural approach is needed to place the housing question in the context of the state's changing nature and role in accordance with the transition from welfare to market-based economies.

This chapter examines policy-making within the shelter sector from the perspective of the impact of the macro-level political economy on micro-level intervention. To establish this relationship more precisely, a framework, which explores the effects of the role and nature of the state, foreign aid and economic reform, is utilized. This framework is deployed to investigate the interaction between these three key elements and how they affected shifts and changes in shelter policies in Egypt from the 1950s.

Egypt provides a valuable laboratory to explore these issues. External development assistance has constituted the major source of finance and has played a significant role in shaping the priorities and approaches for the housing sector. The period under study (1950s–1990s) witnessed many turning points in approaches to development and in human settlements policies: the shift of development paradigm from welfare to market enablement, as well as the massive injection of foreign aid in the Middle East to bind the Camp David accords and the Egyptian–Israeli peace treaty. These dynamics were, and still are, evident in Egypt's development trajectory.

By 1952 the Egyptian government assumed a more central role in service provision with its socialist orientation. On the macro-political level, dramatic changes have taken place since then; but, in effect, these have not been mirrored in appropriate reform on the structural or organizational levels with regard to tackling the shelter needs of the country.

From the perspective of the shelter sector, the core of the chapter explores the role of the state as an interest mediator over four decades. This reveals that the shelter sector always formed an important investment priority, susceptible to both internal and external determinants. Internal determinants are related to domestic priorities influenced by changes in social structure, class interests and resource allocation. External determinants concern the roles played by international agencies in promoting development models in which the shelter sector plays an often uncertain role, or direct political pressure as a part of geo-strategic concerns. The state's receptiveness and ability to mediate is constrained by the extent to which external agendas fit or conflict with the state's development ideology, perceptions of equity, social justice and stability.

The chapter argues that in order to provide a refined understanding of the urban shelter question, it has to be located in its broader socio-economic and political context. Outcomes have generally been technocratic; but the problems were largely structural in nature. The gap between the political and technocratic levels of policy-making and implementation is a central theme in the study.

The starting point of this analysis is that the state's macro-economic policies tend to release and generate forces, and to establish relationships and coalitions among interest groups, which have an impact upon the shelter question. This chapter advances two main propositions:

  • While the state may be receptive to external pressure for aid, this reciprocity is constrained by the extent to which external agendas fit domestic needs and the social contract between the state and various class interests.1
  • External assistance, aimed mainly at security objectives or balancing political interests, frequently has negative effects. The result has generally been distorted and inconsistent policy shifts, questioning the state's role in maintaining or producing inequality.

Underlying the above propositions is the nature of policy-making in a developing country like Egypt. This is characterized by an ad hoc, remedial and reactionary approach.


The revolution: Socialism without socialists (1952–1970)

The Egyptian revolution of 1952 was a copybook example of a developing world country's challenge to imperialism and the delayed dependent development that resulted from it (Hinnebusch, 1990). The Liberating Free Officers Movement had ideals, but was not a political party with a clearly defined ideology, nor did it possess its own politico-technical cadre.

A number of measures were implemented, which aimed to broaden opportunities and narrow class gaps, from open-university education and guaranteed state employment for graduates, to maximization of employment in state firms, rent reductions and price controls.2All had serious implications, decades later, in limiting the ability of successive regimes to reform the associated policies of social equity, which depended upon such measures.

The question of why the regime remained unwilling to adopt a radical socialist model reveals a trend that prevailed through successive regimes. One reason was that distributional policies were used to maintain political stability and as an instrument of control. Another reason was the fear of alienating the bourgeoisie upon which the regime depended. Egyptian ‘socialism’ was not so much the product of a revolutionary mass movement or a matter of ideological belief, as a pragmatic governmental solution to the problems of underdevelopment and a way of facing external international threats (Ayubi, 1980; Dessouki, 1982).

The impact of such a developmental strategy was characterized by being ‘technical’ rather than ideological, organizational rather than socio-political, and excluded the concepts of ‘ideology’, ‘class’ and ‘party’. The lack of a clear ideological doctrine placed it in balance between communist and capitalist stances. A private sector entitled to a fair profit was to be preserved, while the state would plan, stimulate and direct development. In time, the state directly assumed functions of investment and production through a large public sector. Arguably, such characteristics interplayed with each other to produce a series of shifts in urban policy, in general, and housing, in particular. The inability to decide on a leading sector distorted market mechanisms and established the foundation for enduring and inherent problems in the shelter sector.

During the Nasser era, international economic assistance paralleled Egypt's internal political transformation. Relations with the US started to improve again during 1959–1960 with the creation of a new aid bureaucracy in Washington.3 The chosen instrument of American economic aid policy was ‘food aid’, which exerted its influence on domestic stability.4

Relations deteriorated again with US President Johnson's ‘short-leash’ policy. Nasser reactively strengthened Egypt's ties to Moscow. Following the disastrous June 1967 war with Israel and the subsequent war of attrition, Egypt's security concerns prompted greater reliance on the Soviet Union.

Influenced by the social reform ideas of the Eastern Bloc, a humanitarian stance later developed and was reflected in a pattern of housing intervention characterized by public housing developments. The state acted in favour of low-income groups in order to gain political support and sustain the regime's legitimacy (Soliman, 1992).

The public sector made its greatest effort during the early 1960s. The 21,000 public-sector units built nationwide in 1962–1963 have never been matched.5 Despite this activity, private construction began to decline. During this period the government intervened in the housing market not only directly, as an agent, but also indirectly. The rent control acts, which reduced the rents to the advantage of tenants, discouraged private investment in housing. Thus, the average number of units built annually, by both the public and private sectors, declined from 52,000 during the period of 1952–1960 to 30,000 during 1961–1972 (Waterbury, 1982) – that is, from an average of over 4000 per annum to an average of under 3000 per annum during the second period.

A government unable to keep up with rapid population growth and urbanization rates, or to contemplate massive involvement in subsidized public housing, resulted in an accumulated shortage of housing reaching its peak by the early 1970s. Under the notion of a welfare state, the policy geared to public housing provision appeared unworkable.

The more serious implication of turbulent foreign relations was that urban dwellers had become accustomed to, and domestic peace was contingent upon, abundant, low-priced imported food products. This may, in addition, have contributed to the lack of reform in the urban sector and the retention of the socialist measures introduced earlier, such as price and rent controls. Resources diverted to rebuilding military capacity also reduced public investment in the urban sector (Mabro, 1974; Waterbury, 1976).

The enduring twin legacy of Nasserism created the structural foundations of the authoritarian state. At the same time, Nasser also established a form of nationalist independence and populist obligation, which legitimized its authoritarian rule by appearing to incorporate the masses (for example, through food and rent subsidies). This largely illusory process of participatory government created a dilemma for Nasser's successors: by reversing the existing policies that legitimized authoritarian rule, the government risked alienating the incorporated masses and jeopardizing its durability of power; yet, any policy shifts also had to consider the inherent mechanisms of class alliances and interests. These legacies were played out in the urban sector during later decades.

The open door: Redirection, looking outside and facing
North/West (1970–1981)

After the October 1973 war, Sadat used the political capital won in the war and the opportunities created to transform Egypt's policy and economic strategy.6

The new policies helped to ensure Egypt's creditworthiness with the International Monetary Fund (IMF), paving the way for its gradual reintegration within the world capitalist system. However, the social ramifications and the difficulties in absorbing new development complicated the quick pace of economic transformation (Weinbaum, 1983a). In the absence of adequate local savings and government budget surplus, Egypt had adopted a development strategy for which continuous flows of imported capital, commodities and technology were indispensable.7

Despite statements in 1974 and later about allowing the market to allocate resources and set prices, the state was never expected to withdraw from regulating and planning the economy. A continuing reliance on economic and technical aid from foreign governments and international agencies ensured the bureaucracy an active and permanent role (Weinbaum, 1983b).

Internal political interests and foreign aid came together prominently during this period.8 US officials charged with formulating aid projects had to juggle three objectives:

  1. the efforts needed to bolster Egypt's short-term economic stability;
  2. setting in motion programmes for long-term economic growth and productivity; and
  3. the pursuit of these goals while the United States Agency for International Development (USAID) sought to avoid undermining earlier achievements in Nasser's social and economic equity.9

These intertwined factors had a considerable influence on determining priorities and setting the agenda in the urban sector.

Another source of substantial aid was the Arab states. However, despite a significantly high and unprecedented ratio of investment to gross domestic product (GDP), sustained at 29.4 per cent over the entire Arab assistance period, public and private investment was concentrated in the non-tradable sectors of the Egyptian economy – focusing primarily on commercial rather than productive expansion. Investment in luxury housing, luxury consumer imports, banking and tourist facilities limited the prospect for long-term income generation, employment, or exports (Handoussa, 1990; Abdel-Khalek, 1982; Amin, 1982; Ayubi, 1982).

The conjuncture of foreign aid, international realignment and the domestic policy agendas in the Sadat era had important implications for the urban sector, a sector that had seen physical decline and deterioration under Nasser. In order to attract the foreign investment and capital upon which Sadat had based his open-door policy, the strained Cairo USAID mission moved to identify projects that could quickly absorb generous amounts of US assistance.10 Arab investment, in addition, had fuelled conspicuous consumption, driving up demand for land, speculative activities in housing and building materials.

Implications for the urban sector were reflected on the macro and micro levels. On the macro level, the scale of the aid programme, usually politically motivated, determined the approaches adopted and the cost of projects funded. The Camp David Peace Treaty brought US$815 million in aid money each year. This had to be dispensed quickly within strict time limits. Appropriate low-cost, self-financing or a long-term reform process, which incorporated significant institutional-building and community development, would have taken time to mobilize and was thus not pursued. Massive showpiece projects – the largest of their kind at the time – allowed for rapid dispensation of funds. Yet, the scale, novelty and complexity of these projects made them unmanageable and the root causes of the problem were neglected.

Sadat's regime, avoiding possible social instability, maintained the well-established social policies created by Nasser – food subsidies, job-guarantee scheme, price distortions, bureaucratic structure and attitude, tax system and, most importantly, rent control. On the one hand, the state appeared to adopt a radical reorientation towards liberalization through the open-door policy and a shift to the West; on the other hand, Nasser's legacies were too strong and well established to alter.

Sadat's open-door policies may have reinforced an environment of capitalism, which was parasitic in character. Revitalization of the private sector created powerful interests with a stake in the regime. State contracts were in the hands of government officials. Widespread corrupt practices were a regular feature of the daily news. Were the state's intervention efforts, urban development and the housing sector driven by the agenda and benefits of these new interest groups, leaving behind the less powerful sectors of the society?

The explosion of conspicuous consumption by the wealthy elite represented ‘social provocation’ and fed a growing perception that class gaps were increasing. Thus, social cleavages widened, expanding the bases of political opposition, leading to antagonism and instability by low-income groups (Dessouki, 1982; Baker, 1978). All of this paralleled the mounting Islamic fundamentalist movement, born out of the economic crisis and hardship, and contributed to making Sadat the victim of his own policies on 6 October 1981.

The reform and structural adjustment (post-1981)

Well before October 1981, there was growing concern about Egypt's economic instability, the form and scope of private investment, and increasing corruption. The government acted to curb imports and exerted more control on the economy in terms of centralization and planning, though unannounced. On international aid and capital receipts, the government attempted to speed the inflow of assistance, removing bottlenecks to slowly maturing projects and sustaining resources.11

After 1982, when the international economic climate deteriorated, a major economic crisis enveloped Egypt and the government followed a modified strategy.12, 13 It merely sought incremental changes to domestic policies and continued to equivocate the legacies of Nasser and Sadat.14

The government implemented reforms at a pace, which, it believed, was compatible with its own strength and with the need to maintain social peace. At the same time, the strategy postponed the implementation of far-reaching reforms into the early 1990s.15

Under Mubarak's government, there were growing concerns about aid programmes and Egypt's control over basic economic decisions. The conflict centred on the role of the private sector in Egypt's economic development and the contradictory forces of the country's public-driven investments in housing and infrastructure. Behind this were international donors’ attempts to embed Egypt's full return to a private economy. This posed serious threats to low-income groups, constituting a major source of social unrest. Such a goal contradicted the still pervasive Nasserist values of social justice and public ownership, but also threatened a bureaucratic elite deeply entrenched within the state organization.

Paradoxically, the state's intermediary role may have had to be boosted under the economic reform and structural adjustment programme (ERSAP). Foreign debt was probably the biggest challenge facing Egypt during the 1990s, raising serious questions about the country's financial integrity.16 As Egypt's debt grew larger, and the burden of servicing the debt more difficult to bear, the IMF stepped in. In May 1987, Egypt agreed an economic reform package, which provided a standard drawing right (SDR) US$250 million standby credit over 18 months (Butter, 1991). The price of these agreements has been the commitment to an economic reform and structural adjustment package, with an impact on almost all aspects of the Egyptian economic and social life, and subsequently potentially hazardous political implications.

The 1991 ERSAP followed the earlier 1987 one, which fell short of proposing the reforms aiming at solving Egypt's problems. Indeed, it took another decade after the programme was agreed upon for macro-economic stabilization to be under way. Thus, it can be argued that the significant balance-of-payment improvement may be primarily due to increased capital inflow induced by the IMF's ‘seal of approval’, rather than significant current account improvement. There are also some doubts as to whether such improvement is attributable to the adjustment programme or to the extensive debt relief that was accorded to Egypt by the US and the Arab states during and after the Gulf War.17

On the negative side, gross domestic investment (GDI), which averaged 22.5 per cent of GDP over the period of 1987–1990, was accompanied by a low rate of gross domestic saving, averaging 6.4 per cent of GDP and resulting in a saving investment gap equal to 16.1 per cent of GDP (UN, 1993). The negative rate of growth of GDI reflects the decrease in public-sector investment. This is contributing to significant negative impacts on total investment since government investment represents more than three-quarters of total GDI in Egypt and will, ultimately, extend to all sectors, including housing. Thus, the state's ability to remain a ‘provider’ for low-income groups is gradually but significantly curbed under such circumstances.

The impact on the population is through unemployment and poverty. Changes in labour laws raise unemployment among previously employed workers to more than the prevailing level. The impact of privatization on employment, as elsewhere (Pastor, 1987), is negative, at least in the short run. The cost of living is increasingly affected by devaluation, increases in prices of energy, transportation, public enterprise commodities, the elimination of subsidies, raising indirect taxes and the widening of the tax base. This inevitably leads to reducing real incomes. The tight monetary and fiscal policies, and the reduction of government investment, are likely to further depress the overall affordability of commodities and services, including housing.

Although reform programmes have not, yet, provoked social unrest, they have indirectly provided a fertile soil for re-emerging opposition groups (Islamic fundamentalists) to recruit, prepare and promote their case. It can be argued that Egypt has experienced the worst of both worlds: on the one hand, the state's fear of popular discontent has led to a breach of ERSAP targets, thus putting its aid receipts at risk; on the other hand, the measures that it has taken have had precisely the results that it feared.


Examining the three most significant periods in Egypt's modern history, it appears that the social contract between the state and its different constituencies underwent a variety of transformations under the three regimes. Nasser's policies had significant implications for the shape of Egypt's stratified society and social mobility. Policies that seemed to target the masses were gradually appropriated by the emerging new class of bureaucrats and technocrats for themselves.

Sadat put aside the programmes of income distribution in favour of satisfying middle-class consumerism. The emphasis was on export-led growth, with the state acting as a partner in alliance with foreign private capital and with the Egyptian private sector (Waterbury, 1982). The resulting policies imposed economic liberalization, which contributed to growing class inequality, especially in terms of providing public services and housing. Mubarak's model was little different from that of Sadat.

During the Nasser and Sadat eras, the social contract between the state and its citizens was a means of maintaining state and regime stability by appearing to appease the masses with attractive welfare policies. Under Mubarak, because of the contraction measures associated with the ERSAP, the state's ability to provide these welfare services and commodities, to which the masses have become accustomed, was brought into question.

This leads to a general conclusion at this stage: the root causes of the economic and, more specifically, the housing problem are not just the consequences of technical failures or population growth, as has always been claimed by the state; rather, the underlying factors are the driving forces of state intervention, its perception of the problem, its priorities and ways of addressing them.

Socio-economic changes and the urban sector

The previous sections set the context and, in some detail, the framework within which successive Egyptian governments mediated the different interests. This section now explores, more fully, how housing policies came to be enacted in Egypt's urban sector and the broader forces and interests that these policies represented.

The state's early objective, to target and appease the masses, was reflected in its attempt to legitimize and institutionalize the pact between Nasser and the populace through, for example, the national charter or the constitution. In effect, these were attempts to legitimize the original revolutionary aims into a constitutional and legal framework in order to institutionalize and make permanent the characteristics of the coup. This created expectations from the populace to recognize the new system as the ultimate provider. The state took this responsibility and built its support and legitimacy on it.

As a direct outcome of the state's initial bias to the masses, private investment in industry failed to come forward in sufficient quantities and the government decided to nationalize most of the productive capital. The ambitious development projects of the new regime faced many financial difficulties. By the early 1960s, a ‘housing issue’ was hardly recognized as a matter of public intervention. However, the problem had reached a level calling for intervention by means other than market mechanisms. This included the regulation of housing production and the housing market and, under specific political conjuncture, the engagement of the public sector directly in the promotion of housing.

Continued development of state bureaucracy contributed to further enhancing state intervention in the urban sector, in general, and housing, in particular. This transformation can only be understood by examining the effects of state intervention in the housing sector (see ‘The state's mode of intervention’) and by comparing its intentions or perceptions to the medium- and long-term impact.18

Despite the obvious differences between the ‘ideological orientations’ of Sadat and Nasser, Sadat paradoxically continued to use the same mechanisms and tools that Nasser had created. Arguably, the two may have followed different means to achieve the same end: regime stability. Opening up the economy in such unprecedented ways implied inviting capital in an unregulated manner in terms of sectors and size.19

Egypt's economic liberalization policies, together with the migratory waves of Egyptian labour to the oil-rich Gulf States, deeply affected Egyptian social fabric. In addition to the socio-economic changes resulting from economic liberalization, Egypt's heavy dependence upon the US and the Arab countries provided the former with enough leverage to push for a greater measure of pluralism. The encouragement and financial support for private business enterprises caused further changes within the social stratification of the Egyptian society.

Socio-political observers, in Egypt, contend that, under the open-door policy, an expanding bourgeoisie may have acquired state control. This took the form of a powerful joint Egyptian–US chamber of commerce and the so-called Egyptian Businessmen Association, where both had, and still have, direct links to the cabinet, working as advisory bodies. The resulting policies led to growing class inequality in the provision of public services, particularly shelter.20

Under Sadat, from the early 1970s, there seems to have been a time lag between political thinking and legislation. While on the macro-level there appeared to be a reorientation and liberalization movement; on another level, most laws and regulations created by Nasser were untouched. Legislation that fulfilled the new agenda was enacted but left to operate under the constraints of the existing system.

The period under Mubarak, arguably, was primarily one of extension, together with consolidation of the social structure, rather than any radical change. Under the economic reform and structural adjustment strategies (post-1981), it was argued that liberalized market forces would give low-income groups higher incomes as a result of higher productivity, savings, investment and exports. Evidence indicates that economic reform and structural adjustment have led to a serious deterioration of the living conditions of the urban poor (Burgess et al, 1994).

There is also an inherent ‘orthodox paradox’ in the reform programme. The policy imperative of reducing state intervention contrasts with the fact that the state, itself, is responsible for implementing these changes. State agencies are, in fact, being asked to determine their own end. Since public employees are likely to see their jobs disappear with the ‘reform’, the opportunities for delay, or even sabotage, are considerable. This general concept can be applied to any sector, and largely explains the slow reform of laws and regulations controlling the housing market and organizational reform of bodies responsible for such sectors. Given Egypt's unique development trajectory over the preceding decades of a relentlessly enlarging bureaucracy as both a manifestation of, and an instrument for, the co-option of the masses, such resistance to the imperatives of market enablement is hardly surprising.

The government's aim throughout the 1970s and early 1980s was to demonstrate an economic boom, real or imaginary. The ‘false’ prosperity created by dependence upon imported foreign capital and aid contributed to the delay of any real structural reform. At the same time, and in contradiction, the principal characteristic of government policies was to divorce itself from responsibility. What the government interpreted, at that time, as laissez faire or open liberalized approaches may have spiralled out of control. But the question to be posed here is whether this was a conscious process or a continuation of the state's short-term objectives, which in most cases result in unexpected consequences.

The state's mode of intervention

The state's allocation of investment between 1952 and 1970 shows that, while there was fluctuation in other sectors, there was a rapid fall of investment in housing. This paralleled a constant increase in industrial investment over the same period. Macro-economic policies were aimed at reducing investment in housing – a ‘consumption’ sector defined as a welfare service – and redirecting it to ‘productive’ industrial and manufacturing activities. A possible explanation, although the evidence is not categorical, is that the state's intervention was aimed at making investment in the housing sector less appealing or non-profitable. One of the strategies may have been the creation of an imbalance in the supply factor via direct provision from the government's side; another was the continuous intervention in laws and regulations concerned with land, building materials and, most significantly, rent control.

Rent control, if put in its context, was the start of the state taking control of the housing sector, as it did with agriculture and industry, perceiving the capitalist class as ‘exploitative’. In the medium term, rent control accelerated the deterioration of buildings. Owners were reluctant to carry out any maintenance due to the low rent they received, contributing, yet further, to shortage of supply by loss of existing stock. The most important effect of rent control, however, was that it constituted a disincentive for investing in low-income housing.

During the Nasser era, both state intervention and the type of provision reflect the underlying themes: state efforts were directed to the formally employed with secure jobs; the informal sector, under a ‘modernization’ development paradigm, was not recognized. It could also be argued that the interaction between political objectives and the influence of modernization theory produced the state's attitude during this period.

Under Sadat (1970–1981), the outcome of external pressures and domestic interests, in so far as the urban sector is concerned, was to set the scene for an ongoing, though conservative, receptiveness towards policy initiatives, dictated by both domestic and international concerns. The government's continuing inability to assert/decide which sector should lead had serious implications at the macro-economic level, manifesting itself in the housing sector and the way in which the state intervened. The government experimented with several approaches (for example, sites and services, urban upgrading and new towns), but without a coherent overall strategy, demonstrating, again, its pragmatic managerial attitude towards problems that require more than a pragmatic response.

The state's indecisiveness and delegation of the task to the private sector, while maintaining control over the market, resulted in serious distortions. The effects and biases of state policies led to the division of the construction industry into three or more market systems, controlling housing production in the informal and formal sectors. These market systems determined forms of distribution, consumption and exchange value, leading eventually to a profit for people who dominated the market.

From the late 1970s onwards, there was a shift in the government response towards slums and informal areas. This shift towards aided self-help was the result of two main factors.21 The first was the massive growth of spontaneous housing, which was a reflection of a more general growth of the ‘informal sector’. At the same time, the failure of slum clearance and public housing to deal effectively with the problems of slum dwellers or to provide other services needed by growing numbers of poor urban households became clear by the early 1970s.

The second factor was the pressure that came from international lending agencies and, in particular, the World Bank. The World Bank argued for a new approach to urban development, which incorporated various forms of aided self-help (World Bank, 1972). Similar approaches were followed by USAID and the UK Overseas Development Administration (ODA), now the Department for International Development (DFID); the three were heavily involved and operational in Egypt during this period. The two packages, which received the most support, were sites-and-services and upgrading schemes.

The structure of Egypt's state apparatus and its essentially conservative bureaucracy created significant resistance to developing, operating and implementing such novel concepts. Hence, they were accepted in principle, but very little was realized. From the politicians’ point of view, upgrading was a failure or an inadequate approach, while sites and services were termed ‘organized slums’. A possible interpretation of this is the lack of prestige and visibility such projects afforded.

Such approaches were a prerequisite to the aid flows; but the challenge was how they could be implemented practically by an apparatus unused to a participative ideology. At an institutional level, the government had not fully appreciated the reforms necessary to embrace, the new paradigm of growth with equity in the urban sector.

The government went further to experiment with new towns, but adopted the same rigidity of approach, thus undermining their chance of success. Housing policy remained primarily the same. It can be argued that the aim of the new town experiment was a political one, devised as a showpiece in order to demonstrate the state's commitment. But the new towns constituted a massive drain on scarce resources, and the benefits were further accrued by the ‘haves’ and not those originally targeted.

Inevitable outcomes

Quantitative and qualitative misdistribution by region and social group, and numerous dwellings of ‘substandard’ quality, were the main manifestations of the problem at the end of Nasser's rule. There was a disjuncture between the state's announced objectives and the implications of its intervention. The majority of state production was allocated to government employees. Goals to provide sufficient low-cost housing for low-income groups were not achieved. The ‘formal’ sector production was accessible for only 25 per cent of the urban population, mainly due to cost.

In summary, public housing policies were not designed for, or allocated to, the poorest of the poor and seem to have served three functions. First, housing policies were intended to co-opt the masses: the state built houses when it needed their support more as a gesture than a realistic or feasible attempt to satisfy housing need. Second, such policies helped to create jobs and, more importantly, helped to sustain the construction industry. Finally, the same policies provided for government supporters, for members of middle-class groups in strategic positions and for government officials. They served, in short, both growth and legitimacy objectives.

Towards the end of the 1990s, the accumulated outcome could be summarized in three words: housing market distortion. Such distortion manifested itself in different forms:22

  • A massive gap between cost and affordability for rent or ownership of new buildings. The rate of increase in the cost of building materials and construction averaged between 15 to 20 per cent per annum. At the same time, the rate of increase in land prices was 20 to 30 per cent, and in some years reached 40 per cent per annum. Simultaneously, the national growth and development rate had contributed to a mere 5 per cent increase in incomes. Hence, affordability was in continuous decline.

    However, there was also a massive gap between prices and affordability for owner-occupier dwellings. An average dwelling would cost between 7 to 10 times an average household annual income, while it is normally around 3.5 to 5 times.

  • Artificially low rent levels of existing tenants. Several studies indicated the disproportion between rent values and income levels. In a city such as Cairo, rent constituted around 0.02 per cent of an average household income, while acceptable international standards should be 15 to 20 per cent. Controlled rent values were far below a realistic rate of return, while purchase values were far higher.
  • Imbalance from the shift to owner occupation. Since the late 1970s, there has been a major shift to owner-occupier and away from rental markets. This was a direct reaction and natural response to the distortion in the housing market created by rent control measures. Building for rent proved to be unfeasible as an investment. It could be argued that rental had totally disappeared from the new housing market in Egypt.
  • Distortions from the shift to middle- and high-income housing. There was very little, if no, investment in low-income housing. This resulted in a surplus of middle- and high-income housing of around 2 million units, as previously indicated, and a shortage in low-income housing. The situation is aggravated when it is taken into account that low-income groups in Egypt form approximately 40 per cent of the population.
  • Imbalance between formal and informal housing. During the last three decades, 60 per cent of the housing stock was built by the informal sector. This figure soared during the 1970s to reach approximately 80 per cent. Over the last four decades, the formal sector's contribution, public and private, did not stretch beyond 40 per cent of the housing stock.
  • Limited savings and borrowing. As for housing finance, banks and financial institutions have always declined to take part in such activity because of the instability and distortion of the market. Of all banking investment in Egypt, only 1 per cent is invested in housing. In a balanced efficient market this should reach around 20 per cent. This poses a fundamental question: how can the housing issue be addressed without finance?

It is clear from the above that state intervention moved in opposing directions. In attempting to achieve what appears, in theory, as sound and just policies, it has constantly harboured questionable motives. Through the approaches that it adopted – such as building new towns and upgrading existing housing stock – it is evident that the state was trying to juggle and mediate interests and pressures while appearing committed to the masses. Its primary end was to achieve short-term objectives and to maintain stability. This chapter argues that the approach was formulaic and minimalist – a balancing act by the state. By accepting and promoting any specific intervention, successive governments could appear to be restoring trust between themselves and the masses, while conveying the message that incorporation in development projects is conditioned by cooperation. In practice, they did little more than commence a process of patronage, which trickled down from the macro to the grassroots level.


This chapter has addressed the more significant aspects of the political economy in Egypt. The goal has been to assess the impact of domestic and external factors on policy-making and intervention efforts in three distinctive eras of the country's modern history. With a focus on Egypt's shelter sector, a picture has been presented of the different structural factors that have contributed to shaping the state's response to the housing question over time.

Reflecting back on the propositions made in the introduction, the following conclusions can be drawn. The first proposition suggested that, while the state may be receptive to external pressure, this reciprocity is constrained by the extent to which external agendas fit domestic needs and the social contract between the state and various class interests.

On the macro level, intervention measures and development projects appear to have been skewed by political considerations, either domestic or derived from the interaction between internal and external imperatives. The result is the same: state intervention characterized by an ad hoc approach. The case of Egypt shows, to a great extent, that intervention efforts did not go beyond remedial, reactive measures.

The second proposition suggested that external assistance, aimed mainly at geopolitical objectives, frequently has negative effects. The result has generally distorted policies and led to inconsistent policy shifts, linked to the emphasis on the state's role as interest mediator.

If external factors are added to the equation, there has been a major gap on the macro level in Egypt between the manifest objectives of internationally driven urban development programmes and the broader geo-strategic interests that give rise to them. From the point of view of foreign and domestic interests, the state's mediating role was to accede to the demands of the donors. It was constrained, however, by domestic political agendas supported by a resistant bureaucracy. From the point of view of the international donors, the specific conceptual and operational objectives of urban development or shelter provision were subjugated to a broader geopolitical agenda, one which supported Egyptian compliance with a Western agenda and the operational desire to achieve speedy implementation.

It is unrealistic to expect these broader imperatives to have meshed cleanly with the development policies, programmes and projects in Egypt. The underlying issues, here, are how these international political and technological agendas impacted upon the domestic agendas of Egypt, upon the evolving definition of the social contract and, consequently, upon the conceptualization of interest mediation. As seen in this chapter, the policy-making process, in many sectors in Egypt, is essentially the interaction between the needs of the state (especially the autocratic tendencies of the leadership and the local elite) and external forces. These forces determine policies according to the perceived interests of the principal stakeholders and their own relatively short- to mid-term agendas.

Structural changes in development paradigms do not appear to be the main determinant of the policy shifts. Rather, it is the combination of short-term and specific international and state interests, and its responses to international assistance, which is instrumental in the policy shifts and modifications in approaches. There is a conjuncture of three significant determinants of project and programme delivery: the containment of social unrest at the national level; pragmatic geopolitical interests on a regional level; and practical requirements to implement visible showpiece projects or to achieve prompt disbursement of funds at the local level.

More specifically, political unrest during the periods under investigation could be attributed to the same root cause: the failure to address the basic needs of the population, such as transportation, education and, particularly, housing. Indeed, the more the regime failed to address the housing question, the greater the threat of unrest. This threat, in turn, led the state to adopt expedient intervention measures, which primarily concentrated on the containment and maintenance of stability. In other words, the more the regime failed to address the housing question, the more political unrest threatened stability. On the other hand, the more the state sensed this threat, the more it adopted intervention efforts and measures that only aimed at maintaining stability.

Another conclusion relates to foreign aid and market forces. It is also clear that a shift to a market economy underwritten by the assistance programme was inherently contradictory. The question was not only one of intergovernmental and intra-governmental conflicts in terms of perceptions and priorities, but also a conceptual problem that may well have hindered aid efforts.

Underpinning this is a crucial point: aid and structural adjustment, in Egypt and in most developing countries, do not take account of the dualistic nature of the market. Much intervention assumes that the market is characterized by full and free competition, where prices are flexible, respond instantaneously to changes in consumers’ demand and initiate an immediate increase in supply (Riddell, 1987). The case of the housing sector, and other sectors in Egypt, defies this assumption. Production is monopolized by a small number of bodies, including the state. Linkages between consumers and producers are far from perfect and the state controls almost all elements of the market, from laws and regulations governing the cost of materials and rents, to land and finance.

There have been unusual circumstances in the Egyptian case, which circumscribe the applicability of the findings to other situations. These have been the central role that Egypt plays in the Middle East; the special relationship which the country has with the US, in particular, and major donor countries, in general; the rapid and dramatic changes and shifts in the country's ideological orientation and alliance, from the East to the West and at the height of the Cold War; and the significant impact of the latter upon changes in the social structure, interest groups and class alliances.

First, the policy-making process is an outcome of the interaction between the needs of the state (especially the autocratic tendencies of the leadership and the technocrats) and external forces that determine policies according to a different agenda (geopolitical, in some cases). Second, outcomes may, therefore, not be generated by a conscious policy-making process, but, instead, directly from political impact.

The third point is not just the width of the gulf between politicians and technocrats, but the nature of it. When considering intervention, it appears that both groups tend to use the same tools for different ends. While technocrats deal with factors of production in isolation from the interaction between domestic and external determinants, politicians attempt to use technocratic ‘fixes’ to achieve a stability agenda. The end result, in either case, is that the root causes (mainly structural) are not addressed.

Fourth, examination of the consistency between the state's announced ideological orientations and objectives and the final outcomes reveals further ambiguity. It appears that state intervention is determined not only by the prevailing development paradigm, but also, to a greater extent, by the interaction between such paradigms and the state's short-term specific political objectives, whether domestic or international.

On the other hand, policies and provision can produce changes in the social structure, which, in turn, become key factors in the evolving social contract. The chapter shows how state policies such as nationalization, and price and rent controls, were used as instruments to appease the urban masses and build public support for Nasser's new regime. Such policies cultivated a new middle class, which gradually took control of the state apparatus and later shifted policies to serve its own interests. Simultaneously, the government maintained the same rhetoric of alliance to low-income groups. With minor exceptions, the same processes appear to have continued throughout Sadat's period and beyond into the Mubarak period. Government policies can thus create new forces which then work, not surprisingly, for their own interests but distort the original policy objectives away from the target group. The state often finds itself in a position of having to mediate unanticipated interests representing groups generated by its own policies.

Finally, the chapter demonstrates the importance of focusing on the domestic and external macro level. It attempted to link this to the outcomes, rather than to assess ‘on-budget’ state expenditure. Such approaches and models generally fail to account for the effects of factors such as class movements, alliances, socio-political transformations, external political agendas and the impact of development paradigms on social change. Such factors continue to significantly determine policy formulation and state intervention by constantly redefining the nature and role of the state.


1   The term ‘state’ has a specific connotation in political theory. However, in a case like Egypt with limited political institutional development, the term can have a very specific and different meaning. In the text, the term is sometimes used to refer to national interests, at other times to government. The reason for this is that the state, in the case study, is a conglomerate of institutions and agencies whose interests may sometimes conflict. The actual decision-making process is in the hands of a centralized and concentrated power structure that controls the capital (for example, in the Egyptian–US Chamber of Commerce, the president and prime minister act as executives). The idea of an efficiently functioning representative system is questionable. The focus of the study, therefore, is on the central organs of the state. As the determinants of public policy, the study treated them as entities when examining their relations with prominent groups in the society.

2   Other measures included subsidization of popularly consumed commodities, a ceiling on incomes and a progressive income tax, and arrangements for worker profit sharing.

3   The central objectives of the Kennedy administration were to keep the Arab–Israeli conflict from open war; to limit Soviet influence in Egypt; and to restrain Nasser from attacking Western interests in the Arab World (Burns, 1985).

4   Between January 1961 and February 1962, the Kennedy administration signed three ‘Title I Food for Peace’ agreements with the Egyptian government, committing the US to provide about US$170 million worth of surplus commodities to Egypt.

5   The average for the decade of 1960–1970 was 11,000 public-sector units per year.

6   Several forces converged to produce this transformation: the elite who had lost faith in a public sector burdened by bureaucratic inefficiency, corruption and populism as a viable engine of development; the private sector and bourgeoisie who could help to revitalize the economy; servicing the continuing debt crises, which in the 1970s absorbed 40 per cent of export earning; and population growth surging beyond agricultural production, and thus necessitating hard currency for food imports, only obtainable through aid and a Western reorientation (NCSCR, 1985a).

7   The US accounted for nearly half of the foreign aid going to Egypt. More than US$7.6 billion in loans and grants had been obligated between 1975 and 1982, roughly divided between project aid and various commodities (Weinbaum, 1983b).

8   Foreign assistance peaked at US$2.9 billion in 1977 – nearly three times the 1973 figure and sourced from a range of Western bilateral and multilateral donors. Non- US aid doubled from 1976–1979 to US$1.1 billion; but the US accounted for nearly half of Egypt's foreign aid, with more than US$7.6 billion in loans and grants obligated between 1975 and 1982, roughly divided between project aid and commodities (USAID, 1981).

9   By 1981, the USAID mission in Egypt had become by far the largest AID post in the world, with more than 100 professional staff members and numerous attendant consultants and specialists on temporary assignments. In its aid relationship with the US, Egypt arguably represented a ‘case of a totally dependent and “penetrated” country’ (Nonneman, 1988).

10 This is supported by two sources of data: data from the survey carried out in this research: interviews with US and Egyptian officials working on aid projects; and data from an earlier research project looking at the impact of foreign technical assistance on urban development paradigms in Egypt. The crucial point investigated in the later research project was how projects come to exist, and how and who decides priorities and on what criteria (see Zetter and Hamza 1997, 1998).

11 Revenues from petroleum exports and foreign remittances, and ‘strategic rent’ from bilateral and multilateral donors, in return for supporting US foreign policy goals in the region (Richards, 1991).

12 The growth of GDP slowed down during the 1980s, reflecting the economic crisis that Egypt faced during this period. Between the mid 1970s and early 1980s, GDP grew at an average rate of around 9 per cent; and through the mid 1980s the growth rate was still impressive at 6 to 7 per cent per annum. But in the second half of the decade, the rate of GDP growth decelerated, reaching as low as 1.5 per cent during 1991–1992 (UN, 1993).

13 The World Bank (1991) estimates that Egypt's nominal debt grew from less than US$2 billion in 1970 to about US$21 billion in 1980, to roughly US$50 billion in early 1990. If the debt-to-gross-national-product (GNP) ratio is calculated using the free market exchange rate, by 1990 Egypt owed a sum equal to 150 per cent of the value of GNP, the highest ratio in the world.

14 The hybrid legacies resulting from the opening of Nasser's state-dominated economy to the international capitalist market, and the protected interests of the elite, proved durable where the public sector was still the main engine of investment (75 per cent of the total). The bureaucracy, employing a large number of the middle class, was a formidable constituency, a safety valve and an instrument of control. Yet, Mubarak also inherited the contradiction between the standards of nationalist legitimacy established under Nasser, and Sadat's foreign policy alignments.

15 This applies to the macro-economic level in almost all sectors, in general, and manifested itself in specific sectors, such as housing, leaving measures such as rent controls untouched until as late as 1996.

16 From the late 1970s to 1990, Egyptian debt increased tenfold of approximately US$53 billion – about US$42 billion in public- and private-sector debt and US$11.4 billion in military debt (World Development Reports 1979–1997, World Bank).

17 Egypt's position has always been to emphasize the importance of remaining politically stable and to use its strategic importance to extract favours. This is another clear example and evidence of the state's interest-mediation role and the interplay of international and geopolitical issues to fulfil domestic agendas and interests. The Gulf War bargain was attractive, both economically and politically. Economically, the reduction of up to US$20 billion of debt cut yearly interest payments by US$2 billion for the following ten years. Politically, the agreement was easier to sell domestically since the government could argue that its creditors were shouldering part of the burden of past mistakes. Key persons interviewed during the course of this study also confirmed this.

18 This could serve to indicate which group benefited in the end, and how the apparent commitment of the state to the poor resulted in a counterproductive outcome.

19 Under law 43 of 1974, a substantial number of real estate, construction and development companies were established with joint Egyptian and foreign capital. However, very few of these companies catered for low- or even middle-income housing (NCSCR, 1985b).

20 For example, public discourse, at the time, suggests that the bourgeoisie was able to commit the government to the investment of scarce public funds, heavily conditioned external loans and aid money into a network of flyovers and highways, benefiting well-off motorists at a time when public transport was deteriorating.

21 An additional factor was the fear that slums and informal areas could be a seedbed for political unrest.

22 Sources on price increase and other statistical data are Rageh (1996, 1995) and Zaitoun (1980).


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