[Market Economy Guide] Is Big Government Best?

Egypt’s Industrialization Drive to “Become Like Britain” … Failed Due to Corruption Because It Was Not Left to the Market

In 1805, Muhammad Ali, then a general of Egypt under the Ottoman Empire, seized power through a military coup. Muhammad Ali, known as the “Father of Egypt,” wanted to develop Egypt into a modern state independent of the Ottoman Turkish Empire. To that end, he attempted a massive, state-led industrialization of Egypt.

He confiscated most of the land and used it to cultivate Jumel cotton. Egyptian Jumel cotton was of the highest quality and sold at very high prices. Muhammad Ali reaped enormous profits by exporting Egyptian Jumel cotton abroad. He also forcibly purchased ordinary cotton, grain, and other agricultural products from peasants at low prices and exported them at high prices.

The money earned in this way was used to finance industrialization. Muhammad Ali established modern cotton mills and imported British power looms. With abundant cotton and modern equipment, he intended to greatly develop the cotton textile industry. But the result was a complete disaster. Even with the latest facilities comparable to Britain’s, there was no one capable of operating them properly. Muhammad Ali spent huge sums to bring in factory managers from Europe, but the Europeans did little more than provide management advice, while the actual operation of the factories was left to Egyptians and Turks. Since complete novices with neither experience nor know-how in running modern cotton mills were suddenly put in charge, there was no way things could run properly.

Only Imitating the Surface of British Industrialization

Another contributing factor was the absence of an incentive system that could strongly motivate people to work hard. Senior factory managers, rather than devoting themselves to their work, were busy lining their own pockets through bribery, embezzlement, and other corrupt practices. Meanwhile, ordinary workers who actually produced the cotton textiles were not even paid properly. Naturally, no one wanted to work in the factories, and in the end labor had to be procured through forced conscription. Workers who had been dragged there against their will merely pretended to work, while management stood by indifferently, preoccupied with pocketing illicit money.

Given this situation, the productivity of the cotton mills was appallingly poor. The finished goods were so bad that they could not even be exported, and the expensive machines broke down one after another. The machinery had not been properly maintained, and sand got into the equipment.

Thus, Egypt’s industrialization, “imposed from above,” ended in utter failure after wasting enormous amounts of money. It may have looked outwardly the same as Britain’s, but unlike Britain’s Industrial Revolution, it was not driven by the market’s “voluntary power” but by the coercion of a dictator—an outcome that was only to be expected.

There is a saying: “You can lead a horse to water, but you can’t make it drink.” What if Muhammad Ali had led industrialization according to the principles of the market economy? What if he had hired Egyptians who actually wanted to work as laborers in cotton mills, paid them according to their efforts, and boosted their motivation with incentives? Perhaps Egypt might have achieved dazzling industrialization and risen into the ranks of the world’s advanced nations.

Big Government and a Small Market Always Fail

Historically, there has never been a successful case of a “big government, small market” model. The same is true when economic growth is pursued under government leadership rather than through market autonomy. The failure of Egypt’s forced industrialization is a prime example. In fact, today’s advanced countries achieved rapid growth on the basis of large markets and small governments.

Whenever problems arise, there are always people who call for swift solutions through active government intervention. They believe that most crises—economic recessions, environmental pollution, epidemics, natural disasters, inequality, and the like—can be overcome through government-led action.

But ultimately, the affairs of the world are carried out by people, so success does not automatically follow simply because the government acts with good intentions. Rather than stepping forward with the zeal to solve everything itself, the government should have the wisdom to provide incentives so that the private sector can solve problems voluntarily.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 큰 정부는 최선인가?

Author: Sung-no Choi

Date: 2018-11-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=16&idx=11244