Tarik Yousef, Harvard University

Few economies in the 19th and early 20th century were as profoundly impacted by specialization in the production and export of a single agricultural export commodity as was Egypt by cotton. In addition, until the tariff reforms of the 1930s, Egypt operated under a free trade regime with commodities flowing in both directions free of any significant taxes or restrictions. Agreements signed with the European powers and enforced by British Administration after 1880 deprived Egypt of its tariff autonomy. Was EgyptÕs largely open and non-interventionist trade regime optimal? The optimal tariff was a central concern to Egyptian economists and policy makers in the inter-war period and has been an issue for debate among economic historians. At issue is the belief held by authorities in the 1930s that Egypt conformed to the small country-assumption in world cotton markets, or at least faced a very elastic demand curve, and, hence could not have implemented an optimal tariff or manipulated prices to her advantage. In spite of the importance of the issue, no econometric estimates have been calculated of the price elasticity of world demand for Egyptian exports. Using time-series and panel data for the period 1895-1939, this paper demonstrates that Egyptian long-staple cotton commanded significant market power in world markets. Why was not an optimal tariff implemented? A counterfactual optimal tariff would have generated huge revenues, making it possible to finance EgyptÕs industrialization plans. However, the partial-equilibrium welfare effects also indicate that the burden of taxation would have been shared equally by Egyptian landlords and British interests in Lancashire. Thus, an optimal tariff was incompatible with the goals of EgyptÕs ruling elite. A political economy equilibrium between the landed elite and foreign consumers dictated the orientation of trade policy until Egyptian nationalists rose to power in 1952 and ushered in the era of state-led industrialization and anti-trade bias.