Bribes and prejudice: why anti-graft measures worry Egypt's economists

Michael Gunn, Wednesday 4 May 2011

Egypt's anti-corruption purge has sparked debate between idealists calling for a full reckoning and pragmatists concerned about the effects on a tottering economy

The stuff of Egyptian businessmens' nightmares? Former regime officials hold an informal meeting (Photo: AP)

“Thief! Thief!"

Cries echo around the prim apartment-lined streets of an upscale northern Cairo neighbourhood as a bowed but finely-groomed figure emerges into the winter night flanked by two black clad police officers.

Expensively-cut suit offset by clinking handcuffs, this once proud pillar of the business community is frogmarched past a baying crowd then bundled up steep metal steps into the dark interior of a police wagon. As the convoy rumbles away in a blare of horns, enraged citizens surge forward hammering the trundling vehicle with their bare hands. The chant builds: "Give us back our money!"

It's a scene that's been repeated across Cairo's wealthier enclaves since Mubarak's fall in mid-February as state prosecutors, egged on by overwhelming popular sentiment and compelling evidence, have swooped on dozens of members of Egypt's business elite.

Taking place amidst the backdrop of an economy already battered by labour disputes and fragile security, the situation has sparked debate over just how far anti-corruption probes should go.

The vast majority of cases involve figures from the former regime -- a sign of how tightly entwined business and politics had become during Mubarak's 30-year rule. The accusations are legion: elaborate and stunningly remunerative under-the-table deals, bribery, favouritism and massive squandering of state funds.

Many view the Egyptian revolution incomplete if it fails to bring a full reckoning for decades of corrupt business practices. But dig too deep, claim some influential commentators, and Egypt risks destroying successful companies, scaring off investors and causing long-term economic damage. It’s a classic battle between idealism and pragmatism.

For Madga Kandil, head of the Egyptian Center for Economic Studies, enough is enough.

"Three months after the revolution and economic indicators have not improved and the private sector has not resumed investment," she tells Ahram Online. "People I'm talking to are scared of investing, and corruption investigations have contributed to this anxiety."

Other accounts back this up. Insiders talk of a “culture of anxiety” within Egypt’s business community, as members speculate on whom the prosecutor general will target next. Several prominent businessmen Ahram Online tried to interview had already relocated abroad.

"There are people who are very worried right now," says Hesham Ashmawy, head of the Egyptian American Business Association, a frequent commentator on economic issues on Egyptian TV who is close to key business figures. "Many are already awaiting trial, others have run out the country. There will be people getting deeper into corruption to hide their previous corruption."

The fall has been sudden and humiliating. Steel tycoon and NDP chief whip Ahmed Ezz was one of the first to be detained and now languishes in Tora prison, southern Cairo. At least a dozen corruption suspects have joined him.

Even those under investigation who have remained free -- like Ahmed Heikal, the founder of investment bank Citadel Capital -- have been hit with travel bans. At least 25 former regime officials with suspect business interests have found their assets frozen.

The net effect has been paralysis. With CEOs detained or living abroad, business has flatlined, symbolised by a mordant stock exchange and weak first quarter profit reports. Those who remain in Egypt are worried enough about running normal operations, let alone making new investments.

Central bank limits on capital transfers, put in place to halt the flight of misbegotten funds, have had side effects on companies reliant on overseas suppliers, slowing deliveries and further hampering trade.

All this comes at a crucial time. Egypt’s post-revolution economy is tottering, with depleted tourism revenues and stalled manufacturing facing off against a widening budget deficit and popular pressure for expanded public employment and subsidy programmes. Samir Radwan, Egypt's finance minister, recently revised expectations for 2011 growth in gross domestic product from 7 per cent down to 1 per cent.

We need to regain momentum," argues Magda Kandil, who thinks the government needs to make a clear statement on the limits of corruption trials and draw a line under investor concerns.

More worryingly, she suggests the current status could have a knock-on effect, creating further unemployment and escalating living costs, potentially fuelling future unrest.

“The new government has made promises about public spending that it won't be able to keep without the private sector,” says Kandil. “If we don't see improvements then we'll be running around in circles and still complaining next year.”


Most proponents of a full corruption purge argue on the basis of morality and justice but others believe there’s a compelling case for its long-term economic benefits. In this view, endemic corruption was a barrier to deeper foreign investment and eradicating the worst practices will boost investor confidence.


“It’s not true that investors are being sent away by the wave of investigations against businessmen,” says Mohamed Metwally, chairman of the Arab Company for Investment and one of the few prominent businessmen to participate in anti-Mubarak protests from the start.


“Countries abiding by the rule of law which have effective anti-corruption legislation actually attract money. It's a sign of safety for businessmen and investors that nobody is above the law."


A recent report by anti-corruption watchdog Transparency International (TI) cited foreign unease about investing in North African countries based on fears of the need for bribes, a favours system and a lack of transparency.


That was certainly the case in Mubarak’s Egypt, according to Omnia Hussein, Egyptian coordinator for TI. "It was a system where business and politics fed on each other," she says. "Those in the cabinet and the legislature had massive economic interests in the private sector they were supposed to be monitoring."


And this seems to the crux of the argument. No one is arguing that a corrupt system should be protected – rather, they are questioning the feasibility of quickly and fully excising corruption from an environment infected by it for decades.  


Restructuring is likely to take years, if the example of post-Suharto Indonesia – a corrupt dictatorship par excellence – is any guide. Some 10 years after Suharto’s 1998 resignation, much of his fortune remained missing and his corrupt business practices were still mired in legal investigations.


“Each Egyptian on a daily basis followed corruption by virtue of living in a corrupt system,” says Hussein. “I get worried when I hear people saying all businessmen are corrupt. We need to differentiate between the enablers - the corrupters - and those who just played by their rules - the corrupted." In short, this isn’t the case of a few bad apples; rather it’s about degrees of culpability.

Regaining investor trust can be done, says Hussein, by following a case-by-case approach. Laws that were tailored to people's business interests, such as those dealing with procurement and land settlement, allow investigators to target specific violators and beneficiaries.


Widespread regulatory reforms are also needed, says Mona El-Baradei, economics professor and executive director of the Egyptian National Competitiveness Council, who believes media coverage of corruption investigations has been unhelpful.

“By law the businessmen facing trial today are innocent until proven guilty but the media has been labelling them 'criminals' before any court rulings,” says El-Baradei. “You’ve got to reconsider laws and restructure supervisory bodies. Most importantly, you need to build a strong system of checks and balances.”


Magda Kandil agrees that "sensationalist reporting" has inflamed the situation and suggests the media restricts its coverage of on-going investigations.


Some businessmen so far untouched by scandal welcome the scrutiny but others complain of 'mudslinging' accusations used to settle personal scores against businesses that may have done nothing wrong.

“These days, anyone who puts together a dossier gets a hearing,” a business analyst told the Financial Times last week. “The prosecutor doesn’t want to look bad, so he shoots first and asks questions later."


In the end, however, pragmatism may win out. As one financial commentator puts it to Ahram Online, the prosecutor general only has 18 hours a day and 365 days a year to do his work -- the immensity of Egyptian corruption may be beyond even the broadest investigations. Idealists may have to temper their desires for justice, or at least be satisfied by a trickle rather than a flood of anti-corruption cases.


At the same time, New Egypt will have an uphill struggle trying to sideline practices of off-the-books agreements, nepotism and favouritism, that long predate Mubarak’s rule.

"We’re not talking about just the last 30 years, we’re talking centuries,” says Hesham Ashmawy “There will always be corruption in Egypt -- we're looking at reducing the percentage. We don't have a remote control where we can push a button and stop it."


(Additional reporting by Salma El-Wardany)

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