The cost of cronyism under Mubarak

Beesan Kassab , Thursday 14 Mar 2019

How much did crony capitalism cost Egypt under former president Hosni Mubarak? Beesan Kassab sifts the evidence

Concentration of politically connected firms in the heavy-consumption energy sectors

“Crony Capitalism in the Middle East: What Do We Know and Why Does it Matter?” was the subject of a discussion last week focusing on the Mubarak era by Alternative Policy Solutions, a public-policy research project at the American University in Cairo (AUC).

Crony capitalism has been the subject of various studies conducted after the Arab Spring Revolutions in 2011 focusing on the period before the revolutions that saw economic liberalisation across the Arab region.

The AUC event was hosted by Adeel Malik, professor of the economics of Islamic societies at Oxford University in the UK. Malik said that 385 companies in Egypt had seen significant cronyism and had been associated with former president Hosni Mubarak’s regime between the late 1990s and 2011.

Some 497 companies in Lebanon and 662 companies in Tunisia had been similarly connected to their countries’ political regimes. In Morocco, 370 companies are owned by holding companies indirectly controlled by the king.

Egypt ranked first among Middle Eastern countries in terms of the exposure of its economy to cronyism, with 50 per cent of companies having political links with the regime, whereas in Tunisia and Morocco this had reached 40 per cent and in Lebanon 20 per cent, Malik said.

The findings will be published in his book Cronyism in the Middle East: Business and Politics from Liberalisation to the Arab Spring co-authored with Ishac Diwan, a visiting professor at Columbia University in the US and director of the political economy programme of the Economic Research Forum, an association of Middle East social scientists.

Malik said Egypt’s manufacturing sector had doubled the proportion of business owners with links to the regime between 1996 and late 2000, much like in Tunisia and Morocco.

In Egypt, cronyism was present in companies with ties to the former ruling National Democratic Party, whereas in Tunisia the companies were connected to the Democratic Constitutional Party, the ruling bloc before the eruption of the revolution.

In Morocco, companies linked to the royal court showed signs of cronyism. In Lebanon, companies had ties to the leaders of the country’s different sects, while in Turkey companies were connected to the ruling Justice and Development Party.

There are various benefits to businessmen from being associated with political systems, Malik said, including political support, funding, help in acquiring profit-making public-sector companies when these are slated for privatisation, the facilitation of trade barriers and land allocations.

In Egypt, sectors politically linked to the regime had signed more free-trade agreements with the European Union than unconnected firms.

In “Cronyism and Growth in Egypt”, a World Bank working paper released in 2015 authored by Diwan, Philip Keefer and Marc Schiffbauer, it was found that companies politically associated with the regime had received more benefits from subsidised energy directed to the industrial sector than those not close to the ruling system.

 “Companies that were politically connected to the system received 92 per cent of the total loans granted to the private sector,” Malik said.

A study released by the Economic Research Forum conducted by Diwan and Schiffbauer in 2016 called “Banking and Crony Capitalism in Egypt” concluded that companieswith political ties had received the larger portion of bank loans between 2003 and 2010.

The study looked into why private banks preferentially channelled loans to politically connected firms.

“Using a rich corporate dataset, we find that politically connected firms did not have higher profitability compared to non-politically connected firms. This suggests that politically connected firms were perceived to have lower risk. Indeed, we find evidence that this was the case, and that lower risk reflected higher access to bailout guarantees (implicit or explicit), as happened in earlier periods, and/or higher perceived growth opportunities,” the study said.

The 1990s saw politically connected companies enjoying the support of the state-owned banks in Egypt, which enabled them to assume larger roles in an economy that was heading towards greater liberalisation.

This allowed such companies to achieve more benefits from the following phase of liberalised economic policy than firms that were not so politically well-connected.

“In 2010, the companies associated with the system achieved 60 per cent of the profits, while the rate of creating new opportunities did not exceed 11 per cent… In the absence of cronyism, job creation was supposed to reach 25 per cent” in the public sector. “But the sectors in which the proportion of cronyism increased became distorted in terms of the distribution of labour,” Malik said.

The World Bank study concluded that businessmen with close connections to the ruling elite were able to manipulate the larger portion of the official private sector in Egypt by developing relative hegemony over protection and subsidies, allowing them to increase their market shares in comparison to their competitors.

The study looked at data collected on 469 politically linked companies under the Mubarak regime before the 25 January Revolution. Politically connected firms in a sector have negative effects on aggregate growth, leading to a decline in the number of medium and large companies, the study said.

*A version of this article appears in print in the 14 March, 2019 edition of Al-Ahram Weekly under the headline: The cost of cronyism 

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