The political economy of transformation in the Arab region: Between cronyism and dualism

This post was written by Kaouthar Gazdar (PhD in Economics, University of Sousse) & Hajer Kratou (PhD student in Economics, University of Carthage & University of Auvergne)

The second session of the ERF workshop on “The political economy of transformation in the ERF region” introduced two important papers by Ishaq Diwan (Harvard Kennedy School) and Ragui Assaad (University of Minnesota, USA).

Entitled “Crony capitalism in Egypt”, Diwan’s study analyzes the nature and extent of Egyptian “crony” capitalism by comparing the corporate performance and the stock market valuation of politically connected and unconnected firms, before and after the 2011 popular uprising that led to the end of President Mubarak 30 years rule.

Ishac Diwan (Harvard Kennedy School, USA)

By looking closely at capitalism in Egypt, the paper is an attempt to understand why Arab capitalism has not been very dynamic; in other words the reasons behind the low performance and innovation of firms.

Diwan addresses the question of corruption in Egypt while analyzing the performance of politically connected firms which benefited from facilities regulations, government contracts, licenses access, protection from foreign and domestic competitions, as well as from subsidies energy under the Mubarak regime. “Egypt could have performed much better in terms of economic growth and job creation if the privilegies and exclusions were not as much”, he stated.

How can political connections help in capturing the energy subsidies that go to the energy intensive manufacturing sectors in Egypt?

This post was written by Ishac Diwan (Harvard Kennedy School) and Marc Schiffbauer (World Bank) on one of the aspects discussed in Ishac’s paper on “Crony capitalism in Egypt”

It is well known that energy subsidies are high in Egypt. The total bill was close to 12% of GDP in 2012. Much of the attention has focused on that part of the subsidies that goes to households as it is also well known that these are highly regressive, with a large share of the benefit estimated at about 50% of the subsidy accruing to the top population quintile.

But energy subsidies also go to firms, and mainly to those in the energy intensive sectors. These subsidies, mainly in the form of diesel, account for nearly 25% of total energy subsidies, costing overall about 3% GDP, or close to $8 billion (in comparison, public investment was 6% GDP in 2012). Are these subsidies less regressive than those going to consumers?

Let us focus on the manufacturing sector. Using a UN classification of manufacturing industries into low, medium, and high energy intensive sectors, it is possible to classify the firms represented in the most recent industrial survey depending of the sector in which they operate. We find that large establishments (with over 1000 employees) are over-represented in energy-intensive manufacturing sectors, and thus benefit disproportionately from the energy subsidy. So energy subsidies to firms are also regressive. Is this simply because energy-intensive firms are capital intensive, and thus tend to be large?