Chapter 5: Bully Praetorian Republics

Tiger on the Nile? | Impediments | Constitution | Executive | Military | Crony Capitalism | Limited Capital | Prospects | Endnotes | Table of Contents

The critical political weakness of the praetorian republics ruled physically or metaphorically from bunkers, is that their states have little if any autonomy from traditional social forces that managed, typically during the turbulent nationalist phase that followed the end of colonial rule, to seize control of those states. As described in the preceding chapter, Algeria’s "deciders" represent political clans anchored both in society and state institutions. Saddam Hussein of Iraq, Muamar Qadhafi of Libya, and Ali Abdullah Salah of Yemen rule their countries through military/security/party structures that are in turn controlled by alliances of these leaders’ families and tribes. The Alawi sect, of which Syrian President Hafiz al Asad is a member, has come to control virtually all important state structures in Syria. The ruling duo in Sudan of General Omar Bashir and his Islamist counterpart, Hassan al Turaibi, rule the country through the military and Islamist organizations, behind both of which lurk tribal alliances.

In each of these cases the social forces that have penetrated and come to control these states are tribal or religious minorities, typically ones despised by much of the remainder of the population. Their rule is, therefore, seen by much if not most of the population as being fundamentally illegitimate and intended to serve the interests of that social force, rather than the country as a whole. In these circumstances, coercion is necessarily the primary and in some cases, such as that of Iraq or in much of Sudan, virtually the only means by which the public’s compliance can be ensured by the government. Bunker praetorian states are at war with the societies they rule, or easily could be, so effective responses to globalization are impossible. These states dare not permit the freedom of information or even movement, or autonomy of economic action necessary for globally competitive economic growth. Under these conditions of adversity, civil societies and business entrepreneurs, to the extent they ever existed, have been deactivated, silenced, forced into exile, or eradicated. Just as these states cannot adopt and then implement consistent and effective policies for economic growth, so are their societies too weak to respond quickly and dramatically to opportunities that policy changes, were they to occur, might offer. It is conceivable, however, that bunker states could evolve into a less virulent form of praetorian republic, were the political elite through accommodation or some other means to come to represent a broader coalition of social forces. In this event, they would begin to take on the characteristics of the praetorian republics discussed in this chapter.

Egypt, Tunisia and the area controlled by the Palestine Authority are not ruled from bunkers by elites beholden to clans, tribes, or other traditional social formations. In the case of Egypt and Tunisia, and maybe ultimately "Palestine," the ruling elites are at once both more narrowly and broadly based. Their rule rests almost exclusively on the institutional power of the military/security/party apparatus, but because these elites are not drawn from a clearly identified social formation, they are at least not unrepresentative of their relatively homogeneous political communities. Since the state provides the primary underpinning for these regimes, they have relatively little incentive to build and maintain ruling coalitions based in their respective political societies. The rulers of each of them seem content to restrict their extra-state coalition building to the placation of rural and traditional elites. Rent seeking arrangements with crony capitalists are more for the purposes of serving state based patronage networks than for broadening ruling coalitions.

The differences between bunker and bully praetorian republicans, other than that of the key issue of the lack of autonomy of the bunker states from social formations, are not great. The leaders of Egypt and Tunisia, having not been forced to forge societal as opposed to state-based coalitions to come to or maintain their power, lack the political legitimacy that flows, as Max Weber described, from tradition, charisma, or rational-legal procedures. Yasser Arafat used a combination of his coercive capacity based in the PLO, support from Israel and the U.S., as well as political alliances on the ground in the West Bank and Gaza to assert control over "Palestine." By virtue of having built those alliances and because of his historical role as state builder, Arafat personally enjoys considerable legitimacy, but legitimacy that will be hard to bestow on a successor as the Palestinian "state" apparatus has come to supplant the PLO’s broader political coalition as the basis for the Palestine Authority’s power.

The rulers of Egypt, Tunisia, and "Palestine," dependent primarily upon state based patronage networks, are thus politically unable to radically downsize their states or dramatically privatize their economies. The Palestine Authority (PA), for example, is rapidly expanding public employment while subordinating what little private economic activity there is to rent-seeking relationships to key members of Arafat’s entourage. In the first four years of its existence, the PA created more than 65,000 government jobs, such that by 1997 the percentage of the labor force it employed (18.7%) was virtually level with that of construction (19%), making these two sectors the largest employers. In 1998 almost half of all new jobs were in the PA, taking central government employment to more than one fifth of total employment and accounting for some 60% of the PA’s budget.(1) But the PA still has some way to go before it reaches Egyptian levels, where total government employment accounts for about one third of the labor force. Tunisia, heralded as a model for the region by the World Bank, retains a public sector that is among the most costly to the public purse in the MENA.

With insecure political footings in the societies they rule, elites of these bully states are compelled to rely on economically irrational, overgrown governmental and public sectors as they cast about for ways to generate patronage from private economic activities, rather than engage in the political coalition building that would obviate the need for their Leviathans in the first place. But the drain on aggregate economic performance resultant from the appetites of these Leviathans, combined with the need to garner rents from private economic activity, and reluctance to grant any economic or political space to independent actors, inhibit economic growth. These factors also deter political elites from devising creative strategies that would help perpetuate their rule while encouraging economically beneficial responses to globalization as, for example, has been the case in Morocco, a case which will be discussed in the following chapter.

Rent seeking arrangements that have been struck between the political elite and capitalists in Egypt discourage export led growth, for the elite can rig local but not international markets. Crony capitalists are provided local oligopolies and monopolies which they exploit, leaving the more competitive and risky business of producing for export to those unable or unwilling to strike deals with the political leadership. Unlike the development states of Asia, Egyptian policy directs the most capitalized private enterprises to serve local, rather than global markets, so the country’s most dynamic private exporters are, by default, marginal, bit players serving niche markets, seeking to stay as far away from their governments as possible. The vast bulk of the private economy consists of micro enterprises, a large proportion of which are in the informal sector. They lack the capital, technology, productive capacity and, in the case of informal operations, the legal status, to even consider exporting.

The Palestinian economy is a still more primitive, almost microscopic version of the Egyptian one. Its 60,000 private firms are almost exclusively establishments employing fewer than three persons and capitalized at less than $10,000.(2) Since virtually nothing is manufactured or processed for export as the preconditions for such activities have been absent, the patronage that can be extracted by the political elite from aspiring capitalists typically involves the selective use of permissions and regulations for importation. The emerging political economy of Palestine is, therefore, one that appears to be mimicking Egypt’s.

Tunisia has enjoyed proportionately greater export success than Egypt, reflecting in part the fact that its political economy is something of a mix between the comparatively primitive rent seeking one of Egypt and Palestine, on the one hand, and the more sophisticated, liberal, but still rent seeking one of Morocco, on the other. The Tunisian ruling elite has retained its overgrown state and public sector for patronage and control purposes. But the domestic market is too small to support any significant manufacturing industry, so the scope for it to generate substantial patronage through rent seeking is limited, although continuing high tariffs suggest that selective permissions for importation still produce a substantial share of patronage resources. Unlike Palestine, Tunisia receives very little public foreign assistance, so living off external rents has not been an option. The ruling elite has thus encouraged the development of export manufacturing, but, unlike its counterpart in Morocco, has not succeeded in integrating these activities into a tightly structured oligopoly linked directly to that elite. The Tunisian elite thus remains more wary than its Moroccan counterpart of both civil society and capitalist activity. Lacking the legitimacy and means to direct and to benefit from civil society and capitalist activism, as enjoyed by its Moroccan neighbor, the Tunisian elite hesitates to open any wider the doors to either political or economic competition. The regime thus selectively favours trusted, individual capitalists, rather than capitalism as a concept and practice.

That the economic performance of these bully republics differs considerably, despite the structural similarities of their political economies, attests also to the importance of regional factors for the MENA’s economies. The Palestinian economy is hostage to the Oslo Peace process, so as that process slowed, so did it. Closure, which was first imposed in 1993 some six months prior to the signing of the Oslo Accords, was intensified during the Netanhayu years, essentially segmenting "Palestine" into a collection of small enclaves cut off from the outside world. The World Bank noted in 1997 that the economic situation was so bad "that the hopes for private-sector-led development had to be set aside by the international agencies involved in organizing aid to the Palestinian economy." More than 40 per cent of the disbursements by these agencies intended for long term investment were diverted to emergency budgetary support.(3) Tunisia, far removed from the Arab-Israeli conflict and only 80 miles from Europe, was tagged as a "Mediterranean Tiger" in the late 1980s as the World Bank and others were looking for success stories to parallel those of the East Asian "Tigers." While it has in fact remained an economic pussycat by comparison to the East Asian "miracle" economies, even after that miracle toured sour, it nevertheless has substantially outperformed Egypt in globalizing its economy, thanks in large measure to the eager European embrace, propelled as much by fear of potential North African boat people as by any other considerations. Unable to take to their boats to reach European shores, and situated much closer to the Middle East’s "Arc of Crisis," the Egyptians have been proportionately less favored by Europe than the Tunisians. They have also felt compelled to devote a substantially greater proportion of their budgets to the military.

The capitalist legacies of Tunisia, Egypt and Palestine also account for some of the variance of their economic performance. The West Bank and Gaza have had far too discontinuous histories and too much conflict for capitalism even to be sustained at the minimal level it had achieved at the time of the "disaster" in 1948. Egypt’s capitalists have not had to deal with occupation and an intifada, but the Egyptianized minorities among them, including Jews, Greeks, Italians, Syro-Lebanese, and others, were essentially forced into exile, while the native capitalists were subject to the expropriations and other indignities of Nasser’s Arab Socialism. Still, Egypt’s capitalist legacy is both more substantial and continuous than Palestine’s. The Tunisian capitalism that existed at the end of French rule, although substantially disaccomodated by Ahmad Ben Salah’s planned economy in the mid 1960s, has remained throughout much more closely linked to the former colonial metropole. Indeed, it is those linkages that account in part for the comparatively rapid rise of Tunisia’s manufactured exports over the past decade, but which also pose the greatest threat to them. Having agreed to the EU’s terms as laid out in Barcelona in 1995, Tunisia will in the coming decade be losing preferential access to European markets and, theoretically at least, having to open up its nascent manufacturing sector to European competition by lowering its tariffs, which at an average of almost 20 per cent in 1997 were only eclipsed by Syria’s in the Arab World.

At the core of the explanation of the economic performance of these and other MENA states, however, is the nature of their political regimes. Egypt, Palestine and Tunisia have different factor endowments and locations, but they share in common rule by elites whose primary base of support is within state structures, rather than in political organizations anchored in society at large. Compelled to service and maintain these structures, these elites are politically incapable of surviving free and fair elections or permitting truly free economic markets to operate. It is thus sufficient to review the experience of Egypt to illustrate how economies in praetorian republics ruled by "bullies" are hostage to their power requirements.

FROM PARIS TO TIGER ALONG THE NILE? [top]

Belle epoque Cairo was a "Paris along the Nile," as a recently published book attests by title and by photographs of the city’s European architectural legacy.(4) A veritable Mediterranean melting pot as Albanians, French, Greeks, Italians, Syro-Lebanese and others were attracted by the accumulation of wealth first stimulated by the early nineteen century reforms of Muhamad Ali, Egypt at nominal independence in 1923 could boast one of the largest, most successful, and certainly most ethnically and religiously heterogenous capitalist classes in the Mediterranean world. Mutamassirun, the Egyptianized foreigners who originally led Egypt’s capitalist development under the aegis of British imperial control and French investment, were joined as the twentieth century progressed by increasing numbers of native Egyptians, a process that accelerated as the nationalist movement gained in strength. With the ultimate triumph of that movement under Nasser, most of the mutamassirun fled the country, leaving what remained of the capitalist economy in the hands of native Egyptians. But in those hands it did not remain for long, for in the early 1960s the government seized large and even medium sized holdings of property, stocks and bonds, and other forms of capital that had escaped nationalization until that time. Many Egyptian capitalists joined the mutamasriyin in exile, external or internal, while the regime-sanctified "national capitalists," who ultimately formed the core of the crony capitalism that first emerged under Sadat, were awarded niches within the public sector dominated economy. But national capitalism was a contradiction in terms, for the economy was as thoroughly socialized as any in the East Bloc and met the same fate of virtual bankruptcy, only rather sooner.

Faced with an economy that was, as he put it, "below zero," and an Israeli occupation of the Sinai that was corroding what precious little political legitimacy he had, President Sadat, who succeeded Nasser in 1970, saw that he had both to remove the Israelis, or at least try to, and to come to terms with the U.S. He was aware that the latter would require at least some modification at both the rhetorical and operational levels of the Arab socialism then in effect, a price he was willing to pay as he had never been a supporter of that socialism and it had, in any case, run its economic course. So in the wake of the semi-successful October 1973 War, Sadat launched his economic infitah, or "opening," which he claimed would wed Arab petrodollars, western technology, and Egyptian labor and management for the purpose of giving birth to a dynamic, industrialized, mixed public/private economy. The ultimate failure of Sadat’s venture resulted from numerous factors, including ever present regional ones, as his peace-making efforts with Israel could not be disentangled from his management of the economy, which greatly reduced the scope for reform as it dictated the allocation of scarce material resources to compensate for declining political ones.

But even in the absence of the Arab-Israeli imbroglio, the originally intended pace of Sadat’s infitah ran far ahead of the resources at the country’s disposal. As just mentioned, capitalism and capitalists had been decimated by his predecessor, leaving in the vacuum a constitutional/legal/regulatory structure as inimical to private sector activity as any in communist world, a cadre of politically-connected public sector managers with little if any private business experience, and financial institutions that had been shifted from the German to the French model of administrative control, which rendered them useless as tools to analyze and encourage economic competitiveness. Lacking experienced capitalists and not having either a civil society accustomed to private economic activity or a legal/regulatory framework which could effectively structure the market, Sadat’s infitah, although awash in capital and enjoying fulsome support from the U.S. and other western nations, could not develop the economy at the pace which its founder had imagined and which the Egyptian public had been promised. On the political front Sadat was in increasing need of new sources of patronage to substitute for the partial dismantlement of the Marxist-Leninist political structures he had inherited from Nasser and to compensate for the loss of resources from the declining public sector.

The answer to Sadat’s dilemma was provided by his nurturing the growth of crony capitalism, key to which was Osman Ahmad Osman, boss of the huge Arab Contractors construction company. Nasser had created a uniquely ambiguous public/private status for Osman’s company in order to generate patronage for a limited number of key members of the elite. Sadat elevated this inherited crony capitalist to levels unimaginable under Nasser, to which Osman gratefully responded by generating private wealth and political patronage, and the image, if not the reality, of dramatic and rapid economic development. But the image seemed sufficient at a time when oil revenues were flowing in record amounts and per capita income in Egypt and throughout the MENA was increasing at rates envied by the rest of the world.

Mubarak succeeded Sadat after the high point of oil prices had already been reached and within some months of their rapid descent. During much of the remainder of the decade of the 1980s he struggled to keep the ailing economy afloat, threatened as it was with capsize because of its heavy load of external debt. At the end of the decade, when still no major economic reforms had been undertaken, luck of almost the same magnitude as the oil boom rescued the Egyptian economy and maybe Mubarak, whose decision to support the US led coalition against Iraq netted $25 billion in almost immediate debt relief. This in turn paved the way for an IMF led stabilization package that by the end of the decade of the 1990s both the IMF tutor and its Egyptian student were heralding as a textbook case of financial reform. Spokespersons for the latter began referring to the "Tiger along the Nile."

$25 billion of sugar coating had made the bitter pill of stabilization very much easier to swallow, but even it was not enough to induce Egypt to ingest the yet more bitter dose of structural adjustment. By the end of the decade the Egyptian leadership, instead of apologizing for the dilatory nature of its adjustment program, was trumpeting the wisdom of its measured pace. It pointed to debacles in Asia, Russia and Brazil as evidence of the perils of moving too fast, a position which had gained considerable credence among even well informed, "serious" economists.(5) When Egypt failed to privatize one of its four public sector banks by the end of 1998, a condition it had agreed to for an IMF loan, neither the IMF nor the World Bank, nor any of the major bilateral donors, chose to embarrass their budding prize pupil by dwelling on this lapse, which was in fact only one of many departures from promised measures of the structural adjustment program. Such tolerance suggests once again the importance of regional factors and continuation of strategic rents, for the U.S. in particular had no desire to put the economic screws on Egypt as long as it was being helpful in the bogged down peace process.

Indeed, if the prize pupil’s extra points for political good behavior were not added into its marks, its grades for structural adjustment, economic growth and integration into the global economy would not be high ones. The state still employs about one third of the labor force (double the OECD average), a ratio that has not declined under Mubarak. Public employment as a percentage of the total labor force was actually higher by the mid 1990s than it had been in the previous decade.(6) The government employs more than half of all workers with post-secondary education. Government’s contribution to GDP "has remained virtually unchanged in the last decade."(7) The private sector’s share of Gross Domestic Output did not increase during that period, nor have its investments in commodity producing sectors yet to reach one third of the total, despite having constituted 32 per cent as long ago as 1983.(8) Manufacturing’s share of GDP has stagnated. Total fixed investment in industry fell from more than one quarter to less than one fifth in the period 1988 to 1996, as public allocations to that sector have declined and not been replaced by private investment.

Privatization of state owned enterprises, to the extent it has occurred, has not been of the commanding heights of the economy. Egypt not only failed to privatize one of the big four public sector banks before the end of 1998, but in general where privatization has occurred, it has been partial, in most cases not affecting state control nor displacing previous public sector management.(9) Privatization, moreover, has not been a one-way process. As shares on the Egyptian Stock Exchange commenced a steady descent in 1997 that saw the average share lose half its value in less than eighteen months, the government first authorized holding companies to buy back shares in their recently privatized companies when they dropped twenty percent below their issue price. When that measure proved insufficient to stop the price decline, it utilized funds in the public sector banks and insurance companies, as well as the government operated pension fund, to buy at least LE1.5 billion worth of yet more shares, thus effectively re-nationalizing these nominally privatized firms.(10) The Prime Minister told an audience of National Democratic Party (NDP) leaders in the spring of 1999 that less than 10 per cent of state owned enterprises (SOEs) had been privatized. But even that low figure may be in doubt if the "sale to an anchor investor" of the al Nasr Casting Company is indicative of other such "sales." Although the government claimed it sold the company to an investor for LE48 million in December, 1997, the reality was that ownership of it was transferred from the Holding Company for Metallurgical Products to the public sector banks that had held most of its debt and to the employee stock association which held a minority stake.

Persisting state control of the economy has prevented it from becoming effectively integrated into world markets. Egypt is in a small group of Less Developed Countries that is actually "de-globalizing." "Openness, measured by the sum of real trade. . .as a share of real GDP is declining in Egypt. This decrease (from 34 percent to 23 percent over the period from 1981-83 to 1991-93), is pushing down the level of Egypt’s integration with the world economy."(11) The degree of openness is even less and declining more rapidly if the measure is restricted to exports and imports of goods and nonfactor services as a share of GDP. In 1985 that index stood at 88%, whereas by 1997 it had dropped to 47%.(12) The volume of Egypt’s exports has declined steadily since 1994. Egypt’s share of world exports has also declined, from .2% in 1985 to .07% in 1995, while its share of world imports has declined from .5% to .2% over that same period. Egypt’s market share in the EU fell from 1% in 1985 to half that already low level a decade later.(13) Manufactured goods exported as a proportion of the total value added of manufacturing declined by about two per cent during the decade that began in 1989. That proportion, which was at less than 9 per cent in 1997, compared to 11 per cent for Algeria, 39 per cent for Morocco, 64 per cent for Turkey and 124 per cent for Tunisia. (See table xx). In 1998 tariffs, a major obstacle to export led growth, were in Egypt "among the most restrictive in the region and higher than in other emerging markets."(14)

Egypt is also not participating in the revolution in global communications at a level commensurate with its comparative stage of development. As the report of the Ministry of Economy previously cited notes, "Egypt lags behind a large number of the comparison countries with respect to most indicators" (of information sources.)(15) It has fewer daily newspapers, televisions, mobile phones, fax machines, personal computers and Internet hosts per 1,000 inhabitants than almost all comparators among lower and middle income developing countries. In 1998 Egypt had only 12,000 private Internet subscribers, in part because the lack of sufficient phone lines resulted in monthly subscription fees of $30-$60, compared to about $20 in the US. In any case only some 350,000 computers were in use in the country. Since Egypt does not adequately protect intellectual property rights, including those pertaining to computer software, software manufacturers lose as much as 98 per cent of their potential revenues, so are understandably reluctant to make new products available in Egypt and the MENA more generally.(16) Although more exposed to global communications than a decade ago, Egyptians are much less well integrated into global communication networks than many of their fellow Arabs, to say nothing of most Latin Americans and Asians.

The textile industry is a microcosm of the globalization challenges facing Egypt and its response to them. It was the focal point of the country’s first drive for industrialization, became the backbone of the "socialist" economy and its failed attempt at import substitution, and upon it rest many of Egypt’s hopes for export led growth. It employs half a million workers, a quarter of all employment in manufacturing. At the beginning of the 1990s it accounted for 30 per cent of total industrial, non-oil output and 40 per cent of total export earnings. By 1997, however, its share of industrial output had slumped to about one fifth and its contributions to exports to one quarter. The accumulated debts of its public sector component, which constitutes 70 per cent of the industry, amounted to substantially more than its total fixed assets, suggesting that it was insolvent. The three holding companies responsible for the cotton trade and textile sectors lost LE1.32 billion in 1996/97 alone.(17)

Having failed to sustain its contributions to exports, the industry by the late 1990s was in danger of losing even domestic markets, for, according to the GATT agreement signed by Egypt, the country was to lift the ban on textile imports by January, 1998, and ready made clothes by 2003. In order to stop textile imports from "destroying" the industry, as was predicted by the head of the Investor’s Division of the Federation of Chambers of Commerce, the Ministry of Supply and Foreign Trade required in 1998 that all imported fabrics have the importer’s name weaved into them. This "non-tariff barrier to trade," as such methods are called, stopped all imports. This Draconian measure protected the predominantly state owned fabric producers at the expense of the predominantly privately owned garment manufacturing firms, which had become increasingly dependent upon the much better quality imported cloth, despite the tariff of 70 per cent imposed upon it.

Instead of rising to the challenge of globalization, the Egyptian textile industry has been succumbing to it. It has been unable in the 1990s to fill its EU or US quotas under the now expiring Multifibre Agreement, suggesting its lack of competitiveness in these markets, which in the wake of the collapse of the East Bloc have come to account for more than three quarters of Egypt’s exports. In other words, the Egyptian textile industry has lost the contest for textile exports even before the next ratcheting up of global competitiveness in that industry occurs.

As one careful study notes, "the export performance of Egyptian textiles is more constrained by domestic factors than by export market conditions."(18) Those domestic factors relate to the very structure of the industry, "which is characterized by a heavy concentration of basic production in a limited number of integrated mills and a very fragmented capacity in the downstream garment sector in a large number of private units." This report goes on to note that "the private units are too small to benefit from economies of scale, while the public sector mills are too large to be managed efficiently."(19) Inefficiencies result in high costs. Lack of modern computer aided designing in the garment sub-sector results in fabric wastage rates of 17 per cent compared to an average rate of 8% and time loss 15-25 per cent higher than the standard for developing countries.(20) The average operating efficiency for spinning in Egypt is less than 60 per cent, as compared to a global standard of 85 to 90 per cent. This inadequate performance results from both poor management and obsolete equipment, with some 850,000 of the total of three million spindles in use being uneconomic(21) Nominally low wage rates place Egypt among the lowest labor cost producers, with a revealed comparative advantage in the vital EU market that is higher for textiles and clothing than any other country of the world. Yet, wage costs per worker increased faster in the 1990s than either real production or real value added per worker.(22) The labor costs in yarn production are 16 per cent of total costs, putting them among the highest percentages for competitive producers, causing the authors of the most thorough review of the textile sector undertaken in the 1990s to observe that "this is ominous for a country that has wage rates among the lowest in the world."(23) It is ominous because it indicates low total factor productivity resulting from out of date technology and bad management, both of which are in turn the products of inappropriate public policies.

The answer to the problems of Egypt’s textile industry is not just privatization. Indeed, privatization of SOEs in this industry have stopped, largely because no one wants to buy them in the form in which they are being offered, which is as extant companies. The private sector, although outperforming the public in terms of its contribution to exports in relation to its fixed assets, is not doing particularly well. As the report just cited notes, "In weaving, knitting, dying and finishing, and garment manufacturing, privately owned firms are in no better technical condition than the public companies."(24) They are more competitive, however, because they pay yet lower wage rates, suggesting that if the textile industry is not completely modernized, its future lies in becoming an ever more marginal sweat shop. What is true of Egypt is also generally the case throughout the MENA, which actually imports more clothing and textiles than it exports, even though after oil they are its most valuable exports.

The consequences of Egypt’s stalled liberalization were by 1999 beginning to erode the accomplishments of the previously successful economic stabilization program. The Egyptian Pound came under threat, to which the Government of Egypt (GOE) responded by steadily increasing restrictions on its convertibility. In April and May, 1999, the Central Bank moved to close down twenty-four currency exchange companies on various pretexts, while it also greatly restricted the flow of foreign currency to banks. By May, 1999, depositors were being informed by their bank tellers that they could not buy even a few thousand dollars with their Pounds, while businesspeople were for months turning to what for all intents and purposes was a black market for foreign currency, paying up to LE354 for dollars officially pegged at 341.

As the balance of payments worsened, the GOE turned increasingly to issuing domestic paper to cover its budget deficit, and to raising interest rates on Pound deposits, thereby further choking off private sector borrowing. Domestic government debt may have reached LE200 billion by 1999, as some well informed observers claimed, although the Central Bank, which enjoys virtually no autonomy from the government, held to the figure of LE135 billion. Egypt, in sum, appeared by the end of the millennium to be drifting backwards to the precarious economic state in which it was situated before massive debt relief had bailed it out in the wake of the 1991 Gulf War. As the economy slid downward, the GOE imposed more controls on it, further dampening private activity and isolating it yet more from global markets. This chronicle of poor performance raises the question of why the rapid stabilization of the early 1990s did not lead to a successful structural adjustment, as IMF and World Bank textbook theory would have it.

IMPEDIMENTS TO STRUCTURAL ADJUSTMENT [top]

Political illiberalism

As the 1990s progressed, the rhetoric of the regime changed. Having begun the decade with constant reassurances of its intent to democratize, it gradually de-emphasized that commitment and instead spoke increasingly of its sound management of the economy and the measured, steady progress it was making toward economic development and even globalization. This shift in rhetoric may have reflected the belief that more, rather than less control of the polity would be necessary for the implementation of even the limited structural adjustment that apparently was envisioned.

Whatever the cause, reality matched rhetoric, for as the decade wore on political repression steadily increased. Parliament’s approval in late May, 1999, of a new law which further subordinated NGOs to governmental control, amounted to the legislative suffocation of the last remaining element of civil society that was still breathing. Political parties had been choked off gradually during the 1990s. The Muslim Brotherhood was effectively strangled in 1995. During the mid 1990s professional syndicates with political relevance were brought under direct governmental control. The Draconian press law of 1995 was amended somewhat in the following year, but it remained highly restrictive. The 1995 parliamentary elections were among the most fraudulent in Egypt’s modern history, while local government elections in April, 1997, were scarcely contested and resulted in the ruling NDP taking virtually all of some 40,000 seats.

In the mid 1990s it had been possible to argue that restriction of political freedoms was a result of the GOE’s need to combat terrorism. That justification became unsustainable, however, for the insurrection had ground to a virtual halt by the end of the decade. Indeed, except for the aberrant attack in Luxor in November, 1997, there were no serious terrorist incidents after 1996. The government, in a campaign to recruit tourists, was telling the world by 1998 that Egypt was safer than Europe or North America.

The civilian political system, in short, atrophied in the decade of the 1990s, providing a steadily smaller counterbalance to the military and security based core of the regime. It is the need to service that base, both directly by facilitating the growth of a military economy, and indirectly through the encouragement of crony capitalism, that accounts in large measure for the failure of structural adjustment to be rapid or thorough, a point to which we shall return below. But even in the absence of these political impediments to structural adjustment, economic reform would still face the challenge of proceeding in the absence of a supporting constitutional/legal/regulatory structure, the existence of which the standard bearers of the Washington Consensus increasingly recognize is a prerequisite for successful economic liberalization. That structure, moreover, depends for its creation and continued existence on an at least partially competitive political system with some degree of rule of law. That such a structure did not emerge in Egypt in the 1990s is one of the costs of political illiberalism and a principal constraint to sustained economic growth.

Constitutional/legal/regulatory structure [top]

Issued in September, 1971, and slightly amended in 1980, Egypt’s constitution reflects its origins in the very earliest stage of transition away from the command political economy. It expressed various aspirations for a more liberal political system than had been enshrined in the 1964 constitution it replaced, but it provided few institutional manifestations of it nor did it pave the way for a liberalized economy. Article 4, for example, provides that "The economic foundation of the Arab Republic of Egypt is the socialist democratic system based on sufficiency and justice, in a manner preventing exploitation. . ." Article 26 guarantees workers a "share in the management and profits of projects." The Constitution is also not "a living document," in the senses that it was either originally written in such a way or subsequently amended so as to provide for and reflect the evolution of the polity or economy, or that all legislation has been brought in line with its provisions. Given the apparent lack of concern to ensure that the constitution reinforce the rule of law or be made consistent with the rhetoric and partial reality of economic liberalization, it is not surprising that substantive law governing the economy also provides an inadequate legal structure for a free market economy.

According to John Bentley, "Egypt’s 20-year experiment with socialism and central planning severely and adversely impacted on the ability of Egypt’s legal infrastructure to facilitate and encourage private sector economic development. . .Substantive laws were skewed against the free market economy and private sector activity."(25) Bentley himself actually played an instrumental role in commencing reform of substantive economic law. The effectiveness of this reform, however, has been impeded by many factors, including the manner in which that law is made. Virtually all legislation is produced in the government itself, with individual ministries assuming primary responsibility for designing the content of proposed bills. Public hearings do not constitute part of the drafting process and only rarely are public hearings used when legislation is being considered in the standing committees of parliament.(26) See Assessment of the Legislative Sector. Cairo: USAID, 1993, p. 29.(27) Because many or most of the stakeholders who will be impacted by substantive law play little if any role in its formulation, and because of inadequate drafting procedures, numerous outright mistakes occur. Mahmoud Fahmi, Secretary General of the Maglis al Dawla, or State Council, and himself the architect of much of the legislation associated with economic reform, including that which formed the capital market authority and revived the stock exchange, observed with regard to a key piece of legislation that "it violates the constitution because it introduces articles with no legal precedents; its articles furthermore contradict other existing laws."(28)

The rule of law in broader terms is hindered by the inadequate capacities of the courts and judiciary. Having been seriously degraded during the Nasser era, they have not been adequately overhauled and upgraded since then. In the meantime, the case load of all courts has dramatically increased. In 1998, for example, some 32 million legal cases were filed, meaning that statistically speaking, virtually every Egyptian is involved in a new legal matter each year, for each case naturally requires a plaintiff and defendant. Deterioration of the court system has caused potential litigants of higher status to seek to avoid those courts altogether, typically by resolving disputes through arbitration. Most foreign business enterprises operating in Egypt, for example, insist upon arbitration clauses in all contracts in order to avoid having to settle disputes before Egyptian courts. Nathan Brown has observed that the "most obvious loser is domestic business. Less able in constructing private arbitration systems, but equally repelled by slow litigation procedures, owners of small businesses have few attractive options."(29)

With regard to regulatory bodies, which are an essential adjunct of privatization in some sectors, including public utilities, they are in their infancy and it is not clear that the government is going to facilitate their emergence or effective performance. In telecommunications, for example, the regulatory body that was created as the mobile phone network was privatized was simply a vehicle for direct control by the Minister of Telecommunications, who has ensured that the state monopoly over the use of phone lines remains highly profitable, so international charges remain among the most expensive in the world. The two companies awarded contracts to share oligopolistic control over mobile phones were owned by leading crony capitalists, further reinforcing the need and underscoring the absence of effective regulation of this vital sector. A comparative study undertaken by a consultant to USAID of the legal/regulatory regimes of Egypt, Israel, Morocco, Tunisia and Turkey revealed in 1997 that Egypt’s was the least effective by a very substantial margin, with Turkey’s and Israel’s as the most effective and Morocco and Tunisia’s close behind.(30)

Executive branch [top]

Of the three branches of government, the executive was most impacted by the imposition of the command political economy. While the high status and legal standing of the judiciary and court systems protected them in part from the ravages of "democratic centralism," and while the political standing and potential utility of the Parliament also cushioned it from the heaviest blows, the executive, over which the government had direct, undisputed control, became its principle tool for achieving two major objectives--control/surveillance of the population, and cultivation of support through the distribution of patronage. Consequently, the nominal core purpose of this or any executive branch, namely, implementing public policy, was relegated to secondary importance. Little has been done to rehabilitate the executive, to say nothing of modernizing it or redefining its mission from that assigned during the Nasser era to one of supporting economic structural adjustment. It remains, therefore, a major obstacle to more rapid economic growth.

The legacy of the control function is still intact and is suffused throughout the executive branch. Although new, functionally specific administrative bodies were created during the Nasser era in order to control the population, including a vast array of domestic intelligence services and barracked police forces, probably the more serious, residual problem is that posed by the redefinition of the mission of the normal civilian bureaucracy. The Ministry of Local Administration, for example, was assigned the task of controlling local politics and elections, as were, in some measure, the Ministries of Agriculture and Agrarian Reform. The Ministry of Insurance and Social Affairs was made into an organization to oversee activities of voluntary associations, while the various public sector companies were given the task, among others, of mobilizing their labor forces for electoral purposes. The vast bureaucracy and public sector were, in other words, given over to ensuring that there be no autonomous, voluntary activity, a preoccupation that persists.

The second function--that of distributing patronage--has also not been jettisoned. The entire administrative structure was converted to this purpose, for in the first instance patronage meant government jobs, which rose from a few tens of thousands when Nasser took power, to some three million when he died, to over five million when President Mubarak assumed power. In rural areas government employment typically accounts for more than half of employment outside agriculture. The Minister for Administrative Development, whose task it is to reform the executive bureaucracy, estimates that although "there are five million civil servants in Egypt, there are only two million jobs."(31)

The centralized, internally autonomous nature of the executive bureaucracy renders not only efficiency, but transparency and accountability almost impossible to achieve. Because the implementation of virtually any aspect of public policy typically requires inputs from various units, and because there are few mechanisms to coordinate those inputs because no actors want to surrender any degree of autonomy, lest their turf be negatively affected, implementation suffers. In the bureaucratic maze through which virtually any public policy matter must pass, transparency vanishes and accountability becomes impossible to enforce. With the exception of the administrative courts under the Council of State, there are no effective mechanisms to ensure accountability. The Central Organization for Audit, which for some twenty years was the chief means by which Parliament could hold individual members of the executive accountable, including high ranking ones, was transferred in June 1998 to the Presidency.

The Military [top]

The primary economically relevant assets of the military are its direct control of land, labor and capital; its economic relationships with the state and with domestic and international private capital; and the opacity with which it conducts its business. With regard to material resources, the military controls vast tracts of valuable land, much of it in along Egypt’s coastline or the Suez Canal, in prime tourist development sites. The conversion of such land originally assigned to the armed forces either as bases or zones of operation, into other uses, provides a major source of revenue directly to the military and also enables it to enter into joint ventures with public sector and private developers, thereby forging linkages with strategic elites.

The military also controls a large pool of manpower, only a portion of which is absorbed by the primary function of defending the nation. Another significant proportion is utilized in various productive activities, including the raising of crops and livestock; construction of roads, bridges and buildings; operation of manufacturing plants; and provision of human services, particularly that of health care. With direct control over what is probably the largest single pool of skilled manpower in the country, combined with the capital required to establish various enterprises, and the freedom to seek technology through joint ventures and other arrangements with multinational firms, it would be surprising if the military were not seeking to modernize its enclave economy. Seeking and doing, however, are two different things.

The military is not the vanguard of a technological revolution in Egyptian manufacturing industry. Just as there are incentives for it to modernize, so are there disincentives. Many if not most of its efforts in manufacturing appear to be direct spin offs from relatively low level military technology, or joint ventures with private sector Egyptian firms that are advantageous to both sides not because of the military’s high tech capacity, but because the military has access to subsidized inputs. Spin offs include, for example, the production of household cutlery and aerosol canisters for shaving cream in a plant designed to manufacture bullets--hardly the equivalent of the Teflon spin off from missile nose cones, although similar in the fact that the end use of these products is in the household, not the laboratory or in industry.

The existence of "free" labor is also a disincentive for technological modernization. Military production plant 200 that produces the M1-A1 tank, for example, commenced production with 6,000 employees. General Dynamics, the US company under whose license and partial supervision the tank is produced, has steadily pressured the Ministry of Military Production to reduce staffing there to 1,200, but has managed to bring it down only to 4,000. Informed US sources estimate that the plant could now operate with as few as 200 personnel.

The underlying problem of the military economy is that in the nether world of economic subsidies and lack of transparency, real and accurate cost accounting is impossible, so incentives for efficiency are lacking. Thus while the macroeconomic context in which the military is operating might be one that should be inducing cost savings and other efficiencies, the microeconomic setting within which production and other decisions are made is "irrational" in the sense that in the absence of the price mechanism it is inherently incapable of assigning true costs to production inputs.

The World Bank, which gathers data on just about every facet of the Egyptian economy, reports nothing about the military’s role in the economy, although some of its personnel apparently think that role is quite important. In a presentation to a US Government audience in 1998, one of its economists speculated that as much as one half of manufacturing industry was controlled by the military and claimed that the military was one of, if not the principal obstacle to privatization in Egypt. At present the military economy itself appears to be in a proto-privatized state, having forged alliances with domestic and multinational private firms. Joint ventures with multinational automobile companies, for example, are partnerships between the military and those companies. They do not constitute true privatization, to which the military economy is unlikely to be subjected for several reasons. First, the centrality of the military to national security means that it is not directly analogous to the civilian public sector. Those with institutional interests in preserving military control will be able to invoke the national security issue with considerable persuasive effect. Second, the state will remain the primary customer of the military public sector, so the pressure which the market exerts in other cases for privatization is largely lacking. Third, the military is a much more powerful political actor than the public sector, hence more capable of defending its interests. Fourth, the patronage dispensed through the military public sector is an important means of maintaining the loyalty of the officer corps, hence is vital to the ruling elite, so it will exert little pressure to privatize unless the patronage can be privatized as well. Finally, as long as crony capitalism remains ascendant, a topic to which we shall now turn, the economic interests of the most powerful of the business elite are not in contradiction with those of the military, for indeed, they are in business together. It is only over the long haul that the economic forces theoretically generated by implementation of structural adjustment would become sufficiently coherent and autonomous of the state for them to exert real leverage on civil-military relations and to restrict the role of the military in the economy.

Crony capitalism [top]

Over the years the Nasserist state built up a civilian edifice that both camouflaged the vital role of the inner military/security elite, and performed various technical and political functions. But throughout the Nasser era, all important economic and political decisions were made by the President and/or those entrenched in the military or security forces. Sadat sought to expand the roles and power of the civilian political edifice, in part because of his personal background (he had spent much more time in civilian than in strictly military politics, as he was only briefly a serving officer), in part because his primary opponents were entrenched in the military and security forces, and in part because the image he sought to project required more civilian window dressing. He may also have realized that a more open economy was a prerequisite for rapid economic growth, for he did initiate a stillborn structural adjustment. Sadat, in sum, liberalized both the economy and polity, while engaging in sultanistic politics of dividing and ruling the "mamlukes" controlling the forces of coercion, gradually reducing their direct roles in both the economy and polity.

But the "mamlukes" were compensated for their loss of direct control by the provision of new, indirect rewards through patronage derived from quasi-privatized economic operations, many of which were placed under the military. Although Nasser had permitted and possibly even facilitated a few such relationships, such as those that tied Osman Ahmad Osman to himself and key members of the military elite, Sadat proliferated them, vastly expanding Osman’s (and thereby his own) patronage networks, while adding a few new, smaller versions of Osman. As a result, the military/security core elite acquiesced in their nominal loss of power and permitted the rehabilitation of the civilian political system, while establishing methods of remote control than ran through the political economy. Ultimately, however, Sadat’s political liberalization fizzled, partly as a result of his peace making with Israel, which imposed too heavy a burden for the fledgling system to bear. In the final years of his life he fell back on the military and security forces, over which by then he had established unchallenged control. One of his key instruments in so doing was his vice president, Husni Mubarak, an officer well known for his organizational skills in controlling military personnel.

Mubarak is President essentially because Sadat appreciated that he combined a lack of market oriented political skills with an ability to control a top down organization behind the scenes. He needed an organization man, but one whose lack of public appeal would render it impossible for him to challenge the incumbent. Mubarak thus inherited the presidency when he had already established reasonably firm behind the scenes control of the military and security forces, but had no political standing whatsoever. He thus spent the first decade of his rule acquiring some trappings of civilian political legitimacy, while further cleansing the military and security of possible challengers. Appreciating that clubs were trumps and that by about 1990 he had firm control of those clubs, he progressively devalued investments in the civilian political fig leaf, justifying political repression explicitly on the grounds of fighting terrorism and implicitly as a prerequisite for economic reform.

In reality, however, control of the "mamlukes" in the military and security forces requires material resources, which in turn has dictated Mubarak’s strategy toward the economy, hence of the polity. In order to secure his direct, personal control over the sources of patronage, he dismantled some of the Osman empire that was the key to Sadat’s patronage network. He fostered the creation of several additional Osman-like empires, based primarily on construction, an undertaking that provides ample opportunities for generating capital, uniting as it does access to public land and public capital (through state owned banks), requiring governmental licenses and other approvals, and providing endless opportunities for sub-contracting into labyrinths where public monies can never be traced. Thus crony capitalism, which was almost in the singular under Sadat, became "cronies capitalism" under Mubarak, starting first with Osman and his clones, and then spreading out into various other sectors of the economy.

As in Indonesia, or in Tunisia or "Palestine" for that matter, crony capitalists in Egypt are the instruments of powerful political forces lurking in the background. Chief among them are the President and his family, the key member of which is the older son, Ala’. Through family members Mubarak has mediated business relations with many if not most of the leading cronies, of whom there are some two to three dozen. The Mubaraks provide the necessary rent generating facilities, such as access to satellite communications, monopolies over telecommunications markets, or contracts for services to SOEs, while the cronies do the rest. But the Mubarak family is not the only actor in the system. Powerful active and retired military and security generals also have their own cronies. So the Bahgat Group, for example, is tied to military officers who have provided Ahmad Bahgat both access to military factories to assembly electronic goods, as well as arranging for the door to be closed to others who might want to assemble competitive appliances. The automobile industry replicated this model, but without closing the door so tightly to imports, which became a problem in the late 1990s as the currency became steadily overvalued, thus sucking in ever more imports. Finally, in early 1999 the crony capitalists, backed by their protectors in the regime, leaned on the Ministry of Trade, through the Presidency, to issue Decree 619, which prohibited entry into Egypt of transshipped goods, thereby significantly reducing auto imports, for most are transhipped through third countries.

Mubarak, in sum, has diversified the crony capitalist system he inherited from Sadat, and reaped considerable benefits by so doing. He has gained direct or indirect control over the flow of resources, such that his dominance over the key elite is unchallenged. He has been able to present, more or less convincingly, accomplishments of crony capitalism as manifestations of Egypt’s economic liberalization, thereby reducing pressure to really liberalize. His strong position on both counts has enabled him to deal harshly with the civilian political system, partially ignoring it, partially dismantling it.

But the economic price of Mubarak’s political success is high. Inward looking crony capitalism, coupled to the military economy and the Leviathan government with its still large public sector, generate the patronage and provide the controls required for the regime to retain its support within the state, while contemptuously ignoring or repressing what little autonomous political life remains. But this nexus that ties together cronies, officers, bureaucrats and public sector managers is inherently inward looking, as it feeds off of rents that can only be provided by the monopolies and oligopolies of a protected economy. Since the Egyptian economy, like most others in the world, is far from being self sufficient or even capable of being so, the inevitable result is a growing balance of payments problem as imports, sucked in by an overvalued currency, swamp the ever dwindling export capacity, presaging an economic crisis that Egypt’s rulers presumably hope and believe will once again be resolved by a U.S. led rescue plan.

In the meantime, however, the steady slide toward insolvency places stress on the linkages between the cronies and their patrons, as the former can take their money and run, while the latter are rooted in the Egyptian state. When a threat to the Egyptian Pound materialized in February, 1998, for example, Mubarak called in 31 of the key cronies and told them that if they dollarized their holdings he, who had put them in their Mercedes, "would put them back on bicycles." As if to underline the extreme mobility of capital generated by crony capitalism, Osman’s death in the summer of 1999 stimulated a stampede of family and other claimants to Aachen, Germany, where the granddaddy of Egyptian cronies had stashed his fortune. No doubt it constituted a considerable portion of the some $50 to $80 billion the World Bank and other sources estimate Egyptians hold abroad, which in turn is only 10-15 per cent of total Arab holdings outside the Arab world, if the estimate of $500 billion such holdings is correct.

The limited power of capital [top]

The very magnitude of flight capital from the Arab world and the MENA generally, for which savings abroad are 90 per cent of the regions’s GDP, the highest in the world, suggests the relative weakness of capitalism therein.(32) In the case of the bully capitalist states, both the historical legacy and present regime strategy ensure that emerging capitalists lack the power to act autonomously from the state, to say nothing of inducing the state to provide the hypothetical level economic playing field.

As regards the historical legacy, Egyptian and Tunisia capitalists were both much weakened at the hands of their radical nationalist states, although the decimation of nativized foreigners that occurred in the former did not take place in Tunisia, nor were the nationalizations so thoroughgoing. Palestinian capitalists are, for the most part, outside Palestine and seem intent on remaining so unless and until the "investment climate" becomes more favorable. The uneven resuscitation of capitalism in Egypt and Tunisia has been too incomplete and too discontinuous to generate a new class of independent capitalists, although private capital accumulation is accelerating in both, as suggested by the rising share of profits and rents and declining share of wages in both economies. But accumulation of capital and political power are not the same thing. While regimes in bully states are not hostile to capitalist accumulation as they tend to be in bunker states, bully regimes jealously guard their monopoly on political power. As Jean-Pierre Cassarino observes with regard to Tunisia, "The ‘challenges of globalization’. . .have encouraged the mergence of a group of highly visible entrepreneurs. . .but in doing so has strengthened their connection with the state, through the distribution of financial resources, ‘titles of nobility,’ and media visibility." He further notes that "As for the government, there is no question that by mobilizing the "Captains" of these corporate groups, it enhances its control over economic liberalization. . . ."(33) 

Both impersonal and personal methods are used to restrain the political autonomy of capital, as evidence from Egypt suggests. The financial sector remains under close and centralized governmental control. The central bank is neither autonomous statutorily nor effective in practice, having changed neither its organizational structure nor added to its staff of only some 200, despite the new roles nominally assigned to it by economic liberalizaton.(34) Almost three quarters of bank deposits continue to be held by banks 100 per cent owned by the government, with the bulk of remaining deposits in the 23 joint venture banks at least partially owned by the big four public sector banks. In Indonesia, by comparison, deposits in government owned banks dropped from above 80 per cent in 1988 to less than half some six years later.(35) Confidence in the banking system, as one observer tactfully remarked, was much eroded in the 1980s and is still "not commensurate with the ensuing stabilization."(36) Some 30 per cent of the loan portfolios of the four public sector banks are estimated to be "non-performing."(37) Public sector textile firms alone owed the banks LE6.3 billion in 1997, non-performing loans for which there was essentially no-collateral and which will, most probably, never be repaid. In 1993 at the start of the privatization program the government stated that the public sector had a total debt of LE66 billion. Since that time debts are generally thought to have increased, but in 1998 the Central Auditing Agency in its report to parliament noted that as of June, 1996, the public sector owed banks LE26.9 billion, further increasing the informed public’s skepticism about the reliability of the government’s financial reports. This skepticism is underscored by Egypt’s relatively low CIM/M2 ratio, as shown in Table 3-6. The significance of that ratio is suggested by the 1998 annual report of the Central Bank. It noted that the value of paper money circulating in Egypt exceeds LE 30 billion, or about LE500 per capita. Two thirds of the country’s quarter of a million firms that employ fewer than ten people do not maintain bank accounts.

The banking sector’s lack of autonomy from the government was underscored in 1998 and 1999 by a series of scandals involving half a dozen parliamentarians from the ruling party who utilized their intra-governmental connections to plunder the public sector banks or joint venture banks in which they have an interest. The former chairman of Parliament’s Planning and Budget Committee, who had also been minister of aviation and tourism, was finally taken into custody in August 1999, along with another parliamentarian who was the son of a former minister of local administration. These members and their colleagues were charged with having arranged loans exceeding LE100 million without the provision of collateral. This signal that the government was finally bowing to pressure to do something about this long running scandal caused three others to flee the country, to which the government responded by barring four more members of parliament, 15 businessmen and 13 bankers from leaving the country.(38)

The relative weakness of the banking sector and its control by government reflects the situation of the financial sector more generally. The three large state owned insurance companies control 90 per cent of the market directly and own shares in joint venture companies that control another 8 per cent.(39) Public finance is extremely concentrated, such that virtually all allocations of public money for civilian purposes, even those by local governments, must be approved at what in practice is the prime ministerial level. Central Bank auctions of governmental treasury bills are nominally open to all bidders, but in reality restricted to the public sector banks. "The Egyptian banking system’s support of the private sector has been quite limited. . . the amount of credit to it lags even within the Middle East region." Caprio and Claessens go on to note that even some of the so-called "transitional economies," such as Poland and Romania, are allocating proportionately more capital to their private sectors than is Egypt.(40)

The nominal representation of an Anglo-American capitalism in the financial sector, the stock market, in fact more closely resembles the French model of administrative control. Small investors are notable in their absence from the market, in which 30 companies account for over half of total capitalization, of which only 15 "effectively grant investors free entry and exit." The market accounts for a minuscule .77 per cent of the capitalization of emerging markets.(41) The government is the largest player on the exchange, using public monies in an attempt to manipulate share prices.(42) The market itself has been plagued with scandals of insider trading, lack of transparency and inadequate regulation, as well as rapid turnover in key positions, including the chairmanship of the exchange, which had three occupants in less than two years from up to 1999, one of whom was forced out for attempting to enhance transparency of share trading and corporate financial reporting.(43) An advisor to the Minister of Public Enterprise was forced to resign when it was revealed that he was using the confidential information of that Ministry to speculate on the market. One of the top 100 investors in the market is an "official responsible for restructuring public sector companies undergoing privatization."(44) The commanding heights of the economy, in sum, even though they are not so commanding by the standards of many other emerging economies, remain under at least indirect governmental control.

In the case of the Islamic financial sector, in which the potential for conversion of capital into autonomous political resources is much greater, the degree of governmental control is qualitatively higher. The "informal" component of that sector, which consisted of so-called "Islamic investment companies" that proliferated in the mid 1980s and came to control a very substantial share of private savings, largely by serving as channels for remittances from the Gulf, was ultimately rendered illegal by the government at the end of the decade. Ten years later depositors were still struggling to obtain some portion of their frozen funds, the inordinate delay suggesting that the government was purposely seeking to deter citizens from making such investments in the future, were the opportunity to arise.

The formal Islamic sector, which consists of Islamic banks, cannot be dealt with as harshly as were Islamic investment companies, for those banks have international credibility and linkages and, in any case, comply with all Central Bank regulations. The Feysal Islamic Bank, which commenced operations in 1977, is the oldest and largest of the three Islamic banks. In addition, eleven private commercial banks and one public sector bank (Bank Misr) have opened Islamic branches over the past fifteen years. Islamic banks’s deposits of LE7.4 billion amounted to 5 per cent of total deposits by 1997, having achieved low by steady growth rates throughout the decade. The rate of growth of deposits and lending would probably have been substantially higher in the absence of governmental efforts to contain such growth. Those efforts have consisted of attempts to tarnish the Islamic legitimacy of the institutions, as well as the placing of legal obstacles in the path of their operations. The three major Islamic banks, for example, have been forbidden from opening new branches. The country’s official Islamic establishment, which is under direct governmental control, has conducted a campaign against the banks. Sheikh al Azhar Muhammad Sayid Tantawi has issued a string of fatwas favoring conventional banks. In 1997 he contributed a series of articles to Akhbar al Yawm in which he argued against the religious credentials of "so-called Islamic institutions." He referred to those who do not set fixed interest rates as "thieves" and banks that have Islamic branches as "ignorant and hypocritical," causing one of his al Azhar colleagues to observe that his statements may be "politically rather than divinely inspired."(45) Paradoxically the state itself, as another tactic to contain Islamic banking, opened its own Islamic window in the state-owned Bank Misr, which by 1998 had attracted more deposits than any of the fully-fledged Islamic banks.(46)

Potential or actual manifestations of autonomous political behavior by business elites are strongly discouraged. Leadership of the principal business associations is exercised by businessmen with close ties to the political elite or, in the case of the highest profile such organization, the younger son of the President. Informal political "red lines" are made evident to business persons less they cross them and earn the government’s ire. One such red line is support for opposition political parties, which is widely known to invite problems with the authorities for those businessmen who do provide it. All of the many businessmen elected to parliament in 1995 were either members of the ruling National Democratic Party, or "independents" affiliated with it, a sign that capital accumulation is proceeding as the economy is gradually liberalized, but that the power of that capital remains too limited to be exercised autonomously from the state.

PROSPECTS FOR BULLY PRAETORIAN REPUBLICS  [top]

Because globalization unleashes forces that reduce the control of states over their national economies, it poses a particular threat in the MENA, where virtually all states are, by global standards, overgrown. Paradoxically, bunker praetorian republics appear to have greater latitude than their "bully" counterparts to formulate policies in response to globalization. This is because those bunker states are less constrained by their civil societies and the power of capital, a freedom which comes at the price of effectiveness of any economic policy these states adopt. The policy choices of regimes in bully praetorian republics are more constrained by civil society and the structural power of capital, but the probable effectiveness of their policies is greater, as is the possibility for a successful renegotiation of state-society relations that would make those relations more conducive to sustained, broad based economic growth. The line between ruler and ruled in the bully praetorian republics is drawn only by their respective relations to the state, not, as is the case in bunker praetorian republics, also by their membership in clans, tribes, or other social formations. Thus redrawing those lines does not necessarily involve a complete reconfiguration of the political community, possibly as a result of civil war.

While a renegotiation of state--society relations will ultimately be required if bully praetorian republics are to respond effectively to the threats and opportunities of globalization, the analogy of the colonial dialectic suggests that time is required before the balance of power between them becomes more equal, hence propitious for either negotiations, or a breakthrough into power by a new social force. At present the rulers of Egypt seem to be operating on the premise of business as usual. They appear to believe they can reconcile globalization with a political regime based virtually exclusively on state institutions, with all the costs such a regime imposes on capitalist development. The one noticeable change is the expansion of the role of crony capitalists over the past quarter of a century, but at an accelerating pace in the decade of the 1990s, a phenomenon which itself reflects the pressure of globalization. Thus far crony capitalism has enabled the regime to have its cake and eat it too--to retain state control while giving the appearance of adopting the Washington Consensus. But this crony capitalism is economically non-sustainable, based as it is largely on rent-seeking in protected markets. The worsening balance of trade figures and resultant pressure on the currency are early warning signs of the bigger economic problems yet to come in the early part of the new century. While Egypt’s continuing geo-strategic importance will garner it more international rents, it is unlikely those rents will be sufficient to cushion an economy of 70 million people from the ever harder blows of economic globalization.

For Egypt and the other bully praetorian republics, however, crony capitalism does not have to be the end of the line. It could be a way station on the road to a more genuine, effective capitalism. Although the present number of crony capitalists is not large, their successes do serve as models to be imitated by others. As competition increases it could stimulate efforts to enhance returns through both rents and productivity improvements. The calculation of their own economic interests might ultimately cause even crony capitalists to support the creation of "level playing fields" as more profitable alternatives to sharing rents with political elites. This desire might in turn dictate a strategy of support for alternative political actors, including those who speak directly on behalf of this emerging and transforming capitalism.

 International pressures of various sorts that impinge on the domestic economy may also enhance domestic competition and provide opportunities for new entrants to the system. Even limited privatization will ultimately erode some of the economic power base of the state. Economic success and political stability could in turn feed the confidence of incumbent political elites, who might then respond by permitting steadily greater latitude for investors. Rent seeking mentalities would, in this scenario, steadily give way to the understanding that broadly based economic growth will pay the greatest economic and political benefits. In short, crony capitalism could be a developmental phase in the gradual economic reform of a command political economy in which the political elite is insufficiently confident to suddenly throw open the doors to rapid economic and political change. As such, crony capitalism would play a functional, transitional role for the further development of the political economy.

 An alternative, much less benign scenario is also possible. It is that the present state-dependent, crony capitalism is not a way station on the road to a more open, competitive free market system, but is an alternative and hindrance to other, more productive forms of capitalism. The nexus between the political elite and successful businesspeople is, in this view, too central to the system, too institutionalized, and too remunerative to both sides for it easily to be broken. Neither side would ever have an interest in modifying rent-seeking arrangements, and outsiders, whether Egyptians or foreigners, will have insufficient leverage to do so. Entrenched in power and protected by purposeful lack of transparency, cronies and their guardian "mamlukes" in the state will ensure that competitors do not arise. They will succeed, for example, in perpetuating tariff barriers to protect monopolized domestic markets secured through rent-seeking arrangements, and will successfully lobby to retain an over valued currency in order to continue to access imports at lower prices, again in order to service protected markets. According to this scenario, crony capitalism will retain monopolistic and oligopolistic control over domestic markets and will continue to try to isolate that market from globalization, thereby perpetuating both itself and underdevelopment until the strategy ultimately fails as a result of undeniable economic calamity.

 Reference to the possibly analogous case of the colonial dialectic might help resolve whether or not the benign or malignant scenario is the more likely of the two. The globalization dialectic has created a first generation of aspiring capitalist imitators--cronies--equivalent in both substantive and sequential terms to the westernized "compromisers" of the colonial dialectic. Were the door to power to be opened to them now, presumably they would consolidate an imitative system in the shadow of the Washington Consensus--a successful conversion of crony capitalism into a more dynamic, outward oriented version, a la our first scenario.

 But the globalization dialectic has already thrown up a second generation of moralizers, most of whom are searching for radical, non-compromising, nativist solutions of which Islamist ones are far and away the most prevalent. As the globalization dialectic is proceeding at a faster pace than its colonial predecessor, this generation of moralizers has been on the scene for about as long as the capitalist accommodators, with whom they are in competition. But their very radicalism, which has alienated large portions of the population, and the relatively greater power of national as opposed to colonial states, seems to have undermined their chances of a breakthrough. The way may thus have been paved for a third generation antithesis to the thesis of globalization, that is unless an extreme economic crisis swamps these systems in the meantime.

 This third generation is also that of moralizers, but one that is relatively moderate and seeks a synthesis between nativist Islam, on the one hand, and the globalist Washington Consensus of free markets and (implied) secular polities, on the other. With regard to the economy, mention was made in chapters one and two of the role of Islamic financial institutions, which are growing throughout the region. On the political level the most rapidly expanding sector of civil society, including political parties, appears to be moderate Islamism, a movement which eschews the radicalism of underground terrorist groups and seeks political office, where possible, through the ballot box and an Islamicized, yet modernized society through voluntaristic activities. But neither the economic, the social, nor the political manifestations of this third generation of synthesizers has yet matured sufficiently to assume major financial or political responsibility, so the real contest remains that which pits, on the one hand, incumbent elites and the capitalists they have spawned, (but who may, with the impetus of the Washington Consensus behind them, bring about a qualitative change to the political economy) and, on the other, radical/revolutionary Islamists.

For both Egypt and Tunisia the scenario of a renegotiation of power between state and society, with the nascent, as yet largely crony capitalism steadily assuming more power and gradually being transformed into a more robust, more independent capitalism, seems to be the most likely, if indeed the status quo is to change in gradual fashion. Such a renegotiation would be pushed along by the constant economic pressure resulting from globalization. In Egypt and Tunisia, both the state and society have considerable strengths, suggesting that radicals, swooping in from the metaphorical jabal (mountains) beyond, are unlikely to prevail. The state has its well articulated structure, its tradition of rule by law if not of law, its sheer size and history of centrality to the country. But society can also draw on a long tradition of structured political participation, of some independence of civil society and of capital, and on the resources and impacts of globalization itself. The justification for military rule, even indirect, has long passed and the transition back to civilian government is the central issue in current speculation over the next presidential succession, especially in Egypt. The temptation for both countries’ nascent capitalists to seek to play more independent and important roles in shaping public policy for both the economy and the polity must likewise be accelerating. In sum, the balance of power between state and society is becoming more equal, thus suggesting a renegotiation of that relationship could occur. Whether that would precede an overhaul of the constitutional/legal/regulatory structure and the institutionalization of some forms of accountability and transparency, including control of the military, or be a byproduct of those changes, would depend on the historical circumstances.

Tunisia’s response to globalization has been more effective than Egypt’s, largely because it garners fewer international rents, has a greater need to export, and has a tighter embrace of Europe, both historically and contemporaneously. But Tunisia’s comparatively rapid growth may have already plateaued. Its information shy regime may prevent it from moving beyond the level of low cost, low technology production at which it currently operates. President Ben Ali, in many ways a model, hardworking technocrat, seems aware of the problem. After years of hesitation, he finally permitted public access the Internet in late 1997 – but only through companies controlled by his daughter and other close associates. And even so, anyone mounting a web page must seek clearance from the local censor! Even faxes are monitored, and under such conditions some international businesspeople have simply left the country for more congenial climates. The Tunis stock exchange also atrophies. It fails to attract foreign investment not only because of its small size but also for lack of transparency compared to Morocco’s or even Egypt’s market. As in Egypt, the major banks remain under state control, again to preserve confidentiality and cover the non-performing loans of cronies as well as state enterprises. Yet without a more business-friendly climate, advances to higher production technologies are unlikely to happen. Continued production at that level necessarily results in declining national wealth, as competition at the bottom ends of global commodity chains, at which most of Tunisia’s exports are situated, leads remorselessly to ever lower wages and profits. Changes to the international trading order following the Uruguay Round and the declaration of the Barcelona Declaration may also have particularly severe consequences for the "Mediterranean Tiger," dependent as it is on European markets and threatened as it is by European imports. The first MENA country to have its partnership agreement with the EU ratified, the Tunisian state is predicted to lose over 24% of its total revenue, or 6 per cent of its GDP by 2010, as a result of tariff reductions scheduled over twelve years. During that period it is anticipated that despite EU support for "restructuring" of Tunisian industry, only 15 per cent of private firms will certainly survive the dismantling of import barriers, 70 per cent will come under serious threat, and the remainder will go bankrupt.(47) Whatever the outcome, the increasingly intense globalization dialectic is rendering the political economy of Tunisia, as it is that of Egypt, sustainable only if the polity can contain ever increasing pressure resulting from economic stagnation. That containment could ultimately cause these bully states to engage in war with their societies, thus coming to imitate the bunker praetorian republics.

The future of "Palestine" is so heavily dependent upon external assistance and the outcome of negotiations with Israel that the contribution its political economy makes to that future will be less than is the case with Egypt and Tunisia. Nevertheless, the trajectories of those two countries probably are indicative of what is likely to happen to "Palestine." The PA, which constitutes the government of "Palestine," is in developmental terms at about the radical nationalist phase reached in Egypt under Nasser and in Tunisia in the late 1960s under Prime Minister Ben Salah, although it is not by any means so avowedly or operationally socialist. As part of a strategy to "conquer" society, major components of which remain antagonistic to the ruling elite--especially a large and vociferous "second moment" Islamist movement--the PA has vastly expanded the size of its governing apparatus and patronage networks. These "state building" efforts are being financed in large measure by the international donor community, which cares less about democracy and development in "Palestine" than it does about peace between Palestinians and Israelis and the security of the latter. Moreover, the geographic borders and regional alliances of the mini-Palestine will remain undecided for some time to come. In these circumstances of domestic and regional uncertainty, and in the face of an insecure political elite, Palestinian capital will possess neither the means nor the will to make substantial contributions to the economy or polity. Thus "Palestine" looks set to continue to develop as a bully praetorian state.

 

Endnotes [top]

1. Sara Roy, "De-development Revisited: Palestinian Economy and Society Since Oslo," Journal of Palestine Studies, 28, 3 (Spring 1999), pp. 64-82.

2. Roy, 71

3. Roy, "De-development Revisited, p. 72.

4. (Cynthia Minti)

5. Alan Richards, "The Global Financial Crisis and the Middle East," Middle East Policy, 6, 3 (February 1999), pp. 62-71.

6. Samir Radwan, Towards full Employment: Egypt into the 21st Century. Cairo: Egyptian Center for Economic Studies, (December, 1997), p. 6.

7. Howard Handy, Egypt: Beyond Stabilization, Toward a Dynamic Market Economy. Washington, D.C.: International Monetary Fund, (May, 1998), p. 6.

8. The International Competitiveness of Egypt in Perspective, First Report, 1998. Cairo: Research Information Sector, Ministry of International Trade and Supply, p. 23.

9. On the various ways and means by which state control of nominally privatized firms has been maintained, see Dieter Weiss and Ulrich Wurzel, The Economics and Politics of Transition to an Open Market Economy: Egypt. Paris: Development Centre of the Organisation for Economic Co-operation and Development, 1998. See especially pages 105-139.

10. Cairo Times (17-30 September 1998), p. 17.

11. Research Information Sector, op. cit., pp. xiv-xv.

12.Arvind Subramanian, The Egyptian Stabilization Experience. Cairo: Egyptian Center for Economic Studies (October, 1997), p. 41.

13. Handy, op. cit., p. 66.

14. Handy, op. cit., p. 65.

15. Research Information Sector, p. 53. [top]

16. Only East Europe exceeds the MENA in regional software piracy rates--84 as compared to 80 per cent of all software in use being pirated. See Middle East Times (6-12 June), 1997.

17. Potential and Uncertainty. Cairo: Report of the Business Studies and Analysis Center, American-Egyptian Chamber of Commerce (July, 1998), p. 7.

18. Hanaa Kheir-El-Ein and Hoda El-Sayed, Potential Impact of a Free Trade Agreement with the EU on Egypt’s Textile Industry. Cairo: Egyptian Center for Economic Studies (September, 1997), p. 4.

19. Arab Republic of Egypt Cotton and Textile Sector Study. Washington, D.C.: World Bank, 1991, p. 74.

20. Ibid, p. 77.

21. Assessment of the Potential for Liberalization and Privatization of the Egyptian Cotton Subsector. Cairo: USAID (July, 1993), p. II-3.

22. Kheir-El Din and El-Sayed, "Potential Impact," p. 7.

23. Assessment, p. II-47.

24. Ibid, p. IV-12.

25. John Bentley, Egyptian Legal and Judicial Sector Assessment. Cairo: USAID, 1994, vol. II, p. 6.

26. In the 1992 legislative session, for example, the 18 standing committees held a total of only 35 hearings, or less than two hearings for each committee. Five of these hearings were devoted to a single piece of legislation.

27. …

28. Cited in al Ahram Weekly (19-25 November 1998), p. 22

29. Brown, The Rule of Law in the Arab World, p. 234. [top]

30. Egypt: A Comparative Study of Foreign Direct Investment Climates. Cairo: U.S. Agency for International Development Office of Economic Analysis and Policy (August 20, 1997), p. 21.

31. Muhamed Zaki Abu Amer, cited in The Egyptian Gazette, 5 December 1998, p. 2.

32. Tarik M. Yousef, Demography, Capital Dependency and Growth in MENA. Cairo: Economic Research Forum (January, 1998), p. 14.

33. Jean-Pierre Cassarino, "The EU-Tunisian Association Agreement and Tunisia’s Structural Reform Program," The Middle East Journal, 53, 1 (Winter 1999), pp. 69-72.

34. Gerard Caprio and Stijn Claessens, The Importance of the Financial System for Development: Implications for Egypt. Cairo: Egyptian Center for Economic Studies (April, 1997), p. 27.

35. Ibid., p. 25.

36. Subramanian, op. cit., p. 26.

37. Mahmoud Mohieldin, "Causes, Measures and Mpact of State Intervention in the Fiancial Sector: The Egyptian Example." Cairo: Working Papers of the Economic Research Forum for the Arab Countries, Iran and Turkey, 9507 (p. 20).

38. al Ahram Weekly (5-11 August 1999), p. 2.

39. John Westley, Mission Director, USAID, "Change in the Egyptian Economy, 1977-1997," unpublished ms, Cairo, January, 1998.

40. Op cit., p. 25.

41. Al Ahram Weekly (5-11 November 1998), p. 8. [top]

42. Out of the calculation that it could maximize its return from privatizations of SOES by driving up the price of shares, the government began in 1997 to purchase large amounts of those issues, which for some months did have the desired effect. But within a year this strategy backfired, in part because the magnitude of governmental purchases scared off private buyers and because the government itself, under financial pressures, was unable to sustain its purchasing. By early 1999 the share prices of two thirds of privatized companies were below their issue price, a factor which contributed to the further deceleration of the privatization program.

43. Financial Times (15 January 1999), p. 40.

44, Hadia Mostafa, "One in a Hundred," Reuters, (15 September 1997).

45. Hadia Mostafa, "Pennies from Heaven," Business Today. (June 1997), pp. 52-58.

46. Michel Galloux, "The State's Responses to Private Islamic Finance Experiments in Egypt," Thunderbird International Business Review, 41:4-5 (July-October 1999), pp. 494-497.

47. Moncef Mahroug, "Champions, menaces et condamnes," Jeune Afrique, 1853 (July 1996), p. 91. [top]