A glimpse of the private sector performance from a political economy angle

Why Arab capitalism has not been very dynamic? what are the reasons behind the low performance and innovation of firms?  Is it related to cronyism? And if yes, did sections dominated by privileges grow more? Were they more profitable than other non-connected firms?

Ishac Diwan (Harvard kennedy School, USA)

Ishac Diwan (Harvard kennedy School, USA)

All these questions were addressed by Ishac Diwan at the latest ERF workshop and policy seminar on “The political economy of transformation in the ERF region“. In his paper “Crony capitalism in Egypt”, Diwan looks closely at the question of corruption in Egypt while analyzing the performance of politically connected firms which benefited from facilities regulations, government contracts, licenses access, protection from foreign and domestic competitions, as well as from subsidies energy under the Mubarak regime. “Egypt could have performed much better in terms of economic growth and job creation if the privilegies and exclusions were not as much”, he stated.

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

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

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

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

Watch our interview with Ishac Diwan

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