Crony Capitalism in the Middle East

[On October 9, the Middle East Institute (MEI) hosted a panel of experts to launch the book Crony Capitalism in the Middle East: Business and Politics from Liberalization to the Arab Spring, eds. Ishac Diwan, Adeel Malik and Izak Atiyas. These notes summarize my impression of highlights of the presentation and are not an attempted transcription.]

Adeel Malik (Globe fellow, Economies of Muslim Societies, Oxford Centre for Islamic Studies; associate professor, Department of International Development, University of Oxford).

Across the Middle East corruption in government and corruption in business is often seen as the same. An earlier book, Networks of Privilege in the Middle East concluded that the era of economic liberalization led to networks of monopolizing cronies connected to the state. We bring specificity and details to this debate. We focus on the post-liberalization era. We determine who are these politically connected firms (PCFs). Some chapters are descriptive and some analyze causality.

In Turkey the connections may not be directly to the government, but to institutions such as the AKP. In Morocco we looked at firms connected to the Royal Family. In Egypt we looked at linkages to MPs. There is a large and growing presence of cronies, but it varies across countries and sectors. Egypt probably has the highest exposure to cronyism affecting 80% of the subsectors and has more than doubled since the late 1990s. We offer a refined understanding of mechanisms including subsidies, finance, privatization, regulatory capture, trade barriers, and land allocation. PCFs are proportionately concentrated in energy sectors. In Morocco, finance is a lynchpin in the broader network of cronyism. In Lebanon, there is political ownership of the banking sector. Privatization contributes to cronyism when ownership goes into the hands of cronies. In Tunisia those firms that went to the Ben Ali family became the most profitable. In Iran nearly half of the 331 “privatized” companies in 1988-1994 went to semi-public organizations (such as the Martyr’s Foundation and the IRG). Trade reform has preferentially benefited connected sectors. In the case of Morocco, EU-induced tariff reductions compensated politically connected sectors most (especially those connected to parliament as the royal family is not heavily invested in manufacturing).  Technical Barriers to Trade are susceptible to political abuse. Contra Abdullah Al-Dardari’s 2012 prediction that World Trade Organization rules would impede the power of rent-seeking networks, we confirm Luigi Zingales’s 2017 observation that the increasing size and complexity of regulation has made “it easier for vested interests to tilt the playing field.” In Tunisia the regulated sectors are the most profitable because they are protected by regulation.

Ishac Diwan (Chairperson, Socio-économie du Monde Arabe, Paris Sciences et Lettres).

Crony capitalism repressed rather than opened markets and entrenched the autocracy. It is especially destructive in that it affects the growth sectors of the economy and divides the informal from the formal sectors of the economy. Crony capitalism provides a disincentive to property rights protection and a misallocation of resources. Competition is limited and lobbying effectively inhibits structural change. In extreme cases market forces are eliminated altogether. In Egypt PCFs took 85% of private sector credit, derived 60% of net profits, and created only 11% of employment, even as they depress employment by unconnected firms. PCFs in Lebanon over-hire, especially just before elections, and their invasions of the market end up with a net destruction of jobs. In Tunisia they lobby for protection and monopolize whole sectors. In GCC markets are restricted to the royal families and produce few jobs for youth. In Syria and Algeria the private sector is small, but what there is is dominated by cronies. In Iraq there is a kind of competitive cronyism centered on competition for government contracts. In Turkey the experience was initially consistent with growth, but, with the consolidation of AKP power, that growth has now collapsed.

Regime change destroys connections but poses a challenge to the protection of property rights. “Messy democracies” like Tunisia, Lebanon and Iraq could improve Rule of Law over time, but the Tunisian experience shows that political competition doesn’t instantly bring about the rule of law, but democratizes corruption. There is a mix of populism and state capitalism in KSA, Egypt, Algeria, and now in Turkey. In Jordan and Morocco there is a challenge to monarchical management, but there is a need for improved education and innovation.  It is an open question as to whether the AKP experience of “virtuous enterprises” can be reproduced elsewhere.

Karen Young (Resident scholar, American Enterprise Institute).

She prefers the phrase “a stalled statist project” to “crony capitalism.” All capitalisms depends on networks, which is actually a strength of the capitalist system. The degree of internationalization and focus on domestic non-tradables provides productive ground.  Exclusive vs. inclusive is an important issue. Who controls what resources is different in the Gulf than outside.  Has the success of economic human and social development indicators been preferential to certain groups reflective of class or tribe? There are lots of ways of exerting political influence that are not necessarily counter to markets or public good. I think the real issue is about governance and civil society. The ability to form interest groups is restricted or absent throughout the Middle East. Diamond trade is highly networked and poised to boom. Government-related entities are getting a vastly disproportionate share of credit. SMEs receive a tiny portion of bank lending. Governments actively intervene to shore up the prices of related firms. How do we explain the Gulf states allowing connected firms to fail?  Government connected firms are not good employers. I love the cross-regional comparisons. In Latin America race played a role in concentration of ownership.  How does that compare to the Middle East? Statist development continues to overpromise and overspend but fails to deliver growth or a new generation of human resources.

Jean-François Seznec, moderator (Non-resident scholar, MEI).

I notice you did not cover the causality of cronyism.  Is there anything specific to the Arab world? It is due to a strong state, but is it due to authoritarianism or monarchy, or something else? If you are going to focus on the Gulf you must address those firms unconnected with the royal family that are successful because they are not connected to the royal family.

Adeel Malik.  Many of these counties have family based networks. In many cases firms need protection from the state. The sheer scale of exclusion (high political barriers to entry, usually blunt instruments) allow firms to grow to a certain level beyond which they need to [connect to the political establishment]. In the very oil rich countries there is less need to generate additional sources of rent, since the oil provides sufficient rents.

Ishac Diwan. Forms are political entities themselves. The question is how politics and economics influence one another. How can Sisi provide jobs for the youth without letting go of the private sector?  He will try to let the army do the job while cultivating some small companies without political power. He will make space for SMEs to revitalize the market. It is only a fortunate conjunction of economics and political success that allows an AKP to arise to address challenges of the future.

Imad-ad-Dean Ahmad, Ph.D.
Minaret of Freedom Institute

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