Crony Capitalism in the Middle East
Firm-level evidence on politically connected business; Egypt is the core case.
Summary
Diwan, Malik and Atiyas edited this volume applying quantitative methods to the relationship between political connection and business performance in Middle Eastern and North African economies.
The methodological contribution is what distinguishes it from earlier work on the subject. The contributors used firm-level data matched against records of political connection, including in Egypt where post-2011 disclosures identified firms connected to the Mubarak government, in Tunisia where the assets confiscated after Ben Ali's departure identified his family's holdings precisely, and in Lebanon and Morocco through other means. This permitted measurement rather than assertion.
The findings are consistent across countries. Politically connected firms are concentrated in sectors protected by regulatory barriers rather than in sectors exposed to competition. They are larger and more profitable than unconnected firms but not more productive. They benefit from trade protection, from energy subsidies, from access to credit and from regulatory decisions restricting entry. Their presence in a sector is associated with lower employment growth and lower entry by new firms across the sector as a whole. In Tunisia, the Ben Ali family's firms accounted for a small share of employment but a large share of net private sector profits, and the sectors they occupied were those where entry restrictions had been introduced.
The general argument is that the region's low growth and low private sector employment are consequences of this structure rather than of factors commonly cited including education, geography or culture. Policy that increases investment without changing the entry rules will produce more rent capture rather than more growth.
The volume is academic and the country coverage is uneven, since it depends on where the data existed. The measurement of political connection is inherently imperfect. The finding that connected firms are more profitable without being more productive is the central result and is well supported.
Key takeaways 7
- Politically connected firms in the region are concentrated in sectors protected by regulatory entry barriers rather than in competitive sectors.
- Connected firms are larger and more profitable than unconnected ones but are not more productive.
- The presence of connected firms in a sector is associated with lower employment growth and lower entry across that sector.
- In Tunisia the ruling family's firms captured a large share of net private sector profits from a small share of employment.
- Entry restrictions were introduced in the specific sectors where connected firms operated, which is the mechanism of capture.
- Low private sector employment growth in the region follows from this structure rather than from education, geography or culture.
- Increasing investment without changing entry rules produces more rent capture rather than more growth.
Who should read it
Investors and analysts in Middle Eastern markets who want measured evidence on how political connection affects firm performance and sector dynamics.
Where it sits in the reference 2
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