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

This post was written by Kaouthar Gazdar (PhD in Economics, University of Sousse) & Hajer Kratou (PhD student in Economics, University of Carthage & University of Auvergne) The second session of the ERF workshop on “The political economy of transformation in the ERF region” introduced two important papers by Ishaq Diwan (Harvard Kennedy School) and Ragui Assaad (University of Minnesota, USA). Entitled “Crony capitalism in Egypt”, Diwan’s study analyzes the nature and extent of Egyptian “crony” capitalism by comparing the corporate performance and the stock market valuation of politically connected and unconnected firms, before and after the 2011 popular uprising that led to the end of President Mubarak 30 years rule. By looking closely at capitalism in Egypt, the paper is an attempt to understand why Arab capitalism has not been very dynamic; in other words the reasons behind the low performance and innovation of firms. Diwan addresses the question of corruption in Egypt while analyzing the performance of politically connected firms which benefited from facilities regulations, government contracts, licenses access, protection from foreign and domestic competitions, as well as from subsidies energy under the Mubarak regime. “Egypt could have performed much better in terms of economic growth and job creation if the privilegies and exclusions were not as much”, he stated. But the question is: Did sections dominated by privileges grow more? Were they more profitable? According to Diwan, the answer is no. Sections dominated by cronyism did not have much entry, given the lack of competition with unconnected firms. Diwan reaches an interesting conclusion that granting privileges to specific politically connected firms was not part of a successful industrial policy but instead, it led to a large misallocation of capital towards less efficient firms, which together with reduced competition, led to lower economic growth. In an interview with him, Diwan specifies that the paper aims primarily at opening up a new field for researchers studying the private sector performance, enabling them to look at it from a political economy angle.   Read Ishac Diwan’s blog “How can political connections help in capturing the energy subsidies that go to the energy intensive manufacturing sectors in Egypt?“ Watch our interview with Ishac Diwan https://www.youtube.com/watch?v=FyqFLN10tPM The second part of the session was dedicated to Ragui Assaad who presented his paper “Making Sense of Arab Labor Markets: The Enduring Legacy of Dualism”. Assaad investigates the consequences of the nature of the Arab region’s economy on the outcomes of the labor market. He argues that common characteristics shared by the Arab labor markets; such as oversized public sector, high unemployment for educated youth and weak private sector, as well as the low quality of the education system, can be explained by the deep and persistent dualism that characterizes these markets. Such dualism is the result of the use of labor markets by the Arab regimes as a tool of political appeasement in the context of the “authoritarian bargain” social contract that they have struck with their citizens in the post-independence period. Assaad finds that this prevailed dualism will undoubtedly pose serious challenges to any efforts deployed towards transforming Arab economies into dynamic, rapidly growing and more equitable globally competitive economies. Watch our interview with Ragui Assaad https://www.youtube.com/watch?v=FpEi0e48s5I