The nexus of power and wealth in Mubarak‟s Egypt

Christopher Haynes

14/5/12

“People are naïve when they get the idea that we fix elections. Nothing of the kind. It just comes down to the fact that we‟ve studied the Egyptian people well. Our Lord created the Egyptians to accept government authority. No Egyptian can go against his government. Some peoples are excitable and rebellious by nature, but the Egyptian keeps his head down his whole life long so he can eat. It says so in the history books. The Egyptians are the easiest people in the world to rule. The moment you take power, they submit to you and grovel to you and you can do what you want with them.”

(Aswany, 84-5)

This quote from Kamal El Fouli, a corrupt politician from Alaa El Aswany‟s the Yacoubian Building, reveals not some fundamental truths about Egyptian culture, which proved him wrong in January of 2011, but the contempt in which Egypt‟s elites held the common man. The Mubarak regime‟s monopoly on power came by generously rewarding the elites at the expense of the majority. It presided over the tight interlacing of business and political interests that created a small, very rich group of men who corruptly controlled political power and economic markets. It was a group in which businessmen and politicians became effectively indistinguishable, because political power and market control had themselves become indistinguishable.

The protesters who rose up in January and February 2011 against the Mubarak regime cited the state of the economy and corruption as among their main grievances. Many commentators blamed neoliberalism. Neoliberalism is a theory of political economy that favours individual entrepreneurial freedom through private property, free markets and free trade. The state should guarantee security and the rule of law, but not intervene in markets. (Harvey, 2) Has neoliberalism worked this way in practice?

Developing countries have adopted (or had thrust upon them) neoliberal policies to a greater or lesser degree since the 1980s. The results of the past two decades have not been encouraging. Neoliberalism has not reduced state control over the economy. Instead, neoliberalism has concentrated wealth and given the coercive power of the state to those with the wealth. If Egypt is, as many claim, a sterling case of neoliberalism, neoliberalism leads not to a free market but to a state in which a tiny elite control the levers of the economy and enrich themselves in the process.

Corruption may be simply defined as the abuse of state power for personal gain. It may mean when politicians, bureaucrats or police accept bribes, or when well-connected members of the public receive favours from cronies in power (nepotism or patronage/clientelism). This paper argues that “corruption” insufficiently explains the nexus of business and political elites and their effect on the Egyptian economy. There is no doubt the police and bureaucracy are corrupt: Transparency International ranks Egypt 112 out of 183 on its Corruption Perceptions Index. (Transparency) But that is not the focus of this paper. Bribery may place burdens on those seeking to start businesses or develop land, but they also supplement the incomes of low-ranking bureaucrats. Low-level corruption does not place the same stranglehold over an economy that Egypt‟s elites have. The focus of this paper is the effects on privatisation; specifically, how privatisation in Egypt concentrated wealth in the hands of a few insiders.

The low capacity of the Egyptian state under Mubarak to provide services did not reduce its power over the economy, or its ability to collect rent. Why was the state so weak? Let us first consider the argument that pre-revolution Egypt was a free-market economy gone wild.

When found reconsidering the privatisation of three companies in September 2011, Egypt‟s finance minister, Hazem El Belbawi, said “[t]he government will not backtrack on a free-market economy.” (Al Arabiya) But what does he think a free market is? In the study of Egypt‟s political economy, it is not accurate to call Egypt a free-market economy. A free market is one with no force. Prices are set by the complex interplay of supply and demand, and are not affected by coercive government intervention. Economist Walter Block therefore defines the free market as “the concatenation of all voluntary commercial interactions.” (Block) Encyclopedia Britannica equates capitalism with a free-market economy, though others dispute this definition (eg. Chartier, 2011). Nevertheless, its definition of a free market is an economic system “in which most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets.” (Encyclopedia Britannica) David D‟Amato explains that free markets
“divide and moderate market power by denying special protection and privilege and opening competition to a wide assortment of both entrants and methods. Only where potential threats to corporate monopolization are precluded by force of law — through, among other impediments, „safety‟ and „consumer protection‟ standards — can today‟s „captains of industry‟ ascend to market dominance.”

(D‟Amato)

Monopolies and other giant corporations are thus unlikely to exist on a free market. Though a truly-free market does not exist in the statist system, one might say that a market for clothing with many producers in competition not suffering from burdensome taxes and regulatory barriers to entry is a relatively-free market. Through competition and allowing firms to fail and succeed on their own, a free market can provide most or all of the services provided by state-run

enterprises. But a number of vital sectors of the Egyptian economy under Mubarak were not free, but controlled by a few businesspeople who, along with a clique of government powerbrokers, comprised the power elite. This system enabled enormous profits to be made by those who owned the businesses and their associates who controlled the state. Neoliberal policies do not generate a free market. Until recently (if not still today), Egypt‟s market was controlled, not free.

If it chooses to destroy the free market, the state needs to ensure the provision of public goods. The state needs the capacity and the will to do so, or it is a weak state. According to Sahliyeh, a state‟s political power depends on its perceived legitimacy, its ability to maintain public order, a functioning economy, the rule of law and the basic needs of the population. (Sahliyeh) But are those things truly required for a state to retain enough control to meet its own goals? Migdal defines state capacity as the extent to which the people in government can use state institutions to get the people to do what they want them to do. (Aidi, 18) The Egyptian state‟s capacity for imposing its will under Mubarak ended abruptly at the beginning of 2011 but had left the ruling elites in charge for years preceding it. Guazzone and Pioppi argue that to say the state is in retreat in the Arab world is misleading. If we think of the state as a system for concentrating power in a few hands and extending that power beyond the formal institutions of the state, we can see that, while the state might “retreat” from, say, providing social services, but it still maintains its control over the economy, the accumulation of wealth and the distribution of patronage. (Guazzone, 6) Power has fragmented and Arab governments rule more informally, through the neopatrimonialist networks of the individuals who make up the state. (Ibid., 8) State capacity to provide public goods under Mubarak was low, but its level of control remained high for years. How did it maintain this control without providing for basic needs? And how did markets become so distorted? Privatisation.

Privatisation could be a bottom-up process by which the functions of the state get taken out of the hands of the state and taken over by business or civil society. In this way, privatisation could result in a free market. However, privatisation as policy is a top-down approach in which the state is the major actor that sells a state-owned enterprise to private actors and then retains regulatory power over it. (Belev, 5) It is part of structural adjustment, the Bretton Woodsimposed policies of austerity, and is widely considered essential for successful reform. (Ibid., 6) The experience of Egypt (and many other places) has been of privatisation without liberalisation; that is, the state has sold off its enterprises without freeing the market, stifling competition instead.

Privatisation has meant that ruling elites have shifted patronage networks to the private sector without reducing the power of the state as the source of rent. The private sector is still dependent on the state for survival and can thus be co-opted. (Guazzone, 5) It is essential that we consider the process under which this state of affairs came about.

Privatisation and its effects, 1991-2010 Egypt‟s implementation of neoliberal policies, which began in 1991, was preceded by a period of economic instability. Sadat‟s reforms had been “half-hearted”, and the economy of the early 1980s was “an unhealthy mix of state planning and market regulation”. (Ibid., 97) Egypt‟s inflation rate in the 1980s was out of control, averaging well over 10% per annum, and some years exceeding 20%. (Index Mundi, A) Its current account balance was negative every year. (Index Mundi, B) External debt rose from $19b to over $45b in 1989. (World Bank) By the beginning of the 1990s, Egypt‟s economy was in crisis. Its external debt was equal to 150% of

GDP, its budget deficit equaled 20% of GDP, and inflation exceeded 20%. Remittances decreased as a million Egyptians returned home due to the 1991 Gulf War. (Farah, 41)

Negotiations to implement structural adjustment policies (SAPs) resulted in an agreement with the International Monetary Fund (IMF) in May 1991, and with the World Bank in November of the same year. The goals of the SAPs were to improve the balance of payments to enable the Egyptian government to repay foreign debt, reduce inflation and reduce public debt. They would do so by lifting price controls, reducing government expenditure, including subsidies, reducing public investment, introducing new taxes, freezing wage rates, liberalising foreign trade and privatisation. (Ibid., 42) As part of its privatisation programme, the government of Egypt instated law 203 in 1991. Law 203 officially removed 314 public enterprises from government control and restructured them as affiliates of sixteen holding companies, to which they were accountable. The holding companies could then sell the companies without government interference, thus completing the privatisation of the public sector. (Roquette, 12)

Between 1991 and 1993, a number of small state-owned enterprises were sold. The new cabinet of 1996 ramped up privatisation, and by 1998, 20 more of the 314 companies that were to be privatised had been partially divested. (Aidi, 3) Results were either heartening or disappointing, depending what statistics one considered. By approximately the time of the Nazif cabinet of 2004, Egypt‟s foreign reserves and current account balance improved through privatisation, high oil prices, remittances from migrant workers, a rise in tourism and increased tolls from the Suez Canal. These factors were rents and unsustainable; but the policies had brought annual GDP growth up to around 7%. “Egypt‟s macroeconomic scorecard looked very respectable if one did

not examine too closely levels of debt, trade deficits, inflation, unemployment, inequality and poverty.” (Guazzone, 30)

On the other hand, the private sector was not generating new employment as it had been expected to, even though jobs were being destroyed in the public sector. (Farah, 45) If the money saved by the state on public sector wages had been invested in increasing productivity, either by the state or the taxpayers, the private sector would likely have more than made up for the jobs destroyed. However, the amount of money spent on productive activities was negligible, because investment in productivity was unnecessary to generate profit: the elites had become clients of the regime. Since the 1960s, the Egyptian public sector has been used “to subsidise the private sector by creating various channels for the appropriation, exploitation, and even pillage of public revenues and funds, or by selling public sector enterprises to elites at nominal prices.” (Ibid., 25) In the period of economic reform and privatisation, the state subsidised the business elites through its various monetary and fiscal policies, while offering them lucrative contracts. (Ibid., 25) Ulrich G. Wurzel proposes that the purpose of these reforms was “to stabilise the authoritarian regime in the face of increasing economic and political problems” and consolidate power. (Guazzone, 98) By 1998, 20,000 workers had been dismissed and Egypt‟s government had made $3.3b on privatisation. But strikes became more frequent and in 1999 reformers slowed privatisation for a few years. (Aidi, 3) Reform dragged on over the 1990s because Mubarak‟s government in did not have control over the restive groups in society, particularly urban labourers. It had relied on high-level negotiations, co-opting labour leaders through legislation, fraud and patronage. The Egyptian Trade Union

Federation, the state-sanctioned trade union until January 30, 2011, signaled its support for privatisation. But the state did not have enough resources available for patronage to gain the support of rank-and-file union members. They remained unconvinced, and joined other organisations. To water down opposition groups‟ effectiveness, Mubarak reached out to the upper classes, incorporating them into the National Democratic Party (NDP) to build a coalition for reform. (Ibid., 137-8)

By 2002, 190 of the 314 companies eligible for privatisation had been sold. (Guazzone, 30) In June 2004, the US government offered Egypt $300m as a reward for the reforms it had already taken, along with $2b in loans if privatisation continued. (Aidi, 8) The next month, Ahmed Nazif became prime minister, charged by Mubarak with restarting neoliberal policies, including privatisation. In two years, Nazif‟s government had sold 87 state assets worth $3.6b, winning praise from the IMF. (Laframboise, 248) As mentioned above, some of the figures (those the IMF cared about) were indeed impressive. But how were these results being achieved?

A study by a team of researchers at Cairo University lamented the lack of transparency in the privatisation process. It found that the Ministry of Public Enterprises had insisted, throughout the 1990s when most of the formerly-state-run enterprises were sold, that the Central Auditing Agency did not review the valuations of the companies being sold. Companies were sold at bargain prices, and investors later sold them at 300% of the original price. The revenues were not reinvested in the economy but largely financed early retirement schemes (to stop workers from rioting) and debt. (Wahish)

The restructured economy

Despite these revelations, the Nazif cabinets of 2004 and 2005 continued to implement neoliberal policies. The new “business-friendly” cabinet appointed in December 2005 included six businessmen to head the ministries of trade and industry, housing, transportation, health, agriculture and welfare (Farah, 49), some of whom were businessmen close to Gamal. (Guazzone, 30) This cabinet was charged with implementing the far-reaching neoliberal reforms proposed by the NDP. Between July 2004 and March 2006, the Ministry of Investments sold 80 companies at token prices, and most sales were not even publicly announced. (Farah, 49-50) The Bretton Woods organisations gushed with praise. Mubarak‟s Egypt was considered the paragon of neoliberalism in the Middle East (as was Tunisia). But the rhetoric of “the free market” hid the reality of the cronyist market. “In reality, the unfettering of markets and agenda of privatization were applied unevenly at best.” (Armbrust) Businesspeople and bureaucrats colluded to sell state
assets at prices far lower than the market. Some went at prices lower than the estimated value of the real estate on which they stood. (Farah, 81) Instead of fostering a competitive free market, this

accelerated, opaque, cronyist privatisation effectively subsidised the elite-dominated private sector at the expense of the vast majority of the population. (Ibid., 50) But to call it “the private sector” or to use the term “privatisation” is misleading. The neoliberal doctrine of limiting state function and ensuring free markets had no place in Mubarak‟s Egypt. The economy remained a state-controlled rentier economy. (Guazzone, 100) “[B]usiness and government were so tightly intertwined that it was often difficult for an outside observer to tease them apart.” (Armbrust) 77 members of the 2005 parliament were from the business sector. (Farah, 82) Businesspeople bought political office in phony elections run by the NDP, because access to the patronage of the state was the best way to maximise profit. (Armbrust) They knew that anyone who wanted to do business beyond the lowest level needed to have a clientelist

relationship with the ruling elite. (Guazzone, 31) Privatisation has not meant the retreat of the state but a nexus of business and political elites that formed the ruling coalition of Egypt.

Direct rule over markets shifted to indirect, informal control. The law was not effectively enforced because the judiciary was weak; and in any case, powerful players could circumvent the laws when it pleased them. The regime could manipulate the business environment to benefit politicians and cronies alike. (Ibid., 100) Take the issuing of import licenses. A state committed to a free market might offer them to everyone for a small fee, provided they meet a few clear standards, or it might do away with such licenses altogether. Under Mubarak, Egypt granted import licenses as a distribution of privilege. Instead of a variety of importers, many import activities came under the control of a small number of well-connected magnates. These big players oligopolised or monopolised import sectors and drove out rival firms. While smaller producers faced competition from Asian firms, the big players were protected by legal barriers to trade. Moreover, the state fined firms unspecified amounts for unspecified illegal practices. (Ibid., 101) The state crushed those who posed any type of threat to its friends.

Small and medium-sized businesses not connected to the regime had little access to credit, whereas the well-connected received billions from Egyptian state banks, often without guarantees or collateral. (Ibid., 102) Regime insiders were accused of insider trading and other corrupt self-enrichment during the privatisation of state banks. (Ibid., 102) Well-placed firms that supplied steel and cement made huge profits from government contracts. (Armbrust) The granting of licenses for new tourism development zones and other allocation of land for development was repeatedly accused of corruption, nepotism and illegality. (Guazzone, 110) But

the rich kept going to the bank. After routing threats to its friends, the state protected them from the law.

Toothless anti-corruption measures were implemented. Egypt ratified the UN Convention against Corruption in 2005. Bribery, abuse of office and using public resources for private gain were all illegal. A number of agencies existed to tackle corruption, but none of them were politically independent. They were answerable to the president, the prime minister or the minister of justice. The law governing conflicts of interest was enforced selectively, as a further measure to limit competition but not the actions of insiders. (Business Anti-Corruption)

Can we really call this barefaced destruction of markets, this uninhibited enrichment of the rich through their ties to the state, “corruption”?
“[C]alling it corruption suggests that the problem is aberrations from a system that would otherwise function smoothly. If this were the case then the crimes of the Mubarak regime could be attributed simply to bad character: change the people and the problems go away. But the real problem with the regime was not necessarily that high-ranking members of the government were thieves in an ordinary sense. They did not necessarily steal directly from the treasury. Rather they were enriched through a conflation of politics and business under the guise of privatization. This was less a violation of the system than business as usual.”

(Armbrust) Business as usual was facilitated by Egypt‟s neoliberal policies. Neoliberalism is essentially an economic programme that does not suggest changes in the political system. It does not mandate reductions in the state‟s ability to regulate or profit from privatisation. Without a transparent and competitive bidding process, there is no mechanism to determine the market price of the state

assets to be privatised. It seems naïve to give people the power to profit so much from a political system and then expect them to limit themselves. Thus, the creation of business elites with the power to limit competition legally is a predictable, even inevitable, consequence of widescale privatisation. When the state retains full control over processes of privatisation and regulation, their outcome should not surprise anyone: that the well-connected win and everyone else loses.

The Mubarak regime had power over markets but lacked control over society. Admittedly, the police, the agents of the regime, controlled the streets to an extent, but it is not clear that they were acting under orders of the regime, as opposed to on their autonomous initiative. Privatisation can be a way to bring the private sector into the governing coalition, and “[b]y contracting state enterprises and state functions to trusted allies in the private sector, … Egyptian reformers created a new set of intermediaries in the propertied classes through which the state [could] govern and manage the economy.” (Aidi, 11) But “the private sector” as a whole gained little from privatisation. The NDP is not a broad-based party. It did not give the reformers the capacity to co-opt those who opposed neoliberal policies, such as labourers at risk of layoff. (Ibid., 17) Only a select few were allowed the enormous benefits of state resources. The regime offered inducements to attract loyalty in the form of welfare and subsidies, but not career incentives, channels for representation and collective bargaining. (Ibid., 17) Mubarak and his clique lacked social control and were unable to build a broad-based supporting coalition. The neoliberal policies effectively outsourced the provision of erstwhile-state services to grassroots actors, and they did not have buy in from labourers, nor from Islamists. Without the support of such important constituencies, the regime turned to repression of both. (Ibid., 19-20) In contrast to Nasser, Mubarak had no great social agenda. His guiding coalition could impose its will,

though all it seemed to want was profit and regime stability. Let us now meet this group, the coalition to plunder Egypt.

The coalition of whales When speaking of the established business elite of Mubarak‟s Egypt, we are referring to only 32 businessmen. Most of these men benefited enormously from the selective tariff regime of the 1990s, carefully positioning themselves within the networks of Mubarak‟s inner circle. They used their privileged access to information and their links with powerful bureaucrats to enrich themselves further. The client-patron system that emerged erected walls that other businesspeople could not penetrate. (Sfakianakis, 79) In the 1990s, a common term for these powerful businessmen was “whales”. (Ibid., 80)

The whales made obscene amounts of wealth, and naturally handed generous amounts back to bureaucrats and politicians. (Ibid., 81) Vague estimates circulating the Egyptian blogosphere placed the wealth of Mubarak and his family somewhere between $3b and $70b. Ahmed Ezz, General Secretary of the NDP and the largest steel mogul in the Middle East, was said to have $18b. Minister of Tourism Zoheir Garana was said to be worth $13b; Minister of Housing Ahmed El Maghrabi, $11b; and Minister of the Interior Habib El Adly, $8b—“not bad for a lifetime civil servant.” (Armbrust) Though others give far lower figures, estimating barely a fifth of the numbers above (Inside Story), there is no doubt these men made fortunes. We do not know who gave how much money to whom and when. The backroom nature of such dealings precludes public knowledge of the extent of corruption. Nonetheless, because we have seen above the variety of state protections extended to the whales, we have some idea how such

fortunes were made. To illustrate, let us look at some specific practices and incidents of privatisation.

Growing businesses needed at some point to become clients of the state. Alaa Mubarak infamously demanded a cut in any enterprise in Egypt worth his time. (Guazzone, 31) Try as they did to remain independent, successful entrepreneurs that did not want to work with the regime were immediately punished. (Ibid., 112) Even small businesses, as competitors, needed to be demolished. Professor Mark Allen Peterson describes his experience in 2005 meeting residents of Luxor who made souvenirs for tourists. Their houses, stores and workshops had been bulldozed by developers. The goal was for a single business to dominate tourism in the area. That business was owned by high-ranking officials in the Ministry of Tourism, along with Gamal Mubarak. (Peterson) If neoliberalism had intended to create an entrepreneurial class in Egypt, it failed. Only those businesspeople closely tied to the regime succeeded in business without being driven out of the market by lawsuits or their success being captured by the Mubarak family.

Land contracts were a major source of patronage. The Talaat Mustafa Group was headed by Tarek Talaat Mustafa, who was also a member of parliament, and Hisham Talaat Mustafa, who was also in the Shura Council. Hundreds of millions of dollars worth of land contracts were awarded to cronies, such as Talaat Mustafa Group, below market rates, meaning that the land could make far more than hundreds of millions for its new owners. Egypt‟s Central Auditing Organisation estimated that more than $12b was spent on land sold as cheap farmland but later used for luxury real estate. (Mekay) Bypassing competitive bidding but benefiting from stateprovided roads and utilities, Talaat Mustafa purchased vast swaths of real estate for an upscale housing project called Madinaty in 2005. (Armbrust) The state would own 7% of the property,

while Talaat Mustafa would own 93%. Talaat Mustafa would pay no taxes, fees or import duties. It was later discovered that Horus Private Equity Fund III was a shareholder in Talaat Mustafa, and that Gamal Mubarak was one of its owners. (Fattah)

Ahmed Ezz became a close ally of Gamal as head of the NDP. His firm controlled 60 to 70% of Egypt‟s domestic steel market. Another of Gamal‟s cronies, Mahmoud Mohyeldin, Minister of Investment, declared that “Ezz‟s dominance of the steel market does not constitute a monopoly because local buyers have unrestricted access to the international market.” His activities were debated in the People‟s Assembly but the NDP‟s dominance ensured he did not come under any serious public scrutiny. (Guazzone, 31) Ezz cornered the market on steel and was awarded contracts to build a variety of construction projects. In 1996, the Egyptian government attempted to privatise Omar Effendi (OE), Egypt‟s largest state-owned chain of department stores, but backed down due to public opposition. In 2006 under the Nazif cabinet, however, OE returned to the auction block. The committee to privatise OE was under pressure from Mohyeldin to lower the estimated valuation of the company‟s assets. A Saudi investor acquired a majority stake in OE at a price less than half the previouslyestimated value of the land and real estate alone. The Egyptian treasury lost nearly $100m. (Termini)

As a final example of the enormous profits of a privately-owned monopoly following privatisation, consider the privatisation of the production of alcohol. The state sold Al-Ahram Beverages (ABC) to the Luxor Group in 1997. The Luxor Group was headed by Ahmed Zayat, who of course had ties to the regime. ABC bid for the state winery in 1999. Imported wine faced a 3000% customs duty, giving the state-owned winery a monopoly. Zayat fought tooth and nail

for the rights to buy the winery, activating his extensive political network. He succeeded. He had bid against Naguib Sawiris, then chairman of the first mobile operator in Egypt. Sawiris knew the alcohol sector was well-protected from competition and received tax exemptions, and decided he wanted part of it. He built his own winery, importing grape juice and turning it into wine. Sawiris reached a price-fixing deal with Zayat, and the two soon established a duopoly of alcohol production. Not long after, ABC bought Sawiris‟ winery, and in 2002 Zayat sold ABC to Heineken for 1.3b Egyptian pounds. According to John Sfakianakis, from its purchase in 1997 to its sale in 2002, the acquisition of ABC was the most profitable turnover in Egypt‟s history. (Sfakianakis, 86-8)

Conclusion The nexus of political power and wealth that characterised Mubarak‟s presidency was not a free market, but a controlled market. A small number of owners used their connections to the state to corner their markets, creating oligopolies and monopolies from which they became very rich. Privatisation was at the heart of this corrupt process. The state‟s desire to enrich those wellplaced to take advantage of the state firesale is an understandable, perhaps even inevitable, outcome of giving a few people power over privatisation and market regulation.

This study has profound implications for post-revolution Egypt. The danger is that Egypt will not change its system, and merely seek to repatriate the fortunes of the deposed billionaires. A country cannot maintain such an unequal system and become a democracy. Democracy requires a balance of power, not its concentration. Without an overhaul of the system that enables such blatant theft of public assets and twisting of markets, Egypt could slip back to rule by whales.

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