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Introduction: Crony Capitalism in the Middle East—What Do We Know and Why Does it Matter?Crony Capitalism in the Middle East—What Do We Know and Why Does it Matter?

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The popular Arab uprisings in 2011 that overthrew dictators in North Africa (which became known as “the Arab Spring”) were not just a revolt against dictatorships. They were also a rebuke to crony capitalism—against insider businessmen who were connected to the ruling circle and ended up monopolizing all economic opportunities. As the curtain of authoritarianism fell, stories of insider privilege became public knowledge. In Egypt, leading businessmen, such as the steel magnate Ahmed Ezz, became the subject of public resentment due to their close connections with Mubarak. But the circle of privilege was wider, including a narrow clique of businessmen associated with the National Democratic Party that supported Mubarak’s rule and derived all kinds of economic privileges denied to unconnected firms. In Tunisia, the president Ben Ali, his wife, and extended family were believed to have owned about 220 firms in some of the most lucrative sectors of the economy....
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Introduction
Crony Capitalism in the Middle East—What Do We Know and Why Does it Matter?
Adeel Malik, Izak Atiyas, and Ishac Diwan
The popular Arab uprisings in 2011 that overthrew dictators in North Africa were not just a
revolt against dictatorships. They were also a rebuke to crony capitalism—against insider
businessmen who were connected to the ruling circle and ended up monopolizing all
economic opportunities. As the curtain of authoritarianism fell, stories of insider privilege
became public knowledge. In Egypt leading businessmen, such as the steel magnate Ahmed
Ezz, became the object of public resentment due to their close connections with Mubarak.
But the circle of privilege was wider, including a narrow clique of businessmen associated
with the National Democratic Party that supported Mubarak’s rule and derived all kinds of
economic privileges denied to unconnected firms. In Tunisia the President Ben Ali, his wife,
and extended family were believed to have owned about 220 firms in some of the most
lucrative sectors of the economy.
Syria’s Rami Makhlouf, maternal cousin of President Bashar Al-Assad and the principal
owner of Syria’s largest mobile phone network, became the powerful symbol of connected
capital in the run-up to the Syrian uprising. Similarly, Morocco’s royal family and its political
entourage have a controlling stake of the economy, which feeds into popular opposition of
the regime. A recent expression of this was the popular online campaign for consumer
boycott of the three everyday essentials: milk, bottled water and petrol. Much more than
being an outburst against high prices, it was also a protest against the “marriage between
The final version of this chapter was published in Crony Capitalism in the Middle East:
Business and Politics from Liberalization to the Arab Spring. Edited by Ishac Diwan,
Adeel Malik, and Izak Atiyas. Oxford University Press, 2019. Pp. 1-38.
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power and business”, which the suppliers of three commodities symbolized.
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One obvious
target was the Agriculture minister Aziz Akhanouch, one of the wealthiest businessmen of
Morocco and owner of a chain of fuel stations.
Meanwhile, the crackdown on corruption by Saudi Arabia’s crown Prince, Muhammad Bin
Salman, which saw the virtual imprisonment of many wealthy Saudi princes in a luxury hotel,
was both an effort at regime consolidation and a popular signalling device to Saudi Arabia’s
citizenry about the regime’s seriousness against cronyism. In Jordan the mass protests that
erupted in summer 2018 in the wake of an IMF-backed austerity drive also reflected a
seething discontent among middle classes that, while their incomes are being squeezed,
politically connected actors continue to enjoy tax exemptions through a non-transparent
budget. The Iraqi street has been even more prone to popular protests against corruption
rooted in a sectarian political system that encourages the distribution of spoils through shady
contracts for public procurement.
For the lay citizen this nexus between corruption and cronyism and, between business and
politics, is hardly surprising. Businessmen and rulers are often treated as the same in popular
Arab imagination. The Arab private sector is typically a handmaiden of the state, surviving
and thriving in the comforts of the ruling circle. It is therefore unsurprising to find a stark
overlap in public perceptions on corruption in government versus corruption in business. As
Figure 1 shows, there is a strong correspondence between the proportion of respondents who
consider government as corrupt and those perceiving businesses as corrupt.
This constitutive relationship between economic and political power was long recognized by
Middle East specialists, but became a particularly important concern in the wake of neo-
liberal economic reforms, which many Arab states tried to half-heartedly implement in the
1990s. However, unlike some other emerging economies, Arab countries liberalized their
1
Ahmed Eljechtimi, “Morocco consumer boycott has big business in its sights”, Reuters, 30 May 2008.
https://www.reuters.com/article/morocco-protests/morocco-consumer-boycott-has-big-business-in-its-sights-
idUSL5N1SP35Z
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economies without liberalizing their polities. Autocrats remained firmly in place across the
region. To stay in power in the face of rising social grievances, they reverted to repression—
not only of people, but also of markets. Some of the resulting inequality and social exclusion
stands in stark contrast to the riches amassed by connected business elites. Part of this
inequality is attributable to economic disparities within countries, which are fed by the
concentration of economic and political power at the top.
[Insert Figure 0.1 here]
In most Arab economies, relations between the state and the private sector are dictated more
by the imperative of regime security than the demands of economic management (Henry and
Springborg 2010). Autocrats play divide and rule by empowering firms that are politically
trustworthy and closing off business opportunities for firms that are either suspected of
supporting the opposition or could be a potential political threat in future. This primacy of
politics meant that, even as the Arab state reduced its economic footprint in the wake of
liberalization it found other clever ways to control the market. Even as economic reforms in
the 1990s induced a roll back of the state—with public spending in Egypt and Tunisia
declining from 60 percent and 45 percent, respectively, in the early 1980s to about 35 percent
of GDP in 2010—political expediency continued to shape markets. And, selective economic
reform meant that Arab states continued to intervene in financial, product, and labour markets
to advance regime interests.
From Egypt to Jordan, privatized assets ended up in the hands of political cronies. The
control of newly liberalized sectors, such as telecommunications, finance and real estate, was
given to handpicked regime insiders who enjoyed monopoly powers over entire sectors of the
economy. Licensing and re-regulation of the economy generated rents for regime insiders.
Economic reform thus afforded new opportunities for reconfiguring economic and political
power in Arab societies. Our knowledge of these insider privileges and their impact on
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private sector development is, however, typically based on generalized and impressionistic
accounts. An early influential account of cronyism in the Middle East was provided by
Steven Heydemann’s edited volume, Networks of Privilege: The Politics of Economic Reform
Revisited. Heydemann (2004) provided an initial preview of the informal networks that tied
businessmen and rulers, and sustained authoritarian rule.
While studies in this tradition paint a convincing caricature of business and politics in times
of economic reform, they suffer from a weak evidentiary basis. They do not offer a detailed
and systematic understanding of how these “networks of privilege” vary within and across
countries. We still have insufficient knowledge of the nature of political cronies and the
extent of their involvement in specific sectors of the economy. How deeply exposed are these
Middle Eastern economies to cronyism, and do some sectors have greater exposure to cronies
than others? What mechanisms are used to privilege politically connected firms? And, what is
impact of such cronyism on private sector development and economic prosperity more
generally?
The Arab spring provided an impetus for a better empirical understanding of these questions.
The Cairo-based Economic Research Forum (ERF) launched a major new initiative on the
political economy of private sector in the Middle East. The main objective of this Project was
to empirically map the role of political connections across different sectors of Middle Eastern
economies, and to probe their impact on such diverse outcomes as: the growth and
productivity of firms, employment generation, organization of financial markets, provision of
subsidies and credit, and changing patterns of trade protection, among others. Papers were
commissioned for key Arab states in North Africa and the Levant, along with special
comparative studies on Turkey and Iran. These scholarly contributions from the ERF Project,
along with additional invited contributions from leading scholars in the field, provide the
basis for this volume.
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The central objective of this volume is to provide new perspectives on crony capitalism that
are both empirically grounded and theoretically informed. To this end, it pursues three aims:
to identify and locate the presence of political cronies across different sectors of the
economy, to trace their impact on private sector development and to identify the mechanisms
that are used to reward these cronies. The volume is unique both in its empirical focus and
comparative scale. Analysis in individual chapters is based on highly fine-grained data on the
business activities of politically connected actors—furnishing, for the first time, information
on their presence, numerical strength and activities in the economy. Combining this with data
on firms, sectors, and industries allows these chapters to differentiate between connected and
unconnected firms (or sectors), to present rich patterns of variation, pose and test interesting
hypotheses and raise larger questions about the nexus between business and politics in the
Middle East. These fine-grained analyses of individual countries is then put on a comparative
pedestal to generate new insights on the typologies of state-business relationship. The two
hallmarks of this intellectual effort are, therefore, specificity and differentiation.
Temporally, contributions to this volume largely focus on the post-liberalization era—
essentially the period since late 1990s when several countries in North Africa and the Levant
instituted selective economic reform. Our analysis does not offer a static but a “moving
picture” view that treats cronyism as part of the region’s evolving political economy. While it
is not our aim to provide a comprehensive geographic coverage of cronyism in the Middle
East, we approach the subject in an informed manner taking into account past scholarship and
offering, where possible, comparative insights on countries excluded from this volume. In
terms of its geographic focus, this volume does not provide individual case study evidence on
countries of the Gulf Cooperation Council (GCC). The choice of our case studies is
determined by practical considerations. The absence of firm or sectoral data on GCC
countries precludes the sort of rich empirical treatment that forms the basis of most chapters
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in this volume. On the other side of the geographic spectrum lie cases that our study is unable
to cover due to inaccessibility of the field due to conflict and state fragility (Iraq, Syria, and
Yemen) or extreme opacity (e.g., Algeria). We focus on the middling cases that fall between
the GCC types and the conflict-prone countries. What is interesting about these middle cases
is that, in terms of the average level of corruption, they are similar to middle-income
countries but there is sufficient variation in the level and type of corruption.
In the pages that follow, we provide a brief overview of data and methods, synthesize the
principal findings of individual chapters, organizing them around different thematic strands,
and draw out their larger implications for the politics of private sector development in the
Middle East.
Data and methods
This volume throws new light on the conceptualization, measurement and impact of
cronyism. The term, crony capitalism, can invoke different meanings depending on the
underlying context, type of actors involved, and the nature and strength of insider advantage
in business. Often, the analytical boundaries between cronyism, clientelism, and corruption
are blurred. While some chapters in this volume try to explore the political role of business
privileges, the core of our effort focuses on the least common denominator in this debate: the
ways in which politically connected actors manage to extract economic advantage for their
firms, and the consequences of these privileges on economic growth and job creation. This is
clearly in line with conventional academic wisdom on crony capitalism where those in close
proximity to power win “favours that allow them to earn returns far above market returns”
(Haber, 2002).
In light of this, each country study conducts a meticulous exercise in compiling a qualitative
database of firms whose owners or one of the shareholders have well-known and identifiable
political connections. Following Faccio (2009), these studies consider a variety of political
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links, such as whether the owner or top manager of a firm is a member of parliament,
minister, head of state or is closely connected with regime insiders. In classifying a firm as
politically connected, chapters in this volume adopts a more cautious and conservative
approach in that they represent a firm as politically connected only if there is a clear link with
those in political power. As a result, if there is an empirical bias in identifying politically
connected firms (henceforth, PCFs), it is more likely to be associated with the exclusion,
rather than wrong inclusion, of crony firms. Consequently, the effects of cronyism that these
studies seek to identify understate the true impact of political connections. In its empirical
scale and scope, this was an unprecedented data exercise carried out for the Middle East so
far. About 385 firms in Egypt, 497 firms in Lebanon, and 662 firms in Tunisia were
identified as politically connected.
Given their specific configuration of business-state relationship, the identification of
connected firms is less straightforward in Iran and Turkey, our two comparative cases. Here,
political interests are more significant than family or personalized networks. The religious-
secular divide that defines the political arena in Turkey also plays out in the private sector
realm. In Turkey the PCFs are classified as being affiliated with Turkey’s established
political entity, the Justice and Development Party (AKP). The new devout bourgeoisie is
typically affiliated with AKP through membership of business associations (MUSIAD,
ASKON and TUSKON) that have been formed with a professed Islamic objective.
2
By
contrast, the interests of many older and established firms are articulated through more
secular-minded business organizations (TUSIAD, TURKONFED). The PCFs can be further
disaggregated into three categories depending on their degree of association. First, a group of
large companies directly associated with Erdoğan, predominantly (but not exclusively) in
construction, real estate and energy. Owners of some of the firms in this group are the new
2
Due to its association with the Gulen Movement, TUSKON is now closed.
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billionaires of Turkey and have been beneficiaries of lucrative public contracts and public-
private-partnership projects. Some of these projects enjoy implicit guarantees from the
treasury. The third type of firms affiliated with the religious network are referred to as the
Anatolian tigers. These are active in the manufacturing sector and have substantial export
presence.
Another chapter on Turkey (Chapter 8) identifies PCFs in Turkey more directly by treating a
firm as politically connected if one of its shareholders or members of the board of directors
are member of parliament representing AKP, a local official of AKP or are active in AKP
associated foundations and charities or own pro-AKP media. Political connections to
opposition parties are also identified. Similarly, the case study on Iran establishes the
institutional ownership of the top 300 firms listed on the Tehran stock exchange, carefully
slotting them into firms with established links to semi-public conglomerates, some of which
are controlled by Iran’s Islamic revolutionaries. Control of these large corporations is
fragmented among a large number of semi-public entities, themselves controlled by
competing political networks, creating a mesh of interests that is hard to decipher. This
approach is, once again, reflective of Iran’s political economy where the public and the
private are intermeshed on an ideological basis.
Where possible, the qualitative data on political and institutional connections of firms is
combined with micro data on firms and sectors obtained from a variety of data sources,
including the World Bank Enterprise Surveys, United Nations Conference on Trade and
Development (UNCTAD), national tax data, and industrial censuses. Using the rich data on
individuals, firms and sectors allows us to differentiate the performance of politically
connected firms (henceforth, PCFs) from unconnected firms and present in a unified and
integrated manner a bottoms-up view of state-business relationship. In terms of empirical
method, studies in this volume use an eclectic mix of qualitative and quantitative
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methodologies prevalent in economics, political science and sociology. These range from
simple regression analysis to quasi-experimental settings and network analysis. While the
volume avoids specialized discussions on methodology, the narratives in each chapter
emanate from—and build on—the underlying empirical research.
There are, of course, attendant empirical challenges in identifying the impact of political
connections on outcomes (e.g., firm profitability, growth, trade policy, etc.). To probe the
impact of cronyism, some researchers used discrete and plausibly exogenous events, such as
the revolutionary overthrow of regimes, trade agreements with the EU trade, and electoral
shocks. Others are only able to provide thick description of cronyism, focusing mainly on the
stylized patterns of correlation. In most of these cases, we do not claim causal relationships.
For example, answers to some of these questions still remain open: Do some sectors receive
preferential treatment due to the presence of cronies or do cronies enter into more protected
sectors? And, does lobbying play any role in driving protection? All three possibilities are
interesting and relevant although it is sometimes difficult to disentangle them, and remains
beyond the scope of this volume.
Understanding cronyism: Nature, impact and mechanisms
This volume casts fresh light on three important questions: (a) What is the extent of exposure
to cronyism and which sectors are particularly susceptible to political capture? (b) What does
this mean for private sector performance? (c) What mechanisms of privilege are used to
favour politically connected businesses? In answering these questions, we establish new
empirical patterns and pose interesting hypotheses and explanations that can guide future
research. Rather than presenting a chronological summary of individual chapters, we
organize our discussion around these three research enquiries.
Nature of connected firms
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Mapping crony activity in key sectors of the economy, this volume offers concrete
information on the nature, number, presence and characteristics of politically connected
firms. Firstly, the granular information collected on politically connected firms provides a
crucial window into the nature of political connections and the anchoring of connected firms
in the local political economy. This clearly varies by country. Prior to the Arab spring,
politically connected businesses were well-represented in ruling parties in Egypt (the
National Democratic Party, NDP) and Tunisia (Democratic Constitutional Rally, RCD).
Owners and shareholders of these firms held executive positions in their respective political
parties and were sometimes directly elected to the parliament as well. Compared to Egypt
where these networks included about 30 families, connected businesses in Tunisia were
primarily owned by the ruling Ben Ali family and their extended clan members. Thus,
arguably, economic and political power was more narrowly concentrated in Tunisia. Morocco
provides a hybrid case where both the royal family (and its entourage) and allied politicians
control substantial chunks of the economy.
Peeling off concentric circles of influence around the royal court affords a closer scrutiny of
the overlap between business and politics in Morocco. The monarchy controls the lucrative
parts of Moroccan economy through large and diversified business groups. The holding
companies, in turn, own an estimated 370 firms (chapter 5). The royal holdings are the
largest in term of revenue and number of subsidiary companies. Some of these holding
companies where the King had direct controlling stakes, such as ONA and SNI, were
household names in Morocco. These holding companies represented an institutionalized
expression of the changing face of business politics in the wake of Moroccanization and
privatization policies. Beyond the King and his inner circle of advisors, former cabinet
ministers and politicians also control a significant proportion of the PCFs identified in
Morocco.
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Lebanon offers a yet another interesting contrast where rent-seeking and cronyism are
organized in a more decentralized manner. The political settlement in Lebanon is oligarchic
in nature whereby several competing confessional groups draw strength from their respective
sectarian constituencies and compete for resources. Governance arrangements in Lebanon
therefore reflect a horizontal deal among communal oligarchs, supported by vertical
organizations within each community. In this clientelistic setting, PCFs are usually owned by
oligarchs and their closely-knit circle of friends and family.
Sectoral exposure
There is a visible tendency of PCFs to conglomerate in the non-tradable sectors. In particular,
services sectors oriented towards domestic markets remain a preferred home for political
cronies in the post-liberalization era. Across the region, PCFs tend to cluster in banking, real-
estate, tourism, distribution, natural resources, and telecommunications sectors. Standing out
in terms of growth and profitability, these sectors were often selectively opened in the wake
of liberalization through discretionary licences, which were typically awarded to political
insiders. Apart from the need to obtain explicit state permission to operate in these sectors,
politically connected actors were also afforded favourable access to complimentary inputs,
such as land, capital, water and related infrastructure. In Egypt for example, crony firms led
the expansion of tourism in the Sinai, the construction of large real estate projects prospered,
the modernization of the distribution system, and the take-off of modern telecom, thanks to
their access to privileged land, licences, and credit. Foreign-owned banks and firms seeking
entry in domestic MENA (Middle East and North Africa) markets were only allowed if they
were willing to partner with one of the regime cronies. In many instances, this was a result of
highly centralized brokerage involving the most trusted confidants of the regime: in
Morocco’s case the King and his two closest advisors approved all major real-estate
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ventures.
3
Politically connected entrepreneurs also acquired important stakes in media outlets.
The Sawiris family in Egypt, AKP-affiliated business groups in Turkey, and the sectarian
oligarchs in Lebanon made major inroads into the media and entertainment industry.
Besides their dominance in service-oriented sectors, cronies also populated key areas of
manufacturing activity. Using fine-grained evidence from Egypt, Morocco, Tunisia, and
Lebanon, relevant studies in this volume locate the sector-level presence of connected
businesses and highlight important patterns of variation. The presence of PCFs is particularly
noticeable in sectors, such as food, textile, wood, paper products, basic metals, motor
vehicles and furniture. In general, export sectors seem less exposed to crony activity. Some of
these patterns reinforce prior understanding that food subsidies and protective licenses make
food and motor vehicle sectors particularly attractive for connected firms. In general, cronies
tend to conglomerate in sectors that are sheltered from competition and susceptible to policy
manipulation through the use of regulatory barriers and selective enforcement.
There are, however, subtle differences in sectoral exposure within and across different
MENA states, reflecting their distinct economic histories, institutions and political
settlements. For example, in Tunisia the Ben Ali clan had a dominant presence in on-shore
sector activities oriented towards domestic consumption and subjected to regulatory
restrictions, such as wholesale and retail trade, construction and services (see Figure 2).
Lacking the professional acumen to manage export activities and seeking to avoid external
competition, the clan had limited presence in export sectors - a mere 14 percent of the Ben
Ali-owned firms operated in the offshore sector. In Egypt as well, sectors dominated by
cronies were either in non-tradables, or else, they were protected from foreign competition. In
Lebanon too, connected firms have staked their claims on crucial segments of the domestic
3
A WikiLeaks cable noted the "influence and commercial interest of the king and some of his advisers in
virtually every major real estate project here". URL:
https://wikileaks.org/plusd/cables/09CASABLANCA226_a.html
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market. Besides sharing a penchant for banking, media and construction, the Lebanese PCFs
are active in domestic energy distribution, health, and pharmaceuticals.
Among other factors, these patterns could reflect differences in policy and regulatory regimes
that govern individual sectors or political specificities (e.g., the politicization of health
services along sectarian lines in Lebanon). Overall, the MENA states covered in this volume
have significant exposure to politically connected businesses, albeit with important regional
differences. By far Egypt had the highest exposure to cronyism. About 50% of sub-sectors
4
in
Egypt were exposed to politically connected firms. The corresponding ratio was about 40% in
Tunisia and Morocco, and 20% in Lebanon. In Turkey religious-network affiliated firms
constituted about 20% of the total firms in the ISO list.
5
These differences partly reflect the
differential reach of the state in these countries, and thus its ability to create regulatory rents.
In Lebanon, for example, elected governments are weak relative to oligarchs from sectarian
communities. This limits the scope of government intervention, limiting to a handful of
sectors with traditional state influence (zoning laws, regulation of schools and hospitals, and
procurement).
Exploring heterogeneity across connected and unconnected firms reveals interesting patterns
of the size-distribution of firms. Organized around pyramidal structures, the PCFs in Egypt
were generally larger in size and more capital-intensive. In Tunisia the Ben Ali firms were
over-represented at the top end of the firm-size and output distributions, especially in highly
regulated sectors. Similarly, in Lebanon connected firms tend to be larger than their
unconnected competitors in the same sector. Overall, PCFs represent 42.7% of all large firms
in Lebanon (employing more than 100 workers) and 72% of large firms in the sectors where
they operate. Despite the fact that there is an inherent tendency for connected firms to be
large simply because of the way political connections are measured, the greater possibilities
4
Defined at the ISIC-4 level.
5
ISO stands for the International Organization for Standardization.
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for growth available to PCFs means that there is only a slight chance of unconnected firms to
grow in size. Turkey provides an interesting contrast, however, since the religious-affiliated
firms are shown to be, on average, smaller than firms associated with secular networks. Even
AKP-affiliated firms that receive preferential treatment in the award of procurement contracts
tend to be mostly middle-sized firms.
This volume also presents new evidence on the changing sectoral exposure to cronyism over
time. Where such evidence is furnished (e.g., chapter 7), it points to the intensification of
cronyism during the liberalization era. Since the late 1990s Egyptian manufacturing saw a
growing exposure to cronyism. While, in 1996, there was, on average, less than one crony
operating in a typical sector this number had doubled by the late 2000s. Morocco witnessed a
similarly upward shift. Since 1993 there has been a steady shift away from sectors facing
international competition to sectors that are primarily subjected to domestic regulations
(Ruckteschler 2017). As Figure 3 shows, a significantly larger number of connected firms
entered the non-tradable sectors in Morocco relative to the tradeable sectors. This accords
well with the analysis in Saadi and Oubenal’s chapters (chapters 5 and 11, respectively).
Where it is possible to distinguish cronies by types of political connection, we can highlight
their preference for particular sectors. In Morocco, for example, the King and his immediate
entourage expanded their presence in non-tradables, which is also reflected in the growing
exposure of Royal holdings to finance, banking, and real estate sectors. For example, by
2013, the real estate had become by far the largest crony sector in Morocco. By contrast,
cronies in Moroccan manufacturing were mainly politicians and former cabinet ministers.
[Insert Figure 0.2 here]
[Insert Figure 0.3 here]
Mechanisms
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This volume also substantially enhances our understanding of the mechanisms used to
privilege connected businesses. Although the salience of individual mechanisms differs
across countries, there is common reliance on preferential access to finance, energy subsidies,
regulatory capture, non-tariff measures, procurement and privileged access to land.
Subsidies.—Fuel and food subsidies are leading instruments of welfare distribution across the
Middle East. While explicitly targeted at consumers, such subsidies create a large circle of
intended and unintended beneficiaries, including large connected firms. Egypt provides a
glaring example where PCFs were disproportionately represented in sectors more reliant on
energy subsidies. As Diwan et al (chapter 2) show, subsidies to energy-intensive sectors in
Egypt accounted for about 3% of GDP. In turn, these subsidies incentivize connected firms to
become more capital-intensive, hurting their ability to create jobs. Evidence from Tunisia and
Morocco similarly points to the concentration of connected actors in energy-intensive sectors.
Across the region, crony capitalists are especially attracted to the food sector, dominating
several of its product lines that benefit from food subsidies. This makes the region’s
distributive pacts even more rigid and resistant to reform.
Regulatory capture.—Established firms in the Middle East have traditionally thrived under
the protective shadow of regulatory barriers, exclusive licences and monopolies. This volume
adds greater specificity to this insight. Evidence suggests that politically connected firms tend
to receive preferential regulatory treatment, which makes them inherently more profitable
than unconnected firms. In Tunisia, for example, the Ben Ali clan had a disproportionately
greater presence in sectors that were closed to foreign direct investment and required licences
to operate (chapter 6). Importantly, the gap in profitability between connected and
unconnected firms was higher in sectors subjected to entry regulations. Connected firms in
Lebanon also tend to operate in sectors where the state has traditionally intervened by
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defining and selectively applying zoning laws. A privileged domain for PCFs is also created
through the regulation of schools and hospitals in Lebanon.
Regulatory barriers remained a prime instrument for creating exclusive domains of influence
for privileged entrepreneurs in the midst of liberalization. Authorization requirements and
tightly regulated inputs, such as land, allowed cronies to dominate some of the most lucrative
sectors, such as tourism and real estate. Access to land is usually a make or break for projects
in these sectors. Since the government—in some cases, such as Egypt, the military—is the
principal owner of prime real estate, cronies have an inherent advantage. By some estimates,
politically connected firms are 11-14% more likely to have acquired land from the
government (World Bank 2015). In other sectors, such as banking and telecommunication, it
is impossible to operate without licenses and government authorization, which are typically
reserved for privileged insiders. In many MENA states exclusive import arrangements are in
place that are available only to a select few.
Inconsistent and selective enforcement of existing laws and regulations provides another
source of advantage for connected firms. Evidence suggests that, when compared with their
unconnected counterparts, politically connected firms are subjected to a lighter enforcement
regime. There is also greater variation in reported inspections across firms in connected
sectors. In Tunisia Ben Ali firms were significantly less likely to report to tax authorities and
more likely to evade taxes. Using reported gaps in exports with partner countries, Arouri et
al. (chapter 6) found high levels of tariff evasion among connected firms. Estimates
suggested the Ben-Ali controlled firms cumulatively evaded taxes worth US$1.2 billion
during the period 2002-2009.
Access to credit.—Connected firms are also favoured through preferential access to credit.
The region’s banking system suffers from a high degree of exposure through its concentrated
lending to a few sectors or individuals. The clearest evidence of this comes from Mubarak-
17
era Egypt where 92% of total loans extended to the private sector in 2010 were directed to
politically connected firms. This is a fairly widespread phenomenon across the Middle East
where the PCFs tend to have a much higher capital intensity than the rest of the economy.
This extraordinary concentration of loans in large connected firms contributes to the
inefficient deployment of capital. It starves the rest of the economy from credit, forcing firms
to rely on internally generated funds and forgo growth opportunities.
From the regime’s perspective it is important to control the financial sector, since it acts as a
linchpin that binds together different parts of the economy. To demonstrate the centrality of
finance in Moroccan cronyism, Oubenal (chapter 11) conducted a detailed network analysis
of board members of key bank and non-bank financial institutions and showed a growing
presence of board members linked with the royal family. Morocco uses clever corporate
governance instruments such as board memberships to appoint men that are close to the
ruling circle. These inter-locking board memberships, where regime confidants sit on
multiple boards of both financial and non-financial firms, the monarchy is able to control the
economy’s jugular vein.
Despite the universal political impulse to control the circulation of credit, the form and
function this takes can vary in different contexts. In Lebanon, where the ruling class directly
controls the ownership of local commercial banks, finance sits right at the heart of the
country’s political settlement. Compiling detailed ownership and political affiliation data on
the major 20 commercial banks in 2014, Chabaan (chapter 12) shows that the shareholders of
18 out of the 20 Lebanese banks are linked to political elites. Nearly 43% of assets in the
sector are attributable to political control. “Crony capital” within the banking sector is also
shown to affect the quality of banks’ loans, and their exposure to public debt.
While access to finance is narrowly concentrated across these economies the underlying
reasons for this could vary. In Morocco and Tunisia public banks and connected private
18
banks seem to have been the conduit for a large share of finance received by PCFs. The
mechanisms in Egypt appear entirely different, as here a liberalised banking system did
largely work in the favour of connected firms in Egypt mainly due to profitability
considerations. Banks had a clear preference for lending to firms that established themselves
as the largest and fastest growing firms in the market. Enjoying a firm backing from the state,
these firms were more likely to have been bailed out by the state.
In Turkey, on the other hand, the pattern of credit extension by state-owned banks tends to
favour regions where the ruling party has greater political clout. Focusing on a period
coinciding with the rise of Islamic politics, Birkan and Saka (chapter 10) present interesting
empirical patterns on the co-movement of electoral and credit cycles in Turkey. They show
that, in the run-up to local elections, the lending behaviour of private and state-owned banks
differs markedly in provinces controlled by ruling AK Party and the opposition. Evidence
suggests that state banks comparatively scaled up their lending in politically competitive
provinces under AKP rule even as they decreased such lending in competitive provinces
headed by an opposition mayor. Financial sector has therefore emerged as an important
instrument in contentious politics.
In countries of the Gulf Cooperation Council (GCC), where the lines between the public and
the private are generally blurred, the state plays a domineering role in capital markets.
Summarizing the stylized facts of capital markets in the GCC, Akgiray et al (chapter 13)
document evidence on weak patterns of stock market development, especially when
evaluated on market capitalization to GDP ratio, value of trading activity and share of
institutional investors. The state has an overbearing presence in capital markets. Most GCC
countries have a single stock exchange where governments and state-controlled Sovereign
Wealth Funds (SWFs) control the bulk of capitalization. The share of these sovereign
investors in GCC capital markets is more than twice as much as in non-GCC countries.
19
Unlike developed countries, the contribution of institutional investors is negligible, with the
share of investment funds, insurance companies and pension funds being one-third of the
corresponding share in OECD countries. There is also limited competition between the
region’s stock exchanges.
Privatization.—Where public assets were privatized political cronies became the prime
beneficiaries of state largesse. There is plentiful evidence on the political capture of
privatization, whereby public companies were passed into private hands often tied with
regimes. This was most evident in Tunisia where 8 out of 84 privatized firms ended up in the
hands of Ben Ali family. Importantly, it was mainly these newly acquired firms whose profits
witnessed a huge increase after privatization; the non-Ben Ali privatized firms did not enjoy
similar profitability. Evidence suggests that the greater profitability of Ben Ali firms was
largely attributable to their privileged and protected status after privatization. Political
insiders similarly emerged as beneficiaries from privatizations in Morocco. As Saadi (chapter
5) argues, the process of divestment was often designed so as to bypass pre-agreed
procedures and to reward businesses tied to the royal court. In some cases, the Royal family
used the holding companies to take over important state-owned enterprises in lucrative
sectors, such as mining, commerce and services.
While privatizations in many other MENA contexts—including Algeria and Jordan that are
not directly studied in this volume—are known to have favoured political cronies, there are
some important differences within the Middle East. In Egypt the cronies were not interested
in privatized firms, since they preferred to avail opportunities made available by
liberalization rather than inheriting firms ridden by excess labour and dominated by powerful
labour unions. Another difference is between the Arab and Iranian experience. In Iran state-
owned enterprises were transferred to organizations rather than families in the wake of, what
is conventionally portrayed as, “pseudo privatization”. As Harris (chapter 14) shows nearly
20
half of the total shares of the 331 companies that were fully or partially privatized during
1989-94 were acquired by semi-public organizations, such as the Martyrs Foundation,
Islamic Revolutionary Guards, and other charitable parastatals. Although legally described as
“private”, for all intents and purposes these organizations sit at the fluid boundary between
the public and the private, and enjoy the commanding heights of both economy and polity.
The story of privatization in Iran is therefore one of changing structures of institutional
ownership marked by a greater diversification of ownership types rather than a concentration
of firms under a single owner. Resultantly, in the wake of privatization, the dominant
institutional form in Iran today is one of diversified business conglomerates with shared
ownership of several companies linked through formal and informal ties. Debunking the
myth of Iranian exceptionalism and offering a useful corrective to oversimplified journalistic
accounts, Harris brings greater empirical specificity and nuance to the subject and argues that
the persistence of semi-public conglomerates after liberalization holds broad similarities to
the experience of other emerging market economies in Latin America and Africa. These
parastatals are not the sole signifiers of the Islamic revolutionary guards’ growing economic
clout. They are also a product of the exigencies of war and international sanctions, and the
need to cater to wide social constituencies attached to the Islamic revolution in Iran.
Trade policy.—Connected firms tend to be shielded from global competition through
conventional instruments of trade protection, such as tariffs and non-tariff measures (NTMs).
In Tunisia firms owned by the Ben Ali clan tended to operate in sectors that are shielded
through higher tariff barriers. Selective and politically brokered trade liberalization provides a
fascinating instance of how trade policy could be captured even in the process of trade
reform, and in particular, how partial trade liberalization can be used to extend continued
trade protection to politically connected businesses. Malik and Eibl (chapter 7) use a major
episode of tariff liberalization triggered by Egypt’s trade agreement with the European Union
21
(EU) in 2004. The EU-induced tariff cut was followed by a nearly universal increase in non-
tariff barriers, where about 75% of the total manufacturing sub-sectors that faced a tariff
reduction in 2004 witnessed an increase in NTMs in 2005. This increase in compensatory
non-tariff protection was, however, significantly higher for politically connected sectors.
Connected sectors had 50% higher probability of an NTM being applied.
Replicating this exercise in Morocco, the authors find similar evidence on trade policy
substitution in the wake of an EU agreement whereby tariff reductions were followed by
increase in NTMs. Like Egypt, sectors previously exposed to politically connected actors,
many of whom were politicians and cabinet ministers, benefited from a disproportionately
higher level of non-tariff protection after the EU agreement came into force. The ability of
PCFs to benefit from such trade policy substitution signifies their ability to maintain
privileges in the face of pressures for trade liberalization. While NTMs have emerged as the
dominant form of protection globally, they are especially prevalent in MENA countries. In
Egypt 71% of PCFs are protected by at least three NTMs. Tunisia applies, on average, eleven
different NTMs from two different chapters on each of its 1,166 products, and NTM
incidence remains similarly high in other Middle Eastern countries, including Algeria and
Syria.
As procedural and technical regulations, NTMs might appear harmless on paper but can
introduce trade frictions, especially when such regulations are selectively enforced. This
applies, in particular, to the technical barriers to trade that require administrative oversight,
are susceptible to political abuse, and more prevalent in the Middle East. Overall, the
tendency to reward politically connected sectors by affording them greater trade protection
carries larger political economy implications. The NTMs were not simply a means of
compensating firms in connected sectors for loss of tariff protection. In some instances, they
were also used to generate additional rents for insiders. Evidence suggests that, in several
22
connected sectors, the ad-valorem equivalents (AVE) of NTMs were actually higher than the
pre-liberalization tariffs.
The politics of trade protection assumes a distinct ethnic undertone in Jordan where
historically-embedded cleavages exist between the two main ethnic groups, the local
Jordanian tribes described as East bankers that control the public sector and the Palestinians
who, as mercantile elites, dominate the private sector. Jordan’s political settlement is
maintained by appeasing the two ethnic groups through different economic policy
instruments. As Steve Monroe argues in chapter 9 uneven trade liberalization in Jordan is
reflective of the exigencies of this ethnic political settlement. Monroe shows that the nature
of compensation that import-competing industrialists received in the wake of liberalization
depended on their ethnic affiliation. Specifically, the politically included co-ethnic groups
were compensated through informal protectionist deals, such as a lighter tax and regulatory
enforcement, uncompetitive government contracts, access to policymakers and insider
information. By contrast, private sector elites belonging to the politically excluded ethnic
groups—namely Palestinians—were compensated through formal instruments of protection
such as tariffs, regulatory barriers and subsidies.
Procurement.—Privileged treatment of connected firms in the award of government
procurement contracts appears as another mechanism to reward cronies. While there is
scattered evidence from Lebanon (Leenders, 2012) and Morocco on this, rewarding
connected firms through procurement has acquired particular salience in Turkey where more
than 50,000 firms are awarded public procurement contracts, predominantly in the
construction industry. Such contracts can serve as an important form of rent distribution to
politically important constituencies. Studying 18,000 procurement contracts in Turkey,
Gurakar and Bircan (chapter 8) provide systemic evidence of favouritism of firms that are
connected to the religious business networks associated with AKP. Majority of firms
23
receiving these contracts were established in the 1990s when Anatolian tigers began to gain
prominence. Such preferential arrangements were especially rife when competitive
procedures were more relaxed. Like Iran, these rents seem to be targeted at a distinct social
constituency—in this case, regions providing the core support base of AKP. However, the
consequences of this for growth and investment are still unclear.
Impact on job creation and growth
The fine-grained data on political connections allows chapters in this volume to examine the
relative performance of connected firms, and to probe the effect of unfair competition on the
dynamism of unconnected firms. Part I of this volume is devoted to studying the impact of
political connections on profitability of firms and their ability to grow and create new jobs.
Chapters 2-5 present rich evidence on this subject.
Diwan, Keefer, and Schiffbauer (chapter 2) show that connected firms in Egypt tend to be
larger in size, more indebted, capital-intensive, and reliant on subsidies. In 2010 such firms
derived 60% of net corporate profits but generated only 11% of employment. Sectors where
PCFs entered became more skewed in terms of employment distribution and had relatively
fewer middle-sized firms. Importantly, employment growth declined after the entry of these
firms into sectors previously unexposed to cronies. The authors argue that the decline in
sector growth is due to the negative impact of the entry of politically connected and
privileged firms on their unconnected competitors, whose incentives to invest and innovate
shrink in the face of unfair competition. The overall estimated effects are quantitatively large:
employment in the formal sector could have been 25% larger in an ideal world of perfect
competition. The clearest evidence of the cost of cronyism in terms of lost growth comes
from Egypt where national job creation in the formal sectors, in the absence of cronyism,
could have been higher by 25 percentage points over a ten years period.
24
Evidence on Tunisia is similarly instructive. Arouri, Rijkers and Baghdadi (chapter 6) show
that firms owned by the Ben Ali clan displayed considerable heterogeneity, including firms at
both ends of the size distribution. While together they produced around 5% of all private
sector output and derived 15% of all net private sector profits, the very large firms were
hugely profitable. For instance, the top ten Ben Ali firms accounted for approximately 4% of
economy-wide output and 10% of gross profits in the economy. Strikingly, these firms
dominated sectors that were protected by regulatory restrictions. As Arouri et al. document,
connected firms represented a paltry 0.1% of all firms in these protected sectors but
accounted for 10% of all jobs, 39% of output, and 53% of net profits.
The analysis on Lebanon by Diwan and Haidar (chapter 4) presents an interesting parallel
where, at face value, the presence of political connections and job creation do not run in
opposite directions. The bulk of job creation in Lebanon takes place through large firms who
employ around 16% of the total labour force. When excluding self-employed firms, large
firms actually accounted for 55% of net job creation in Lebanon. This stands in stark
comparison to Egypt and Tunisia where 90% of the new jobs were created by small firms.
Importantly, in Lebanon, connected firms, which tend to be larger in size, employed more
workers per unit of output produced and were less productive. The PCFs created 20.32%
more jobs each year on average than unconnected firms operating within the same sector, but
their output per employee is 20.38 percent lower.
It is possible, however, that while large Lebanese firms create more jobs, on average, they
can affect the growth of jobs in unconnected firms, thereby reducing net job creation at the
sectoral level. Diwan and Haidar show that, on a net basis, job creation has indeed been
constrained by the dominance of political connections, as in Egypt. For every additional PCF
in a sector, 6.8% fewer jobs are created each year, on average, in this sector. Engaging with
several competing explanations, the authors argue that these peculiar patterns of job creation
25
are not attributable to PCFs conglomerating in sectors that have low growth potential. Neither
are these sectors capital-intensive and thus dominated to low job growth. These findings need
to be situated in the specific Lebanese political economy where oligarchic business interests
are nested within a broader clientelistic system that exchanges privileges with jobs for
political constituents. The overall result is, however, lower aggregate employment growth.
While the findings on Morocco are less fine-grained, Saadi (chapter 5) furnishes broad
illustrative patterns on the monarchy’s commercial interests, locating its presence in different
sectors and offering broad comparisons across connected and unconnected sectors.
Preliminary evidence suggests that the PCFs in Morocco enjoyed a greater market share,
higher net and gross margins and greater value-added per worker. While more definitive
evidence on the aggregate impact of cronyism on growth and job creation is yet unavailable,
there is a suggestion that Morocco has managed to achieve moderate levels of growth despite
pervasive cronyism, possibly because connected individuals were under more pressure by the
palace to manage their firms efficiently in the service of the national economy.
Turkey adds crucial source of variation. Atiyas, Bakis and Gurakar (chapter 3) offer more
unambiguous evidence on a positive growth-impact of cronyism, although the mechanism
they describe is different. The authors provide two pieces of evidence. On the one hand, they
show that the gap between labour productivity of new growth centres in Anatolia, the AKP
heartland where the country’s emergent devout bourgeoisie is based, and that in traditional
industrial centres (such as Istanbul, Ankara, Izmir, and Kocaeli) was reduced, especially in
the 2000s. This productivity catch-up was accompanied with an increase in the share of
Anatolian provinces in total exports of the country. Second, they show that the number of
firms associated with religious networks among the top manufacturing firms in Turkey
increased significantly, again in the 2000s. Thus, here it is the process of increased inclusion
of a rising tide of SMEs in the national economy that led to a solid growth performance.
26
Thus, the preferential treatment of AKP-affiliated regions ended up including firms that were
previously excluded and on the margins of economy.
Culling evidence from the 1000 largest industrial firms, chapter 3 demonstrates that a
growing share of Turkey’s largest firms are now affiliated with the religious-network. Still,
however, these firms are comparatively smaller in size than their secular counterparts and are
predominantly active in traditional labour-intensive industries. Importantly, the authors show
that, in manufacturing sectors, an affiliation with religious network generated additional entry
of firms and increased exports. These favourable effects of political affiliation are, however,
conditional on the sector where these firms operate. Focusing on the construction sector,
Gurakar and Bircan (chapter 8) show that AKP-affiliated companies won more contracts
when less competitive tender procedures were used. While we do not have direct comparative
evidence on Iran, Harris (chapter 14) argues that semi-public conglomerates linked to the
Iranian regime and operating in relatively concentrated sectors are not entirely protected from
competition. Citing the example of a publicly-owned technology services group, Hariss
shows how the firm competed with other private operators and was still able to graduate into
higher value-added activities, upgrade its technological capacity, and expand its footprint in
overseas markets.
With the exception of Turkey and Morocco, the evidence marshalled in this volume suggests
that in the cases studied carefully (Egypt and Lebanon), and in other cases that are discussed
(Iran, Jordan), exposure to politically connected firms are likely to have imposed significant
costs on Middle Eastern economies. Extending prior analysis on this subject (World Bank,
2015), this conclusion underscores a perverse trade-off between privileges and jobs. While
connected firms are both privileged and profitable, they generate fewer jobs in aggregate.
This points to a fundamental contradiction: while connected firms receive a disproportionate
27
share of privileges, employment is largely concentrated among informal firms (Malik, 2014).
This disconnect represents a key paradox of private sector development in the Middle East.
Politically connected sectors are generally less competitive and have fewer medium-sized
firms than sectors with less crony exposure. The cost advantages derived by crony firms are
usually a result of state patronage, which can kill their incentives to innovate or compete at a
global scale. In Egypt, the probability that a PCF invests in product innovation is a meagre
one percent compared to over seven percent for unconnected firms (Francis, Hussain, and
Schiffbauer, 2018). At the same time, unfair competition drives their competitors to shrink
and reduce their investments as well. As in Lebanon (chapter 4), their unfair competition
means that there is little incentive, either for an industry leader or follower, to innovate.
Concentrated sectors in Lebanon also experience lower entry and exit rates of firms. This is,
in fact, a larger pattern across the region. By one estimate, the entry of new firms is 28%
lower in politically connected sectors, and the probability that micro firms will grow “beyond
10 employees 5 years later is 3% in Tunisia and 12% in Lebanon” (World Bank, 2015).
This evidence fits well in the analytical characterization of an Arab variety of capitalism
offered by Steffen Hertog (chapter 1). Hertog argues that privileges distributed by extensive
and “over-ambitious” Arab states create deep divisions, both among workers and businesses,
between insiders who have access to those privileges and outsiders who do not. These
divisions destroy incentives for productivity enhancing investments on the one hand and
create vested interests that block any attempt to reform. The result is a deep segmentation
between a relatively small and generally uncompetitive formal business sector and a
relatively large informal sector that lacks the resources and capacity to grow and become
more competitive.
However, rather than offering a homogenous description of cronyism, the empirical patterns
in this volume are sufficiently differentiated and call for a more nuanced understanding of the
28
nature, mechanisms and impact of politically connected firms. Thus, while insider
connections between business and politics are generally harmful for private sector
development, the extent of disadvantage is likely to vary across the different countries studied
in this volume. For example, placing the evidence in a comparative perspective, it is fair to
argue that the overall cost of cronyism is likely to be larger for Egypt and Tunisia than for
Morocco and Lebanon. While cronyism can be clearly viewed as a barrier to prosperity in
some countries it is entirely consistent with economic growth in others (e.g., Morocco and
Turkey).
In Turkey the rise of new economic players, popularly described as Anatolian tigers,
supported export-oriented growth and strengthened a new brand of popular politics. While
instances of insider privileges, such as favourable access to construction contracts, are not
uncommon Turkey’s emergent private sector has aided job creation. Relative to the case of
rent-filled industries, direct state support to these firms has been more benign, with their
growth relying instead on programmatic policies that favoured SMEs and exports. The recent
closure of hundreds of Gulenist firms and the country’s macroeconomic challenges, which
have intensified in the wake of its geo-political stand-off with the US and the drastic fall of
Lira, illustrate a different political phenomenon that may be economically destructive, at least
in the medium term. Iran presents another distinct intertwining of economics and politics
where organizational interests, rather than private sector firms, control the commanding
heights of economy. This should be situated and contextualized in Iran’s peculiar political
economy where parastatal organizations, as vanguards of the Islamic revolution, act as key
distributional nodes for supporters of the revolution.
External validity
Our analysis has only begun to scratch the surface from a complex and multi-layered
phenomenon. Data limitations have prevented us from analysing cronyism in crucial states in
29
the Levant (Syria), North Africa (Algeria) and GCC. Is our analysis generalizable to the rest
of the Middle East? To what extent are the empirical patterns summarized above valid for
countries missing from our analysis? In this section we try to develop comparative insights on
these missing cases drawing on prior qualitative research. The blurring of boundaries
between the public and the private remains a characteristic feature of the region at large.
Cronyism is a definite concern in these countries too, but its form and function can vary
depending on the underlying context.
Syria offers an interesting comparative case where some of our headline findings continue to
apply. Like many other MENA countries studied in this volume, the Syrian regime was
compelled to partially liberalize its economy in the face of falling external rents from oil and
aid in the late 1990s. In the backdrop of the Syrian regime’s historic antagonism towards the
private sector, economic reform was not intended to create a level playing field but to create
business segment that is “dependent”, “loyal”, and controllable through discretionary
enforcement of regulations (Haddad 2012). The private sector that gained root after Syria’s
partial reform efforts did not evolve from the endogenous diktats of the market but was
guided by a visible hand of the regime, cultivated through informal networks managed by the
regime’s bureaucratic and security elites along with their extended families.
Like several other MENA cases reviewed in this volume, privatization benefited selected
families of businessmen and bureaucrats aligned with the regime. In terms of sectoral
presence, Syrian cronies entered into the most lucrative sectors, such as communications,
information technology, car-dealership, transport, and free trade zones. Many of them also
benefited from monopolistic protection in textiles, food processing and pharmaceuticals
sectors. Regulation and its selective enforcement provided an important source of privilege
for connected business elites in Syria. An iconic piece of regulation in this regard was the
Investment Law No 10 of the early 1990s, Syria’s key step towards a partial liberalization of
30
the economy and promotion of foreign investment. The Law offered key tax and tariff
exemptions, and set out preferential arrangements for foreign currency transactions and
repatriation of profits. However, given that private investors were required to obtain official
permission and licences, enforcement became an arena for the negotiation of privileges as the
regime enjoyed wide discretion in rewarding cronies and blocking the entry of unconnected
businessmen.
Algeria offers another example of a highly centralized bureaucratic state where business-state
relationship operates in murky and opaque ways. Like other MENA states, the Algerian
private sector is both weak and depoliticized. The country’s substantial oil riches and its
adverse historical legacy, defined by the mass exodus of French capital and skilled labour at
the time of independence, meant that the Algerian state came to play a more domineering role
in the economy. A peculiar feature of Algeria is the regime’s extreme resistance to economic
reform. Even when reform became unavoidable in the face of plunging oil prices in mid-
1980s, mounting debt and civil war, the regime undertook only partial steps, some of which
were quickly revoked. The restricted space for reform is partly rooted in a factionalized
system, which makes elite consensus difficult, and the regime’s extreme risk aversion
towards the emergence of independent business actors.
While stories of corruption and cronyism are rife in public circles, oligarchic interests tend to
operate under the garb of secrecy that makes it difficult to identify the nature and scale of
cronyism. Popular accounts suggest that business tycoons tied to the Presidency, especially
the President’s brothers, and some of the current and former security officials control the
heights of Algerian economy through questionable business practices.
6
Since the government
and its allied departments hold a firm grip on the economy, procurement, contracts and
licenses remain key arenas of patronage. Exchange rate restrictions have given rise to a huge
6
It is understood that businessmen close to the Presidency have become increasingly powerful as a
“counterweight” to security services who have traditionally remained important arbiters in economic matters
too. https://www.alaraby.co.uk/english/politics/2015/3/27/ali-haddad-and-algerias-economic-barons
31
black market premium—the differential between official and black market exchange rate—
which is economically irrational but feeds the sprawling network of rentiers. Cronies also
tend to operate through a variety of import and distribution companies that depend on
preferential access to foreign exchange and tag onto the state’s extensive subsidy and
procurement regime.
The entanglement between business and politics take a slightly different turn in the GCC
where the private sector enjoys “deeper business traditions” and “autonomous social
standing” (Hertog et al. 2013). The immense resource wealth enjoyed by the leading Gulf
states, such as Saudi Arabia, Kuwait and Qatar, means that they have little need to close off
economic access to generate additional rents. Although the GCC private sector has shown
greater dynamism and strength in recent decades it still lacks “structural independence” from
the state and is unable to act as an organized class with strong bargaining power. Despite a
more open door and less intrusive economic policy, the business climate for smaller firms is
poor with limited access to finance, high barriers to entry and weak bankruptcy rules. The
private sector is typically made up of large established firms operating in refining,
construction, and trade that enjoy preferential access to the state and its subsidies.
Importantly, access to these sectors is restricted to business conglomerates that are connected
to the royal circle through regime fixers, favoured clan groups, members of the royalty and
their trusted intermediaries. In short, it is impossible to gain economic influence without an
endorsement of the regime.
State contracts and licenses are, once again, important means of rewarding business cronies.
An additional factor at play in GCC is the permission to import cheap labour, which acts as a
key source of advantage for the private sector, especially in construction and services. While
the GCC private sector has a weak presence in manufacturing, connected families tend to
operate in sectors oriented towards domestic consumption and services. Leading families
32
have won exclusive rights to the distribution of foreign brands, such as cars, electronics, food
products, and the like. Ownership patterns are organized around familial lines intersecting
with ethnic and royal kinship bonds. In this milieu, there are very thin dividing lines between
public and private interests. This raises important conflict of interest issues where those
making key economic policy decisions stand to benefit from the same policies as direct or
indirect controllers of the private sector. Gulf countries tend to have questionable corporate
governance practices with friends and relatives of wealthy families sitting on multiple
corporate boards. Apart from lacking full independence, company boards also fare poorly on
transparency and disclosure.
Traces of cronyism can also be found in the Palestinian territories in the post-Oslo period,
which saw a distinct intertwining of business and politics that was manifested in the
emergence of powerful business conglomerates in the West Bank controlling prized sectors,
such as telecommunications, real estate and retail trade. Such cronyism intensified since 2007
when a former Finance Minister, Salam Fayyad, took reigns as Prime Minister and instituted
administrative and economic reforms, which included the administrative division of the West
bank and Gaza strip (ostensibly to counter Hamas’s influence). Under Fayyad, the Palestinian
security sector expanded considerably and was brought under a “greater oversight” of United
States and Israeli authorities (Dana, 2015). These administrative changes were coupled with
the creation of profitable economic opportunities in finance and real estate sectors that made
the West Bank a prosperous enclave. This coincided with the emergence of a new class of
political entrepreneurs who enjoyed both close connections with the Palestinian Authority
and Israeli business counterparts (and security establishment). Embedded in the larger geo-
political settlement, these crony capitalist relations provide binding elite commitments for a
project of state building under occupation.
33
Iraq offers another peculiar case where the private sector has historically operated under the
state’s thumb, enjoying very limited autonomy and depending mostly on public contracts in
an oil-driven economy. The US occupation of Iraq brought a major shift in the country’s
political economy. In its wake, Iraq made an abrupt transition from an economy of
centralized control to an economy of decentralized corruption. The political fragmentation of
Iraq along ethnic and sectarian lines has institutionalized clitentelism by creating a
competition for spoils that has democratized corruption at a truly unprecedented scale. In this
respect, post-occupation Iraq resembles Lebanon where sectarian competition for political
office has blurred the boundaries between clientelism and cronyism, and where government
departments have become patronage machines that duplicate resources to satisfy the narrow
interests of sectarian solidarities. However, a key difference is the sheer scale of resources in
Iraq that have converted the country into a breeding ground for “organized corruption
syndicates” where brokers, contractors, top bureaucrats and political godfathers skim off
government contracts. While Iraq’s private sector is particularly anaemic—majority of
manufacturing firms have either closed down or working well below capacity—the few
companies that became successful are essentially suppliers and importers whose survival
remains tightly linked with government procurement contracts. One sub-region within Iraq
where some private sector activity has taken off since Saddam’s overthrow is Kurdistan,
which has witnessed growing foreign investment activity in real estate, banking and telecom.
Even here, owners of telecom operators that received exclusive rights to operate were deemed
close to the political leadership of the Kurdistan Regional Government (KRG).
In conclusion, echoes of cronyism are visible in other MENA contexts. However, it is
important to guard against a monolithic representation of business politics in the Middle East.
This volume paints cronyism as a differentiated tapestry whose effects are often subtle and
highly context-specific. We thus make a strong plea for empirical differentiation where,
34
despite broad similarities, each case is different in its own way, and is situated within its own
respective political economy. There is thus probably more “within heterogeneity” in MENA
cases than is probably recognized.
Situating the evidence on cronyism in a global perspective
Are the Middle East’s crony capitalist’s structures any different from the rest of the world?
The term, crony capitalism, is frequently invoked to describe business-state relationship in a
wide range of countries from Africa to Latin America. In fact, business and politics remain
enmeshed in most developing countries, and such overlap has not always impeded
development. The remarkable growth experience of East Asia’s tiger economies took place
despite the intimate connections between big businesses and politicians. The rise of Chaebols
in South Korea, growth of crony firms in Suharto’s Indonesia, and the proliferation of family
business interests in Philippines are just a few cases in point. Even China’s recent growth
experience cannot be deciphered without the overlay of elite incentives that tie Chinese
businesses with elite cadres of the Chinese Communist Party.
Historical experience from the United States and Britain echo a familiar logic. The early
capitalists who shaped America’s economy are traditionally remembered as robber barons.
These were the likes of Rockefellers and Carnegies whose private fortunes were built on
exclusive insider deals with the public sector, such as monopolies and privileges in railroad
construction. Similarly, private corporations in the heydays of British economy tremendously
benefited from a certain alignment of interests with state elites, since often times their
overseas economic interests were firmly embedded in British imperial interests. In fact,
modern political economy, which is chiefly concerned with such co-evolution of economic
and political exchange, recognizes that in early stages of capitalism “all economic
organizations are also political organizations” (North, 1991). Transitions to development
35
have typically involved close proximity between business and politics that is often shaped by
“deals” rather than “rules” (Hallward-Dreimer and Pritchett, 2015).
Cronyism can be an imperfect solution to a commitment problem that most governments
face: any government that is “strong enough” to protect asset holders can also predate on
these assets (Haber 2002). In the absence of strong political institutions that could tie the
hands of governments, cronyism can “guarantee a subset of asset holders that their property
rights will be protected”. It can thus provide a second-best solution to the commitment
problem where growth is facilitated through “particular” rather than “universal” rights for the
private sector. There is also a more explicit political purpose of cronyism. By closing off
economic access and affording protection to favoured actors, crony relations generate rents
that could help to sustain ruling coalitions. They can serve as a “binding commitment” for
elites that ensures their support for the prevailing political order (North, Wallis and Weingast,
2009). Business-state relationship is therefore central to understanding the genesis and
persistence of political power. This holds particular relevance in MENA countries.
While earlier discussions on crony capitalism bemoaned the harms caused by an intrusive
state that generates and protects rents for unproductive actors (Krueger 2002), there is
growing intellectual convergence among scholars that what matters is not just the heavy-
handed state intervention but the capacity of the state to solve coordination failures and its
capacity to promote development (Bardhan, 2016). In this view, crony relations are not
always an unqualified barrier to prosperity but can accommodate or even support economic
growth, as has been borne out by the East Asian experience (Khan and Sundaram, 2000). In
East Asia industrial policy was not simply about creating productive rents for performers but
also entailed rent sharing with spoilers. This involved striking deals with rent seeking groups
who could throw spanner in the works. Such arrangements for rent sharing existed, for
example, in Japan where potential spoilers in Liberal Democratic Party were systematically
36
bought off. In Malaysia, the Chinese business conglomerates brought prominent members of
Malay political elites on company boards. In short, the challenge is to create the right
“balance between the power of the state and the power of firms” (Zingales, 2017).
Recognizing the need for a more nuanced engagement on the subject, countries studied in this
volume indicate important patterns of heterogeneity whereby the nature, form and function of
political connections in business vary substantially across time and space, depending on the
underlying economic, historical and institutional context. However, the empirical patterns we
highlight in this volume raise a broader question: How does cronyism in the Middle East
differ from other middle income regions, such as Latin America and East Asia where close
proximity between business and politics has had differentiated effects? While a satisfactory
answer would require a more rigorous intellectual exercise, we use our knowledge of the
MENA cases to offer potential leads that can guide future research.
Exclusion.—Crony relations between political and economic elites typically involve the
granting of special privileges that entails at least some degree of exclusion for unconnected
firms. A stark difference in the Middle East is the sheer scale of this exclusion. Such
exclusion is not simply an unintended by-product of preferential treatment of connected
actors but is often part of a deliberate strategy to exclude independent businesses who could
potentially convert their economic strength into political power. There is thus an explicit
political rationale for the creation and maintenance of crony relations in an authoritarian
context where regimes are extremely risk averse towards independent businesses who could
potentially support political opposition. When the exclusion motive is predominant, state
predatory behaviour becomes especially fierce in fast-growing sectors, in which the risk that
opposition-linked firms might thrive is deemed to be particularly high. This explains why
barriers to entry are often higher in sectors with the greatest potential for growth and rent
extraction. In Egypt, these sectors included finance, real estate, distribution, manufacturing,
37
and tourism. The exclusion motive also drove crony relations in Tunisia, and presumably, in
countries with narrow capitalism, such as Algeria, Libya, Iraq, Syria, and Yemen.
Conceptually, exclusion could take multiple forms. We could propose at least four gradations
that hold special relevance for MENA countries. At one end of the spectrum lie milder forms
of cronyism with limited protection and predation. An example could be non-competitive
procurement in Turkey (especially before 2013) that did not necessarily create elaborate entry
barriers, at least in the short run. When the market is large enough, there are plenty of
alternative channels to grow. In Turkey the construction industry was much larger than public
procurement, and creative destruction was still possible. A second level could consist of the
types of support for PCFs that do result in entry barriers, thereby limiting growth possibilities
of unconnected firms and influencing the general business environment in economy. Crony
relations can entrench dominant firms, which, in turn, exercise greater power to prevent
further entry even when there are no explicit regulatory barriers to entry (e.g. discriminatory
licensing regime). Preferential access to finance can further reinforce this exclusionary
arrangement, especially if banks lend mainly to connected firms because of implicit
guarantees. Egypt would fit well in this category.
In the third category, entry barriers are more explicit with more crude forms of market
closure that can affect the nature and direction of capital accumulation. It can distort the
economic structure, tilting it away from manufacturing towards a concentration of cronies in
tourism, real estate, and services. Licensing becomes a particularly important exclusionary
instrument here. With their control over complementary inputs (finance, land, and
infrastructure), state elites can also determine the profitability of investment. Such
arrangements were in place in Egypt, Tunisia and Morocco. The fourth level is defined by
explicit expropriation of businesses, which can prevent both entry and growth of firms. This
is an environment where firms want to operate under the radar screen and avoid attention by
38
the regime. Although relatively rare in comparison to other categories, expropriation does
still play a role in MENA states, and is manifested in Egypt, Algeria, and even Saudi Arabia
where “Royal expropriations” of successful businesses was flagged as an important concern
in a WikiLeaks account.
7
Although Turkey has maintained a relatively open access regime
since the 1990s, the recent crackdown on Gulen-linked firms signifies a major retreat.
Overall, all the above gradations of exclusion are present in one form or another in MENA
economies.
In most MENA states, crony relations seek to ensure both economic and political survival,
which effectively means that barriers to entry and growth exist not just for the economic but
also political realm. Repression of markets and political management of the private sector
form part of the regimes’ security agenda. This clearly distinguishes the region from
developing democracies, such as India and Mexico, where cronyism in rent-thick sectors is
typically used to raise political finance and is not a central “security” concern. Cronyism can
thus be a particular drag on growth in the Middle East where autocratic regimes intervene to
exclude unconnected firms from high growth sectors—an important reason why the region’s
private sector remains anaemic even two decades after liberalization.
Partner or perish.—To exclude economic actors who could potentially challenge the status-
quo, Arab states use relatively blunt incentive instruments that are characterized by generous
carrots and deadly sticks. The moment a business becomes successful or indicates a potential
for growth it is pressurized to “sell or go into partnership” with the regime’s frontmen. The
standard operating principle for firms to survive (and thrive) is to partner with regime insiders
either directly or through brokers and fixers. In this scenario, firms prefer to operate under the
radar screen and avoid direct confrontation. The fundamental logic of doing business is to
either partner with the regime insiders or face extinction. A popular refrain in Syria is that
7
https://wikileaks.org/plusd/cables/96RIYADH4784_a.html
39
you are either with Makhlouf (President Assad’s cousin) or against the law. A defective and
discretionary legal regime means that businesses are often only allowed to operate in a grey
zone to ensure that they remain vulnerable and pliant. The Tunisian tax code for example was
so unwieldy and costly under Ben Ali that any firms could be found guilty by sending in the
tax inspectors.
Differential bargaining strength.—Global literature often studies the role of political
connections in the corporate sphere as part of a lobbying game where protection is exchanged
in return for campaign contributions. The political context is typically democratic or
clientelistic. The balance of power between political and economic elites clearly varies across
countries. Zingales (2017) presents a useful taxonomy to examine this. At one end are
regimes where economic power is granted by political power through the creation of
monopoly or quasi monopoly rights. At the other end of the spectrum are “vertical politically
integrated” regimes where rich businessmen control the political system (Haber, Razo, and
Maurer, 2003). Indonesia under Suharto would be an example of the first regime, whereas
Thailand under Thaksin and certain Latin American countries would serve as examples of the
second category. The US is considered as somewhere in between, albeit with the risk that
increased concentration of economic power may push the US closer to the second type.
Where does MENA fall in this classification? We tend to believe that most countries
examined in this volume are closer to the first category where businesses do not represent a
dominant force behind political authority; in fact, they are mostly at the mercy of rulers.
Compared with many other middle-income countries, the average Middle Eastern state holds
a decisive upper hand in its relationship with the private sector. Relatively insulated from
pressures emanating from market actors (partly due to their greater reliance on external
rents), these states enjoy greater bargaining power over capitalist classes. Business
associations are easily controlled from above and lack substantive power, which results in
40
their weak capacity to articulate business interests. Cronyism, in this milieu, supports an
unequal exchange between the state and the private sector—almost a one-way street that does
not support the emergence of bargaining structures that could deliver concessions for the
wider business community. Inheriting an adverse historical legacy, most countries in the
region had either very weak private sectors to begin with or merchants whose power was
substantially weakened after the discovery of oil.
In an institutional context where regimes only tolerate a dependent private sector, cronies
were sometimes created through initiatives of the political authority, such as in Egypt and
Tunisia. Alternatively, political authority imposed well defined limits to their independence,
as in Morocco. In the Gulf emirates and Saudi Arabia, the private sector is extremely
dependent on discretionary favours by the regime, and is also directly or indirectly owned by
the public sector. Even in Turkey, where business interests are relatively well organized, and
the political structure is more competitive (at least during the period covered in the book) the
recent clamp-down on Gulen-associated businesses reflects the power of the state over
business. In the last few years, the conflict between AKP and the Gulen movement created a
deep cleavage within the devout bourgeoisie, between businesses close to the AKP and those
associated with the Gulen movement.
Erosion of state capacity.—The differential nature and impact of cronyism is ultimately
connected with the character of the state, its capacity and the nature of its relationship with
society, especially the private sector. Discussions on cronyism are thus tied with the very idea
of a developmental state. The greater autonomy of MENA countries from productive sectors
of the economy is partly rooted in history and in these states greater reliance on external
rents, whether from oil, aid or remittances. Such excessive dependence on rents means that
these states have historically faced fewer compulsions to give concessions to productive
constituencies. Distrustful of private sector growth, governments prefer to support the
41
population directly, often in the form of subsidies and salaries from public employment. In
turn, the population prefers to “see the money on the table” rather than demand support for
small and medium-sized enterprises, given the poor state of the business climate. This defines
a low-equilibrium trap where the region lacks not just a strong private sector but also a
popular constituency with vested stakes in private sector development.
In this backdrop, protection afforded to politically connected firms does not derive from a
well-thought out industrial policy, but instead, emanates from a drive to ensure regime
durability. In other words, it is driven more by a political rather than an economic rationale.
Besides weak incentives for private sector development, the capacity of most Arab states to
design and implement incentive compatible support schemes is much more limited due to
bureaucratic fragmentation and a weak legal framework, which suggests that economic
outcomes dependent not only on the nature of political connections but also on the larger
institutional environment in which they are situated. Both law and the enforcement
environment has come under greater spotlight in the wake of liberalization. There is evidence
of a worsening enforcement environment. Even when regulations were streamlined on paper,
officials retained considerable discretion in the manner in which they are applied—harshly to
political opponents and flexibly to well-connected firms. In the post-liberalization era, the
enforcement and implementation of regulations has therefore become more important than
regulations per se.
Limited export orientation.—Connected firms in the Middle East tend to prefer sectors that
are closed off to competition. As a result, they tend to populate services and non-tradable
sectors and have a noticeably insignificant presence in export-oriented manufacturing, a
characteristic that distinguishes them from some of their counterparts in East Asia that were,
by contrast, more actively engaged in export markets. In South Korea, for example, three-
fourths of the chaebols were concentrated in export sectors. Greater trade orientation meant
42
that even if connected firms sought privileges from the state they were ultimately subjected to
global competition. Thus, the ‘guiding hand’ of the state was tempered by the ‘disciplining
hand’ of the market. East Asian firms were also inserted in a regional trading environment
where firms needed to compete in order to survive and grow. Such horizontal trading
arrangements are extremely weak and underdeveloped across the Middle East. Where PCFs
are inserted into export and trade networks, as in Turkey’s manufacturing industry, cronyism
represents a more benign form of favouritism and firms receiving preferential treatment are
concentrated in relatively more labour-intensive industries.
Inter-firm linkages.—The nature and strength of inter-firm linkages provides another
important marker of distinction. The long-run impact of cronyism can be very different when
crony firms enjoy dense linkages with other firms, many of which may be unconnected and
smaller in size. In such situations, benefits of protection are not entirely appropriated by a
few large firms but are shared more widely with emergent and prospering business players
who could ultimately challenge their monopoly of privilege. The growth of large firms at the
top of the pyramid can thus generate positive spill-overs for many small and medium-sized
firms that seek to benefit from backward and forward linkages. While more systematic
evidence is needed on the subject, weak inter-firm linkages are a pervasive feature of private
sectors in MENA countries. By contrast, inter-firm linkages are stronger in comparative
terms in East Asia, and have been further bolstered in recent decades by the emergence of
regional supply-chains in which East Asian firms have managed to insert themselves.
Distortionary mechanisms.—Some of the mechanisms through which connected firms draw
their privilege are arguably more harmful for business environment. Middle Eastern cronies
are generally more reliant on distortionary subsidies, tax exemptions, foreign exchange
controls and other regulatory restrictions that can have economy wide consequences. There is
also a higher reliance of crony firms on forms of protection that have become outdated in
43
other regions. These include permits and licences and administrative restrictions that make
key areas of economic activity out of bound for unconnected businessmen. As evidence from
North Africa suggests, connected firms were favoured by affording protection from foreign
competition, whether through barriers to imports or foreign investment. In fact, both the
incidence and intensity of non-tariff protection is significantly higher in sectors exposed to
cronies in North Africa. By contrast, connected firms in East Asia have remained much less
reliant on non-tariff barriers, which are typically more discretionary, non-transparent and
harmful for intra-regional trade. Access to finance is also more tightly controlled in the
Middle East. Circulating among a narrower circle of connected firms, it bypasses many
private sector firms that operate on the margins.
Summing up—and guideposts for future research
Before concluding this chapter, we identify the contributions this volume makes to the
existing literature on cronyism, in general, and the Middle East, in particular. First, it
uncovers significant variation on the nature of political connections or state-business relations
across countries. Second, it highlights variation in the density of crony relations within and
across countries, and over time. Third, it provides much more detailed information on
mechanisms of privilege that are used to generate rents for politically connected actors,
varying from subsidies to non-tariff barriers and public procurement. Fourth, it provides
empirical evidence on the impact of political connections on key economic outcomes such as
job creation and economic growth. Fifth, it situates these insights in larger analytical
discussions on political economy of the Middle East.
Like any intellectual endeavour, the strength of this volume lies in both engaging with
established debates and generating new questions that can guide future research. We identify
several related areas of enquiry in this regard.
44
First, in order to obtain a complete picture of cronyism it is important to expand the
geographic coverage of this enquiry to other key MENA states, such as Saudi Arabia, Iraq,
Algeria, and Jordan. Where data on politically connected businesses is more difficult to
compile, alternative approaches could be used to indirectly map the patterns of ownership and
trace their impact on firm performance, such as sector case studies, event studies, and social
network methods.
Second, while cronyism is not typically the result of lobbying efforts in MENA it is important
to ask what do rulers and politicians gain in exchange for the favours they extend to
connected business actors? In this quest, economists and political scientists need to work
closer together. Analysis in this volume offers some partial leads, but do suggest a range of
possibilities. For example, there is clear evidence in Lebanon that politically connected firms
pay back by creating jobs for different confessional groups linked through the sectarian
oligarchs. This is a crucial function of cronyism in a clientelistic political milieu. In contrast,
in Turkey, politically affiliated SMEs provide the bulk of the votes for the AKP, while large
connected firms have been systematically encouraged or even forced to take over major
media networks, such as newspapers and TV stations, which are currently acting as major
propaganda instruments for the government. Given that newspapers are not inherently
profitable, engagement by cronies in some sectors is best thought of as a way of returning
economic favours in other profitable sectors. Finally, in Syria, connected oligarchs (e.g. Rami
Makhlouf) have firmly stood behind the regime despite civil strife, shielding it from internal
pressures that an otherwise more open economy would have placed on it. Moreover, regime-
affiliated businessmen have resisted the temptation to take their assets and investments
abroad and have helped the regime bypass sanctions. While these are useful leads, future
research needs to uncover the precise nature of exchange between regimes and connected
businesses.
45
Third, there is also need for more rigorous research on the precise conditions that make
cronyism, in its various forms, an impediment to productivity, employment, innovation, and
growth. Among other factors, this would require a better understanding of the decisions of
connected firms to invest in productivity upgrading versus lobbying efforts. At the same time,
probing the impact of crony firms on non-crony firms remains a priority area of research.
Given the salience of exclusion as a key feature of cronyism in MENA, a more
comprehensive understanding is needed of when and how the existence of connected firms
leads to the exclusion of unconnected firms, and how does exclusion affect growth. Do crony
firms drive out unconnected firms from the market or prevent aspiring entrepreneurs from
entering? How do connected firms perpetuate a regime of exclusion? And, is there
competition among cronies? How does the extent of crony behaviour affect the extension of
the informal markets, and of the phenomenon of the “missing middle”?
Fourth, while our analysis is chiefly concerned with formal business activity it is important to
explore the connections between cronyism and informal economy, which is both sizeable and
significant in many MENA states. Is cronyism partly to blame for the growing informality?
Are firms pushed to the margins of the economy due to the exclusionary protection afforded
to politically connected entrepreneurs? And, to what extent are cronies direct beneficiaries of
some forms of informality (it is believed that the Ben Ali and family had some stakes in
Tunisia’s smuggling networks)? These remain important questions for future research.
Fifth, military and security services have important business stakes in several MENA
economies, including, most notably, Egypt and Algeria. Yet, their role in shaping business
politics continues to be a missing elephant in the room. Industries linked with the Ministry of
Military Production in Egypt have gradually established substantial stakes in manufacturing.
Apart from electronics, cement, and other key manufacturing lines, the military also has
business interests in construction and the hospitality sector, such as hotels and resorts.
46
Military-owned firms tend to enjoy distinct privileges that may not available to other
competitors in the market. These include preferential access to finance and prime real estate,
various types of tax exemptions (including from VAT), less stringent inspections from
government departments. Military-owned firms can also be a more attractive proposition for
partnership in joint ventures with foreign companies. The relationship between military and
big business constitutes a key parameter in the evolution of state-business relationship in
Egypt. Some analysts have alluded to the military’s distrust of business cronies during the
Mubarak-era who emerged as key beneficiaries of economic liberalization (Kandil, 2012).
There are some indications that, with its growingly visible presence in the economy, the
military is redrawing the boundaries of state-business relationship in Egypt (Adly, 2014). The
encounter between military and business is clearly a sensitive territory for researchers but a
dispassionate scholarly analysis will help to demystify the field.
Sixth, another dimension that deserves scholarly attention is the manner in which business
politics in the Middle East is shaped by the external environment. The tragedy of 9/11
ushered a period where both the American and European governments exerted a strong
diplomatic push for political and economic liberalization. Often, economic liberalization was
itself conditioned by the regime’s incentives to display their reformist credentials abroad.
Despite rampant cronyism and evidence of partial reform, many North African countries
continued to receive favourable assessments from international donors. In Egypt business
cronies also enjoyed privileged association with foreign companies through their
representation in joint business councils set up with major trade partners, such as the US and
EU chambers of commerce and industry (El Tarouty, 2015). The decade of 2000s also saw
substantial investments from Gulf elites who partnered with regime insiders in Morocco,
Jordan and Egypt and made their presence felt in lucrative real estate and tourism projects.
47
In Iraq the US occupation and the sectarian political settlement that emerged in its wake
created a fertile environment for cronyism where top government functionaries, their political
god fathers and foreign companies are regularly implicated in the systematic pilferage of oil
revenues through questionable transactions. Yet, the role of external influences can be more
subtle in other cases, such as Iran where state-business relations are profoundly influenced by
sanctions and Turkey where externally-induced checks and balances played a more
favourable role in sustaining both political and economic liberalization during the 1990s and
2000s.
Foreign companies have vital economic stakes in the GCC countries themselves, since the
region’s enormous resource riches increase the potential for rent extraction here. In what
ways do these companies, backed by their respective governments, shape the local business
climate? Do these companies benefit from an uncompetitive and non-transparent business
environment? And, how do regimes leverage their relations with foreign companies to
achieve regime stability? Does this lead to an entrenchment of cronyism in MENA? The
upshot of the above discussion is that external influences appear in many guises and their role
needs to be studied in the relevant country context.
Organization of the book
This volume begins by offering a broad analytical sweep on the Arab variety of capitalism by
Steffen Hertog. Proceeding to the empirical chapters, we present the analysis in three inter-
related parts. PART I (chapters 2-5) showcases chapters that study the impact of cronyism on
firm performance and outcomes of broader interest, such as growth and job creation. PART II
of this volume (chapters 6-9) is dedicated to the analysis of mechanisms used to privilege
politically connected firms. These include discussion of regulatory restrictions (chapter 6),
trade protection (chapter 7 and 9), and procurement (chapter 8). The role of financial markets
is separately explored in PART III (chapters 10-13) that assembles evidence on the credit
48
dimension of cronyism in Turkey (chapter 10), Morocco (chapter 11), Lebanon (chapter 12)
and the Gulf (chapter 13). Chapter 14 offers broader evidence on ownership patterns of
Iranian conglomerate, which include both financial and non-financial firms. By way of
conclusion, chapter 15 offers systematic introspections of the nature of state-business
relations in the Middle East, situating them both in a global comparative perspective as well
as within the region’s evolving political economy.
49
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Figure 1: Citizen Perceptions on corruption (Gallup)
Figure 2: All in the family: Ben Ali and clan’s control of lucrative sectors
Source: https://www.latribune.fr/actualites/economie/international/20110118trib000593005/tunisie-l-empire-
economique-des-trabelsi-et-ben-ali-menace.html
52
Figure 3: The growing concentration of connected firms in non-tradeable sectors
Source: Ruckteschler (2017).
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In Spoils of Truce, Reinoud Leenders documents the extensive corruption that accompanied the reconstruction of Lebanon after the end of a decade and a half of civil war. With the signing of the Ta'if peace accord in 1989, the rebuilding of the country's shattered physical infrastructure and the establishment of a functioning state apparatus became critical demands. Despite the urgent needs of its citizens, however, graft was rampant. Leenders describes the extent and nature of this corruption in key sectors of the Lebanese economy and government, including transportation, health care, energy, natural resources, construction, and social assistance programs. Exploring in detail how corruption implicated senior policymakers and high-ranking public servants, Leenders offers a clear-eyed perspective on state institutions in the developing world. He also addresses the overriding role of the Syrian leadership's interests in Lebanon and in particular its manipulation of the country's internal differences. His qualitative and disaggregated approach to dissecting the politics of creating and reshaping state institutions complements the more typical quantitative methods used in the study of corruption. More broadly, Spoils of Truce will be uncomfortable reading for those who insist that power-sharing strategies in conflict management and resolution provide some sort of panacea for divided societies hoping to recover from armed conflict.
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The revenues of large companies often rival those of national governments, and some companies have annual revenues higher than many national governments. Among the largest corporations in 2015, some had private security forces that rivaled the best secret services, public relations offices that dwarfed a US presidential campaign headquarters, more lawyers than the US Justice Department, and enough money to capture (through campaign donations, lobbying, and even explicit bribes) a majority of the elected representatives. The only powers these large corporations missed were the power to wage war and the legal power of detaining people, although their political influence was sufficiently large that many would argue that, at least in certain settings, large corporations can exercise those powers by proxy. Yet in economics, the commonly prevailing view of the firm ignores all these elements of politics and power. We must recognize that large firms have considerable power to influence the rules of the game. I call attention to the risk of a “Medici vicious circle,” in which economic and political power reinforce each other. The possibility and extent of a “Medici vicious circle” depends upon several nonmarket factors. I discuss how they should be incorporated in a broader “Political Theory” of the firm.
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This essay tries to bring out some of the complexities that are overlooked in the usual treatment of the state in the institutional economics literature and supplement the latter with a discussion of some alternative approaches to looking at the possible developmental role of the state. It refers to a broader range of development goals (including the structural transformation of the economy) and focuses on problems like the resolution of coordination failures and collective-action problems, the conflicting issues of commitment and accountability and the need for balancing the trade-offs they generate, some ingredients of state capacity and political coalition building usually missed in the literature, the possible importance of rent sharing in a political equilibrium, the advantages and problems of political centralization and decentralization, and the multidimensionality of state functions that may not be addressed by markets or private firms. ( JEL D72, H11, H77, K00, O17, O43, P26).
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In this book, Safinaz El Tarouty provides a detailed account of the role of Egyptian businessmen in the survival of Mubarak’s regime until its collapse in 2011.
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This book, first published in 2003, addresses a puzzle in political economy: why is it that political instability does not necessarily translate into economic stagnation or collapse? In order to address this puzzle, it advances a theory about property rights systems in many less developed countries. In this theory, governments do not have to enforce property rights as a public good. Instead, they may enforce property rights selectively (as a private good), and share the resulting rents with the group of asset holders who are integrated into the government. Focusing on Mexico, this book explains how the property rights system was constructed during the Porfirio Díaz dictatorship (1876–1911) and then explores how this property rights system either survived, or was reconstructed. The result is an analytic economic history of Mexico under both stability and instability, and a generalizable framework about the interaction of political and economic institutions.
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The concepts of rents and rent-seeking are central to any discussion of the processes of economic development. Yet conventional models of rent-seeking are unable to explain how it can drive decades of rapid growth in some countries, and at other times be associated with spectacular economic crises. This book argues that the rent-seeking framework has to be radically extended by incorporating insights developed by political scientists, institutional economists and political economists if it is to explain the anomalous role played by rent-seeking in Asian countries. It includes detailed analysis of Thailand, Malaysia, the Philippines, the Indian sub-continent, Indonesia and South Korea. This new critical and multidisciplinary approach has important policy implications for the debates over institutional reform in developing countries. It brings together leading international scholars in economics and political science, and will be of great interest to readers in the social sciences and Asian studies in general.