Cronyism and Elite Capture in Egypt

From Businessmen Cabinet to Military Inc.

Sarah Smierciak

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000485318
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Political Corruption & Misconduct
• Index: Politics & International Relations

Examining business-state networks in Egypt (1991–2020), this book highlights the complicity of international actors in facilitating inequality and elite capture. Using interdisciplinary methodology, it argues that Western actors promoting market liberalization have served as central partners in enabling elites to capture the fruits of Egypt's economic reforms.

In the years leading up to the 2011 Revolution, Egypt's crony capitalism reached new levels of visibility with the appointment of a "Businessmen Cabinet." The businessmen-turned-state representatives ushered in a wave of "market liberalizing" reforms, expanding avenues for the abuse of power. Providing a detailed look at some of this period's chief beneficiaries, including a number of Egypt's wealthiest oligarchs, the volume follows their ascent from former President Hosni Mubarak's first round of neoliberal reforms in 1991 through his last wave of reforms beginning in 2004 and ending in regime overthrow. The final chapter examines the fate of these elites under the brief rule of Muslim Brotherhood President, Mohammed Morsi, and of Abdel Fattah el Sisi's current military-backed regime.

Based on five years of fieldwork and dozens of interviews with businessmen and state representatives, this book offers a unique look into the politics of policy, and inequality, in Egypt. It will be of interest to scholars reading political economy, international development, and Middle East studies.

1 Providing context

DOI: 10.4324/9781003185345-2

This chapter provides background to the events, ideological debates, and key concepts discussed in this book. The first section offers a brief overview of some of the major developments shaping Egypt’s political economy since the first round of market liberalizing reforms initiated under President Sadat (1974–1981) until the rise of the “Businessmen Cabinet” in 2004. In addition to outlining important macroeconomic developments, it also introduces several organizations constituting central nodes in the networks woven throughout the remainder of this book. This sets the scene for subsequent chapters, which will examine interrelated developments occurring at the meso and micro levels of organizations, networks, and individuals throughout reform programs of the 2000s.

The second section provides a summary of the ideological context from which Egypt’s reforms of the 2000s arose, and identifies some of the core themes examined in this book—in particular, the role of industrial policies concerning export promotion and small and medium-sized enterprises (SMEs), as well as the development of Public Private Partnerships (PPPs). “SMEs” and “PPPs” are also highlighted as unique tools used to facilitate elite capture of both state resources and international development support—recurring themes throughout this book.

Egypt’s waves of market liberalizing reforms, 1974–2004

Sadat’s infitah, 1974

Beginning with Law 43 of 1974, Sadat’s infitah, or economic opening, marked the first major steps away from Nasser’s era of import substitution industrialization. Central to these reforms was an emphasis on attracting foreign investment in a push toward economic liberalization (Waterbury 1983). This period witnessed three pivotal and interrelated developments in Egypt’s political economy. First, there was a major shift in Egypt’s balance of trade with a spike in imports and a sharp drop in exports. The balance plunged from −$467 million in 1973 to −$2 billion just two years later (World Bank 2020)¹ as import restrictions were lifted and entrepreneurs opted for quick and easy money—shuttling consumer goods into the country, rather than pursuing expensive and difficult industrial projects.

Second, with Egypt’s increased economic participation in the international sphere, the role of foreign interlocutors took on a new importance in shaping the country’s political and economic arenas. In particular, USAID—dubbed the “shadow cabinet” for its political influence (Mitchell 2002, 163)—along with the IMF and World Bank, became major participants in setting Egypt’s economic agenda. The IMF played an especially significant role, deciding conditionalities for loans from both the Fund itself and US banks (Dessouki 1981).²

Finally, on the domestic front there emerged the “infitah bourgeoisie,” a new capitalist class cultivated by the regime (Roccu 2013, 9). State-owned land was sold off to connected individuals at prices well below market value, not only squandering public resources but also channeling investor money toward unproductive activity—particularly evident in the real estate boom (Kandil 2012, 161). The emergence of this new capitalist class also sowed the seeds for increased business participation in politics. With the country’s first business lobby, the Egypt-US Joint Business Council (est. 1974)—later called the American Chamber of Commerce (AmCham)—the entrepreneurial elite gained both direct access to the presidency, as well as a forum for creating partnerships with foreign investors and political actors (ibid., 164).

Mubarak's Structural Adjustment Program, 1991

Kandil (2012) describes Sadat as “the founder of the Egyptian dependent state, the nondeveloping, deindustrialized, and randomly liberalized state,” adding, “Mubarak only followed in his footsteps” (161). Indeed, Mubarak did not inherit an enviable economy. Accompanying Sadat’s infitah was a significant rise in foreign debt, increasing tenfold during Sadat’s decade in office from 1971 to 1981 (ibid., 162). Although over half of the country’s debt was forgiven in 1991 following Egypt’s cooperation with the US during the First Gulf War, Egypt’s financial situation remained dire and Mubarak, “under intense American pressure,” adopted the IMF-led reform program (ibid., 205).

The Economic Reform and Structural Adjustment Program (ERSAP) had two major aims: macroeconomic stabilization and structural adjustment—the latter, an IMF-imposed program designed to reduce the country’s fiscal imbalances. While Egypt was lauded as a poster child of IMF reforms, under the surface, the country’s economic growth proved far less impressive. Much of the perceived growth between the 1990s and early 2000s resulted from the previously noted debt relief packages following Mubarak’s support for the US during the Gulf Crisis, increased remittances, and other significant aid inflows. Meanwhile, domestic growth continued to exist largely as a result of construction sector activity and other non-tradables (Harrigan 2011, 9).

With regard to structural adjustment, the push for privatization proved superficial and slower than desired by the IFIs. Sale of public enterprises often served to transfer state resources into the hands of politically connected individuals (Sfakianakis 2004),³ and by 1998 only 91 out of 314 state-owned enterprises had moved into the private sector (Adly 2009). Meanwhile, growth was neither labor-intensive nor export-led as the IMF structural adjustment reforms had nominally intended (Harrigan 2011). Instead, private investment in industry (compared to total private investment) decreased from 26 percent in 1992–1997 to just 11 percent in 2000–2003—with public sector investment in industry decreasing even more (Abdel-Latif and Schmitz 2009, 10); and trade activity increased, typically requiring far fewer employees and characterized by a high ratio of imports to exports (Pfeifer 1999). While this produced a decade of wealth for some, the majority faced an opposite trend as these transformations were accompanied by the reduction of government spending on social goods.

These developments prompted changes not only in the Egyptian economy but also in the country’s political balance. By 2002 domestic debt had increased from 67 to 90 percent of GDP compared to the previous decade, and “the generosity of regime-friendly capitalists” became a central source of economic support for the ruling powers (Kandil 2012, 211). Mubarak had long cultivated relationships with select businessmen since assuming office in 1981. To build his sociopolitical base, “Mubarak had to clip the wings of powerful business magnates associated with the Sadat era… so as to clear the way for a new set of business magnates entirely loyal to him” (Soliman 2011, 38). These businessmen who once secured their privileges behind closed doors now expanded their presence in the halls of government.

Direct political participation of businessmen could be seen in their growing number of parliamentary seats, increasing from 12 percent in 1995 to 22 percent by 2005 (ibid., 145). Meanwhile, elite business associations—particularly AmCham and the Egyptian Businessmen Association (EBA), established in the early 1980s—had taken on considerable political importance, serving throughout the 1990s and into the 2000s as central vehicles influencing policy direction and decisions (Roccu 2013). But more influential still were the organizations founded and/or chaired by the young heir apparent, Gamal Mubarak.

Gamal stood at the center of many of the top “pro-business” organizations established throughout the reform era of his father. He returned to Cairo in the mid-1990s after working as an executive with Bank of America in London, and quickly set about collaborating with others of Egypt’s “globalizing elite” to support the country’s internationally sponsored economic liberalization. On the side, he would also begin his foray into conflict-of-interest activities, establishing the investment advisory firm, Medinvest Associates Ltd. in 1996, “which became one of the leading intermediaries for Western investors seeking to purchase stocks and companies in Egypt” (Rutherford 2008, 219).

Accompanying Gamal as co-founder of nearly all of his pet projects was the lawyer, Taher Helmy. Helmy, who also helped draft the legislation behind the 1991 privatization program (Grimaldi and O’Harrow 2011), enjoyed a rich portfolio of capital. He inherited high-level military capital from his father, Samir Helmy—a colonel in Egypt’s Army Corps of Engineers, member of the Free Officers (who ruled Egypt following the 1952 coup), and confidant of former President Gamal Abdel Nasser, under whom he served as Minister of Industry. These links no doubt facilitated Taher’s appointment as the official spokesman for the Egyptian Armed Forces to the Clinton administration in the 1990s (Wahish 2005). And well before his work as liaison between the Egyptian military and US government, Taher had cultivated a wealth of cosmopolitan capital. He graduated from St. Louis University School of Law (1974), joined the Illinois and Chicago Bar Associations in the late 1970s, and became partner at the Chicago office of the international law firm Baker McKenzie in 1981 (Baker McKenzie 2019).

The ECES (est. 1992): formalizing networks of “knowledge”

One of the earliest organizations co-founded by Gamal and Helmy was the Egyptian Center for Economic Studies (ECES)—an economic think tank that would become a central conduit connecting business elites with political decision makers (Roll 2010, 365; Roccu 2013). The organization received considerable start-up funds from foreign “development” bodies, with its most significant endowment a $10 million start-up grant from USAID, complemented by undisclosed amounts from the World Bank and United Nations Development Programme (UNDP) (ECES 2009, 12).

Along with Gamal and Helmy, a number of Egypt’s most prominent businessmen across sectors participated in the organization’s establishment. Two additional founding board members—Galal Zorba and Mohammed Farid Khamis—will reappear throughout this study in leadership positions of organizations and committees central to defining the industrial policies of Egypt’s market liberalizing experience.⁴ Additional ECES board members of particular relevance to this study included Alaa Arafa, Mohammed Kassem, and Rashid Mohammed Rashid (ECES 2009, 2014).⁵ This formalization of elite business networks not only strengthened ties between individuals within the group, but also facilitated access to policymakers in the public sector (Rutherford 2008).⁶ Indeed, many of the ECES leaders would themselves become public officials, most notably: Rashid, Mohamed Mansour, and Ahmed Maghraby—Ministers of Industry and Trade, Transportation, and Housing, respectively, in the Businessmen Cabinet. Alongside businessmen-turned-politicians, others like chief economist at the ECES and future Minister of Investment, Mahmoud Mohieldin, provided the technical knowledge and discourse to support the neoliberal project.

In addition to cementing pathways of domestic networks, the ECES also facilitated more direct communication with foreign partners interested in Egypt’s economic liberalization. The Executive Director of ECES between 1996 and 1997, Ahmed Galal, served his first round in the position while on leave from the World Bank, where he had worked since 1984 (World Bank 2018). He would take up the role of Executive Director again between 2000 and 2005, before returning to the World Bank (2006−2007)...