It has been almost 20 years since the term “crony capitalism” began to be applied to Middle Eastern political economies and the initial qualitative research undertaken to describe the phenomenon. Cronyism predated neoliberal economic reforms in the Middle East associated with the wave of globalization that began to gather momentum in the wake of the collapse of the Soviet Union. However, those reforms accelerated its spread while rendering cronies more visible in their respective national political economies. That it took almost a generation for a book dedicated to the subject based on empirical research to be published attests to the difficulty of obtaining reliable data on the inner workings of most Middle Eastern political economies. It also attests to the surge in interest in cronyism stimulated by the Arab uprisings that commenced in late 2010 and have recently recurred in several Arab countries. Protesters themselves, to say nothing of public-opinion polls, have singled out cronyism and the corruption associated with it as a — sometimes even the — main motive inspiring widespread desire for change. This is despite the fact that, although the identities of rulers’ cronies have been known to both protesters and political economists, relatively little has been learned about how cronyism actually works and its specific consequences for political economies.
This new edited volume, based on a remarkable array of empirical evidence, thoughtfully and meticulously analyzed within a clear conceptual framework, has now laid bare the causes and consequences of cronyism. The latter have been devastating for Middle Eastern economies. This raises the question of why external actors, whether in the form of international financial institutions, multinational organizations or powerful states, have in their dealings with Middle Eastern countries done so little to counter cronyism and have even supported it. Whether the vehemence with which Arab protesters have for almost a decade sought to put paid to the crony capitalism that has excluded them from participation in their polities and economies might ultimately induce external actors to heed those calls, remains an open question.
The genesis and approach of this volume provide insight into how political expediency has trumped analysis, understanding and real desire for positive change in the calculations of major external organizations, such as the World Bank. Of the 25 contributors to the volume, at least seven are reported to be associated with or previously having worked for that organization or an affiliate. The Cairo-based Economic Research Forum, which sponsored the research upon which the book is based, receives support from the World Bank. The forum’s director when that research was commissioned is a former World Bank employee. The neo-institutional economic framework closely associated with Douglass North and his co-authors, which guided the book’s research, has been a major theoretical inspiration for much of the World Bank’s research over the past decade. This book, in sum, represents the collected wisdom of researchers both influenced by and contributing to the intellectual accomplishments of the World Bank. This is very much to the Bank’s credit and to that of those associated with it. Driven by the desire to better understand economic growth, the World Bank has directly and indirectly facilitated scholarly insight into its processes more effectively than virtually any other organization.
It is puzzling, therefore, that the clear, negative implications of crony capitalism for economic growth have not guided, or even marginally influenced, World Bank programming in the Middle East. Along with other major providers of capital, the Bank continues to fund governments identified in this volume and elsewhere as being honeycombed with “networks of privilege.” These connect political patrons to crony clients through which they extract rents from their citizens and from external providers of assistance, much to the detriment of economic growth. Presumably the answer to this riddle lies in the political imperatives and calculations of those deciding such policies, as well as in the structure and functioning of the Bank and public-assistance organizations. Much as in intelligence agencies, research and operations are separate undertakings driven by their own agendas and logic. In the case of the World Bank, the purpose of the operational side is to fund projects, with staff careers heavily dependent upon the volume of funds they “push out the door,” almost regardless of relevant costs and benefits of the projects. In short, the Bank’s research findings are not integrated into its operational objectives and methods. This is a shortcoming that this example of research on crony capitalism amply illustrates.
What then are the approaches and associated findings of this volume that should shape the thinking of those interested in enhancing the performance of Middle Eastern political economies? As just noted, its theoretical underpinnings are provided by neo-institutional economics and, within that sub-discipline, the Northian distinction between limited- and open-access orders. In the former, which include the Middle Eastern crony-capitalist economies analyzed in detail in this book — Egypt, Iran, Jordan, Lebanon, Morocco, Tunisia, Turkey — limited-access orders are sustained by intra-elite agreements to share rents extracted directly or indirectly from those excluded from organizing effectively, and hence prevented from exercising equal economic or political rights. Limited-access orders cleave economies and polities into insiders and outsiders.
As the editors state in their excellent introductory chapter, “By closing off economic access and affording protection to favored actors, crony relations generate rents that could help to sustain ruling coalitions” (p. 27). This, in turn, raises the question of what mechanisms are used to favor cronies over the excluded. That investigation constitutes Part II of the volume and one of its two primary foci, the other being the consequences of that preferencing. Among the findings of the empirical investigations upon which the editors draw in their introduction, is that the mechanisms used to privilege “politically connected firms” (PCFs) vary substantially from country to country, as do the economic sectors in which PCFs congregate. In Egypt and to a lesser extent in Tunisia and Morocco, food and fuel subsidies are particularly prone to capture by PCFs. In Egypt, for example, energy subsidies “accounted for about 3 percent of GDP,” a substantial misdirection of nominally intended welfare distribution. A further negative consequence is that these subsidies incentivize PCFs to enhance production by infusions of capital rather than by increasing employment.
A second mechanism through which crony capitalism operates is regulatory capture. PCFs tend to congregate in sectors where regulations can reduce or preclude competition. In Ben Ali’s Tunisia, for example, firms connected to his clan gravitated toward sectors closed to foreign direct investment and requiring licenses to operate. The result: their profitability was substantially greater than that of nonconnected firms. PCFs in Lebanon congregate in sectors regulated by zoning laws — for example, real-estate development — or by financial, health, safety and quality regulations, of which the prime examples are banks, hospitals and schools. Throughout the region, favorable access to land, much of which is typically government owned, is a standard mechanism by which PCFs are advantaged. Heavily regulated sectors such as banking, telecommunications and importation are others. But regulatory capture is also manifested more broadly by “inconsistent and selective enforcement of existing laws and regulations” that advantage PCFs — such as by subjecting them to lighter reporting requirements or, as in Tunisia, to reduced taxation. PCFs there evaded some $1.2 billion in taxes from 2002 to 2009 (p. 14).
Access to credit has been the most commonly studied mechanism supporting Middle Eastern limited-access orders, with findings reinforced by those in this volume. In the last year of Mubarak’s Egypt, for example, 92 percent of private-sector loans were directed to PCFs. Disproportionate credit allocation is widespread in the region and drives greater capital intensity of PCFs. This not only reduces employment growth but leads to inefficient deployment of capital since PCFs tend to be less productive than non-connected firms. The apogee of credit access as an enabler of cronyism is achieved in Morocco, where interlocking memberships on boards of firms by individuals close to the monarch provide the key channels through which credit is allocated and the dominance of the makhzan (the ruler’s household) sustained. Lebanon’s national banking Ponzi scheme, dependent as it and the country have become on an ever-increasing flow of foreign funding, rests on the ownership of 18 of the 20 leading commercial banks (controlling 43 percent of banking assets) being linked to political elites of the various sects. In Turkey, where political institutions and processes are more important than in Arab countries, state-owned banks favor regions where the ruling party prevails or it is in intense competition with the opposition. This redirects credit away from provinces in which the opposition predominates.
The fourth mechanism analyzed is privatization, infamous globally as a means by which cronies, such as Russia’s oligarchs, are prime beneficiaries. As is the case with other mechanisms, the importance of privatization varies in Middle Eastern countries, with Ben Ali’s Tunisia being the most egregious example. Some 10 percent of privatized firms, including those whose profits soared in the wake of privatization, became controlled by the Ben Ali family. In Morocco, holding companies under royal-family control captured the most substantial share of privatized businesses. By contrast, privatization of state-owned firms in Iran enriched not individual cronies, but state-controlled, semi-public institutions, such as the Martyrs Foundation and the Islamic Revolutionary Guards Corps, which collectively came to control half the shares of the 331 companies privatized in 1989-94. Cronies in Egypt had little interest in gaining control of formerly state-owned enterprises, saddled as most were with debt and overemployment.
Trade policy and procurement are the final mechanisms identified in the volume through which Middle Eastern crony capitalism operates. The former typically protects PCFs from global competition, especially by nontariff measures implemented by administrators responsible for regulations and hence able to apply them selectively in favor of PCFs. The chapter by Malik and Eibl that deals directly with this mechanism in North Africa reports that EU-induced tariff reductions in the early 21st century resulted in a dramatic increase in nontariff measures. Sectors in which PCFs dominate had a 50 percent higher probability of receiving such protection than other sectors. The editors observe that nontariff measures were not just to compensate business for loss of tariff protection. They were intended to “generate additional rents for insiders.” Moreover, nontariff measures are more common in the Middle East than elsewhere, possibly because they are highly vulnerable to political abuse, requiring as they do intrusive administration (p. 17).
The mechanism of discretionary government procurement is utilized most visibly in Turkey. There the government awards contracts annually to over 50,000 firms, predominantly in the construction industry. A study of 18,000 of those contracts reported in the chapter by Gurakar and Bircan reveals systematic favoritism to religious business networks connected to the ruling AKP. Were the volume to contain a chapter on procurement in Egypt since 2013, when the military seized power and began rewriting the country’s laws and regulations, essentially to remove them, the evidence would suggest that the military and companies it controls have become the overwhelmingly dominant contractors to the state. In both Turkey and Egypt, authoritarian governments have awarded an ever-greater share of procurement without requiring competitive bidding. Contracts are overwhelmingly let to the politically connected.
The associated major concern of the volume is to detail the economic impacts of these mechanisms. The editors, especially Ishac Diwan in his concluding chapter, are careful to note that in certain circumstances, including in South Korea, cronyism can have favorable economic consequences, as in support of export-led growth. Such policies induce productivity gains by forcing PCFs into global competition. Such policies are lacking in virtually all Middle Eastern variants of crony capitalism, with the partial exception of Turkey. So, while crony capitalism can support rapid economic growth, and indeed has done so (especially in East Asia), in the Middle East it has had a net drag effect.
Job creation is an important casualty of some, but not all, variants of Middle Eastern crony capitalism. Egyptian PCFs, for example, in 2010 earned 60 percent of net corporate profits, but provided only 11 percent of employment. Sectoral employment growth actually declined in the wake of PCFs’ entries into them. In their chapter, Diwan, Keefer and Schiffbauer estimate that Egyptian formal-sector employment would have been a quarter greater over a decade in the absence of favoring PCFs. Arouri, Baghdadim and Rijkers’ chapter on Tunisia reveals similarly negative consequences for employment growth in sectors dominated by PCFs.
In Lebanon, on the other hand, to illustrate the diversity of crony capitalism in the region, large firms, which are overwhelmingly politically connected, have accounted for 55 percent of job creation, as compared to 10 percent in Egypt and Tunisia. The explanation by Diwan and Haidar in their chapter on Lebanon is that these firms serve as conduits of patronage within the clientelist-based confessional government. Firm interests are promoted by political patrons in return for employing the politicians’ clients. The net effect on job creation, however, is negative, as the reduced hiring of middle and small firms in sectors where PCFs are present more than offsets job gains in those large firms.
In Morocco and Turkey, however, crony capitalism appears not to have had such negative effects on job creation and value added per worker. Saadi’s chapter on the former reports that value added per worker, if not job creation, is higher in Moroccan PCFs than other firms. He suggests that careful oversight of PCFs by the monarchy might account for their comparatively better performance in this and some other regards. The chapter on Turkey by Atiyas, Bakis and Gurakar provides evidence to the effect that the rate of growth of labor productivity in firms located in Anatolia, the heartland of the AKP’s Islamist constituency and the area that has most benefitted from its policies, was higher than in traditional industrial centers, including Istanbul. Inclusion fostered by crony capitalism can have, and in Turkey has had, positive impacts economically and, at least until Erdogan and the AKP veered off to the authoritarian right, politically as well. The editors conclude that, with the partial exceptions of Morocco and Turkey, the evidence indicates that cronyism has imposed “significant costs” on Middle Eastern economies (p. 22).
With regard to economic growth, the principal conclusion is that state patronage combined with the exclusion of non-connected firms discourages innovation and productivity enhancement. Growth therefore depends upon adding production inputs rather than on more efficient use of existing ones. Measures of total-factor productivity in the Middle East, which reveal it to be the lowest of any global region, support this conclusion. The extensive and obtrusive means by which outsiders are excluded impose a wide variety of costs, which the editors note are of particular relevance in the Middle East. These direct costs include corruption, limits on the growth of non-connected firms, misdirection of capital investment, inadequate diversity and volume of exports, and outright expropriation of businesses. Indirect costs include those from firms being induced into partnerships with political elites, inadequate interfirm connections, lack of an independent business voice in public-policy making, and states with limited capacities. The last is indicated, for example, by the near absence of effective industrial policies and their implementation.
Hertog’s chapter on cronyism in Arab capitalism places these indirect costs within the overall context of the segmentation of both labor and private-sector business. Such divisions inevitably result from cronyism. They deepen divides not only between labor and capital, but between those in each category, such as between informal and formal workers, and politically connected as opposed to nonconnected businesspersons. This segmentation undermines mobility and other important elements of economic growth. Maybe more important, it renders the organization of reform coalitions extremely difficult, thereby perpetuating the authoritarianism that presides over these limited-access orders.
This edited volume, in sum, is the definitive work on the political economy of Middle Eastern crony capitalism, analyzing it in detail and situating it in the larger global framework. In addition to scholars and students with direct interest in the topic, the book should be read by those in government and international organizations with responsibilities for the Middle East generally, especially the provision of public foreign assistance. The medical adage of “first do no harm” would surely give them pause; the harm of such aid in the form of its support for crony capitalism is so clearly detailed in this volume. Readers who want better to understand the Arab uprisings and the difficulties reformers face in facilitating transitions from closed to open-access orders would also benefit from the insights into segmentation provided by many of the authors. Last, but by no means least, Middle Easterners wanting to know in detail why their countries and the region as a whole are failing to develop and remain mired in authoritarianism would — almost regardless of their present knowledge — also learn from the book.
No review is complete without some suggested improvements, possibly for a successor edition. Although the concluding chapter by Diwan is forward looking on the question of the political requirements for reducing or removing constraints on private-sector development, the volume as a whole is somewhat backward looking; much of it rests on data from the pre-Arab- Spring period. As for the data itself, it is drawn from an extraordinarily wide range of sources. While the authors of all chapters are meticulous in describing their data — sources and the means of analyzing it — the effect of such abundance is to overwhelm the reader. Inclusion of a table listing data sources and type by country would be helpful. The volume is organized theoretically rather than by country, normally an advantage as this emphasizes the underlying argument. The cost, however, is some redundancy, most especially Lebanon and Turkey, and the lack of overall assessments of the impact of crony capitalism on specific countries. Finally, as militaries and security services encroach ever further into the economies of many Middle Eastern countries, the question arises as to what impact this trend will have on crony capitalism in particular countries and the region as a whole. The editors briefly address this issue, as well as the possible configurations and consequences of crony capitalism in Middle Eastern countries not included in the volume. At 464 pages, it is already long enough, but a successor volume would be more than welcome.