Cleft Capitalism

Over the course of four decades, the Egyptian economy underwent consistent and comprehensive economic liberalization, privatization of state-owned enterprises, and deregulation. Yet the Egyptian economy today still experiences low growth, declining total investment rates, and high unemployment and underemployment. The private sector has never become globally competitive. The chapter traces this failure to establish an integrated market order. The problem of market integration in Egypt was not the absence of the Weberian spirit for exchange and the profit-making mentality among a majority of economically active people. Rather, it was the hard constraint of accessing capital. The 2011 uprising highlighted that these efforts at transformation failed not only economically but politically as well.

Studies of Egypt's lackluster development performance have largely focused on the issue of crony capitalism, particularly the routes through which big business emerged after infitāḥ. It is undeniable that politics has played a significant, if not a central, role in the rise of big business in Egypt since the mid-1970s. This is hardly surprising, let alone unique. This literature on cronyism and rent seeking suffers from a blind spot in assessing the problematic nature of Egypt's capitalist transformation. Where large enterprises came from does not explain the lack of vibrancy and dynamism in the rest of the private sector. The issue with Egypt's private sector, as well as other cases of failed market transformation, seems to lie more with its inability to engender a robust stratum of small and medium-sized enterprises rather than the existence of large enterprises that are politically connected.

Contrary to the expectations of neoclassical institutionalism, the weakness of formal property rights neither impeded the expansion of market exchange nor t deterred thousands of Egyptians from engaging with this expanding market since the mid-1970s. Alternative private economic orders have retained the capacity for sustained market creation and expansion, albeit imperfectly. This market expansion was not conducive to market integration, though. The resultant capitalist order was cleft. In order to grow, private enterprises must have access to inputs and market outlets that go beyond what is immediately available from their direct, private social capital. Throughout Egypt's capitalist transformation, access to capital, in particular, finance and land, remained quite restrained for the vast majority of private market actors. This was due to politico-historical factors that were continually perpetuated, eventually leading to the rise of institutional arrangements that were exclusionary for the broad base of private sector enterprises and entrepreneurs.

For a vibrant and integrated capitalist order to emerge, capital should be made accessible to a majority of market actors. However, Egyptian SSEs have faced high administrative and economic barriers to financial and physical capital, a central mechanism through which cleft capitalism has been produced and reproduced over time. The problem of restricted access to capital has institutional and political origins. The rules, norms, and structures—-be they formal, informal, or a mix—that have governed the distribution of opportunities for accessing capital has produced three separate business subsystems—baladi, dandy, and crony—since infitāḥ in 1974. It was the predominance of a coalition of bureaucratic actors that maintained certain institutional arrangements for directly accessing land and bank credit.

This chapter discusses the historical and political factors that led to the production and reproduction of cleft capitalism since infitāḥ. It addresses the question of where the institutional condition of cleft capitalism came from. It examines the multiple political and economic factors since the mid-1970s that shaped the role of the state amid the process of market making and why they led to the development and perpetuation of cleft capitalism. It was the predominance of a coalition of bureaucratic actors that maintained certain institutional arrangements for directly accessing land and bank credit. However, this was neither uniform nor always strategically pursued, as it did not always result from top-down decisions by leadership of the executive where most formal power resided. Rather, there were many instances when bottom-up forces from within an incoherent and fragmented bureaucracy solidified the same institutional arrangements of a centralized and hierarchical system.

Despite waves of market-oriented reforms in Egypt, the overconcentration of credit, mainly extended to the state and a few large private sector firms, has persisted and failed to produce intermediate institutions that could open up channels of credit access for the broad base of SSEs. The chapter shows that the essential investment tool of debt financing has been made systematically unavailable to the broad base of these establishments because of an institutional and organizational framework that has been overly centralized and hierarchical. These institutional traits have ultimately raised the transaction costs for SSEs to an extent that has effectively excluded them from accessing credit, precluding any credible chance of scaling up and thus calcifying the institutional condition of cleft capitalism.

Despite the virtual abundance of desert land, access to this land for productive uses has been quite restricted for most private sector enterprises. Indeed, entrepreneurs have traditionally underlined access to land, like finance, as a major barrier to growth—a consistent and constant theme since the launch of infitāḥ . Similar to the case of finance, centralized and hierarchical institutions dominated land management that excluded SSEs from accessing the physical capital needed to expand. Taken together, the lack of access to these crucial capital inputs has created and perpetuated the institutional condition of cleft capitalism that has robbed the Egyptian private sector of any ability to follow the paths taken by more successful market transformations.

This chapter portrays a detailed and vivid picture of Egypt's baladi capitalism through exploring how SSEs function. Informed by extensive field research conducted in mid-2013, the chapter depicts a lively portrayal of how Egypt's private SSEs evolved and the diverse and complex modes of articulation between what is formal and informal and what is economic and social. Social networks, usually composed of family and friends, reduce the asymmetries of information between parties. Such networks are quite prevalent due to the weakness of formal contract enforcement and the high risks associated with impersonal transactions. Socialized and personalized transactions have contributed to the rise and constitution of a market since infitāḥ, defined as the space where price-driven exchange occurs. However, they couldn't substitute for the missing ingredient of access to capital that could have propelled Egypt's baladi capitalist subsystem into a robust and integrated private sector.

Despite economic liberalization and private sector development, designed to serve as the neoclassical solutions to Egypt's economic woes, entrenched levels of social marginalization and exclusion that were derived from earlier attempts at top-down modernization and colonial rule persisted after independence. Throughout most of Egypt's contemporary history, including the social reform eras in the 1950s and 1960s, state institutions maintained ties with only limited segments of society. This implied the absence of complementarity between social evolution that involved the vast majority of the people, on the one hand, and state attempts to deliver development, on the other. This overarching concept can be used to understand the historical lack of complementarity and intermediate institutions between capital-regulating organizations and SSEs, the missing-middle syndrome, rampant economic informality, and finally cleft capitalism as the general condition for underdevelopment throughout the past four decades of attempted market making.