Should one consider companies with political connections as national or private entities?

Ishac Diwan, professor at Paris School of Economics (Photo N.B.C)

Privileges, corruption, favouritism.. On October 6th 2015, Professor Ishac Diwan, lecturer at Paris School of Economics, presented an analysis of the impact of these phenomena on productivity in Egyptian businesses at the FEMISE and Partners workshop on “Firms and Globalization”.

-“What do you mean by a “politically connected” business?”

– “This is a company owned or managed by a person with political influence. Such companies benefit from measures of administrative simplification; they can have an inspector sent to competitor companies; they influence economic policies in order to benefit their sector… For example, the billionaire Rami Makhlouf is none other than the cousin of Bachar El Assad. His companies dominate the private sector in Syria. Should such companies be considered as national or private companies? Where is the boundary?Company directors play a role within the leading political parties, whereby politicians rub shoulders with business leaders who in return commit to financing their campaigns. In other, more extreme cases, they occupy the economic arena in order to prevent the opposition from reaching positions of power. The Islamic sector in Egypt is prevented from development in this manner and remains limited in its scope of influence. “

-“To what extent does this relationship with political decision makers stimulate productivity?”

“A close relationship with the power base can serve the development of successful industrial policies, as we have observed in South East Asia. But the political leaders must be able to negotiate with captains of industry from a position of strength, which has not been the case in the Arab world. Egyptian firms generate profits that are highly correlated to their privileges without necessarily playing a role of locomotive in their respective sectors. Quite the contrary, businesses connected to political power generally create little employment. Moreover, their competitors reduce investments because they have no room for development. This system represents a real limiting factor for economic development.With new governments, companies that had close connections to the Moubarak family in Egypt and the Ben Ali family in Tunisia have stopped investing, through fear of reprisals. This accentuates the economic difficulties in these countries. Current political leaders, who are seeking to boost the economy, make new deals with these companies in order to encourage them to invest. The situation has returned to business as usual for the Sawiris family for example.”

– “What recommendations would you make for the Egyptian government?”

“A market economy only works well when there is competition. Credit needs to be distributed on a more competitive basis. For example, over 80% of private credit was allocated to 460 companies controlled by 32 families in 2010. But can economic liberalisation be achieved without political liberalisation?! ”

Interview and photo by Nathalie Bureau du Colombier, Econostrum during the Workshop on “Firms and Globalization” held on the 6th of October at Aix, Marseille, France.

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