Dictators May Be Bad for the Economy

It may surprise Western economists, but the Egyptians knew it long ago: The "stability" Mubarak provided was not good for the Egyptian economy.

Two recent papers looking at Egypt’s economy under Sadat and Mubarak lead to the inescapable conclusion that while dictators who provide “stability” may be good for U.S. and European economies (and the bank accounts of the dictators), they are hell on their own economies.

The first paper “When Cheap is Costly: Rent Decline, Regime Survival and State Reform in Mubarak’s Egypt (1990-2000)” from the March 2011 issue of Middle Eastern Studies examines the problem of “rents.”

A rent is a fee charged for the use of natural resources. Many countries in the Middle East are “rentier states”–they have little productive economy and their primary international income is derived from selling access to their natural resources.

Normal economic wisdom claims that external rents–in Egypt’s case oil exports, foreign aid and Suez Canal fees–are associated with weak state institutional capacities. Current neolibral theories suggest that steady and consistent decline in rents should reverse this trend and improve state capacity building.

The problem: didn’t happen in Egypt. Between 1990 and 2000, oil revenues declined from 11 percent of GDP to a mere 2 percent, Suez Canal revenues stagnated at 4 percent, and foreing aid declined from 5 percent to nearly 1 percent.

The author of the paper, A.I.A. Adly, sums it up thus:

Despite their consistent decline or stagnation, rents assumed a critical position in state finances… Despite the decline in external rents, exports and state revenues, there was hardly any state capacity building to restructure and diversify non-oil exports.

On the contrary, Adly says, echoing political economist Robert Springborg, “Egypt is de-globalizing.” Why? Because the Mubarak regime was making so much money off these rents they didn’t need to worry about developing economic sectors that didn’t profit them directly.

Whereas in a productive economy many citizens are employed in economic activities, and they are taxed by the state which returns the money to them in the form of infrastructure and services (military, police, schools, roads, libraries, parks, etc), in rentier economies the state sells these resources and redistributes the wealth to the population in the form of infrastructural improvements and services.

Except when they don’t.

Whereas in a productive economy declining economic revenuse lead to decreasing tax revenues which force governments to (try to) do something about it, rentier economies involve only a small sector of the population. These elites may well keep a lot of the rents money. As rents decline, they can merely increase the amount of money they skim and decrease the amount of goods and services the state provides to the populace. From the viewpoint of “the narrowly-defined interests of the agents involved” (as Adly puts it), there’s no strong incentive for actually advancing the development of the country.

This develops eventually into a kind of “crony capitalism”  involves the development of a government-business elite that profits enormously from the nation’s resources. Some of this wealth trickles down to the educated elites and technocrats needed to run those parts of the society the elites need, but it brings little or no wealth to the majority of the population.

The problems with “crony capitalism” are evident in the report just released by the  Public Funds committee, indicating that Dr. Abdel-Azim Wazir, the former Governor of Cairo, Dr. Abdel-Rahim Shahata, another former governor of Cairo, and three other leaders of the governate, illegally granted large pieces of land around the new Kutamiya development to 31 businessmen in exchange for bribes equalling 10 million Egyptian Pounds, according to a May 12 story in Al-Masry al-Youm

Usurprisingly, then, we learn from the second paper, “Analyzing the fiscal process under a stochastic environment: evidence from Egypt” by Amir Kia and Norman Gardner that the fiscal budgeting process used by the Mubarak regime was unsustainable.

The paper rejected a standard economic measurement that tests whether a government sticks to its budget–Egypt usually doesn’t–as  way to determine whether the budgeting process worked. The authors argued that persistent deficits and the accumulation of debt in Egypt does not mean that the debt is unmanageable because governments can always change the way they do things.

It is possible for a government to change the historical pattern it has been following so that it will not continue to borrow and run a ‘Ponzi’ scheme in the future.

Unfortunately, even with this more generous–the authors say “realistic”– assumption, “it was found that the fiscal budgeting process in Egypt is sustainable in neither a stochastic nor a non-stochastic environment.”  In fact, the only two measures that had any real impact on helping Egypt fix its disastrous deficits-to-GDP ratio were the austerity budget adopted in 1967 (under Gamal Abdel Nasser) and paying an additional cost of living allowance to government employees since 1975 (instituted under Anwar Sadat).

So the avowedly socialist government of Nasser did more to help the debt than the avowedly neoliberal Mubarak government.

This brings us to the economic woes behind the uprisings. The standard wisdom is that Nasser’s socialism improved the lot of the masses but ran up unmanageable debt. The Mubarak regime has integrated Egypt into the global economy but his liberalizing reforms have been slow due to pupolar protest.

From the perspective of common people, though, Nasser created infrastructure while Mubarak has let it decay. There’s a lot of development–shopping malls, office buildings, gated communities–but these are mostly for the elites, not for everybody. These papers give some analytical insight into the processes by which this occurred before they threw Mubarak out.