The Economic Cost of Authoritarianism

For three decades, Mubarak made a strong argument that political reforms need to come after economic reforms. He argued that people care about making a living – food, shelter, jobs, education and health-care – rather than political freedoms. And to reform the economy we need “stability,” as opposed to the chaos that comes with a democratic process. Yet every day that passes shows how flawed this argument is: we are losing both, out political freedoms and our economic livelihood.

Putting aside political freedom, for those who believe that this is a luxury, Egypt’s economy can never develop under an authoritarian regime like ours. Why?

1. Investment risks: when any big investor (local or foreign) thinks about investing a developing country, they have to assess their investment risks. There are the normal business risks that people think about, but in addition, they look at the “country risks.” They ask questions like, how stable is the regime? Can the laws change suddenly? Can our investments be expropriated? How corrupt is the government? Can we secure our property rights? How effective and clean is the legal system? What are the risks of social unrest?

It is obvious how low we will score in any of these questions. The regime is unstable. The laws change overnight for no reasons or stupid reasons or unknown reasons. Corruption is everywhere, the courts take forever to get anything done, and when you do, you can’t enforce your rights. Property rights are uncertain – anyone can claim your land and get away with it.

Reasonable investors take these things into consideration. Imagine the amount of investments (local and foreign) that can pour into Egypt if we fix these problems above.

2. Corruption: we always used to make fun of people asking tourists for “bakshish” everywhere they go. Now, it’s “blackmail,” everywhere and for everything. If you have a business that looks profitable, you get hordes of government employees blackmailing you for everything. A world bank report lists 16 government agencies that harass a retail business owner, some visit twice a week for small amounts, others are more effective and visit once a year for larger amounts. All of those street bureaucrats have the power to shut down a business and possibly jail the manager or owner. As irritating as it may be, this is actually the easy type of corruption to deal with. The tough one is for senior and more powerful individuals who want to “partner” with you. You often need one of them to get protection and to avoid their harassment, and they want a piece of the pie; a share of the business just to avoid their evil.

How does that translate into money? As a business owner, you have to pay for everything that is your right. You have to pay to protect your business, your employees and yourself. And the cost of all these payments adds up. At the end of the day, a business that may seem very lucrative ends up with losses. Owners flee with bad debt, jobs are lost, and factories close.

3. Hit and run mentality: when investors know about all these risks, and they do, most end up with a short-term mind set. They are reluctant to make long term investments. They want to make their money back quickly. Serious investors disappear and we end up with parasitic investors. Everyone is looking for a quick hit, and avoiding serious long term investments. This is one of the reasons a “business-man” is now a dirty words.

4. The cost of political uncertainty during transition: and now as we live through the transition years from Mubarak to God-knows-what, there is an added dimension of risk. Nobody knows what is next! And that has been the situation for the last 5-10 years. Is it going to be Gamal Mubarak? An army General? The Muslim Brotherhood? A populist leftist person who will get us back to the Nasser-era socialist policies? Or another corrupt dictator with more monopolies and corruption? With this level of uncertainty at hand, any serious investor stays away. Many business owners and wealthy families are liquidating their assets and parking them in foreign bank accounts – and it’s hard to blame them. Uncertainty brings fear and capital is coward!

5. The lost Egyptian diaspora: there are millions of Egyptians who live abroad – in The Gulf countries, Europe, the US and elsewhere. They are wealthy, educated, connected, and patriotic. They are dying to serve their country, but are often denied the opportunity. They have enough capital and knowledge to fix this country, but they will not come back to face a worse Egypt than the one that drove them away in the first place. They have gotten accustomed to live in free societies with individual rights, to have protections for their personal properties. It is sad to sit and listen to them complain with bitterness about their last experience starting a business in Egypt or trying to help a university or government agency. Nobody listens to them, and when someone does, they often treat them as a cash cow that is to be exploited.

Imagine that we have a political system that is similar to Turkey – a country with very similar background to Egypt – or like Eastern European countries or many African countries: free election, accountable government, less corruption, and political stability. How much more economic development would we achieve? How much more investments can we attract? How many more jobs can we create?

Putting aside political freedoms, for those who believe that these are a luxury, Egypt’s economy can never develop under an authoritarian regime like ours. The economic cost of authoritarianism is much more than any other challenge that our economy is facing.

Amin Elmasry. 19 June 2010.

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