pyramid capitalism: cronyism, regulation, and employment growth in egypt

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Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt Ishac Diwan, Philip Keefer and Marc Schiffbauer Dec 2016

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Page 1: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Ishac Diwan, Philip Keefer and Marc SchiffbauerDec 2016

Page 2: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Motivation

• A wealth of research has documented the value of political connections, giving rise to a central question:

Does cronyism have only distributional consequences, or does it also influence aggregate economic growth?

Page 3: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Empirical literature• Political connections account for about 20% of firm value

(IDN: Fisman 2001; Egypt: Chekir and Diwan 2012; Acemoglu et al. 2016).

• Connected firms enjoy policy privileges: better access to credit (e.g. Cull and Xu 2005; Khwaja and Mian 2005), access to government licenses (Rijkers et al. 2015).

• Impact on firm performance ambiguous (Roberts 1990; Ferguson and Voth 2008; Haber and Maurer 2007 versus Bertrand et al. 2007; Faccio 2007, 2010).

Page 4: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Theoretical literature

1. Coordination failure prevent larger scale investments (Murphy, Schleifer, Vishny 1989).

→ Pro: public funds channeled through few connected firms can overcome coordination failure.

2. Connected firms lobby for inefficient protection from competition.

→ Contra: these closed deals discourage growth of non-connected firms that do not grow (Aghion et al. 2001).

• “Pro” might rather apply for low income countries and “Contra” for middle income countries where efficiency in existing markets matters.

• Hypothesis: connected firms did not create enough jobs in Egypt but suppressed the growth opportunities of non-connected firms, limiting aggregate growth.

4

Page 5: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Contribution

1. Construct novel database for Mubarak’s Egypt: • larger sample of 385 politically connected firms;

• policy shift around 2000 led to expansion of connected firms into many new activities, allowing us to compare growth in sectors that experienced crony entry and those that did not.

2. Document for the first time the negative impact of cronyism on growth.

3. Array of supporting evidence that growth impact not due to selection effects and consistent with the mechanism in Aghion et al. (2001).

Page 6: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Main findings1. Quasi-experiment: 4-digit sectors that experienced crony entry

between 1996 and 2006 experienced lower aggregate employment growth than comparable sectors that did not.

2. Growth effect not due to self selection: crony firms did not enter into sectors that would have also grown more slowly even in the absence of crony entry.

3. Mechanism consistent with Aghion (2001): • Crony entry skewed the distribution of employment in these sectors towards

smaller, less productive firms.• Crony firms enjoyed multiple privileges that reduced competition and

investments by non-crony firms, including trade protection, energy subsidies, access to land, and favorable regulatory enforcement.

• These privileges account for their higher profitability.

Page 7: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Egyptian capitalism in the 2000s

• Nasser: state-led development.• Sadat: timid opening to the private sector, constitution of a business

elite: marriage of state bourgeoisie and old money.• Mubarak1: gradual economic without political liberalization:

– Private investments allowed in strategic sectors (telecom, steel, construction, cement, …).

• Mubarak2 (around 2000): in addition, connected business elites take up top political posts and enter new economic activities:– Macro stabilization, economic reforms (trade, finance, privatizations).– But: private investment and formal job creation remain small.– Rise of non-tariff barriers, high concentration in bank lending, energy

subsidies to industry.

Page 8: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

8

Identification of politically connected firms

• We identify politically connected businessmen who managed or owned a firm and, at the same time, controlled influential political posts in the government or the ruling party (NDP) before 2011.

• Several were ministers or heads of policy committees in the NDP.• Interviewed banks, lawyers, and anti-corruption activists to double-check list.

Type of political connection across firms and by 4-digit sectors

Type of PC firm Number of PC firms of that type

Number of 4-digit sectors (out of 320) with at least one PC

firm of that type

Politically connected owner + CEO

47 48

Politically connected owner 334 142

Any type incl. board members

385 155

Page 9: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

9

Additional data

• Information is combined with establishment census to measure 4-digit sector performance; employment and firm characteristics of all economic establishments (2.4 million) in 1996 and 2006.

• Additional data sets to measure 4-digit sector policy privileges such as non-tariff barriers (WITS), energy intensities (UN), access to land and enforcement (WBES); and firm performance (Orbis)

Page 10: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

10

Empirical identification: policy shift led to expansion of crony firm entry into many new activities around 2000

• Quasi-experimental setting: observe entry of 35 politically connected firms into 26 out of 165 previously unconnected 4-digit sectors between 1996 and 2006, permitting us to estimate a difference-in-difference effect.

• Estimate whether employment growth declined from 1996-2006 after crony entry into sectors that were initially unconnected relative to sectors that remained unconnected.

• Identification assumption: politically connected firms did on average NOT enter into intrinsically low growth sectors.

: employment growth of the 4-digit sector s between 1996 and 2006: entry of politically connected firms between 1997 and 2006 sectors without crony firms before 1997X is a matrix of control variables (size and maturity of sectors); S a matrix of sector dummies

∆ 𝑌 𝑠 ,2006−1996=𝛽𝐸𝑃𝐶𝐸𝑛𝑡𝑟𝑦 𝑠 ,1997−2006+𝛽𝑁𝑁𝑃𝐶𝑠 ,1996+𝛽𝐸𝑁 (𝑃𝐶𝐸𝑛𝑡𝑟𝑦𝑠 , 1997− 2006∗𝑁𝑃𝐶𝑠 ,1996 )+𝛽𝑋 𝑋 𝑠 ,1996+𝑆+𝜀𝑠 , 2006

Page 11: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Lower aggregate sector growth after crony firms enter into initially unconnected sectors

    Employment growth 1996-2006    CEO Owner Broad

  Entry PC 32.2*36.1*

* 7.15 10.3 7.40 7.10    (1.95) (2.09) (0.84) (1.24) (1.20) (1.01)  Not connected before 1996   -6.32   15.1   -6.95

     (-

0.58)   (0.82)  (-

0.46)

 (Entry PC) *  

-24.8*

*  

-18.7*

*  -

14.7* (Not connected before 1996)  

(-2.17)  

(-3.47)  

(-1.77)

  Sector size-.418*

*-.401*

*-.420*

*-.382*

*-.422*

*-.376*

*    (-2.44) (-2.17) (-2.37) (-2.16) (-2.37) (-2.31)  Sector maturity 12.5 12.6 12.4 12.3 12.6 12.8    (1.57) (1.56) (1.51) (1.53) (1.55) (1.60)  No. of sectors 224 224 224 224 224 224  R-squared 0.161 0.163 0.155 0.159 0.159 0.161  1-digit sector dummies Yes Yes Yes Yes Yes Yes

Page 12: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Crony entry skewed distribution of employment towards smaller, less productive firms

Employment distribution before / after crony entry into previously unconnected sectors

Page 13: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Identification assumption is plausible

On its face, it seems implausible that connected firms would avoid high growth sectors (Loewe, 2013).

1. Crony firms did NOT enter more mature (“dying”:) sectors: Cronies entered sectors with higher share of young firms in 1996.

2. In other countries, the 4-digit sectors entered by connected firms in Egypt exhibited, if anything, faster growth than the sectors that remained unconnected.

Growth of treatment and control group sectors in all other countries from 1996-2006

  Employment growth 1996-2006Labor productivity growth 1996-

2006

 

All Countrie

s

All Developi

ngMEN

A ECA

All Countrie

s

All Developi

ngMEN

A ECADifference crony versus non-crony sectors, 1996-2006

.714** 1.41** -.025 2.99 .728** .961 .331 2.71**

(2.08) (2.81) (-0.01) (1.35) (2.13) (1.39) (0.45) (3.56

)

Page 14: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

14

• Energy subsidies to industry accounted for 2.9% of GDP in 2010 (in comparison, public investment was 6.2% of GDP in 2010).

• Operating in high energy intensive sectors (cement, steel, etc.) requires exclusive operating license which have been granted to only few (connected) firms.

Escape competition through privileges 1: politically connected firms obtain the bulk of

energy subsidies to industry

Share of Connected and All firms in high, medium, and low energy intensive manufacturing sectors

45%

26%

8%

29%

0%

10%

20%

30%

40%

50%

60%

high energy-intensive low energy-intensive

Politically connected firms All manufacturing establishments

Chi2-test Pr = 0.000 Chi2-test Pr = 0.173

Page 15: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Escape competition through privileges 2: Industries with PC firms are more likely to be protected

from import competition

15

• NTM protection in Egypt among highest in the world (Malouche et al., 2013).

• 71% of PC firms are protected by at least three Non-Tariff Measures (NTMs) relative to 3% of all firms.

20

25

30

35

40

45

50

55

60

8

9

10

11

12

13

14

15

16

17

1995 1998 2001 2004 2007

Average tariffs (weighted) Year latest revision of NTMs on imports

Tariffs and NTM amendments since 1995

Number of Class B NTMs per industry

% PC Firms

% all firms

Pearson Chi 2 – test (p-value)

At least 1 82% 56% 0.00

At least 2 82% 27% 0.00

At least 3 71% 4% 0.00

At least 4 26% 3% 0.00

At least 5 18% 3% 0.00

At least 6 15% 2% 0.00

At least 7 13% 0% 0.00

At least 8 10% 0% 0.00

Share of Connected and All firms protected by NTMs

Page 16: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Escape competition through privileges 3-6: Politically connected firms also benefitted from other

policy privileges

16

• Within the same 2-digit sector, firms in 4-digit industries with more politically connected firms report greater access to government land, credit, and industrial zones.

• PC firms also used their connections to reduce their own regulatory burden (policy implementation).

Page 17: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

17

PC firms have higher profit margins only if protected from import competition or benefitting from energy subsidies

Dependent Variable: ln(Profits/Revenues) PC firms 1.58*** 1.38*** 1.36** -2.32 1.56** .267

(3.24) (2.30) (2.30) (-1.19) (2.37) (0.33) NTMs -.144 -.218 (-0.56) (-0.78) PC firms * NTMs 1.03**

(2.40) Dummy high energy -.634 -2.60** (-1.04) (-2.73) PC firms * Dummy high energy 4.55**

(3.77) Year Dummies Yes Yes Yes Yes Yes Yes Age No Yes Yes Yes Yes Yes No. of firms 253 253 253 253 253 253 R2 0.059 0.061 0.063 0.069 0.063 0.094

𝑌 𝑖𝑗𝑡=𝛽𝑃𝐶 𝑗 𝑡+𝛾 𝐸𝑛𝑒𝑟𝑔𝑦 𝑗 𝑡+𝛿 (𝑃𝐶 𝑗𝑡∗𝐸𝑛𝑒𝑟𝑔𝑦 𝑗 𝑡 )+𝜃 𝑋 𝑖𝑡+𝜏 𝑡+𝜀𝑖𝑗𝑡 Profit (margin) of firm i in industry j and time t number of politically connection firms in industry j and time tEnergy dummy equal to 1 for high energy intensive sectorsX age of firm i

Page 18: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Conclusion

• We find that:– a small number of entrepreneurs have managed to control a rising and substantial share

of the Egyptian formal private sector over time.

– The PC firms tend to operate behind trade barriers, and benefit disproportionately from energy subsidies, access to land, industrial zones, bank loans, or fast-track regulatory enforcement.

– They are not more efficient than NPC firms -- their higher profits derive from their concentration in protected or subsidized sectors.

– Job creation declines after crony firms enter into initially unconnected sectors.

• These effects add up to a sizable negative aggregate growth impact:– If energy subsides are moved to public investment, it can rise by 50%.

– Employment growth over a ten year period declined by 19-25%-points (1.7-2.3%-points annually) in initially unconnected sectors after firms managed or owned by politically connected business enter.

Page 19: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

BACKUP SLIDES

Page 20: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Lack of formal sector job creation in private sector

Source: World Bank (2014): More Jobs, Better Jobs: A priority for Egypt

1998 2006 20120

10

20

30

40

50

60

70

80

90

100

15 16 16

32 26 23

34 38 47

Job status of men in the labor force, aged 15-64

unemployedfarminformal privatepublicformal private

Page 21: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Real GDP moderate

Page 22: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Private investment remains low, capital flight high

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

-5

0

5

10

15

20

25

30

35

40

Total in-vestment

Private inv.

Public inv.

Capital flight

Page 23: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

High levels of perceived corruption in business

Gallup 2009-11 PEW, 2011

Page 24: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Identification of PC firms

1. We identify politically connected businessmen who managed or owned a firm and, at the same time, controlled influential political posts in the government or the ruling party (NDP) before 2011.

– Most were ministers or heads of policy committees in the NDP.– Interviewed banks, lawyers, and anti-corruption activists to double-check list.

2. Identify 104 publicly listed firms for which these PC businessmen served as CEOs, board members, or major shareholders (>10%).

– Several of the 104 firms are holding companies or investment funds masking large business conglomerates.

3. Recovering all subsidiaries (up to two tiers), we unambiguously identify 385 firms that are directly or indirectly controlled by one of the PC businessmen.

Page 25: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

The larger net profits of PC firms relative to other large (Orbis) firms disappeared after the fall of Mubarak on Feb 11, 2011

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2003 2004 2005 2006 2007 2008 2009 2010 2011

5% lnProfits diff 95%

• Implicit test of the quality of our measure of connected firms.

Difference in Profits of connected and non-connected large firms

Page 26: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

PC firms are larger and have higher profit margins

PC vs. other establishments

PC vs. other est., within

2-digit sector

No. of Politically connected

establishments

No. of other establishments

Ln(Employment) 1.40** (15.88)

1.02**(12.39)

436 19,375

Ln(Revenues) 1.61**(6.46)

1.59**(6.27)

67 611

Ln(Profits) 1.43**(1.95)

1.37*(1.73)

49 239

Ln(Profits/Assets) 1.88**(3.03)

2.17**(3.29)

47 236

Within-sector differences, politically connected (of any type) and other firms

Page 27: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Coverage of PC and NPC firms by size categories in Orbis

# of employees # of est. % of est. % of jobs # of est. % of est. % of jobs

<20 8 2% 0% 1,375 19% 0%[20,99] 73 16% 0% 2,571 35% 2%

[100,199] 44 9% 1% 853 12% 2%[200,999] 186 40% 12% 1,642 22% 12%>=1,000 158 34% 87% 914 12% 84%

OrbisPC NPC

Large firms are well distributed among connected and non connected firms

Page 28: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Distribution across sectors

• PC firms are present in half of the sectors:– Overall: in 155 of 320 (48%) 4-digit ISIC Rev. 4 sectors.– Manufacturing: in 73 of 126 (58%) 4-digit sectors.

• High concentration of PC firms in several sectors: tourism, real estate, construction, wholesale & retail trade, mining, finance, business services, and some manufacturing sectors.

• Exclusive licenses in wholesale & retail trade: several families benefit from the exclusive right to distribute/sell international brands in Egypt.– For instance, General Motors, Mercedes, Caterpillar, McDonalds, Costa Café, KFC,

Hardee’s, Samsung, Labanita, Dell, UPS, Pal Zileri suits, etc.

• Vertical integration: PC firms often own subsidiaries providing goods and services -- possible tunneling of profits through transfer pricing.

Page 29: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

PC firms are present in many aggregate economic sectors

Number of…PC firms PC CEO PC board PC owner PC PE inv

Agriculture 17 2 9 8 6Mining 12 0 2 2 11Manufacturing 193 26 81 164 98 Food & beverages 33 1 11 16 11 Textiles & clothing 22 3 14 14 9 Chemicals 15 0 3 10 7 Pharmaceuticals 13 0 4 2 8 Base metals 19 5 7 16 5 Machinery & transport 27 4 10 18 8 Other manufacturing 64 5 18 49 25Utilities 18 0 2 10 10Construction 36 8 12 29 15Services 388 45 119 288 129 Wholesale trade 91 8 22 65 28 Retail trade 25 0 4 18 8 Transport 13 0 2 9 4 Hotels & resturants 43 7 11 35 8 Finance 53 11 29 38 15 Real estate 25 4 11 18 12 Business services 103 7 27 75 44 Travel & tour operators 10 1 2 7 3Total PC 2-digit sectors 664 73 211 462 244

Page 30: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Selected 4-digit sectors with and without PC firmsISIC Rev4 Description PC firms PC families PC CEO PC board PC owned PC PE inv PC only PE inv # firms 2006 #est>200 empl Age5510 Short term accommodation activities 35 17 5 8 29 7 5 3,056 129 15.04100 Construction of buildings 21 16 4 8 16 10 2 5,385 35 10.86201 Computer programming activities 18 11 1 2 14 11 4 157 2 5.54773 Other retail sale in specialized stores 16 14 0 3 11 5 4 138,202 12 9.86612 Security and commodity contracts brokerage 15 14 1 7 10 3 0 367 0 8.96820 Real estate activities on a fee or contract basis 15 16 3 8 10 9 1 2,234 2 6.42100 Manufacture of pharmaceuticals 13 10 0 4 2 8 7 189 22 11.44663 Wholesale of construction materials, hardware 13 13 0 0 12 4 1 2,933 9 12.12220 Manufacture of plastics products 12 13 0 3 8 4 2 2,399 30 9.02930 Manufacture of parts for motor vehicles 11 16 2 3 8 4 3 58 1 10.33510 Electric power generation, transmission & distribution10 4 0 1 7 3 3 348 29 19.06810 Real estate activities with own or leased property 10 19 1 3 8 3 1 1,338 0 7.5910 Support activities for petroleum & natural gas extract 9 8 0 2 1 8 6 33 3 10.02394 Manufacture of cement, lime and plaster 8 10 1 2 7 4 0 68 10 14.31410 Manufacture of wearing apparel, except fur apparel 7 3 2 2 5 4 0 57,214 103 12.12410 Manufacture of basic iron and steel 7 3 2 3 7 1 0 454 17 13.34530 Sale of motor vehicle parts and accessories 7 3 1 3 7 1 0 31,131 1 10.41020 Processing and preserving of fish 0 0 0 0 0 0 0 329 3 14.21622 Manufacture of builders' carpentry 0 0 0 0 0 0 0 18,825 1 10.01629 Manufacture of other products of wood 0 0 0 0 0 0 0 4,570 3 11.01701 Manufacture of pulp, paper and paperboard 0 0 0 0 0 0 0 992 9 13.52211 Manufacture of rubber tyres and tubes 0 0 0 0 0 0 0 168 1 12.62593 Manufacture of cutlery, hand tools & hardware 0 0 0 0 0 0 0 13,599 0 11.82670 Manufacture of optical instruments 0 0 0 0 0 0 0 215 0 9.22750 Manufacture of domestic appliances 0 0 0 0 0 0 0 391 27 10.72821 Manufacture of agricultural machinery 0 0 0 0 0 0 0 175 1 14.43100 Manufacture of furniture 0 0 0 0 0 0 0 88,829 14 10.14741 Retail sale of computers, software in stores 0 0 0 0 0 0 0 18,066 1 4.54772 Retail sale of pharmaceuticals 0 0 0 0 0 0 0 50,566 1 9.05210 Warehousing and storage 0 0 0 0 0 0 0 41,356 12 11.36110 Wired telecommunications activities 0 0 0 0 0 0 0 41,904 14 4.76920 Accounting, bookkeeping and auditing activities 0 0 0 0 0 0 0 3,888 2 10.17410 Specialized design activities 0 0 0 0 0 0 0 875 8.18110 Combined facilities support services 0 0 0 0 0 0 0 341 4 8.3

Page 31: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Classification of manufacturing industries by energy intensity

Intensity of energy consumption Industry

High Energy Intensity Manufacture of textiles, Paper and paper products, Coke and refined petroleum products, Chemical products, Non-metallic mineral products, Manufacture of basic metals.

Moderate Energy Intensity Food products and beverages, Wearing apparel, dressing and dyeing, Manufacture of leather products, Wood and wood products, Printing and publishing, Rubber and plastic products, Fabricated metal products

Low Energy Intensity Tobacco products, Machinery and equipment n.e.c., Office, accounting and computing machinery, Electrical machinery and apparatus n.e.c., Radio, TV and communication equipment, Medical, precision and optical instruments, Motor vehicles, trailers and semi-trailers, Other transport equipment, Furniture and other manufacturing n.e.c., Recycling

Page 32: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Are PC firms more likely to operate in sectors protected from import competition?

• We match data on Non-Tariff Measures (NTMs) at the 6-digit product level from the World Bank with the Orbis firm data at the 4-digit industry level.

‒ Limit analysis to manufacturing & mining as NTMs mostly for tradable goods: 200 politically connected firms.

‒ Overall, 65% of all 4-digit manufacturing & mining industries and 56% of all Orbis firms had at least one NTM protection.

• Most NTMs in Egypt in form of legal technical barriers to import (Class B) including licenses requirements, regulations on distribution, or product-quality & traceability inspections of embedded materials (rules of origin).

• NTM protection high by international comparison (Malouche et al., 2013): ‒ Out of 43 developing countries in 2010, EGY has the 10th highest frequency of NTMs and

the 8th highest covariance of different NTM classes across industries.

Page 33: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Non tariff measure classification

B140: Authorization requirement: importer must receive authorization, permitsor approval from a relevant government agency for reasons such as national security, environment protection, etc. Example: Imports must be authorized for drugs, waste and scrap, and firearms, etc.

B840 Inspection requirement: Requirement for product inspection performed by public or private entities. Example: Textile and clothing imports must be inspected for size and materials used before entry is allowed.

B859 Traceability of materials: Disclosure of information that allows following a product through the stages of production, processing and distribution. Example: Manufactures of automobiles must keep the record of the origin of the original set of tyres for eachindividual vehicle.

Page 34: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

World Bank Enterprise Survey data

• We use the following policy indicators coded as dummy variables from the WBES:– Land acquisition from government: “Does your establishment own or lease the majority of its land?

From whom you have got the land (people, government, for free, other)?”– Industrial zone: “Is the firm located in an industrial zone?”– Bank loan: “Does your establishment currently have a loan from a financial institution?”– Waiting time for construction permits: “What was the actual wait duration (from the day you applied

to the day you received the service or approval)?”– The Coefficient of variation in the waiting time for construction permits.

1. We pool information on perceived policies from Egypt’s various World Bank Enterprise surveys between 2004 and 2008. – These include in total over 4,200 different firms.– WBES data cover only firms with at least 5 employees.

2. We aggregate perceptions by sector, at the 4-digit (ISIC Rev. 3.1) level.– Consider only sectors with information for at least 10 firms.– On average, each 4-digit sector has 66 firms.

3. We merge aggregated WBES data with PC firms at the 4-digit sector level (87 manufacturing sectors).

Page 35: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Distribution of politically connected manufacturing firms by type in WBES

No. of politically connected

firms

No. of 4-digit sectors with

politically connected CEOs

No. of 4-digit sectors with

politically connected

owners

No. of 4-digit sectors with any

type of connected firms

0 55 22 15 1 22 18 16 2 8 12 5 3 2 7 9

[4,5] 0 11 16 [6,10] 0 11 14

[11,20] 0 5 10 [21,35] 0 1 2 Total 87 87 87

Page 36: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Firms operating in industries with more connected firms are more likely to have access to government land, industrial zones, and bank loans

36

• Merge WBES data with list of PC firms at 4-digit industry level (87 industries).

• Probit ( dummy if firm i in the 4-digit sector j has access to land, industrial zone, or loan):

average age and size; S: 2-digit industry dummies.

Acquired Land from

Government Located in Industrial City Obtained Bank Loan

CEO Owner Broad CEO Owner Broad CEO Owner Broad No. of PC firms -.007 .021* .015* .068 .041** .034** .139* .032** .019** (-0.11) (1.79) (1.75) (0.73) (2.32) (2.01) (1.74) (2.54) (2.21) ln(empl) .337** .338** .337** .269** .271** .269** .195** .197** .195** (16.4) (16.2) (16.1) (6.46) (6.50) (6.34) (9.32) (9.34) (9.29) Age -.019** -.018** -.018** -.034** -.034** -.034** -.005** -.005** -.005** (-8.93) (-8.90) (-8.91) (-8.84) (-8.84) (-9.04) (-2.66) (-2.64) (-2.66) No. of obs 3,015 3,015 3,015 3,009 3,009 3,009 3,003 3,003 3,003 Sector dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes R-squared 0.193 0.194 0.194 0.187 0.189 0.191 0.070 0.071 0.070

Political connections and firms’ access to land, industrial zones, and credit

Page 37: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Politically connected firms have access to fast-track regulations

37

• Firms in connected sectors wait 86 days less for construction permit.

• At the same time, the variation in waiting time across firms in connected sectors is higher suggesting that some firms in connected sectors have access to fast-track regulatory services.

Waiting days for

Construction Permit CoV (Construction Permit)

CEO Owner Broad CEO Owner Broad No. of PC firms -40.9** -6.00** -4.13** .193** .037** .023 (-2.58) (-2.77) (-2.93) (2.65) (2.36) (1.52) ln(empl) 3.11 2.77 3.19 .001 .001 .001 (0.82) (0.74) (0.86) (1.03) (1.31) (1.15) Age 1.52** 1.56** 1.58** -.013 -.014 -.014 (2.57) (2.64) (2.65) (-0.97) (-1.06) (-1.03) No. of firms / sectors 986 986 986 63 63 63 Sector dummies Yes Yes Yes Yes Yes Yes R-squared 0.081 0.076 0.075 0.466 0.468 0.453

Political connections and variations in regulatory enforcement across firms

Page 38: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Entry of connected firms from 1997-2006 into initially unconnected sectors

Sector name 2-digit ISIC Rev. 3.1 4-digit Sector name 4-digitOther mining and quarrying 1410 Quarrying of stone, sand & clay

1429 Other mining & quarrying n.e.c.Manufacture of food products & beverages 1551 Distilling, rectifying, blending of spirits

1552 Manufacture of wines1553 Manufacture of malt liquors & malt1554 Manufacture of soft drinks & mineral water

Manufacture of chemicals & chemical products 2412 Manufacture of fertilizersManufacture of basic metals 2720 Manufacture of basic precious metalsManufacture of electrical machinery 3140 Manufacture of primary cells & batteriesManufacture of radio, TV & communication equ. 3230 Manufacture of television & radio receiversManufacture of furniture 3691 Manufacture of jewellery & related articlesRecycling 3710 Recycling of metal waste and scrap

3720 Recycling of non-metal waste and scrapElectricity, gas, steam and hot water supply 4010 Electricity production, transmission & distribution

4020 Manufacture & distribution of gasCollection, purification and distribution of water 4100 Collection, purification & distribution of waterWholesale trade and commission trade 5131 Wholesale of textiles, clothing & footwear

5141 Wholesale of solid, liquid & gaseous fuels5152 Wholesale of electronic & telecommunications parts

Retail trade 5211 Retail sale in non-specialized stores with foodWater transport 6120 Inland water transportInsurance and pension funding 6601 Life insuranceRenting of machinery and equipment 7111 Renting of land transport equipmentOther business activities 7411 Legal activities

7430 Advertising

Page 39: Pyramid Capitalism: Cronyism, Regulation, and Employment Growth in Egypt

Firm census data reveal stagnant firm dynamics and job creation in Egypt

Younger medium or large firms missing

Egypt Turkey

• In Egypt, there is a lack of young growing firms that could put domestic competitive pressure on the few large firms which do not create enough jobs.