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0 Today is a fantastic day in Egypt's history. The Parliament has finally removed any word that stated that Egypt is a socialist country from the constitution. We are, for all intents and pruposes, a capitalist country now. So, why am I not happy?
Maybe it's because I know that those are hollow words replacing even hollower words to begin with. A country is not a capitalist country just by calling itself capitalist, the same way a country is not a socialist country by calling itself socialist. What matters is the way they conduct themselves, the way they run the government. And in a country where education, healthcare, and food are subsidized, and where we hire people we don't need and can't by law fire them, is not a capitalist country, no matter what you call it. So why the change in name?
Well, the government in charge, in its ineptness, hasn't been able to run the hundreds of factories- many of them are in the red- that they own, which employ thousands of egyptian workers for a less than living wage (most don't get more than 50-60 $ a month). However, they can't close them down and fire the workers, because it's against the law for them to fire government employees. So, what they do is this: They sell a controlling interest in the factory to some foriegn investor, which makes the factory of the company private, and have him/her deal with the problem, which of course the investor has no interest in doing. He just wants the land of the factory or company, or the fact that it's one of the few companies that operate in that specific market sector and already has a huge share in, which allows them to become instant oligarchs thanks to government control of that sector before. Fine, all is well in good. Nothing against the basic principles of Capitalism here, right?
Ehh, not really! There are a few things that are against the principles of capitalism in that nifty litte model. First of all, those factories/Companies were owned by the government, through seizures or investment, which makes them funded and run by the taxpayer, which are egyptians like me. The fact that they can sell the factory that technicaly belongs to the people for whatever price they deem right, without oversight or accountability to the price of the sale or the money received, is bullshit. If it's public property, then the public owns the property and the government is the managment, so if a sale is negotiated, then the money should go to the public, directly in cash, and not in the hands of the government. No?
But even if we ignore that little problem, we have the problem of corruption in setting the sale price. Since the ministery of Investment has the portofolio of all public owned properties and is the one handeling all sales in that matter, it has unchecked power regarding who buys what for what price, which gives the minister in charge fantastic leeway to make croney business deals. Let's, for example, take the case of an unnamed Hotel in Luxor, which uswed to be owned by the government, which rented it to a foreign firm that ran it for 2 million dollars a year. You then receive a nice little news bit that last year the ministery of investment sold the entire Hotel for less than 4 million dollars a year to a very known egyptian billionaire. Now, if you studied Finance, you would know that the average payback period on any investment is anywhere between 3-5 years on average, so let's say 4 years. Since the Hotel sued to bring in pure income to the owners of 2 millions dollars a year, that makes its average price based on the payback period in order for the investor to break even about 8 million dollars. And mind you, this is just from renting it, which means that the revenue of running it must exceed that by at least another million dollar a year, i.e. 3 million dollars, which in turn makes the average price around 12 million dollars. How much was it sold for again? Less than 4 million dollars. This means that it was sold at a discount of 8 million dollars, or 66.6%. This of course makes no sense, unless the Minister pocketed some of that discount in his pocket, and let's say half of it, i.e. another 4 million dollars, which makes the discount on the price about 33%, which is still a good deal for the investor. Everyone wins, if by everyone we mean the investor and the minister. Meanwhile, publi property has been sold grossly below fair market price, and the egyptian budget defecit is closing in at 500 billion Egyptian Pounds thanks to mismanagment and corruption. And people wonder why the hell they keep pushing for this newer and tougher tax law. Well, someone has to pay for their newly pruchased by the government luxury cars. God forbid they use the money they stole to buy their own cars. That's for retirement pruposes! You don't want them to work in their old age, now do you?
Now, which brings us to the final problem with this new capitalistic model: It's not capitalistic at all. It's exactly what capitalism stands against. But they call it that, and that's what the people in the street see, so that's the view they get of capitalism and businessmen: corrupt exploiting croneys. In their heads, Capitalism ends up meaning: factories closing, less jobs, corrupt government and shady sales. And people wonder how socialism still has it's appeal in Egypt after ruining the economy for so many decades. Well, the so called socialist ruined it, and now the so called government capitalists are selling it for much cheaper than it costs. And slowly but surely you find yourself staring at a very nice and impending economic crisis. Good thing we are not called socialist anymore, huh?
A capitalist government should be one to encourage investment in new sectors and old ones, not one selling off all of its money making properties cheap during a fiscal crisis. A Capitalist government wouldn't allow such corruption or wouldn;t have the necessary system to keep the corrupt in their midst in check. A Capitalist government would start looking at its own out of control spending instead of creating new tax laws in order to collect money to keep it floating. A Capitalist government would harnass the power of capitalism to improve the economy and raise the standard of living for its people, like Ireland and Spain did, instead of selling everything off and hope for the best. But we are not that. We are capitalists now to justify corrupt and shady business deals and sales, the same way we were socialist to justify controlling the entire economy and making sure that nobody would have the money or the ability to oppose the government. What's in a name, really? It doesn't matter what you call it, what matters is how it works, right?
Right?
English
Hi SM,
Great piece. You have absolutely hit things right on the spot. The way Egypt is economically run has nothing to do with capitalism or socialism in any standard sense. The tool for supervision and control which is theoretically the Parliament has no opinion or action and everything is running with no objection and with al lot of cornyism since many years. Pity!!
Egyptian in Germany
Nice post SM, I however dislike the term capitalism as it was actually coined up by Marx-Leninists. I prefer the word free-market economy.
The problem with our neo-capitalist state is that it is based on the concept of free-market for some (the political connected cliche) and socialism for the rest. Being an investment banker you must know how difficult it is for an average unconnected Egyptian to start a business let alone expand an existing one. Imports in every sector are monopolized by a handful of business people who get favorable customs and quotas from the government while the rest suffer are burdened with ridiculous tariffs on both raw and finished products. The same goes for exports.
Banking is another sham with some business people having access to large amounts of funds with little or even no collateral, while the rest required to provide enormous collaterals which make undertaking any bank financing counterproductive.
Don’t even get me started on Construction, telecommunication, textile and heavy industries which are in the hands of a few known patrons of the Mubaraks.
The government needs to remove trade and financial barriers and open up the market to all Egyptians rather than the few patrons of the regime. Then and only then can the system be called “Capitalistic”.
I am not sure you are correct. There are plenty of capitalist elements in Egypt:
Free floating currency
Free Stock exchange
Better foreign investement system
free banking system
New and improved financial regulations
free central bank
etc
Plenty of good to go witht he bad you mentionned.
Herlock
Wow, I actually understood most of that…
I get where you’re coming from SM and I agree with you.
Since we’re finally cleaning up the “constitution” we should get rid of Article 2 while we’re at it as well.
Ya know, the one that says Egypt’s laws are derived from Shariah Law or something like that, I mean if Egypt is truly trying to run a civil secular democracy – but are we, really?
I wonder if the Ikhwan and their fundie friends would support an initiative to ammend Article 2? 🙂
A Capitalist government would harnass the power of capitalism to improve the economy and raise the standard of living for its people, like Ireland and Spain did, instead of selling everything off and hope for the best
don’t forget they got a great help from EU subventions alike a “Marschall plan”
till now these both countries were on the ascention way ; but they will get their flat calm soon unless legislation and taxes still stay lower than the average of the other EU states.
hi sandmonkey. i saw this report that an Egyptian 23 years old blogger was sentences to 4 years in prison. was wondering if it’s one of your friends…?
When a tourist comes to egypt, the taxi driver sways him into going to have tea with his cousin, who offers him a camel ride by the pyramids on his other cousin’s camels, the other cousin also has a perfume shop, where he sells concentrated ‘egyptian’ perfumes, and so on and so on
Rami
It is neither capitalism nor socialism. It is on a smaller scale the same thing what the SM described – cronyism.
The Parliament has finally removed any word that stated that Egypt is a socialist country from the constitution.
But Egypt still considers itself an Arab country, right?
When will the APARTHEID!!! ever end?
Holy crap you’re smart SM.
Property values. If it was claimed by the government for “public use” by disenfranchising ownership of the property, especially if that property gained more value under private control than public. In all honesty, that property belongs to whom lost it in seizure as the public venue was unable to satisfy the cost to investors. See?
It is bad to say you will sell it back, but you can give it back and save the trouble of the government having to make it benefit you as the true owners may be able to pay the tax on it were they to have it back. Justice?
The tourist of course goes along until he discovers that the circle never ends, and the egyptian made lots of money out of them, each one taking a cut of the other’s share.
Is this capitalism, or socialism in your opinion?
Neither; as mentioned above you could call it cronyism if you like.
In the US we call it “networking” 😉
Capitalism requires a measure of freedom to be successful. It doesn’t work so well if there’s a chance that your business will be seized by the government without fair compensation, that you’ll be taxed unfairly, have trouble getting necessary government permits, etc, since no one will take the financial risk to start a business if the government is just going to screw you.
So then socialism by any other name still smells as sour?
Hernando de Soto spells out some more problems with the economies of places like Egypt in his excellent book, “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.” For example, de Soto points out that in Third World countries like Egypt, people’s titles to their homes are poorly documented, which means they can not use them as collateral for loans to start businesses. Most small businesses in America start up on such loans. Egyptians, by contrast, can not leverage the value of their homes, which become dead capital.
De Soto also points out that starting a business in America or Canada takes only a day and a day’s pay to get the necessary permits because the governments are organized to facilitate business start-ups. By contrast, in Egypt starting a legal business requires over a thousand steps that take months and require trips back and forth to many government bureaus and six months average salary. You have to hire a guide to walk you through it. The government is organized to thwart budding entrepreneurs. That’s why it’s hard to start a business bigger than a pushcart.
Incorporation laws are also a problem. In the US, you can form a corporation fairly easily. In fact, many of my friends in IT here in America are contractors who are their own corporations. The more common advantage of a corporation is to amass large amounts of cash to fund a business, more cash than a partnership can draw. In the US, share holders in corporations have defined rights. In the Third World, corporate law is vaguely defined and lends itself to sharp operators and thieves. Consequently, if a business takes off in a Third World country, it is hard to expand it because no investor is going to risk his capital in a venture where he loses control of his money.
This is how the non-capitalist Third World shoots itself in the foot and stunts its own economic growth, while simultaneously blaming America for economic imperialism as the cause of their poverty.
By the way, I’m American, and I know that my government gives a huge amount of money to Egypt.
Where does it go?
Ya3ny its a start…
JFP,
The US gives Egypt an annual sum of 2 billion dollars. More than half is in the form of military aid e.g. the Modernization of Egyptian armored divisions (M1A2 – Abrams), Choppers (AHA – Apaches) and F-16s. The rest consists of Wheat and foreign currency to support the economy.
I think Egypt could make it without U.S. foreign aid.
The military part of the aid isn’t all that important since basically there are no potential upcoming wars in the region and even if a war did break out between Egypt and Israel for instance the Israeli military is usually 10 to 20 years ahead in terms of technology and logistics (we’d loose anyway). Lybia isn’t a potential threat neither is the Sudan. I think this country is spending way more on the military than it should.
About the wheat part, initially stopping the aid would result in a sharp rise in wheat prices which would be overcome in less than a year with an automatic increase in local output which would help the growth of wheat agricultural sectors which have been stagnant for over 35 as a result of cheap wheat imports.
The biggest blow would be the loss in foreign currency I guess the Egyptian pound Exchange rate would go up by about 5 – 10%.
In the long term I think Egypt would be better off without foreign aid. I think the camp 1978 david accords should stand as they are but it is about time for foreign aid to stop. If the US wanted to help I think it would be better off giving the aid money (or a part of it) to local pro-democracy NGOs.
#15 Tantor,
Excellent post BTW. What you’ve said outlines problems endemic to Modern Egypt’s Economy. I’ll add that these problems never existed before the Nasser’s Socialist “Revolution” (Coup d’etat actually).
President Sadat tried to open up the economy (the infitaah period) but his untimely assassination and the succession of indecisive Mubarak left the economy in the hands of a few socialist technocrat university professors who tried all kinds of socialist experiments and 5 year plans, all which ended in failure.
The Government acknowledge its ultimate failure in each aspect in regulation, infrastructure & planning for the last 55 years on a row and decided to turn itself into a 2nd grade tax collector, (or legal armed thief if you prefer this expression).
from the experience of the last 55years they proved efficiency in merely acquisition & corruption, the examples of Spain & Ireland have absolutely [NOTHING] to do with Egypt case, the egyptian government does not have and never had the capacities to either serve the needs of the market, the people, or even the countrywise macro-economics
so, from now-on we have to start from the scratch with outdated infrastructure, unqualified employment, loose shady regulation and smelly short capital (the banking system is very weak with trelatively limited finance), and hope in the course of the next decade we finally get any thing closer to (Capital Economy).
what matters the common person is, will any service (health, education, transportation) improve, are wages are going to be, at any stage matching the levels of middle class living?
[By the way, from reading the hints about the ammendments, the words (socialism) and all its interpretations been removed, but i can’t find (capitalism) or (free market) any where, only a vague expression of (Freedom of Economic Activities.art#4)
you can find yourself Egypt ranking, and tell me what encouraging atmosphere will drag investors to egypt
http://www.doingbusiness.org/ExploreEconomies/
http://www.heritage.org/research/features/index/countries.cfm
most Arabs, are hardcore socialists in their way of living.
Rami
Not really, all immigrants or “guest workers” help each other and network, regardless of nationality. Similar experiences you describe can be applied to italians and Jews in US at the beginning of XX century, russians and poles working now in France or UK, or immigrants from mainland China and Hong Kong in Canada.
Some networking or cronyism is not a bad thing, however in some countries it is so wide spread that these countries could not work without it. In short term it helps many people to make ends meet but at the same time it is a barrier to further economic development of these countries.
ella – sure, this is absoloutly true.
however, when i said most arabs are socialist in their way of living, I was referring that the whole arab culture based on cooperatives between members of the same family, or the same neighbourhood, or the same town..etc. This is more apparent in farming but still you can find it in modern businesses too.
I do understand what you mean by networking, but the difference here, is that most of these relationships are enforced by family or society values, not based on informed individual choices. For example, if a cousin resorts to another cousin for help/aid and is denied that help, knowing that the second person could help, then the second person’s image could be harmed in the little society that surrounds them, and might even be boycotted by other family members.
This is also aparent in some Arab nations, more than others. This is changing, but it forms the base of the value system for most arabs, I dare say.
Shukran, ramy, for the info.